"Great Expectations"

Posted by: Paul Donovan

20 May 2020

Daily update

  • US President Trump declared the American economy will be "great" in the third quarter. This depends on your definition of "great". The third quarter should see a strong GDP growth bounce back. This will be fuelled by delayed consumer demand, and spending of "forced savings" acquired during the lockdown. Markets tend to underestimate the resilience of consumers in a crisis.
  • The level of GDP will not be great in the third quarter. Living standards will be below those of 2019. Unemployment will be at least double pre-crisis levels, and businesses will have failed. The GDP level is unlikely to recover before late 2021. Will the political story be 1980 Reagan ("Are you better off than four years ago?") or 1984 Reagan ("Morning again in America")?
  • Eurozone and the UK consumer price inflation is due. This will perhaps owe more to statisticians' imagination and creativity, and less to actual prices. The virus is disinflationary, but consumers are likely to be believe inflation is higher than reported (as high frequency purchases are perhaps more likely to rise in price).
  • Bank of England Governor Bailey is speaking, and the minutes of the last Fed meeting are due. European consumer confidence data is too irrelevant to be worth mentioning.

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