Liquidity Market Taking a Breather... Need to Consider the Post-'V-Shaped' Economic Recovery

Faster-than-Expected Economic Rebound... Employment Shock Also Recovering
Government Support Measures Must Continue to Sustain Trend... Income Compensation and Other Actions Essential

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The liquidity-driven phase in the financial markets that continued after the outbreak of the novel coronavirus infection (COVID-19) has entered a pause. Fiscal policies of governments worldwide are weakening as the spread of COVID-19 subsides. Until national budgets are finalized and the U.S. Federal Reserve announces additional monetary policies, the liquidity-driven market is expected to slow down, while economic trends?previously overlooked by market participants?are anticipated to be sensitively reflected in asset prices.

Faster-than-Expected Economic Recovery After COVID-19 Shock

Shinhan Financial Investment forecasted that future economic trends will exert significant influence on asset prices. They emphasized the need to pay attention to the faster-than-expected pace of economic recovery. The global economy showed a 'V'-shaped rebound starting in May. The Emerging Market Economic Surprise Index began improving from mid-March as China recovered first from the COVID-19 shock, continuing rapid improvement through the end of June.

Accordingly, expectations for the economy were quickly revised upward. The Organisation for Economic Co-operation and Development (OECD) announced in its mid-month World Economic Outlook that this year's growth forecast was revised to a 4.5% contraction. This is a 1.5 percentage point (P) upward adjustment from the forecast released in May, when COVID-19 was spreading rapidly. The first and second quarters of this year contracted by 3.0% and 9.7% quarter-on-quarter, respectively, but the third and fourth quarters are expected to grow by 6.0% and 2.8%, partially offsetting the first half's slump. Next year's growth forecast was slightly lowered from 5.2% to 5.0%, but the absolute level of gross domestic product (GDP) is expected to recover faster than previously anticipated. The expected period to return to pre-COVID-19 GDP levels has also shortened. While it was previously expected to be difficult until next year, the mid-term outlook now anticipates recovery by at least the second half of next year.

Government’s Aggressive Stimulus Measures Driving Economic Recovery

Households in advanced countries did not experience a significant decline in purchasing power despite the COVID-19 shock. Disposable income, which indicates purchasing power, actually increased despite a temporary halt in economic activities and reduced employment income. In the U.S., disposable income rose by 17.0% year-on-year in April, expanding the growth trend, and maintained an increase of around 10% through July. The Eurozone and Japan showed similar trends.

Ha Geon-hyung, an economist at Shinhan Financial Investment, diagnosed that this was due to government measures such as basic income payments, unemployment benefits, and tax cuts leading to increased disposable income. U.S. wages and labor income decreased by 7.0% year-on-year in April and continued to decline through July. Transfer income, which refers to income supported by the government or family without production activity, surged by 112% in April and maintained double-digit growth through July. South Korea showed a similar pattern. Household disposable income in the first half of this year increased by 5.8% year-on-year. Although labor income decreased by 1.7%, transfer income surged by 39.0% due to disaster relief funds and unemployment benefits. Notably, since support was provided universally regardless of income, high-income households in the 4th and 5th quintiles also saw increases in transfer income.

Employment Shock Also Recovering... Market Structure Changing

Employment shocks in countries other than the U.S. were more limited than expected. China implemented factory closures and movement restrictions to curb COVID-19 spread, causing the surveyed unemployment rate to exceed 6% early in the year. After these measures were lifted, the rate dropped to the mid-5% range. The Eurozone and Japan maintained unemployment rates in the 7% and 2% ranges, respectively, despite the COVID-19 shock. In contrast, the U.S. unemployment rate, which had hovered around the mid-3% range, surged to 14.7% immediately after COVID-19. This was because policy authorities passed the CARES Act, providing an additional $600 weekly unemployment benefit until the end of July, making layoffs easier. In response, the U.S. aggressively implemented the Paycheck Protection Program (PPP), offering unsecured loans to small businesses and sole proprietors under conditions of employment retention and wage protection, focusing on employment recovery.

Economist Ha analyzed that market-level responses also had a positive impact. The expansion of online remote work helped partially mitigate employment shocks caused by reduced face-to-face activities. According to the International Labour Organization (ILO), the online employment index sharply rose from February, when COVID-19 intensified, reaching an all-time high in May. Increases were especially notable in software development, sales and marketing, and professional services. After May, as lockdown measures were gradually eased, temporarily laid-off workers returned to their workplaces, leading to a decline in the unemployment rate. The contribution of temporarily laid-off workers to the unemployment rate decreased from 11.5 percentage points in April to 3.8 percentage points in August.

Continued Government Income Support Measures Needed for Economic Recovery

Shinhan Financial Investment pointed out that extending government income support measures is necessary for sustained economic recovery. Since unemployment rates tend to rise with a lag during economic crises, the negative effects of short-term unemployment caused by COVID-19 could become more pronounced starting next year. This is why employment support policies, which are currently being gradually reduced, need to be expanded. Researcher Ha stated, "Because aggressive policy implementation in the first half of the year to respond to COVID-19 damage exhausted resources, fiscal deficits in major countries are expected to shrink in the second half compared to the first half. If government support disappears, household income depletion and consumption contraction could reoccur, so continuous income support measures are necessary even after the COVID-19 situation eases to ensure a soft landing of the economy."

He also emphasized the importance of forming a virtuous cycle linking consumption, production, and investment. Economist Ha said, "Looking at China, which is leading proactive economic recovery, government-led investment expansion is the foundation for forming a virtuous cycle. From next year, when additional fiscal stimulus measures are expected to be fully implemented, confidence in the economy is anticipated to improve."

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