Changing seasons in the macro climate

As we swiftly head towards the end of the year, several people have asked me what the outlook is for Q4. My response? “100% of sod all, is still sod all.” This is something I said a couple of weeks ago when I was, of course, referring to the fact that if GDP started at 100, and dropped 50%, even a rebound to 60% means you aren’t back at square one.

As we look at the impacts of 2020 on our economy, a number of people will highlight the speed of our rebound. They will look at the current level of the markets and suggest we are in rude health. However, the reality is, we are starting from a hole that is twice the depth of the GFC. Yes, twice the depth of the GFC. This is an important detail to remember as we close the year; facing the headwinds of real economic weakness and continued fear around CV-19.

Credit availability goes cold

On a macro level, there are several challenges blocking our economic bounce back. Amongst them, credit availability. We can see this clearly when looking at mortgage applications versus credit. In this scenario, supply has fallen over 30% since February – before the pandemic – with an 18% decrease in government loan availability, and a 57% drop in jumbo loan availability.

And, it’s not just housing. Last quarter, every sector of consumer lending saw tighter conditions. The implications here can be significant, especially when looking at the sustainability of the recent leap in retail sales.

At the same time, banks are considering risk and upping their loan loss provisions across the globe. In fact, last quarter, the six largest US banks increased their loan loss provision by 43%. In the UK, Barclays’ provisioning went up 75% and Lloyds 270%. Quite simply, as bank purse strings tighten, we will not have cash lying around.

A silver lining on the horizon

While I’d never claim to be a virologist, when looking at CV-19 data, it looks like change is in the air. Although infection rates are increasing, both deaths and hospitalizations are lower than ever in the west. Although some might argue this could be a result of its swift beginning, it might also show significant improvements in our medical response to CV-19 and a silver lining emerging for health this year.

According to recent research from Franklin Templeton Gallup (FTG), American’s fear of the virus has been “disproportionate”. Agree or not with this sentiment, what is interesting is the suspected knock-on impact of “fear” on our economy. FTG suggest the misconception of the risks of CV-19 has the power to delay recovery, prolong the recession and increase inflation pressures.

Hope in the air

When we look at the underlying economy, we’ve enjoyed a significant rebound in the data. Unfortunately, despite an encouraging rate of change, we are still mired at low levels of activity and face a herculean task to drag ourselves out of the current hole.

However, if the response to CV-19 continues to improve, the task will get a lot easier as fiscal and monetary stimulus continue into 2021. At the end of August for example, we saw the Fed introduce a new strategic framework indicating significant changes in the conduct of US monetary policy. The flexible 2% average inflation target (FAIT) initiative announced will no longer pre-emptively raise interest rates to counter the perceived inflation risk. Although there was no discussion about the monetary policy tools (such as quantitative easing or yield curve control) that could be used to hit these new objectives, the weak underlying macro backdrop more than justifies further action.

Indeed, given the massive monetary and fiscal stimulus expected between now and the spring, we really could be setting the stage for fireworks.