The other “R” – recession

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Early in July, investors were buoyed by news of progress in the development of coronavirus vaccines.

However, as the month continued, optimism was tempered by a surge in infection rates in countries including the US, Australia, Spain and India.

Investor sentiment was further dampened as the strained relationship between China and the US continued to deteriorate.

Against a backdrop of renewed uncertainty, some scrambled for the traditional safety of gold, pushing its price to new all-time highs.

According to the World Health Organisation (WHO), over 17.1 million cases of Covid-19 had been diagnosed worldwide by the end of July, with more than 668,000 deaths recorded.

In the UK, parts of northwest England were placed under fresh restrictions following a surge in Covid-19 cases, and the easing of lockdown restrictions on some businesses and activities was postponed. Meanwhile, concerns over an increase in cases in north-eastern Spain spurred the UK government to amend its travel advice, driving down the share prices of UK travel, leisure, and airline companies. The FTSE 100 Index fell by 4.4% during July.

The US slipped into recession during the second quarter, and the economy contracted by 32.9% as activity was curbed by lower consumer spending and a sharp increase in Covid-19 cases. Although the economy is expected to rally in the third quarter, the intensifying surge in infections could undermine its recovery.

Consumer confidence weakened in July amid signs that the labour market is under pressure. The Dow Jones Industrial Average Index rose by 2.4% over the month.

Europe also entered recession: the eurozone’s GDP shrank at a record rate of 12.1% in the second quarter, and the economies of Germany, France, Italy, and Spain all notched up double-digit contractions during the period. In particular, Germany’s economy was affected by a sharp decline in import and export activity. The Dax Index experienced a choppy month, but ended July broadly unchanged, while the CAC 40 Index fell by 3.1%.

Elsewhere, European leaders finally agreed on an EU recovery fund worth €750 billion.

In Asia, the economies of South Korea and Singapore slid into recession during the second quarter; in comparison, Japan had already entered recession in the first three months of the year. China bucked the trend, however, avoiding recession by posting annualised economic growth of 3.2% during the second quarter.

 

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