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Executive Summary
August continued to be an eventful month for the global economy, being affected both by the continued Covid-19 pandemic as well as the continued unprecedented policy response to meet the pandemic’s effects.
How has the direct impact of the pandemic evolved?
After a resurgence of cases in July, August saw multiple days with record high Covid-19 case counts, with surges in the US and some developing countries being the chief drivers. Cases of Covid-19 have now exceeded 23 mn, while over 800,000 have died from the virus.
The US has continued to be the worst hit country: GDP data released for the 2nd quarter showed it to be the worst quarter on record. With August seeing a continuation of a new surge which begun in July, retail performance and consumer confidence took large hits in the month, while reductions in unemployment slowed. Any expectations of a V-shaped recovery are now being considered unlikely.
Key developing economies have been doing worse: The performance of emerging economies also took further hits, as India, Brazil, and Mexico saw large outbreaks continuing to worsen. Compounding worries, Chinese consumer performance and retail sales saw surprise weakening as well, raising questions on whether the developing world would see even further economic harm.
Success stories have seen reversals – worsening tourism prospects: Countries like New Zealand and Vietnam which were earlier hailed as countries that had successfully handled their own Covid-19 epidemics, saw unexplained new cases which forced major cities in both countries into lockdown. With even success stories starting to fail, prospects of an Asian travel bubble and early tourism recovery are looking bleak.
How have policy responses affected economies?
Response has been massive, but might not be enough: The response to deal with the economic fallout was massive from the start, but the continued impacts of the virus are making it clear that this is not enough. The US has been struggling to pass further fiscal stimulus, although it may have the space to do so if it wishes, the same is not true for emerging markets.
Monetary action has kept assets strong – but the dollar weakened: Following continued monetary easing by central banks in the developed world, emerging central banks have also continued their accommodative monetary stances. While this has helped drive investment into financial assets, the dollar has soured – helping haven assets such as gold drive up to record highs.
Geopolitical tensions remained in focus as well: Tensions between the US and China, both on matters of trade as well as on questions on security, added further uncertainty to the global economy. The US and China were supposed to hold trade talks, but this kept getting delayed, and analysts worry that in the run-up to the US elections, incentives might be aligned towards greater tensions.
How have commodities been performing?
Oil prices rose very gradually:
Oil prices rose gradually across August, as cautious optimism on the performance of the global economy combined with restrained supply, despite rising US-China tensions and a resurgence in COVID-19 cases. Prices reached a five-month high of US$45.86 a barrel on the 25th of August, after seeing lows of US$ 43.30 per barrel on the 31st of July.
Gold prices rose to further record highs:
With a weakening of the US dollar combining with some negative economic data, the price of gold reached record highs in August, before moderating down lower. Prices rose to highs of US$ 2,069.40 per ounce on the 6th of August, a record high for gold, before falling to lows of US$ 1,927.94 per ounce, on the 25thof August.
Top 5
Will the Global Economy Ever Recover From the Pandemic?
Three indicators - exports, unemployment and the highly regressive nature of the pandemic within and across countries suggests that the road to recovery will be a long one. While there is no universal solution, officials need to press on with stimulus and refrain from confusing a rebound for a recovery.
The Quiet Revolution in Emerging-Market Monetary Policy
Emerging Markets have benefited from the expansionary monetary policy measures of advanced economies. However, EMs may have to deal with unintended consequences of QE combined with a recession leading to bankruptcies that will be difficult to remedy given the constrained fiscal space
Virus surge makes US weak link in global economic recovery
A weak US economic rebound may be the greatest risk to the eurozone and the world economy, along with a second wave of the pandemic. Despite congressional discussions for a fresh round of stimulus has failed, stock markets maintain record highs buoyed by the Fed’s commitment to low interest rates.
Markets Are Fixated on the Wrong Bogeyman
While prospects of surging inflation is weighing on investors’ minds given monetary easing and skyrocketing gold prices, deflation may be the bigger risk. This is supported by the low inflation rates despite widespread economic stimulus, indicating the significance of a collapse in global demand.
Gold Is Soaring - Is Big Inflation Next?
While many investors may have increased allocations to gold anticipating a spike in inflation, markets that typically indicate rising inflation are signalling the opposite this year. This may be because the spike in gold prices is driven mainly as a result of the uncertainty in the wake of the pandemic.
Compiled by: Chayu Damsinghe
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.
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