The Day at a Glance | April 1 2020

Manufacturing affected at a global level due to coronavirus

Final economic activity figures at a global level in manufacturing confirmed that March was one of the worst months in many years for the sector, this after the closing of factories and damage seen occur in supply chains. In Europe, manufacturing activities deepened their contraction in Germany, France and Italy (the three largest economies of the region) with the biggest drop in production and new orders in 11 years seen in the month of March. Some companies have even reported problems with purchasing inputs, even with the recent decline in production. Job cuts have also accelerated and demand is expected to keep falling in the next few weeks. “Company closures, lockdowns and rising unemployment are likely to have an unprecedented impact on expenditure around the world, crushing demand for a wide array of products”, said Chris Williams, chief economist at IHS Markit, where the PMI indicators are constructed. In Asia, manufacturing PMI`s find themselves in a deep contraction (<46), with Japan and South Korea recording their worst figures since the global financial crisis. Only China showed a recovery in its activity during March, as the economy recovers from the virus`s impacts. The weakness is expected to continue throughout April, with the main clients of Asian factories (the US and Europe) at a total standstill due to the health emergency. In the US, PMI`s and ISM`s will be published today, which are expected to show a deepening contraction in the manufacturing sector, in line with what is observed in the rest of the world.

Insufficient stimulus, deficits expanding

Concerns are rising regarding the fact that the $2 trillion dollar stimulus approved in the US last week may not deliver on time resources to small businesses and families affected by the virus. Many businesses had to close down in the middle of March and it could take weeks for the government boost to reach them, which may be too long of a period for some businesses that don`t have enough funds to stay afloat. Concerning retail sales, the situation has become desperate as many businesses have started renegotiating rents or have even said they will not pay rent for the month of April, putting pressure on landlords. Similar complications will be faced this month by workers whose jobs have been lost and must make payments as soon as April. The halt in income streams threatens to result in a more serious problem, which would imply the permanent closing of many businesses and a much lower ability of the economy to recover once the health emergency passes. This is why the government has decided to intervene and guarantee these income streams, however this could take too long. The logistics required to assure these resources reach families and businesses still has to be defined and must consider anti-fraud controls as some people may try to take advantage of the situation. Additionally, social distancing measures carried out in the US in order to contain the spread of COVID-19 have become more strict and will extend for a longer period of time (at least until April 30th), which increases the chances of seeing a deeper and more prolonged impact on economic activity. This has led different market players to come to the conclusion that the government will have to carry out a greater stimulus in order to face the issue – this under the risk of substantially increasing the US fiscal deficit. Only due to the $2 trillion dollars approved up to now, the fiscal deficit is expected to increase to $3.7 trillion dollars in 2020 and an additional $3 billion in 2021, taking the total close to 15-20% of the world`s largest economy`s GDP. Employment figures published this morning show the first contraction regarding private employment in 2 and a half years, as many businesses have closed due to government ordered measures; data suggests that the country`s employment`s biggest cycle of expansion has come to an end this month.

Trump and Putin talk about oil

According to recent reports, the US and Russian Presidents had telephone conversations to find solutions and alleviate the pressures that the collapse of international oil prices has put on the oil sector. Trump assured he had a “constructive” and extended conversation with Putin, in which they agreed to have their Energy Ministers meet and seek a solution to the problem. It`s expected an agreement to cut production could be reached. US Oil companies have started to suffer the impact of low prices as Whiting Petroleum Corp. is the first to start its legal bankruptcy process, with the risk of other companies following their footsteps. At the moment, Russia has said it will not increase its production of crude oil, but in Saudi Arabia production has surpassed 12 million barrels a day. With crude oil storage facilities approaching maximum capacity levels and even lower prices in the horizon, a diplomatic solution reached between Washington and Moscow seems to be the only way to prevent the collapse of companies in the oil industry at a worldwide level.