In this way, the “K” shape of the recovery, with some actors gaining and some losing, would dis-integrate, with the upward sloping line falling downwards because of the problems experienced by consumers and companies in the bottom sloping line.
Number crunching
The latest data substantiates this spill-over mechanism. Business surveys in the services sector reflect a very acute deterioration in confidence in the hospitality industry, but most other sectors are softening as well.
It is difficult at this stage to gauge which trajectory is currently priced in by the markets.
Equities have been remarkably resilient over the last two months despite signs that the global recovery is struggling.
Also, the risk premium on corporate bonds remained low, although the deterioration in growth prospects raises default probabilities.
There are probably two factors at play here. First, there is a certain “automatic stabilisation” mechanism at work, since a relapse in economic data is normally followed by another layer of policy accommodation. This is another reason to see a “mediocre swoosh “ as more likely than a proper “W” shaped recovery.
It is quite remarkable that the latest bouts of market volatility owe more to the conflict between the Democrats and Donald Trump on a fresh fiscal stimulus than to the data flow.
Equities would definitely struggle if the political configuration post US elections made it difficult to swiftly engineer another fiscal push at the beginning of 2021, for instance if Congress and the White House were not aligned.
The second factor is quite simply that the more advanced we are in the pandemic the closer we should be to a vaccine, even if we need to factor in the time it would take to make it widely available to the public.
This perspective would make us relatively confident that “W” – that is, a double-dip - rather than an indefinite “sine wave” with several episodes of recession, is truly the worst scenario we can face.
Gilles Moec is Group Chief Economist, AXA Investment Managers
