The anatomy of a fear of growth
SMANY unfamiliar with the pandemic it’s never been easy to figure out what’s going on. Yet in recent days, uncertainty has accelerated. Stock markets are volatile; uncertainty about the development of inflation and labor markets is high. The fate of the economic recovery appears to depend on the answers to a number of big questions. Will the spread of the Delta variant of the coronavirus derail the global recovery? Will the underlying weaknesses be revealed as governments loosen stimulus? How excited are households and businesses to spend? But the answers are not clear. And four indicators of the recovery – market prices, “high frequency” activity indicators, hard data and economists’ forecasts – all give mixed signals.
Start with the markets. US Treasuries are a safe haven in these uncertain times. In March, investors sold them, spooked by rising inflation, pushing the ten-year Treasury yield to 1.7%. But it has slowly receded since, as doubts about the continued strength of the economic recovery settled in. Fear of growth appeared to intensify on July 19, when the ten-year rate plunged to 1.19%. the S&P 500, the main US stock index, fell 1.6%, with small businesses hit the hardest. Commodity prices have also suffered a shock. That of Brent crude fell 7% to $ 69 a barrel. The dollar has strengthened against other rich world currencies.
All of this seems consistent with concerns about the recovery and, in particular, a reassessment of the so-called “reflation trade,” where investors buy assets most likely to benefit from an economic recovery. Yet by the next day, the fear of growing up had apparently disappeared. The stock markets have reversed their fall. The price of oil and bond yields recovered somewhat.
High frequency data presents an equally confused picture. According to a recent report by JPMorgan Chase, a bank, global mobility measures continue to advance, suggesting continued growth of GDP. Yet Britain, the first large, wealthy country to be hit hard by the Delta variant, tells a different story. Our “economic activity index” for the country, using Google data on visits to workplaces, transit stations, and retail and leisure sites, fell about 5% since the peak of June (and there is little sign of greater mobility from July 19 from, when England lifted all national restrictions on covid-19). British history seems likely to set a trend to some extent. In America, surveys suggest that the rise in coronavirus infections linked to the Delta variant has been accompanied by an increase in fear of the virus reported by people.
The most difficult type of data – publications from official statistical agencies – does not yet reflect the impact of rising covid-19 infections. But they also give mixed signals. Measures of economic “surprise” in activity indicators (ie a comparison of published figures with economists’ forecasts) still seem fairly positive, especially in Europe. Housing construction in America is proving to be more vigorous than almost everyone expected; The UK government is borrowing less than expected by economic forecasters, a sign of a good recovery in tax revenues. But there were also disappointments. In America, for example, the University of Michigan consumer confidence index fell in July, against expectations of an increase.
Due in part to the evolution of activity indicators, revisions by economists of their expectations of GDP growth, our fourth measure, also sends mixed messages. JPMorgan analysts estimate that US production will grow at an annual rate of 4.3% in July, which is lower than they had forecast a week ago (which is nevertheless an acceleration compared to the month of June). Economists at Goldman Sachs, another bank, see downside risks to the global economy but still expect a robust recovery in 2021.
Put it all together and the picture is one of growing uncertainty about whether or not the global economic recovery is continuing at a rapid pace. In the rich world, consumers are still sitting on piles of accumulated savings, and workers are in high demand. Still, the biggest rebound in activity, flattered by a favorable comparison to last year’s lockdown-induced depths and, in America, generous stimulus checks, has passed. In its place are insignificant doubts about the sustainability of the recovery. Governments’ emergency stimulus programs are coming to an end. There are growing concerns that as the Delta variant of the coronavirus spreads, the resurgence of cases could impinge on economic growth, especially in places with large unvaccinated populations. ■
This article appeared in the Finance & Economics section of the print edition under the title “Mixed Messages”