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'It will be a long walk until we get back to anything that's called normal': Torsten Slok

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Torsten Slok, Deutsche Bank Securities Chief Economist, joined Yahoo Finance's Jen Rogers, Myles Udland, Dan Roberts, and Melody Hahm to discuss his outlook for the global economy and what the road to an economic recovery looks like.

Video Transcript

MYLES UDLAND: I'm joined now by Torsten Slok, the Chief International Economist at Deutsche Bank, and Torsten, let's kind of start. We'll go through, I guess, all the major arguments being had right now, but let's start with this idea of the worst being behind us in terms of economic data here in the US. Now, of course, you know, we won't get second quarter GDP until the end of July, but that reading is happening right now.

We're getting the employment numbers. We're getting consumer confidence, regional Fed surveys. Does this notion that the cratering we expect in the economy is probably over? Does that sound right to you? How are you thinking about that?

TORSTEN SLOK: Yeah, that's a very important question, Myles. I mean, we're fighting two wars. One war is already flattening the virus curve, and we are succeeding on that front. Of course, going right through this slowly, but the virus curve is beginning to move low. And that is definitely good news.

The problem is on the second war we're fighting namely on the recession curve, as you're saying, the data still continues to be very bad. And unfortunately, jobless claims, in particular, which gets attention and is probably one of the most important indicators given this weekly. It's certainly also still showing very bad numbers in the four, five million range, and we unfortunately continue that to be in the millions still over the next several weeks.

So the main answer to your question is that we probably have the worst behind us, but it is a very slow moving and developed with some time before we get to the other side of this. And that does mean, also, that economic data will continue to be not great at least for the next month or two. But there's a second derivative, meaning the improvement will continue through from here. We do agree with that.

MYLES UDLAND: And then, I guess, thinking about what the economy is like, you know, two, three quarters from now. I mean, you remember back after the crisis. It was six, seven years until the output gap closed given the dent we took there. I mean, are we looking at another decade of, I guess, below trend or below potential economic growth, that kind of fall out? Is that what you're thinking about longer term?

TORSTEN SLOK: Yeah, I remember you and I were talking about it. After the financial crisis, some time it would take, and I do think that one important difference today is that it will probably go faster with the economy coming back. But I was quite surprised on Friday when the Congressional Budget Office, they published their estimate for where they think the unemployment rate will be by the end of this year, and unemployment rate in February was 3.5%.

And now, the CBO is saying the unemployment rate at the end of this year will be 10%. That's telling you that even the CBO, which is the official forecast, at least for their Congress estimates of where the economy will be going, their view is that this will be a very, very slow move forward. And it makes complete sense that not only will the older generation-- remember, people that are more than 65 years old, they account for more than 20% of consumer spending.

And remember that not only will they most likely stay at home until there is a vaccine, but you will also have requirements about more distancing in restaurants, more distance in planes, trains, buses, everywhere we go, concerts, sporting events. And all that does argue for consumption only coming back relatively slowly. We are seeing in some of the daily data that auto sales for people that are more than 55 years old is still very pressed relative to auto sales.

It's actually begun to rebound, the younger generation. So we're beginning to see this pattern of older consumers in particular, not people being slower in coming out. And with the big picture of the economy only gradually improving, it does bring unfortunately some memories back to when we first discussed this after the financial crisis that it could take [AUDIO OUT] to what markets are pricing at the moment.

JEN ROGERS: Torsten, I really appreciate a lot of that map and analysis you went through in your note, a less than grand reopening. And as you say, I mean, there is a wide range of possibilities. Everybody's trying to figure it out, and you're just sort of taking the pieces here. You're looking at a recovery of only about 40% of lost output or employment likely to occur by year end. And one of the types of stood out to me was sort of how it breaks down by industry and job categories, what people do, the kind of contact they have, close contact with other people.

And one of the higher categories on there was teachers. So given that that's one of the higher categories you had, but everybody that has kids at home wants those kids to go back to school. How does that impact your thinking about all of the other industries in there that have less contact, but is making it a little bit more challenging for people's productivity?

TORSTEN SLOK: Absolutely, so there are two dimensions to the reopening will importantly, be, of course, which states open first. As we know at the moment from the University of Washington model, for example, Vermont is poised to open around May the 4th. California will be reopening around May the 16th, and the tri-state area, where we all are here, will, at least according to that model, is poised to reopen only around June the 1st.

So what we tried to do was to ask the question, which states will reopen first? And how much of GDP will they account for? And the other dimension is then, well, what do they then do in those states? And exactly as you say, some occupations are more concentrated in some states in terms of, for example, a hairdresser, for example, teachers, where you have to be close to each other.

You have to be close to your customers, or you have to be close in the school setting to the kids. So that begins to open all kinds of questions of, well, maybe you need more social distancing for those states, where you have closer proximity professions and closer proximity occupations. And when you take these two dimensions and add it together, you do get, unfortunately, that it is a very, very slow walk we have ahead of us. And it will take quite some time.

So it's more the Nike swoosh we have in mind, rather than the V-shape, or L-shape, or U-shape. Some people sent me a bathtub shape recovery, where we'll be walking around a very low line for a long time. I do think that when we start to drive back to work, when we start to get back and go to lunch, and we will be shopping a bit more. Then we will also see a consumption go back.

But to your good question, it does open up also some debate about, well, how can we even open the schools? Because that is one of the most close proximity occupations you can have, which is, again, raising debates about the medical discussion. Well, if you open schools and kids begin to go back and there's more containment risk, what does that mean then when they come back to their homes again?

So there's a lot of different dimensions that are very difficult to quantify, but we tried to do our best in this. And we do think still that it will be a long walk before we get back to anything that's called normal.

MELODY HAHM: I mean, Torsten, looking a bit further out, what kind of secular trends do you anticipate with the employment space? So of course, we mentioned teachers and a lot of service industry professionals, who will be at highest risk early on. But when you think about where those displaced workers or perhaps people who have gotten laid off and furloughed during this time, where do you anticipate future job growth?

Because even if retail store is open, it doesn't mean Macy's will be thriving, again, right? It isn't mean J.C. Penney will be back and booming just because those stores will be open. How do you anticipate this shift?

TORSTEN SLOK: Yeah, this is very important. When we look at some of the countries that already have opened, for example, Austria, Denmark, some parts of Germany, and also, New Zealand, you've actually seen some parts of their economies do relatively better. I have been a bit surprised on some of the daily data of credit card usage that has actually shown some parts of retail doing a bit better, clothing and footwear, including even hairdressers have actually done better. But to your more long run question, it does open up a lot of debates about, well, where is the job growth? The three sectors, of course, that have been generally doing well and we expect to continue to do well, of course, some parts of retail.

Generally speaking, retail should be doing OK. Also, health care, of course, should be doing well, and tech should also generally be doing well. But we do need some growth to interrupt the slack for the enormous amount of job losses we have, and one final important that I mentioned to you. A good question also is that, remember, that in Europe, people were never really fired.

We never saw lay offs to the degree that we've seen in the US, because there was the-- in Germany, the famous Kurzarbeit, meaning short working hours, where people were really not let go from their employers, but they were actually compensated and paid by the government. But that means that we have had a much, much smaller negative impact on employment in the European case than we've had in the US, so we are monitoring.

A good question, namely, all these people who unfortunately lost their jobs over the last few weeks, can they be reskilled? Are they coming back to the same industries? And it will probably take some time. That's also illustrated by the Congressional Budget. I was, again, expecting the unemployment rate here to still be around 10%.

MYLES UDLAND: And Torsten, I want to finish up by thinking about the next arguments that we all have. I mean, I think we've seen so many of the Fed complaints from the crisis make their way into the discourse extremely quickly, right? The Fed is reflating the market, this, that, the other. What about Europe? Because you mentioned the employment situation hasn't been quite as dire.

The ECB is in a much different place than it was to '09 and 2010. But are we going to be looking at another Euro crisis from what's also a recession, nearly a depression in Europe in a couple of years time? Are we going to see in many ways just a replay of the 2010s nightmare that, I think, we saw around the globe as we entered the 2020s?

TORSTEN SLOK: So it's clear, and this is a very good question, Myles. It's clear that there are, of course, a number of tensions in terms of this was not a crisis that was caused by any one. This wasn't caused by the banking sector or households signing wrong contracts, or mortgage service, or anyone else.

This was a national disaster that hit all of us at the same time. And it's something that exactly is becoming more and more important and will be a conversation now for quite some time. All the government bonds that have been issued in Italy, in Germany, including, of course, also in the US, will be buying all these bonds. What are the implications for other fixed income assets now that we are flooding the market globally, treasuries and government bonds around the world?

Would that be sucking dollars out of investment grade credit? What would that mean for equities? There is a significant growth in finance term in the risk free asset, so you open up your textbook. And you start studying. Well, what does it mean when the start of risk free assets starts growing so much? And it does have varying implications, of course. Where are we going to buy these risk free assets?

At the moment, the ECB and the Fed is doing that. But down the road once the Fed and the ECB step back, we do need to see some natural demand, and that will be money taken from pension savers, insurance companies. That will have to go in to the risk free asset arm and bonds in Europe, in the US, elsewhere. And that will have some implications for risky assets, and therefore, for what it means, in particular, of course, for credit.

But also, down the road mainly for equities, so these are very important dimensions of your good question namely. What are the consequences of this significant amount of things? And the 800 pound gorilla in that debate is the debate about the supply and demand in government bond markets. Not in this for the next several years.

MYLES UDLAND: Yeah, in many ways, we waited all 2010s for that question to get answered, and then it never did. We just got another crisis, and then, I guess, we'll do it all over. All right, Torsten Slok with Deutsche Bank, always great to get your thoughts. We'll talk to you soon.

TORSTEN SLOK: Thanks for having me.