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 an excerpt from this week’s edition of The Lens below as you prepare your business for coming changes.
Following COVID-19 recession, we expect Trump narrowly loses election bid
Key Takeaways
- As economic forecasters, we hold a view on elections when the outcome will have a material impact on the economic outlook or the business environment. Due to the US economic outlook and recent polling data, we have changed our base case, and now expect that President Trump will fail to win reelection in November.
- Following the COVID-19 shock, President Trump’s approval ratings have fallen significantly. He is now losing by a significant margin in the key swing states he needs to secure his reelection bid in November.
- Trump’s surprise victory in 2016 came when he won a large number of swing states by narrow margins. Joe Biden is currently leading in the polls in every single one of these swing states – some by as much as 10%.
- The US economy is manifestly weak, with the unemployment rate spiking to levels not seen since WWII. With many states beginning phased reopenings, many workers will regain their jobs, though most states plan to maintain social distancing and other COVID restrictions that will limit the economic recovery prior to November.
Our View
Trump still has a path to a reelection in November. But based on recent polls from key swing states, Trump will lose the November election. The economy will continue to weigh on Trump’s popularity, as economic weakness is expected to persist across 2020. To win reelection, Trump needs to significantly reverse the polling trends in these swing states, including winning at least one of the key rust belt states of Pennsylvania, Michigan, or Wisconsin, in addition to winning Arizona, North Carolina, and Florida. This will be difficult to achieve amid an ongoing US recession.
Business Implications
A Biden presidency would shift the government agenda to the left, especially on public spending, fiscal policy, and health care expenditure. But Biden is a moderate democrat, and far less likely to institute sweeping changes to any major US economic policy institutions. Though businesses may see some increased tax or regulatory costs under a Biden presidency, we also expect a Biden presidency to gradually normalize trade policy with most of the world, reducing some of the business uncertainty and costs associated with the recent trade wars.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
Chinese policymakers enact fiscal stimulus to pave way for recovery
Key Takeaways
- Chinese Premier Li Keqiang announced a fiscal stimulus package worth at least 3.6 trillion RMB to underpin the country’s post COVID-19 economic recovery.
- This increase in fiscal spending is on par in absolute RMB terms with Beijing’s fiscal stimulus during the global financial crisis, but it is substantially smaller relative to the economy’s size. (The COVID-19 stimulus package amounts to roughly 4.1% of China’s GDP in 2019.)
- The Chinese government also scrapped its GDP growth target for 2020, citing uncertainties in the external economic environment amid the global pandemic. Instead of striving for a numeric target, Chinese policymakers will focus on stabilizing domestic demand with a focus on boosting job creation.
Our View
The policy announcement from Beijing is largely in line with our expectations. We have repeatedly stated that firms should expect the government to announce a fiscal stimulus similar to the one in 2008 (in absolute terms) during China’s Two Sessions this year. While the government has yet to release details, we believe the scrapping of the growth target marks a shift in China’s economic governance. This year, leaders will focus on demand stabilization rather than overstimulating the economy through inefficient, wasteful investment.
Business Implications
The newly-announced fiscal stimulus will lead to a surge in investment in areas referred to as “new infrastructure” (to differentiate them from traditional areas of focus like real estate and railways). In addition, the stimulus will include cash transfers and tax cuts for firms and households, which will likely support employment and consumption. B2B firms should aim to capture new growth opportunities in areas such as 5G networks, industrial internet of things, and healthcare infrastructure. B2C firms should expect a faster recovery in consumer spending after Q2, as fiscal measures put a floor on domestic demand and employment.
Boyang Xue, Analyst for Northeast Asia
FrontierView clients: See our more recent China 2020 Outlook Update for further insights
Argentina defaults on its sovereign debt for the ninth time in its history
Key Takeaways
- Argentina officially defaulted on approximately US$ 68 billion of external debt last Friday, May 22, after it did not pay a US$ 500 million coupon.
- We expected this outcome, as did financial market participants. The Argentine peso showed almost zero variation when markets opened on May 26.
- The default in-and-of-itself was a foregone conclusion as risk premia pushed the cost of borrowing to stratospheric levels since last year. Moreover, bondholders have agreed to not kick-off legal proceedings while restructuring talks continue.
- The government announced a self-imposed deadline of June 2 to reach an agreement with creditors. However, now that Argentina has officially entered default, there is effectively no deadline to reach an agreement.
- Due to the nature of these continued talks and the gradual advancement made on alternative debt restructuring offers, our new base case calls for Argentina to reach a restructuring agreement in June or July.
Our View
We expected Argentina to default as part of our baseline economic forecasts and have therefore not significantly altered our outlook for the country. However, it is clear that the default makes the situation more perilous for Argentina as any major mistake could trigger legal action, prolonging Argentina’s debt crisis and creating more economic and financial sector uncertainty. We believe that both sides have acted in good faith up until now and that it is in both parties’ best interest to avoid a prolonged default. Moreover, the two sides made significant strides last week to come to an agreement before the missed payment. As such, we expect a restructuring agreement during the next two months. The more likely downside scenario would be no deal until the end of 2020. A more extreme downside scenario would entail no agreement this year and the commencement of legal proceedings against the government.
Business Implications
Firms had largely expected this outcome and have executed contingency plans. In fact, clients told us during a webinar last week that the COVID-19 crisis and uncertainty regarding FX were more significant risks to their businesses than the sovereign debt default. The default still entails elevated risk, however, that financial and economic fundamentals could deteriorate if markets lose confidence in the government’s ability to come to an agreement. Clients should expect significant pressure on the Argentine peso and/or import restrictions under such a scenario. Inflation expectations would also surge, creating even more pricing problems for firms and lower customer demand.
Alex Schober, Senior Analyst for the Southern Cone
FrontierView clients: See our recent Argentina webinar for further insights