Euro Macro: We have revised up our estimate of government funding needs – The economic shock from Covid-19 has led to a sharp deterioration of the public finances for eurozone member states. Since the crisis began, we have been tracking the funding needs of eurozone member states and our estimates have only gone up. Indeed, we have now raised our estimate for the eurozone as a whole to a total additional funding need for this year of around EUR 1050bn compared to EUR 850bn previously (see table below). Taking into account government plans before the corona shock, total gross issuance this year of bonds and bills will total almost EUR 2.5 trillion with net supply at around EUR 1.2 trillion.
The upward revision of our funding need projection mainly reflects the downgrades to our economic growth forecasts (see yesterday’s Global Daily Insight). This reflects the high automatic stabilisers in the eurozone (reflecting higher spending on for instance unemployment benefits and lower tax revenues), which is reflected in a cyclical deterioration in the public finances. In addition, governments have been adding discretionary fiscal stimulus. Most notably, yesterday Italy announced a new EUR 55bn package. In total, we now see a total fiscal impulse in the eurozone of 9.5% GDP, with 3.8% GDP of discretionary fiscal stimulus and the remainder due to the automatic stabilisers. The eurozone budget balance will deteriorate by a similar amount relative to its pre-Covid-19 expect level, taking the deficit to around 10.5% GDP.
We are currently reviewing our ECB call given the changes to our base case. We currently expect the PEPP to be stepped up by EUR 500bn by June to a total of EUR 1.25 trillion. However, given the deterioration in the economic growth outlook, the rising risk of deflation, and the even bigger surge in bond supply, the ECB could very well step up its asset purchases even more aggressively. (Nick Kounis, Aline Schuiling and Jolien van den Ende)
US Macro: Labour market looks to be stabilising… – There were a further 3mn new jobless claims last week, down from 3.2mn the week earlier. There were signs of a stabilisation in the continuing claims data, which increased by 456k to 22.8mn on a seasonally adjusted basis in the week to 2 May, but actually fell by 629k on an unadjusted basis to 21.1mn. This was the first overall fall in the continuing claims since the surge in jobless claims started in mid-March. As we have discussed previously, we think that in the current environment the non-seasonally adjusted numbers give a better read on the real labour market conditions, and that the continuing claims – which represent the stock of unemployed – are more representative than the initial claims (which is a gross flow number, and appears to count many duplicate claims). Indeed, if you add up the flow of initial jobless claims over the past two months, it would now come to 38mn since early March – an enormous discrepancy from the continuing claims. All of this suggests that we may be over the worst in terms of the initial hit to the labour market. The data so far points to a further significant fall in the May nonfarm payrolls (out on 5 June), albeit on a much smaller scale than the unprecedented 20.5mn decline in April – we currently project a fall of 3.5mn. From June, we expect payrolls to begin rising again.
…but permanent damage will be significant – With that said, much more important for the medium term outlook will be how many of the millions of unemployed become permanently displaced from their previous jobs. The data from last week’s April nonfarm payrolls report suggest that by far the bulk of the newly unemployed have been temporarily laid off, or furloughed. With the economy now reopening, many of these workers are likely to return to their previous jobs – we estimate around half, over the coming months. However, it has become increasingly clear that the reopening process will be a very gradual one – potentially punctuated by renewed outbreaks and a reintroduction of restrictions. Meanwhile, some sectors – particularly hospitality – will face prolonged restrictions regardless (for instance, restaurants in many states are now capped at 25-50% of normal capacity levels, to enable social distancing). This will inevitably weigh significantly on employment in these sectors. We therefore continue to expect unemployment to end the year in the high single digits – up sharply from the 3.5% registered in February – and with only a gradual improvement in 2021. (Bill Diviney)