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 coming changes.
Rumbles of OPEC+ deal won’t lead to significant oil price recovery
- The COVID-19 outbreak led to the sharpest reduction in global oil demand in history. Transport, almost 35.0% of global oil demand, has effectively ground to a halt amid domestic and international restrictions on movement, while industrial production and power consumption are also both sharply lower.
- Early in the COVID19 crisis, Saudi tried to coordinate further cuts to limit downside price shocks to oil: Russia stated it would not participate. This led Saudi to flood markets with oil, in an attempt to force Russia back to the table.
- Both Russia and Saudi have long been frustrated by the US shale industry, whose massive growth has depressed the recent and future outlook for global oil prices. Previously, due to the fragmented private sector nature of US shale ownership, coordination was impossible. But comments from the Texas state regulator for oil production suggest that there is the possibility for a historical agreement to limit crude output along with OPEC members and Russia.
- News reports have hinted at further cuts as high as 10mm bp/d on a global basis – some 10.0% of global oil demand during normal times. But generating this magnitude of cuts would require US participation.
- Other news reports suggest that President Trump is considering US oil tariffs on Russian and Saudi oil, a move designed to US oil prices and protect the US shale industry, though such tariffs may not be effective in the short run.
In the short term, the issue is the demand side of oil. No scenario will lead to a reduction of oil production that will prevent historic oil inventory builds from occurring across 2Q2020. But barring a deal, total storage capacity will run out within the next 4-6 months. Expect prices sub-$40 to persist across 2020, and for large inventories to weigh on prices into 2021.
Low oil prices are not much of a benefit to the world economy at the moment, as the main beneficiaries of lower oil prices are seeing domestic demand (for countries) and product demand (for airlines/autos/manufacturing and chemicals firms) fall for reasons unrelated to cost structure. It provides minor relief to countries that rely on petroleum-based baseload energy generation or where households and firms rely on off-grid generation. Firms may wish to hedge 2021-2022 planned oil consumption against futures, as global oil prices are expected to rise in 2021, with possible upside risks depending on the speed of the global economic recovery and the number of US shale bankruptcies in 2020.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
China’s economy expected to rebound in Q2 2020 on late April stimulus
- To account for growing turmoil in the external environment as COVID-19 evolves into a global pandemic, we have significantly revised down our forecast for China’s 2020 GDP growth to 2.5% YOY.
- China is beginning to recover from its Q1 domestic epidemic; however, dampened demand and production disruptions in major developed markets are sending shockwaves through its manufacturing sector. These shockwaves will impact production as well as consumer spending, as millions of Chinese workers employed in the country’s small and medium sized enterprises face layoffs in the coming months.
We expect China’s economy to rebound this quarter due to a sizable fiscal stimulus package that will help shore up domestic demand. We believe the stimulus package will be announced around late April, during the Communist Party’s annual Two Session Meeting, where key economic policies are approved.
Although China is set to recover more quickly than many other markets, the speed of recovery will depend heavily on the details of the stimulus, shifts in global markets, and their impacts on the Chinese economy. With this in mind, executives should continue utilizing our forecasts to set their expectations and adjust their targets for 2020.
Boyang Xue, Analyst for Northeast Asia
FrontierView clients: See our more recent China Market Review for further insights
The COVID-19 crisis plunges Mexico into a deep recession
- Mexico is set to enter a deep recession in 2020 stemming from the impact of the COVID-19 crisis. We have revised our GDP growth forecast from 0.4% YOY in January to -4% YOY, stemming from lower exports (-3.5% YOY), investment (-3.5% YOY), and consumption (-3% YOY).
- Mexico’s outlook has rapidly deteriorated because of the negative impact of COVID-19 on the US economy, thus severely affecting Mexico’s manufactured exports, of which, more than 85.0% are destined to the US. Secondly, Mexico will receive lower remittances due to rising unemployment in the US. In 2019, Mexico received around US$36 billion in remittances, more than the US$33 billion it received in FDI. When the US unemployment hit 10.0% in October of 2009, Mexico’s remittances plummeted by almost 36% YOY (see graph below).
- In this dire context, the López Obrador administration has reacted late both in terms of social distancing and economic stimulus measures. For example, at this point, Mexico is one of the few countries worldwide that has not completely shut down its airports nor has announced a robust fiscal stimulus package.
President López Obrador (AMLO) continues to be fixed on not providing a needed stimulus fiscal package that could help cushion the devastating blow of the pandemic. On April 5, AMLO reiterated that his economic proposals to tackle the crisis are: expansion of existing social programs, credit to small businesses, including those in the sizable informal sector, and “republican austerity”, a mixed of well-administered public spending and an austere budget. These proposals are likely to fall short to curtail the economic crisis generated by the pandemic, thus Mexico’s economic recovery is now more attached to the US economic recovery rather than domestic countercyclical policies.
The operating environment in Mexico sharply deteriorated in Q1. Firms should put in place contingency plans in 2020 and revamp their scenario-planning strategy for the rest of the sexenio.
Alejandro Valerio, Senior Analyst for Latin America
FrontierView clients: See our more recent Mexico: Outlook Revisions for further insights
South Africa’s tough COVID-19 response hits already weak economy
- The government has implemented a far-reaching response to the pandemic, including border closures and a strict lockdown involving movement restrictions and the closure of non-essential businesses. The lockdown will last until mid-April but may be extended. South Africa has 1686 confirmed COVID-19 cases as of April 6, the highest in Sub-Saharan Africa.
- Special COVID-19 treatment centers have been established, testing is being ramped up (soon 30,000 people will be tested per day) and a National Ventilator Project will initiate local production of ventilators, likely by mid-Q2.
- Economic support measures include special funding for highly impacted sectors such as tourism, retail, agriculture and small and medium enterprises; tax subsidies and extended tax deadlines; and a scheme to subsidize wages and salaries to mitigate job losses.
- The central bank’s decision in March to cut its benchmark rate by 100 basis points to 5.25% will complement these measures by easing borrowing costs.
Even taking into account the government’s stimulus measures, the economy is like to see a deep contraction in Q2, moderating later; expect a full-year recession for 2020 overall.
Companies will need to thoroughly revise their 2020 assumptions for the market, assuming weaker business and consumer demand, and a reprioritization of government spending toward the public health system. Firms should proactively asses their eligibility for government support schemes to help their local units and partners weather the coming months.
William Attwell, Practice Leader for Sub-Saharan Africa
FrontierView clients: See our SSA in 2020: COVID-19 Response and Containment Measures report for further insights