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This week on COVID-19: Major market updates reveal sharp downward growth revisions

DuckerFrontier, March 12, 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.

China’s GDP growth forecast revised down to 4.6% due to COVID-19
Key Takeaways
  • We have revised our 2020 annual GDP forecast for China to 4.6% YOY, down significantly from our previous forecast of 5.4% YOY.
  • This downward revision can be attributed to the economic impact of China’s draconian epidemic-control measures, which are weighing on consumption, investment, industrial production, and trade.
  • These measures (e.g., drastic movement restrictions, extended public holidays) have slowed the normalization of business operations in China. Fortunately, they also seem to have curbed the epidemic; the number of new infections has slowed dramatically.

Our View

We now expect China’s economic growth to stall at 0.0% YOY in Q1 before ticking up to 6.2% in Q2 on the back of pent-up demand and fiscal stimulus. However, the risks to this forecast clearly tilt to the downside because of rising threats to demand for Chinese exports from the coronavirus’ continued spread across the globe.We now expect China’s economic growth to stall at 0.0% YOY in Q1 before ticking up to 6.2% in Q2 on the back of pent-up demand and fiscal stimulus. However, the risks to this forecast clearly tilt to the downside because of rising threats to demand for Chinese exports from the coronavirus’ continued spread across the globe.

Business Implications

Entangled in a volatile and constantly evolving situation, firms should continue using DuckerFrontier’s forecasts to help evaluate the impact of COVID-19. With growth in China set to rebound in Q2, firms should prioritize industries that are likely to recover more rapidly and focus on sectors that are likely to remain resilient in the face of rising external headwinds.

Boyang Xue, Analyst for Northeast Asia

FrontierView clients: See our more recent China Market Review for further insights

 

Perfect storm for MENA as coronavirus spreads and oil prices crash
Key Takeaways
  • Pursuing a market share policy war against US shale producers and Russia, Saudi Arabia announced plans to increase oil production from 9.7 million b/d to 12.3 million b/d as well as to cut selling prices to major customers in Asia and Europe.
  • This decision was in response to Russia’s unwillingness to extend the production cut deal with OPEC beyond March 2020, and is likely to prompt other oil exporters that were previously bound by the OPEC+ deal to raise production.
  • This significant supply increase in crude oil is happening amid a substantial reduction in global oil demand due to coronavirus related economic disruptions spread across the world. Weak prices will persist until inventories stabilize, but this requires a decline in production to meet falling demand. The immediate shock has already led to inventories to work off – Chinese refinery runs in February were down around 2.9mm bp/d, reflecting inventory builds of some 3% of total global oil production in February.

Our View

DuckerFrontier revised its annual average Brent crude oil price forecast from US$53 to US$43 for 2020. This is based on the assumption that oil prices average sub-$40 for the rest of 1H2020, rising into the mid/high $40s in 2H2020, as global growth picks up mildly in H2. Although it is likely that Russia and Saudi reach an agreement to restore the previous quota arrangement (since neither country can withstand such oil prices economically or politically for too long), that will not push average prices back up over $50/bbl for 2020. Amid weak global demand, the strong inventory build up is likely to keep prices depressed in the rest of 2020.

Business Implications

The combined implications of depressed economic activity across the world and the oil price crash will dampen the outlook for both oil exporters and importers in the MENA region. As oil exporting governments are likely to prioritize supporting their consumers in the short term, lower oil revenues will delay public investment plans and reduce previously set budgets for procurement spending. Public spending will contract in countries like Saudi Arabia and Algeria in 2020. In oil importing countries, benefits of easing inflationary pressures on consumers will be cancelled out by coronavirus related disruptions to tourism. Services industries dampened remittance inflows from Europe and the GCC will hit consumer incomes in North Africa and the Levant, while tourism recovery expected in Morocco and Egypt will be delayed.

Zeynep Kosereisoglu, Director for the Middle East

FrontierView clients: See our recent Global forecast revisions – COVID 19 and oil price shock for further insights

 

US macroeconomic outlook deteriorates sharply as the virus escalates
Key Takeaways
  • The coronavirus outbreak in the US has triggered wide-spread pessimism about the US economic outlook, not to mention the turmoil in financial markets.
  • As of March 11, there were 938 cases that had been discovered and 29 deaths according to the US Centers for Disease Control and Prevention (CDC). The true number is expected to be larger due to insufficient testing, and the CDC is unable to collect nationwide testing statistics as it claims that many tests are conducted by states. The Atlantic reports that as of March 9, there were altogether 4,384 people tested, based on data reported by states.
  • Most forecasters, including DuckerFrontier, have dramatically revised down their forecasts in response to the coronavirus shock. Though there is still no timely economic data available for a rigid estimate, we do expect a quarterly contraction in Q2 due to weak domestic and foreign demand.

Our View

The US outlook has worsened significantly following the onset of the coronavirus. Outbreaks in China and Europe will likely cause global trade to contract, threating US manufacturers. Fears among US consumers will substantially affect businesses such as large retail stores, restaurants, and hotels, though panic stockpiling may boost sales of necessity goods in the short run. Our model therefore projects a contraction in Q2 and a full-year growth rate of 1.2% for 2020 under such adverse conditions. Though, pre-coronavirus robustness may provide some extra buffer. Labor market indicators and corporate profits had been outperforming expectations up to February, giving the economy a relatively better position to uphold consumption and absorb losses. Nevertheless, a caveat is that turmoil in financial markets may exacerbate the contraction. US firms have been highly leveraged due to years of extra-low interest rates. The current panic in credit markets, if lasts for long, will raise borrowing costs and effectively cut off credit supply for many low-rated firms.

Business Implications

Businesses should be prepared for an incoming contraction as well as operational disruptions. Government policy responses, though necessary, will do little help to mitigate losses.

Yang Liu, Senior Analyst for Global Economics and Scenarios

FrontierView clients: See our more recent Global forecast revisions – COVID 19 and oil price shock for further insights

 

Democratic party consolidation makes Biden the likely nominee
Key Takeaways
  • Former Vice President, Joe Biden, now has a total of 857 delegates after two consecutive Super Tuesday wins, beating out Sen. Bernie Sanders, who has captured 709 delegates. Most analysts now expect Biden to compete against President Trump in the November 2020 election.
  • Ahead of Super Tuesday, Biden received numerous endorsements. He also won in Michigan, a state that Sanders took in 2016, and an important swing state in the 2020 presidential election.
  • Many perceive that Biden, a moderate, will be more electable than Sanders, a far leftist, when faced against President Trump in the November election.
  • The March 10 results proved to consolidate the race for the Democratic nomination. Amid this party consolidation around Biden and concerns about the economy following the coronavirus outbreak, betting markets have flipped and now expect a democrat to win the 2020 election.

Our View

In our Events to Watch for 2020, we noted that a Biden presidency was our upside event, against a base case that Trump would win re-election. A Biden Presidency would be more moderate – with some mild increases likely in social expenditure, but an end to the cycle of constant business uncertainty generated under the Trump administration. Though Trump still has a clear map to victory, online prediction markets have started to favor the Democrats in recent weeks, based on the view that Biden is more electable than Sanders. Poor management of the coronavirus shock by the Trump administration could lead to substantial domestic economic weakness that could tilt the election for the democrats.

Business Implications

In a race this close, firms should evaluate the impact to their business that either a Biden or Trump re-election scenario could have, despite the likelihood of Trump winning reelection now being lower than before.

Sara Brown, Junior Analyst for Global Economics and Scenarios

FrontierView clients: See our more recent Events to Watch for 2020 for further insights

 

Coronavirus will trigger severe Western European economic slowdown
Key Takeaways
  • Amid signs of manufacturing stabilization in January, the coronavirus will trigger a renewed broad-based economic downturn of the eurozone.
  • Coronavirus cases rose rapidly in Western Europe this week, reaching more than 19,000, with Italy the most affected, followed by Spain, France and Germany.
  • Italy introduced a nationwide lockdown by restraining travel, banning large gatherings, and closing schools and universities, hampering turnover in business, recreation, education and food services’ sectors. In response to travel restrictions, tourist arrivals to Western Europe are expected to diminish by nearly half in Q1 2020 compared to 2019.
Our View

Coronavirus concerns have led DuckerFrontier to revise forecasts down for all key Western European markets. The region is likely to avoid a recession but the steeper slowdown in H1, exacerbated by the effects of coronavirus, pose significant risks to employment and consumer demand. The Bank of England mimicked the US Federal Reserve’s emergency rate cut. Likewise, the European Central Bank should cut rates on Monday and expand the amount of corporate purchases, in an attempt to bolster financial sentiment, while also calling more assertively for fiscal stimulus.

Business Implications

The slump in Chinese sentiment will translate into even slower demand for manufactured goods (especially computers, electronics, pharmaceuticals and transport equipment) and will dampen business sentiment. Compounding the slowdown in external demand, France, Spain, Italy, and Germany will see weakness in the services, especially in the travel, hospitality, recreation and retail sectors, further depressing both B2C and B2B demand. Firms should accordingly inform their assumptions and adjust their targets for 2020.

Athanasia Kokkinogeni, Senior Analyst for Europe

FronterView clients: See our recent WUER Market Monitor for further insights

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