News - 04.05.2020

Cause for prudent optimism

  • The Financial Centre

Near two months of confinement show their effect.

First, and most importantly, the infection curve and the death rate have been brought down significantly. The numbers at present allow governments across Europe to consider lifting some of the lockdown measures. There is thus a great deal of optimism that the lockdown will soon come to an end.

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People’s and businesses’ patience will however be tested by the only gradual nature of this opening-up of our economies. The discipline and civility which all of us have shown ourselves capable of during the last weeks will be required for some more time as we need to keep the infection rate from ticking back up.

Second, on the economic side also, numbers are being produced that underpin the consequences of the lockdown. Various countries have produced grim estimates of how much their economies will shrink. In the case of Luxembourg, the statistics agency’s forecast ranges between 6 and 12%, depending on the length of the lockdown. If the economy can slowly open up as announcements this week seem to indicate, we should be able to limit the damage to a 6% downturn and 7,2% unemployment rate this year. The good news would then be a 7% growth rate in 2021. This would still equate a two year stagnation with a hefty price tag. A 12% downturn looms however in case we have to keep large areas of our economy on standby or life-support for a prolonged or renewed period.

Another source of data that can give us cause for optimism is the monthly publication by the CSSF of assets under management in Luxembourg funds. The figures at the end of March do show a decrease of 11,11% which in and of itself is anything but negligeable. However, if you pick this number apart, you see that 8,37% is due to market value loss in a month where exchanges have seen the wildest downturn in decades. You also see that « only » 2,74% is due to redemption, ie money being pulled out of funds by investors. These numbers come after a month of February that still saw positive inflow of funds, albeit of only 0,28% and a market value loss of 2,81%. They will be followed in a few weeks by April numbers that probably reflect a recovery to some degrees of market value.

The good news of the numbers on the health front allowing a gradual opening up of the economy and the perspective of limited damage on the economic side can easily explain why we can look at this glass as being half full.

We should however also remain extremely prudent given the frailty of the economic situation we are in all over Europe. Deconfinement will need to strike a very delicate balance between health imperatives and the wish to bring economic life back to normal. If the number of infections go back up with kids going back to school and shops opening up again, governments will probably have to reintroduce restrictions which would then come again at a high cost to our economies.

Also, if we take a look across the pond, we see quite a gloomy picture with unemployment since the beginning of this crisis hitting 30 million people. This leads to real consumer spending out-plunging even consumer confidence indexes and to savings rates spiking. As Paul Krugman admonishes us in his last NYT column : « Pay no attention to the Dow ; keep your eyes on those disappearing jobs ». We may of course be tempted to consider this a problem peculiar to the US, given the nature of their labor relations and of their social safety net. The last time we thought of something as a US problem only was in 2007-08 with the sub-primes. We were reminded the hard way that there are not only advantages to an interconnected economy…

Nicolas Mackel, CEO of Luxembourg for Finance