Prolonged Gap Between Real Economy and Asset Prices... Financial Markets Becoming More Sensitive to Negative Factors

Signs of Flexible Economic Recovery Remain Weak in Second Half
Expected Recovery Time Lengthens...
"The Greater the 'Decoupling,' the More Vulnerable to Minor Setbacks"

Beverly Hills, USA Regains Vibrancy Amid COVID-19 Crisis

(Beverly Hills AFP=Yonhap News) On the 25th (local time), shoppers are returning to luxury stores on Rodeo Drive in Beverly Hills, California, USA, which reopened after three months due to the COVID-19 pandemic.

[Asia Economy Reporter Minwoo Lee] Despite weak economic indicators, prices of risky assets such as stocks continue to rise. Given the weak signs of a resilient economic recovery in the second half of the year, there are concerns that if the gap between the real economy and asset prices widens, financial markets may react sensitively even to minor negative factors.

The International Monetary Fund (IMF) on the 24th (local time) presented the global economic growth rate for this year as -4.9%, down 1.9 percentage points (P) from its April forecast in the World Economic Outlook report. The main reasons cited were the resurgence of COVID-19, intensified US-China trade conflicts, and increased debt burdens. It lowered growth forecasts for major countries one after another: the US (-5.9% → -8.0%), Eurozone (-7.5% → -10.2%), China (1.2% → 1.0%), and South Korea (-1.2% → -2.1%). KTB Investment & Securities researcher Hyeyoon Lim analyzed, "Rather than placing great significance on the downward revision itself, attention should be paid to the fact that the outlook for the global economy is dominated by downside risks rather than upside potential. Also, despite active policy responses, the pace of rebound is slow and the magnitude is limited, so it should be kept in mind that economic recovery will take considerable time."

◆Still Slow Economic Recovery... Evident in Latest Economic Indicators= The upcoming major economic indicators for June are likely to show signs of a slow recovery. First, the Manufacturing Purchasing Managers' Index (PMI) from China's National Bureau of Statistics, to be released on the 30th, is expected to show limited rebound reflecting weakening external demand. Researcher Lim said, "Since March, one pillar of China's production recovery has been the quick resumption of economic activities compared to other major countries, which led to favorable export performance. However, as other major countries have also resumed economic activities, this rebound effect is likely to diminish, and if global demand does not recover, China's export recovery will also be limited."

South Korea's export figures, to be announced on July 1, are also expected to struggle to escape sluggishness. The average daily export value from the 1st to the 20th of this month was $1.56 billion (approximately 1.88 trillion KRW), down 16.2% compared to the same period last year. This is even weaker than last month's $1.62 billion. Excluding relatively favorable exports to China (which increased by 3.8% year-on-year on an average daily basis from the 1st to the 20th), demand weakness due to the COVID-19 shock continues.

The US nonfarm payroll data, to be released on July 2, is expected to be similar to last month. According to the Bloomberg consensus on the 25th, an increase of 3 million jobs is anticipated. Last month, the increase was 2.509 million. Considering the reopening of economic activities, recovery is likely to be centered on the service sector, which was heavily impacted by shutdowns, such as tourism. However, it is too early to be conclusive. Researcher Lim explained, "There is a risk that temporary layoffs could worsen into permanent layoffs, and the total number of workers decreased from 150 million in March to 130 million last month, so the gap with pre-COVID-19 employment levels remains large. Additionally, with a surge in part-time jobs, rising COVID-19 infection rates, and overloaded medical facilities, it may take considerable time for the economy to normalize."

◆Asset Prices Rising but Concerns Over Volatility from Minor Negative Factors= Currently, the world is responding to an unprecedented shock with much faster and more aggressive stimulus measures than during the financial crisis, resulting in rising prices of risky assets such as stocks. The market holds high expectations that fiscal policies aimed at preserving private purchasing power and the Federal Reserve's monetary policies, which maintain low interest rates and support the credit market, will largely offset the shutdown shock. The belief that the low interest rate trend will continue long-term also supports expectations of capital inflows into risky assets.

However, the real economy's recovery remains slow, and signs of a resilient rebound in the second half are weak. Concerns are growing that as the divergence between the real economy and asset prices (the "Great Decoupling") continues, financial markets may react sensitively to risk factors. Researcher Lim pointed out, "For example, if the strength of additional fiscal policies falls short of expectations, or despite various Fed policies, concerns about rising interest rates (due to increased government bond issuance for funding) or the possibility of deleveraging by some companies emerge, we should prepare for a decline in asset prices, that is, a mitigation of the decoupling."

This content was produced with the assistance of AI translation services.