Improving business surveys, progress with the U.S. fiscal stimulus package, and EU deal on crisis relief suggest we are now in the early stages of a recovery.

This is supported by the incoming economic data and the massive economic support that is being provided by governments across the world. Republicans have now agreed on their $1-trillion version of the next fiscal support package while Democrats are proposing a $3.5-trillion package. We expect a final agreement soon that will provide significant support for consumers and the economic recovery. We also expect these relief packages to continue until we are through the pandemic. Meanwhile, the Federal Reserve meets this week and we expect them to reinforce their message of historically strong monetary support.

Follow-on to the CARES Act

The CARES Act that was enacted in March in response to the pandemic provided over $2 trillion in economic support. It included a weekly $600 extra unemployment payment that is set to expire at the end of this month. This has created the need to pass an extension program, considering the pandemic continues to cause significant economic harm to many workers. While the extra $600 has boosted consumer spending, 68% of recipients are making more with this payment than they made at their old job. With concern that this is discouraging some from returning to their jobs, the $600 payment is a major sticking point in negotiations for the next relief package.

We expect the follow-on program to strike a better balance between providing enough support for households to pay their bills while still leaving an incentive for people to work rather than remain unemployed. We expect this fifth coronavirus relief package of at least $1 trillion to pass this week or next. It is expected to include another $1,200 payment to many consumers, $100 billion in aid to schools and universities, and additional money for coronavirus testing. Democrats also want additional funding for states and municipalities that could be included.

Business Surveys Support Recovery Narrative

On Thursday we will get the first look at second-quarter economic output with the consensus calling for a historic drop of 34%. However, the incoming economic readings have been showing significant improvement, suggesting that we are now in the early stages of an economic recovery.

Last week’s release of the July business surveys showed the U.S. reaching a six-month high, a significant rebound from the historic April lows. While the pandemic continues to create economic uncertainty (especially for travel and leisure), we view these rapidly improving business surveys as an early indicator of renewed economic expansion.

Europe’s business surveys reached a 25-month high, suggesting a solid economic recovery is beginning in Europe (which has also controlled the spread of the virus relatively well). We remain encouraged by the economic data coming out of China with all of this suggesting a synchronized global expansion has started.

Historic European Agreement Supports Recovery

A major concern for Europe ever since the creation of the euro was monetary union without fiscal union. This was at the root of the European sovereign debt crisis that hampered the global recovery from the 2008 financial crisis. Last week, the region took a giant step in the direction of fiscal union with all 27 leaders of the EU member states approving the European Commission’s proposal for a joint COVID-19 crisis recovery fund. We view this as a game changer for the stability of the euro and Europe.

The details include a €750bn recovery package (worth 5.4% of GDP), of which 52% will be grants and the remainder loans. This will be financed by the issuance of common EU bonds with the funds allocated to countries based on need, not on contribution to the budget.

This means that high-debt countries like Italy, Spain, Portugal and Greece will receive more in funds than they contribute, while high-income countries will be net contributors. While this is essentially what the United States does for its states, European Union countries had never agreed to this level of fiscal federalism before.

Importantly, high-debt countries weighed down by their fiscal constraints now have a better chance of a strong recovery out of the COVID-19 crisis. In addition, there is now a lower risk that populations will become frustrated by the lack of benefits of the union and will vote to leave the project altogether. This lower break-up risk should support Europe’s economic recovery, the euro, and European assets.

This unprecedented global policy response should ensure that a sustainable economic recovery develops that supports stocks and other risk assets in the months ahead – despite the uncertainty that the virus will continue to cause.

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