BlackRock Investment Institute

Macro insights

A focus on financial vulnerabilities

We are tracking the coronavirus shock and recovery along three signposts. First, we are following the reopening of economies while balancing the virus response. Our second signpost is about the successful implementation of policies to bridge households and businesses. Our third signpost is on financial vulnerabilities – exploring whether income disruptions could turn into systemic financial stress.

We judged financial vulnerabilities to be limited before the pandemic - banks were better capitalized than during the global financial crisis (GFC) - and we still see a only a modest chance of the shock turning into systemic financial stress and permanent scarring of capacity. This means the permanent income loss is likely to be just a fraction of that caused by the GFC.

We do see a rise in financial vulnerabilities over the medium term due to higher unemployment and default rates and significantly greater debt levels resulting from the disruptions to incomes and cashflows. Both households and businesses continue to benefit from fiscal and monetary policy – at least for now. Existing financial vulnerabilities – elevated U.S. corporate debt levels, underperforming European banks, persistent euro area fragmentation and volatile emerging market capital flows – could be amplified by the crisis. 

U.S. bankruptcy indicators, 2005-2020

Sources: BlackRock Investment Institute, National Association of Credit Management (NACM) and Bloomberg, with data from Haver, June 2020. The NACM indices show filings for bankruptcies in the service and manufacturing sectors as measured by the NACM survey. A lower number means filings for bankruptcies increased (note the right-hand scale is inverted). The Bloomberg bankruptcy measure is a monthly total of US corporate bankruptcy filings reported by Bloomberg.

When we look at the financial vulnerabilities of households and firms, we find considerable variation across countries and income groups. Households seem to have some financial cushioning, potentially more than firms (even though the latter have drawn down a considerable amount of credit through various channels since the start of the pandemic). The revolution we are seeing in macroeconomic policy is propping up both households and companies – yet policy fatigue remains a risk, especially in the U.S.

There are some tentative signs of an uptick in bankruptcies in the U.S. See the red line in the Bankruptcy Rises chart above. Survey data in the same chart suggest that pressures in the U.S. are more severe in the service sector than for manufacturing. But some of this includes “Chapter 11” style bankruptcies, which provide temporary protection for firms from creditors but allow operations to survive in the long run.

Google search results, June 2019 to June 2020

Sources: BlackRock Investment Institute and Google Analytics, June 2020. Notes: Auto loan stresses are captured by searches for 'Bankruptcy' within the Google Autos and Vehicles category. The mortgage forbearance line shows searches for 'mortgage forbearance.' Both indices are normalized so that the peak search level equals 100.

For households, we look to internet search data to gauge signs of stress. See the Consumer Stress chart above. These point to a sharp rise in searches in the U.S. for mortgage forbearance, as banks started to offer the option to defer payments. There has also been a notable uptick in searches for auto loan bankruptcy. Forbearance or deferrals might cushion the income shock temporarily by reducing net outgoings, helping to avoid the adverse effects of default. But such measures only switch the payment schedule around. Permanent damage may only be avoided if incomes are restored quickly.

Recent macro insights

Spending mix key to inflation
U.S. consumers are spending more, last week’s U.S. personal consumption data show. But goods spending is not rising as quickly as it was last year.
Tighter conditions
U.S. financial conditions have tightened a lot in the last six months – in other words, financing is becoming more costly for individuals and companies
Red-hot goods inflation slows
High inflation is largely due to the massive pandemic-induced shift in consumer spending toward goods and away from services, in our view.

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