Exists from lockdown proceed with no major mishaps, leading the stock markets to still trade sideways. Progress towards implementing budget supports is slow, which constitutes a potential risk and a source of volatility.
Worldwide COVID-19 cases crossed the 5 million mark, while deaths topped 325,000, as of 20 May.
For us, the key issue remains that in the absence of vaccine, this virus will be with us for a long time. For this reason, there can be no rapid return to normality. Levels of acquired immunity remain low according to recent serology studies. The capacity of nation states to conduct mass testing and contact tracing remains limited, with the exception of a few countries in Asia. This, in turn, limits the pace at which re-opening can proceed and sows the seeds of a potential second wave.
A vaccine would be obviously be a game changer. As we have seen this week, with the positive news from Moderna’s vaccine trial, the market enthusiastically responds to every bit of good news about vaccines, no matter how tentative and preliminary the results. Nonetheless, the consensus among experts remains that a vaccine will not arrive until 2021 at the earliest. The logistics required to support mass manufacture and delivery of the vaccine could further lengthen the timeline.
On the data front, the major news is arguably the US data on activity and expenditure for April. The data for the first quarter of 2020 show a far more modest contraction in the US economy than in continental Europe. One plausible explanation is that lockdown measures came in to force later in the United States so the resultant contraction in activity occurred later and therefore had a smaller impact on the March data for the United States. The April data for the United States corroborate this hypothesis somewhat with retail sales, excluding autos, falling over 17% on the month and industrial production falling over 11% on the month. Nonetheless, it still seems likely that the absolute contraction in activity was larger in Europe. In Italy, for example, industrial production in March fell by almost 30%.
The major news this week was the Franco-German proposal for the EU Recovery Fund. If anything the size of the proposed fund is a slight disappointment – the EUR 500 billions figure is significantly lower than that discussed in an earlier plan, produced by the Spanish government. The proposal does however favour grants over loans. There is hope that this Franco-German plan could prove a pivotal moment in the creation of a genuine federal state.
The proposal has however not yet been adopted. It has already run into resistance from a familiar set of northern European countries. It may require diluting down in order to win the support of all countries. Moreover, we do not yet know how exactly the scheme will work and whether in particular, it will lead to the EU gaining tax revenue streams of its own.
There have been other significant development this week regarding the policy response to the crisis:
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