Developed Market GDP

Michael Rudd, CFA | President, CEO and Portfolio Manager

This week, we were able to get a preliminary picture of the economic impact of the pandemic from governments around the world with the release of Gross Domestic Product (GDP) data. GDP is an interesting measure but, by its nature, is backward looking and usually not a very good input in determining our view of the individual companies that we invest in. We would not normally spend much time in this note (or in our Investment Committee) discussing GDP, but because of the current situation and the quick change to the global economy, we thought it useful to discuss the reports this week.

Data was released for parts of Europe and North America. There seems to be a uniform split between different parts of the economy across all countries. Retail services and commercial investment have taken a serious hit during the shutdown, but goods consumption and residential investment has held up. This does make sense given the pattern of behavior change: we are buying groceries and staying home, instead of going to restaurants and traveling. The same for commercial and residential investment, people are still building and renovating houses, while businesses have stopped that type of activity.

  • Figure 1 presents Gross Domestic Product data for select European countries, the United States and Canada. We had to do some adjustments to make the numbers comparable, as not all countries release their data the same way.
  • The green lines are from Europe. They look a little worse because the pandemic started there earlier, so a larger portion of the quarter is representative of the effects of mitigation policies implemented by governments.
  • The blue lines are Canada and the US. It appears that Canada looks very similar to the US at this point. That does make sense given our reliance on manufacturing for the US economy and our exposure to commodities, which have experienced significant impact. One item to note about the US is the drop in personal consumption. The consumer is approximately 70% of the US economy and its year-on-year growth is at a 40-year low, so this was, and will continue to be, a major driver.

“This means that” because Q1 represents only a partial impact of mitigation policies, we should expect Q2 to be worse. In our Investment Committee this week, we concluded that Q2 is already reflected in financial markets. The real question from an investment perspective is: What does Q3 look like? At this point, no one knows the answer to that question.

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