Global Economy Outperforms Expectations


Key takeaways from this week’s note:

  • New IMF forecasts anticipate diminished decline in the global economy this year.
  • U.S. retail sales grow rapidly in September.
  • Bank earnings are mixed as interest costs fall, but mortgage refinancing is a bright spot for banks and, presumably, for the consumer economy, too.
  • Disney’s managerial announcements this past week weren’t entirely new – more a completion of changes announced earlier in the year – but do serve to reinforce the company’s ongoing commitment to focus on streaming services.

We monitor earnings results and public information related to marketers and media owners along with government data and economic releases from countries around the world. We do this to better understand consumer trends as well as advertising and digital transformation issues.

IMF’s global economic outlook is improved for 2020, but still reflects a historically weak year. This week, the IMF published an update to its global economic forecasts for 2020 and 2021, reflecting a slight improvement in current year expectations but also a reduction in next year expectations. This year is now expected to decline in real (inflation-adjusted) terms by 4.4%, while 2021 is expected to grow by 5.2%.

The outperformance versus prior expectations was, in part, attributed to China, where public investment was cited as contributing to boosted economic activity, and to both the U.S. and Europe, where government transfers supporting household incomes were cited as limiting the pace of decline in those regions.

Some markets were responsible for limiting the improved forecast for various reasons. In India, it was a compression in consumption and collapse of investment. In Mexico, it was faster-than-expected spread of the virus. In South Korea, it was softer-than-expected export demand. And, in the Philippines, it was a decline in remittances from abroad. Growth is still expected in subsequent years, with 3.5% now expected for 2022 and beyond. Risks of worse outcomes remain “sizable,” and could occur because of a resurgence of the virus or public policy missteps, or both.

Of course, outcomes are still expected to vary widely by population segment and by business type. Concerns of a “K-shaped” recovery, where wealthier segments of a given economy’s population recover relatively quickly while others struggle for an extended period of time, was reinforced in the report, which noted “the burden of the crisis has fallen unevenly across sectors.”

Younger workers, those in less secure or informal work arrangements and those employed by smaller enterprises “appear more vulnerable” and, in general, “low-wage earners are at an appreciably higher risk of losing their jobs than those in upper quintiles of the wage distribution.” The report also reiterates concerns that “gaps in childcare limit parents’ ability to work, particularly that of mothers” and describes ways in which underprivileged students are impacted by an absence of the supplemental instruction wealthier students’ parents can afford while school closures may also limit access to nutrition and safe environments for those who are poorer.

The healthier-than-expected conditions were mirrored in trends reported by the U.S. Commerce Department, whose latest monthly retail sales data came out on Friday. On a year-over-year basis, preliminary U.S. retail sales for September 2020 showed year-over-year growth of 7.1%, substantially above the revised 0.3% growth rate for August.

This followed a June and July that were essentially in-line with the “normal” growth of 2019’s full-year levels after significant declines in March through May. In assessing the U.S. data, it is important to consider that September’s growth occurred despite an absence of stimulus payments by the government to consumers.

​​​​​​​Within the United States, most categories of retail activity were up year-over-year. Motor vehicle and dealer sales were a key driver, rising by 14.1% in September after growing 1.8% in August. The two months together look more like what we saw in July and June – 7.1% and 10.1%, respectively – which, at the time, appeared to reflect some pent-up demand and the impact of stimulus checks.

After avoiding any month of decline during the worst of the period of lockdowns, building material and garden equipment stores continue to be very healthy: for September they rose by 23% following on gains of 13% in August and 17% in July.

Food and beverage stores are also faring well, with a 12% rate of growth in September after growing by 7.9% in August. Levels have remained elevated at high single digits or low double digits through the pandemic period.

Sporting goods, hobby, book and musical instrument stores had a good September as well, rising 18% versus the 6% growth rate in August.

Health and personal care stores also accelerated meaningfully, with 7.8% growth in September versus 1.0% in August.

Clothing and related stores continue to stand out for how weak they are. Among different categories posting declines, clothing and clothing accessory stores remain very weak, falling by 12% in September. This compares with the 25% decline in August and comparably significant declines in July and June following on a near-evaporation of the sector in April and May.

Evidently, consumers may not be replacing as much clothing as they used to, and we can presume changed social and professional habits are limiting the need for new purchases as well.

Food service (i.e.: restaurants) and drinking establishments (i.e.: bars) continue to be weak with another 14% decline to follow on August’s 17% fall, although these rates are still better than significantly worse declines during prior months of the pandemic.

Electronics and appliances stores continued to be soft, with a 6.1% decline in September to follow on August’s 4.7% fall.  Department stores improved but remained weak posting an 8.2% decline. This was still better than the ‘teens declines of the prior three months.

Unsurprisingly, we continue to infer that e-commerce is rising at a rapid pace. During September, non-store retailers, which captures most e-commerce activity as well as catalog and other related sales, accelerated from already high levels to grow 27%. In August growth was 21%. This category of activity represented 15% of all tracked retail sales, or 16% excluding food services and gasoline sales.

Factors supporting these consumer spending trends may be supported by the release of results from several of the world’s largest banks this week. Among the world’s biggest financial institutions, the U.S.-centered JP Morgan Chase, Wells Fargo, Bank of America and Citigroup all released quarterly earnings results this past week.

Common trends include significant ongoing gains in deposits. Loans were relatively unchanged-to-down by comparison, at least in part because wholesale (business) customers are paying down their revolvers. While as-reported net revenues (revenues excluding interest expenses) were generally down and served as an overall drag on results, non-interest fee-related revenue held up relatively well with capital markets-related activities generally doing well in the quarter.

Mortgage-related revenues were healthy, with “extraordinary” levels of refinancings noted, while fees from credit cards were generally soft.

Refinancings are particularly noteworthy and may be helping to support current retail and consumer spending trends. Recent data for the United States from the Mortgage Bankers Association includes forecasts for $1.7 trillion in refinancing activity this year from 5.5 million loans, which compares with $900 billion in 2019.

To the extent this volume of activity plays out, it would represent the most significant amount of refinancing value since 2003. It should perhaps go without saying that $800 billion is noteworthy in context of an economy with $15 trillion in annual spending, although it is difficult to know how much of this capital is spent rather than saved or otherwise invested in the current environment.

Streaming services are a minor beneficiary of current consumer spending trends, and Disney’s “restructuring” was a focal point in the press this week. Arguably, it was only a continuation of what the company was doing prior to Kevin Mayer’s departure in May. Earlier in the week, Disney announced personnel changes that were characterized as a reorganization to drive the company’s focus on streaming services.

Prior to his departure in May, Kevin Mayer oversaw the company’s streaming businesses, including Disney+, Hulu and ESPN+, international operations and all ad sales and distribution activities. When changes were announced at that time, Rebecca Campbell was announced as overseeing most of the company’s streaming and international businesses, although each of the streaming services had leaders of their own, with Hulu’s appointed shortly before Mayer left. These responsibilities included businesses that she previously led between 2017 and 2019.

During the interim period between May and this week’s news, ad sales and distribution for the company’s media businesses reverted back to individual media divisions – the studios, entertainment networks and sports networks – at that time. The changes announced on Monday mostly transition the responsibilities that Mayer had to Kareem Daniel, who has had a range of roles in the company over the past 14 years. Daniel’s group is now called Media and Entertainment Distribution. Campbell now reports both to Daniel in her streaming services capacity and directly to Bob Chapek in her international capacity.

None of this takes away from the fact that Disney has been primarily focused on building out its streaming services for the past couple of years and that its related properties are central to the company’s strategy. Centering a large media conglomerate around streaming services is not easy, regardless of the formal structure. Managing through potentially conflicting internal financial and qualitative preferences remains a key challenge, regardless of the formal reporting structure.

Reporting last week in The Information indicated that, prior to the installation of Chapek as CEO, there were internal disputes regarding who had the authority to greenlight a program that would run on the streaming service.

Pronouncements of who has sole P&L accountability may help, but changes to those pronouncements are not always made public and will be as much a function of how well a management team works together as anything. This will likely be the most important factor that determines how fast Disney or any of its peers grow as they evolve their businesses on an ongoing basis.