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LGT Navigator: US economy contracts more than expected

May 29, 2020

The US economy contracted more strongly than expected in the first quarter. Europe's stock markets are continuing their upward trend for the time being, with the SMI exceeding 9900 points for the first time since the end of April. Swiss tourism is facing a miserable summer.

Economic collaps

The European stock markets continued their upward trend in the second half of the week. In Switzerland, the SMI gained +2.2% on Thursday and closed above 9900 points for the first time since the end of April. In Germany, the Dax rose +1.1% and approached the 12,000 point mark. The EuroStoxx 50 advanced +1.4%. The prospect of a further aid package boosted market sentiment. French Finance Minister Bruno Le Maire wants to speed up negotiations on the planned European recovery fund. He hopes there will be agreement on the details as early as next week, Le Maire said. The fund volume is to amount to EUR 750 bn, whereby two thirds of the money to be distributed would not have to be paid back. All EU members must agree to the plan, but four states have already announced their opposition.

By contrast, the stock markets in the US and Asia have run out of steam. American stock markets regained some initial gains in Thursday's trading, with the S&P 500 closing -0.2% lower. The Nikkei, the leading index in Tokyo, also fell today (-0.2%), as did the Hang Seng Index in Hong Kong (-0.6%).

Since the year's low in March, stock markets around the world have rallied strongly, spurred by massive cash injections from governments and central banks. But despite the recent recovery, strategists assume that stock markets are heading for the worst stock market year in ten years, according to a Reuters survey. Based on the survey, most of the leading indices are likely to perform as badly as they did during the financial crisis of 2008. However, 70% of the analysts expect that markets will not fall below the March low.

US-economy slumps

Meanwhile, no improvement is in sight on the economic front. US economic output fell at a -5% annual rate in the first quarter, the Commerce Department announced, revising an initial estimate (-4.8%). This is the sharpest decline since the recession following the financial crisis. The worst is yet to come: Economists expect economic output to slump by around 30% annualized in the second quarter, followed by -15% in the third quarter, according to a survey by data service provider FactSet. In addition, more than two million people in the US have filed jobless claims last week. Since March 21, the initial applications have totaled around 40 million. Although the figures have fallen steadily in recent weeks, the situation on the labour market remains dramatic: in April alone, more than 20 million jobs were lost, putting an abrupt end to the American job boom. The labour market data for May will be published on 5 June.

Swiss tourism at a standstill

The Swiss tourism industry needs to prepare itself for a miserable summer, after hotel beds already remained empty for the past two months. The Economic Research Institute of the ETH Zurich (Kof) is forecasting -37% fewer overnight stays than last summer. Although the population is likely to take more holidays within the country due to travel restrictions, this will not compensate for the absence of foreign guests, the Kof notes. In particular, cities and hotels specialising in Asian travellers must expect a massive slump. The Alpine regions and Ticino should fare somewhat better. There are no signs of a rapid recovery: the Kof expects the number of overnight stays to return to pre-crisis levels only in 2022 – a wave of layoffs and bankruptcies is likely to be the result.

Economic confidence in the euro zone improved somewhat in May, but the index remains far below the long-term average and has recovered only slightly from the crash of the previous months. A country comparison shows a mixed picture: While the mood in Germany and the Netherlands has improved overall, the index has reached a new all-time low in France. Analysts therefore expect economic output in the euro zone to fall sharply again in the second quarter, after already shrinking by 3.8% in the first quarter.

Economic Indicators May 29

MEZ Country Indicator Last
08:00 GER Retail sales -5.6%
08:45 FR Gross domestic product Q1 (q/q) -5.8%
09:00 CH Kof-indicator 63.5
11:00 EZ Consumer price index (y/y) 0.9%
14:30 US PCE price index (y/y) 1.7%
14:30 US Personal expenses (m/m) -7.5%
15:45 US Chicago purchase manager index 35.4
16:00 US Uni Michigan consumer confidence 73.7



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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
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Source: LGT Bank (Switzerland) Ltd.

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