The World In A Week – Interim Update14th May 2020
We knew it was coming, but that did not stop the market from overreacting to what is undeniably a certainty.
The UK economy shrank at the fastest monthly rate on record during March, due to the lockdown and the enforced economic slowdown. UK gross domestic product (GDP) fell 5.8% compared with the previous month, making it the largest drop since records of monthly GDP began in 1997.
It also meant that the UK has had its first quarter-on-quarter drop in GDP since the Global Financial Crisis. The 2% fall compares to falls of 1.2% for the US and 3.8% for the Eurozone. The recession will technically become official when we have a negative reading for this quarter, as you need two consecutive negative quarters for a recession.
Although much of this was widely expected, it did not stop the market reacting wildly. The first three days of this week saw the FTSE 100 swing more than 200 points, evidencing that volatility is here to stay. As we wrote on Monday, the likelihood of a ‘V’ shaped recovery has dissipated, and our base case of a ‘W’ shaped market is looking more probable.
That means more commitments of economic stimulus if markets became too unruly. In anticipation of this, we have already had proposals from the US of an additional $3 trillion fiscal package. However, there is a conflict building between those who see these extreme measures as absolutely necessary, and those that fear the spectre of rising debt will come back to haunt us. Exceptional times call for exceptional measures and ultimately the combined total of the global promises is essential to combat the global pandemic.