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This week on COVID-19: Recession concerns pressure major markets’ ability to act fast

DuckerFrontier, March 26, 2020

The Lens is a weekly newsletter published by DuckerFrontier’s Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Our teams of analysts are conducting research into the potential impacts of the novel coronavirus (COVID-19) on the global economy and business environment. Subscribe today to receive the latest insights on COVID-19 business impacts in your inbox every Thursday.

Read this week’s edition of The Lens below as you prepare your business for coming changes.

US will see a sharp contraction in 2020 due to the COVID-19 explosion
Key Takeaways
  • COVID-19 cases are growing exponentially with New York being the new epicenter. As of March 24, there were 42,164 positive cases among 294,056 tested, and 471 people died, according to the COVID Tracking Project. 20,875 cases were in New York. By contrast, 10 days ago there were fewer than 2,000 cases.
  • Frequent international travels, high population density in urban areas, and previous government inaction had fueled the crisis. Now, though we have stronger restrictions in states like New York, it will still be a week or two to see the effects of these restrictions.
  • The economic cost of the COVID-19 crisis, namely a sudden stop in the economy, has led most forecasters, including DuckerFrontier, to revise down their forecasts dramatically. Meanwhile, the Federal Reserve has lowered the policy rate to 0.0% and unleashed an unlimited Treasury purchase plan to prevent capital markets from falling apart.
  • On the fiscal side, the White House and Senate leaders have agreed on a 2-trillion stimulus package, which will then need to be passed by Senate and Congress.

Our View
  • The US outlook has worsened significantly in the past few weeks, with market focus shifting from external turmoil to a sudden domestic stop. Will we see another 2008 financial crisis? Most people expect the initial blow to be steeper but the duration to be shorter, and fiscal policy will play a key role in limiting the duration.
  • Steepness of this recession: We have seen businesses close or be severely disrupted due to the virus in only a few weeks, and this will only be exacerbated as we have more restrictions. Clearly, there will be a loss in output and income, and 2020 Q2 could easily be worse than 2008 Q4, the worst quarter during the financial crisis. In particular, initial unemployment claims this week reached the same peak level during the 2008 financial crisis.
  • Duration: The COVID-19 recession has a different nature compared to the 2008 financial crisis. Some of the lost production and demand will not be wiped out but deferred. Household indebtedness has declined from 100.0% of GDP in 2008 to 76.0% in 2019, which will help consumption resume more quickly. The financial sector is much more regulated with better capital adequacy, and the Fed is doing whatever it takes to save it. A greater risk is now on the corporate side, as US firms are highly leveraged due to years of extra-low interest rates, and this also explains why we need bold actions by the Fed to buy capital markets.
  • The role of fiscal policy: Automatic stabilizers such as unemployment benefits will provide some buffers, regardless of what the discretionary stimulus package will eventually look like. But we still need a big package to avoid massive bankruptcies because the initial blow will be very quick and severe. At this point the stimulus package is still not passed and we will continue to follow it closely.
Business Implications
  • Businesses should be prepared for an incoming contraction and preserve cash flows. While a fiscal package will do a lot to help, firms should be aware of the uncertainties and the potential delay from its passage to its implementation.

Yang Liu, Senior Analyst for Global Economics and Scenarios

FrontierView clients: See our more recent How to Adjust to Global Disruptions Caused by COVID-19 for further insights

 

Coronavirus to drive a 1.2% recession in 2020 in the Eurozone
Key Takeaways
  • WEUR governments have enforced national lockdowns to combat the unfolding pandemic. Italy and Spain are currently suffering the worst coronavirus contagion.
  • Most recent survey data confirms the collapse in business sentiment. Eurozone Services Purchasing Managers’ Index (PMI) dropped to 28.4 in March from 52.6 in February, but manufacturing PMI proved more resilient, moving to 44.8 from 49.2 respectively.
  • The European Commission gave to EU countries the green light to spend on wages, employment protection schemes, and tax cuts to soften the economic hit. Likewise, the ECB decisively loosened monetary policy, ensuring cheap credit and liquidity to governments and businesses, with the hope of wiping out the threat of financial turmoil.

Our View
  • Coronavirus fears and national lockdowns have led DuckerFrontier to revise down its forecasts for all key Western European markets, predicting a 1.2% YOY eurozone recession for 2020. The eurozone economy will contract by 7.3% YOY in Q2 due to suppressed investment, exports, and consumer demand. DuckerFrontier assumes that the eurozone economy will operate below 50.0% of its capacity for two full months (March and April), and only moderately recover in H2.
Business Implications
  • The impact of the pandemic will vary by sector, and each sector will adjust and recover at a different speed. Services turnover (retail & wholesale, accommodation & food services, transportation, etc.) will be bruised, resulting in increases in unemployment, slowdowns in wage growth, and severe drops in consumer confidence. Firms should optimize their supply chains, and make an effort to further consolidate costs, while shifting to digital sales.

Athanasia Kokkinogeni, Senior Analyst for Europe

FrontierView clients: See our recent WEUR Market Monitor for further insights

 

Latin America’s key healthcare stakeholders respond to COVID-19
Key Takeaways
  • Latin American healthcare ministries have been announcing distinct policy responses to the COVID-19 crisis at different magnitudes and timelines.
  • Both Argentina and Brazil have put forth the most comprehensive responses to the crisis in the region thus far, injecting funds into the public health system, facilitating supply chains for medical equipment and supplies, rapid response plans for emergency infrastructure, and adding healthcare professionals to the workforce.
  • In Brazil, the Ministry of Health announced it would accept other markets’ authorization processes for importing products needed to combat and mitigate COVID-19, while also producing tests domestically.
  • Meanwhile, Argentina and Uruguay are seeking domestic alternatives for testing and the detection of COVID-19 in order to surpass bureaucratic and cost hurdles for imported products.
  • The Ministry of Health of Panama, Uruguay, Colombia and Brazil have all launched apps that allow the population to, at different levels, interact with information pertaining to COVID-19 and keep themselves informed on testing, treatment and government updates.

Our View
  • The disparate levels and timelines that different Latin American governments have taken relative to the outbreak of COVID-19, combined with different existing healthcare systems, infrastructure, and personnel, will make crisis management far more difficult for some countries than others. Further, as governments increase funding in order to fulfill their rapid responses, financial duress is likely to confront several stakeholders nationally and regionally, resulting in negative spillovers in both the medium and long-term.
Business Implications
  • Latin America will continue to experience volatility through 2020. Firms should prepare for payment delays as payers experience financial distress, volatile demand swings, and additional government intervention mechanisms.

Victoria Tellechea-Rotta, Analyst for Latin America, Healthcare

FrontierView clients: See our more recent COVID-19 and LATAM Healthcare Systems for further insights

 

COVID-19 & global oil price crash hurt Algeria’s growth
Key Takeaways
  • The breakdown of the OPEC+ oil production cut deal caused oil prices to fall as low as US$25/bbl and for DuckerFrontier to revise down annual Brent crude price average to US$43 for 2020. This will severely hurt Algeria’s energy revenues (which accounts for 96.0% of total exports) for 2020.
  • COVID-19 is further worsening the global manufacturing slowdown, as business activity rapidly shrinks amid nationwide lockdowns in Europe. EU demand for Algerian gas had already declined by nearly 15.0% in 2019.
  • Algeria is slashing public spending further, reducing the procurement budget by approximately 25.0%, as its fiscal and trade deficits widen, and macroeconomic standings deteriorate further.

Our View
  • The twin crises of COVID-19 and oil price crash will significantly weaken Algeria’s ability to fund localization incentives and support the deteriorating economy though public investment. Private confidence will remain subdued as consumers fear that public support and expat remittances will decrease in 2020. DuckerFrontier has revised down exports, gross domestic investment and consumer spending forecasts for 2020 and slightly for 2021.
Business Implications
  • Businesses will feel intensifying price pressures. Additionally, only essential investments such as in the oil and healthcare sectors are likely to remain in 2020; thus creating higher competition for firms looking for demand opportunities. Operational challenges will grow more cumbersome as localization pressures increase and access to foreign currency is further restricted.

Mansour El-Zahab, Analyst for Middle East and North Africa

FronteirView clients: See our recent COVID-19 & Oil Crash Hurt Algeria’s Growth for further insights

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