< Back to Trader Blog Articles

Monitoring the economic reopening


Economic development in a country is best measured by GDP and GDP expectations. Given that share prices reflect expectations on the future stream of earnings, economic expectations are a key driver to the outlook. Following the start of the covid-19 pandemic, and the consequent lockdown period, economic expectations have turned negative for 2020. Nevertheless, the focus has shifted on the recovery beyond the short-term decline, and whether economies will bounce back as easily as expected.

On June 24, the International Monetary Fund (IMF) issued its warning that economic expectations are now worse than initially anticipated, and downgraded its outlook from April by another 1.9% to a global growth decline of 4.9% in 2020. Despite forecasting a 5.4% increase in global growth in 2021, the IMF remarked that the 2021 GDP level is still expected to remain significantly lower than pre-covid-19 levels.

Relative to the US, Europe suffered a larger downgrade to the economic outlook, with the IMF forecasted output to decline by 10.2% in Europe compared to 8% in the US. Within the region, the fund slashed the forecasted decline for France, lowering the expected economic decline to 12.5%, similar to Italy and Spain.

Despite that some economies have achieved declining infection rates, the IMF stated that material headwinds remain to economic growth. The persistence of social distancing measures, the decline in productivity and the greater damage from lockdown measures on supply potential, are all expected to lead to a slower recovery path than initially estimated.

In the long term, the drivers of economic growth and potential GDP ultimately underpin the value of equities and therefore are the same drivers for equity market returns. In fact, the long-term aspect in this equation could offer an explanation to the current disconnect between financial markets sentiment and the expected decline in GDP growth in the short term.

Meanwhile, economic data since the reopening still presents mixed signals. In the US, manufacturing PMI rose to 49.6 in June, beating expectations. Even so, the below 50 reading represents a period of contraction in the overall economy. Moreover, the number of US citizens filing for unemployment benefits came in above expectations, despite slowing down to 1.48 million in the week ending June 20. Moreover, due to a decline in government social benefits, personal income in the US declined month-on-month, raising the question whether fiscal benefits will be renewed beyond July.

In Europe, PMI data points to a more positive direction with Eurozone PMIs beating expectations as Germany and France PMI readings came in better than expected. France even managed to record the first expansion in the private sector, with Composite PMI reading of 51.3 for the month of June. However, the covid-19 pandemic created both supply and demand disruptions which has triggered a surge in demand for funding. Loans to companies in the euro area expanded by 7.3% in May, continuing to increase on a monthly basis as companies aimed to boost their liquidity and ensure funding during this crisis.

Despite that the economic reopening seems to be on track, the potential rise in covid-19 cases and the risk of renewed lockdowns still remains high. The increase in daily covid-19 cases and the reduction of hospital capacity in the US is once again reigniting concerns. Case in point governors in Texas and Florida have decided to halt the reopening by introducing new measures on restaurants and bars. While different methods can be implemented to contain the spread of covid-19, any form of measure to slow or halt the economic reopening could hinder the economic recovery.


This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.