Global consumption is now recovering after bottoming in March-April. But an economic recovery is about more than just consumption. The next indicator we need to see turn positive is capital expenditure (investment). This means businesses in the real economy starting to invest more cash in new capital equipment and staff. For businesses to invest, economies need: (i) a strong savings rate (the proportion of income that is saved by households and businesses) to provide the capital needed to invest, and (ii) improved confidence levels in future economic output.
We are seeing higher savings rates in 2020 in most major economies. In Q1 2020, the Eurozone region household savings rate rose to 16.9%, up from 12.7% in the previous quarter. In the US, the personal savings rate surged from 7.9% at the beginning of the year to 32% in April and 23% in May.
When companies decide to increase investment levels, they need liquidity available to allow them to fund that investment. The combination of higher savings rates in major economies and the recovery of free cash flow generation in some sectors of the economy suggest the current environment could support a bounce back in investment levels.
Improving PMIs (lead indicators of economic sentiment) and recent economic data releases also sugges that economic confidence is improving, but this is tentative so far. If the improved confidence levels in major economies can last (a second wave of COVID-19 may have something to say about that!), then the real economic data over the next three to six months could start to improve considerably.
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