The Lens is a weekly newsletter published by FrontierView’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 an impending recession.
Companies need to start preparing for a global recession
Key Takeaways
- The spread of coronavirus across the world will lead to one of the sharpest contractions in world GDP of all time in the first half of 2020. Rarely has such a sharp, synchronized slowdown in domestic activity taken place. Governments around the world are taking steps to limit the social cost of the disease, implementing measure to reduce the total number of cases and the death toll. But reducing the social cost of the disease bears a severe economic cost. This is playing out in severe contractions in domestic activity in those cities and countries implementing quarantine measures, potentially causing a recession.
- Firms need to prepare for a global recession: Around the unique problems posed by the coronavirus, the underlying challenge for firms is the need to prepare their businesses for the first truly global recession since the 2008-2009 crisis. Just like in any other recessionary period, cyclical industries will see more significant drops in demand and more pricing pressures than defensive industries. We will see a rise in global unemployment, and firms will need to target their most resilient customers. Governments will step up to provide policy stimulus, but in some cases, government policy actions may not be enough to prevent a downward spiral – a particular risk for emerging markets with limited fiscal firepower.
- Firms need to align internally in order to respond effectively: Crises and recessions present challenges, but also opportunities to improve long-term competitive positioning. Executives need to juggle both risks and opportunities simultaneously. The immediate problem for many of our clients is the need to revise key assumptions and update targets amid ongoing uncertainty as to the full extent of the economic downturn. The crisis has also raised key risks, like liquidity challenges for operating subsidiaries or key distributors, but also supply chain disruptions that may impact the ability for firms to get goods to market. But this is also an opportunity-rich environment for firms to make targeted acquisitions or to take market share from more vulnerable local competitors.
- Let us know how we can help: The rapid spread of the coronavirus, and the broad and deep impact now expected on the global economy, has caught the world by surprise. Our research team has completely adjusted their research agenda to help our clients manage these challenges. There will be more surprises to come before this crisis is over – some good and some bad. But by leveraging our scenario-based approach to pressure-test your new assumptions, targets, and global portfolio, we aim to help reduce uncertainty, improve internal alignment, and provide you with the information your teams needs to outperform your competition.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
FrontierView clients: See our brand new COVID19 hub for up-to-the-minute updates
Brazilian economy facing major headwinds and risks for 2020
Our View
- We have significantly reduced our Brazil growth forecasts for 2020 as investment, consumption, and exports weaken amid the COVID-19 crisis.
Market Trends
We have revised our GDP growth forecast for Brazil from 2.5% in January to 0.8% following the COVID-19 outbreak in China and global pandemic. We have revised export growth down from 1.1% to -1.6% YOY amid broad external demand weakness weighing on both the volume and value of exports, especially commodities. The fall in exports will be partially offset by a decline in import growth from 5.4% to 1.1% YOY amid supply chain disruptions, weak internal demand, and FX pressures. We have cut our investment forecast down from 4.5% to 1.3%YOY because of heightened economic uncertainty, supply chain disruptions, and weaker external and internal demand.
Increased uncertainty on the government’s reform agenda will also weigh on business confidence. Consumption has been revised from to 2.9% to 1.0%YOY, as coronavirus containment measures begin to become more widespread and economic uncertainty grows. Consumers will become more hesitant to tap into favorable credit conditions as the fear of unemployment rises and banks become more risk-averse. Government spending has been marginally revised upwards from 0.2% to 0.3%YOY as pressures for the government to increase spending to offset COVID-19 economic pressures mount. So far, we expect most of the spending to be funded through budget reallocations and already-available credit sources.
We expect the economy to rebound in 2021, growing at 2.8%, and following a U-shape recovery in global trade and internal demand. This forecasts compares to 3.3%YOY in January as some economic slack spills over into the new year. Further downward revisions remain likely and depend on the extent to which the country moves into full national quarantine, and we see production halts in the US. The potential for the government to pursue more aggressive fiscal measures to support growth remains, but this would further delay the government’s fiscal consolidation ambitions and create future risks.
FrontierView for Latin America
FrontierView clients: See our live COVID-19 dashboard for further insights
Russia to under-perform in 2020 and continued oil climate uncertainty
Our View
- Firms need to brace for a very weak Q2, with a likely bounce back in oil prices and demand in H2.
Market Trends
GDP will now moderate considerably this year (from 2.0% YOY to 1.3% YOY) as a result of lower oil prices and the impact of the coronavirus on consumer spending and investment. Consumer spending has been cut from 2.9% to 2.3% YOY as a result of considerably less spending in H1 and higher import prices from a weaker ruble. The weaker ruble – now forecast to average 69 this year, from initial expectations of 64 – will hurt investor confidence and even drive interest rates back up, reducing investment forecasts as well. Exports, already slowing notably in H2 2019, will weaken further this year from worsening global demand, and despite Russia’s exit from the OPEC+ output cut deal. Russia will only produce at most some 500,000 barrels more oil per day now, which will not necessarily allow for greater exports of energy, not to mention the drop in demand for Russia’s other resources.
FrontierView for Russia
FrontierView clients: See our live COVID-19 dashboard for further insights
Mexico likely to face a 2020 recession, downward growth revisions
Our View
- Mexico’s economy will contract by 1.5% in 2020 as exports, investment, and consumer spending sharply decline due to the COVID-19 pandemic.
Market Trends
We have revised our GDP growth forecast for Mexico down from 0.4% in January to -1.5% following the COVID-19 outbreak in China and global pandemic. We have revised export growth down from 2.5% to -1.5% because of the impact of sharp economic slowdown in the US on Mexico’s exports. The fall in exports will be partially offset by a decline in import growth from 0.9% to -0.2%.
Investment will decline from 0.5% to -1.5% stemming from a worsening domestic outlook and heightened global uncertainty. With further volatility in 2020, Mexico will see less investment as firms and markets continue to reel due to the crisis. Investment in the manufacturing sector, which was expected to revamp in H2 following the ramification of the USMCA, will likely stay depressed due to contracting manufacturing activity and consumption slowdown in the US. Consumption has been revised down from 0.9% to -1% as unemployment rises in the commerce, service, and tourism sectors. Consumer sentiment will sharply deteriorate in Q1 and Q2, just to slowly bounce back in Q3, assuming the COVID-19 outbreak can be contained by then.
Externally, the deterioration of the US labor market will reduce the amount of remittances Mexico was expecting to receive in 2020 (last year it received US$ 36 billion). Government spending will remain at 0.6% as the Mexican government prioritizes fiscal stability over short-term action; the government has announced a moderate stimulus package, but only to be applied in a downside scenario. We expect the economy to rebound in 2021, growing at 1.5% and following a U-shape recovery in global trade and internal demand. This forecast is lower than the 1.9% we had in January due to forecasts revisions we have made to our US outlook for next year. Further downward revisions remain likely, and depend on the extent to which Mexico moves into full national quarantine, and we see production halts in the US, in addition to lower investment into the country due to high uncertainty and volatility in global markets.
DuckerFontier for Mexico
FrontierView clients: See our live COVID-19 dashboard for further insights
Nigerian growth weakens, but resilient sectors offer opportunities
Our View
- Lower global oil prices, weak investment, and slower consumer spending will curtail GDP growth.
Market Trends
GDP growth is expected to slow to 0.5% YOY in 2020 compared to the previous 2.1% forecast due to the recent oil price slump and reduced global growth expectations caused by the coronavirus pandemic. MNCs should expect weaker customer demand while local partners will face rising operating costs. The government’s reliance on oil revenues will force it to prioritize civil service wages and cut investment. Lower export revenues from oil will exacerbate forex shortages and trigger a devaluation of the naira around Q3 2020. The resulting higher inflation rate will curtail customer spending power in 2020.
FrontierView for Sub-Saharan Africa
FronterView clients: See our live COVID-19 dashboard for further insights