The guest commentary below was written by written by Daniel Lacalle
The recent jobless claims figures show how difficult it will be for the U.S. recovery to be as quick and strong as initially expected.
- 7.7 million jobs were lost in Hospitality and Leisure in April, 2.5 million in Education and Health, with 2 million in Retail and another 2 million in Professional Services. These sectors are unlikely to recover fast and enough to compensate the job losses of the past month and even less likely to see the same level of wages of 2019.
- Credit card delinquencies are rising, and retail sales are going to see a very modest recovery because household debt is increasing, wages are under pressure and most citizens are changing their consumption patterns, looking to strengthen their savings in case another shock arrives.
- Corporate debt is rising to new records due to the collapse in operating revenues. As such, companies will likely take all possible measures to conserve cash flow, reduce expenditure and be prudent about hiring decisions. This will lead to slower job creation and investment even once the economy opens.
- Tax increases are likely to affect the recovery. The government deficit is soaring, with the Treasury looking at $2 trillion of new debt in 2020 due to the measures implemented to combat the economic impact of coronavirus. Unfortunately, the Democrats are looking to increase taxes just when the economy needs more investment and attraction of capital. If taxes rise significantly, what is already a weak outlook for capital expenditure and job creation is likely to worsen.
All of this makes a V-shaped recovery even more challenging than before. However, the U.S. economy is likely to recover faster than the Eurozone and suffer less in 2020.
The eurozone has made a very agressive experiment trying to hide soaring unemployment under government-financed temporary lay-off schemes. This may prove a short-term success because official unemployment data will not seem as negative even when almost 30% of the labor force will be under some form of unemployment scheme by May 2020.
However, this is also an enormous risk for economies with already elevated levels of debt and government spending. With public spending to GDP at 40% before the crisis, governments are likely to increase their expenditure by at least 10 points of GDP. This will likely lead the eurozone into a debt crisis like the 2011 one and with similar ramifications.
Central banks are massively injecting liquidity, but a solvency crisis is not solved with more liquidity. Government debt spreads are already rising in the eurozone despite an unprecedented quantitative easing program from the ECB.
The combination of a rigid labor market, high government spending and rising taxes will also likely impact the eurozone recovery, which is likely to be weaker, more prolonged and with higher unemployment than the United States one.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.