Post Covid-19 economic rebound to hinge on varied regional approaches to unemployment/worker subsidies

Author Angie Joe, Consulting, and Julia Kelly and Blake Vance, Business Development

The pressing question facing the entire global petrochemical chain is just how long it will take to jump start the economy across the regions.

Much depends on when workers return to their posts and consumers resume purchases of durable goods including automobiles, appliances, electronics, toys and furniture.

Countries battling the Covid-19 pandemic are taking different approaches in curbing employment or softening the blow for those who are out of work. Argus looks at how individual governments are trying to support businesses and their constituents for when demand will finally pick up.

As it stands, the IMF is forecasting a global 2020 GDP decline of 3pc, following a 2.9pc rise in 2019. It anticipates a rebound in 2021, mainly stemming from developed nations such as China, the US, the UK and other Asia and EU countries.

Americas

Unlike European economies that have wage subsidies in place, the US Congress has focused on stimulus checks for the unemployed and loans for small businesses. US lawmakers on 27 March passed a $2.2 trillion stimulus package that expanded unemployment benefits and included financial aid to businesses. Congress on 21 April approved a $484bn increase for small-business loans. That is on top of the $350bn that was earmarked in late March. Among other ideas proposed is a plan from some House Democrats to provide every qualified American with a $2,000 debit card. The card would be reloaded with $1,000 each month until a year after the coronavirus crisis ends. On 21 April Trump ordered his administration to draft a plan to make funds available to the oil and gas sector. The lending plan is under development.

The US unemployment rate rose by 0.9 percentage points, from 3.5pc in February to 4.4pc in March. This is the largest month-on-month rise in US unemployment since January 1975. The number of those unemployed skyrocketed to 7.1mn in March from 1.9mn in February. According to the US Labor Department, initial jobless claims for the week ended 2 May came in at 3.17mn, compared with 3.84mn the prior week. The lower number of cases reflects significant delays in filing state unemployment claims due to processing issues. The problems include antiquated computer systems and an inability to manage so many cases at once. Jobless claims in the past two months totaled more than 33.5mn. Total claims so far are more than three times the toll of the Great Recession that ended in mid-2009.

Economists from the St. Louis district of the Federal Reserve forecast 47mn US jobs will be lost. Second quarter unemployment is projected at 32.1pc, considerably higher than the 24.9pc rate during the worst of the Great Depression in the 1930s.

US initial jobless claims (2005-18 April 2020)
Source: US Department of Labor

Across the country, states are beginning to release plans for reopening economies and embarking on a path to normality. Georgia reopened gyms, salons, bowling alleys and tattoo parlors with restrictions, with restaurant dine-in service resuming on 27 April. Midwest governors from Michigan, Ohio, Wisconsin, Minnesota, Illinois, Indiana and Kentucky formed a coalition to work together toward reopening their economies. In Texas, retail stores, restaurants, movie theatres and malls all reopened at 25pc capacity operating rate on 1 May. The Texas governor states that the next phase of openings could occur as early as 18 May. Louisiana’s statewide stay-at-home order was extended to 15 May.

New York, the epicenter of the US outbreak, has announced a plan to attempt to reopen separate schedules. California began reopening its economy on 8 May. Oxford Economics expects second quarter US consumer spending to contract by more than 13pc, for a 43pc drop on an annualized basis. This marks the sharpest drop on record. Business investment is forecasted to shrink by 14pc, with crude dragging down the energy sector.

Many emerging Latin American markets rely on oil and commodity exports, leading to a higher correlation between currency values and oil and commodity prices. Prior to covid-19, a massive inflow of foreign investments into Latin America inflated asset prices and hiked commodity prices. Latin American corporations borrowed to finance operations and generated excess liquidity.

But the virus halted the global economy and shook investment activity, resulting in a rush to withdraw funds from the region. Given that most private and public debt in the region is held in US dollars, the pandemic will only exacerbate an already grim situation. The Brazilian real/$USD exchange rate averaged 5.22 in April, a real depreciation of 23pc from December 2019. Rating agency Fitch has lowered Brazil’s credit rating into negative territory, expecting a major GDP contraction in 2020. The Mexican peso reached a multi-decade high exchange rate of 25.78 in April off the drop in crude oil prices that same month. The Colombian peso depreciated 23pc in Q1 2020 and is expected to fall further in the first half of the year. Latin American currencies will remain hostage in the foreseeable future to risk sentiment and commodity price fluctuation.

Europe

European countries have taken different approaches to keeping unemployment low. The idea is to have an able workforce that is ready to move once economic conditions improve. Italy has banned employers from making layoffs for 90 days. Other governments have enacted wage subsidies to counter unemployment.

German employees have had their hours scaled back, but the government is still paying two-thirds of their salary. Unemployment will peak at 5.9pc in 2020, according to figures released by the Joint Economic Forecast on behalf of the German Federal Ministry for Economic Affairs and Energy. Year-over-year unemployment will increase by a quarter of a million to 2.5mn.

Germany on 20 April started to slowly reopen many nonessential small stores, including shops of up to 800 square meters and car dealerships. They also announced on 6 May that schools, restaurants, and hotels will be able to reopen in the upcoming weeks. Unlike other European countries such as Spain and Italy, Germany never fully shut its economy. Many German factories have continued operating, giving the country an advantage during the pandemic. But many German state economic ministries are projecting as much as 9.8pc GDP decline in the first two quarters of 2020. Research institutes, such as the Joint Economic Forecast Project Group, expect an overall 4.2pc drop in GDP for 2020. Germany’s economy is likely to recover as early as next year with a 5.8pc GDP increase.

France is covering up to 84pc of 8mn employees’ salaries, which is about one-third of the private sector. The central bank has projected a 6pc GDP decline in the first quarter compared with the fourth quarter of 2019. The would be the steepest since 1968.

Britain’s wage subsidy program funds 80pc of workers' wages, with up to £2,500 ($2,705) a month. Oxford Economics suggests that unemployment in the first half of this year would be capped at a 2pc point increase. While the UK GDP is expected to fall by 5.1pc, there could be a quick recovery to 6pc growth in 2021.

The euro area unemployment rate rose from 7.3pc in February to 7.4pc in March, Eurostat data showed. In the broader EU, unemployment rose by 0.1pc from 6.5pc previous month, to 6.6pc in March. US joblessness, in comparison, rose by 0.9pc from 3.5pc previous month to 4.4pc in March.

European unemployment (2005-January 2020)
Source: Eurostat

The latest World Economic Outlook from the IMF shows Spain’s 2020 unemployment rate reaching 20.8pc, up from the October forecast of 13.2pc. In February, before the coronavirus took over and lockdowns were put in place, Spain’s unemployment was already 13.7pc. Analysts believe that the overall economic hit will be worse in the second quarter due to effects on sectors such as tourism and hospitality. The Central Bank of Spain said that first quarter GDP will fall by 4.7pc. The tourism-dependent economy is at risk of shrinking by as much as 12.4pc for the year if the lockdown extends beyond 12 weeks. Even in the conservative scenario in which lockdowns are lifted after eight weeks, the bank predicts a 9.5pc drop in GDP for 2020. But it anticipates a speedy recovery in 2021, with a GDP growth rate of at least 5.5pc.

Italy on 4 May started to reopen factories, construction sites and wholesale commerce. But most consumer economy remains unopen until 18 May, as long as the country does not get hit with a second wave of cases. The World Economic Outlook’s most recent forecast shows Italy’s 2020 unemployment rate hitting 12.7pc, up from its October forecast of 10.3pc. When the coronavirus first emerged in Italy and caused massive shutdowns, Italy’s unemployment was already 9.8pc. The Italian government will implement a strategy to start to re-open businesses on 4 May. But, viewpoints on the plan vary for different regions due to economic inequality between the north and south. While coronavirus cases are largely contained to the northern region, southern Italians fear that opening the economy risks further spread of the virus. If the coronavirus were to move south, the economic toll would be even more severe.

Governments are closely monitoring conditions and are considering additional measures to supplement those already in place. Agencies dealing with German unemployment have already requested another $11bn in funding, while France and Britain estimate costs at $21bn and $50bn, respectively, over a three-month period.

GDP fell in the euro area and the broader EU from the fourth quarter of 2019 to the first quarter of 2020. The European economy on an annual basis shrank by 14.4pc in the first quarter. This reflects the strict and broader lockdown that Europeans enacted before other areas began to shut down. Economists expect a deeper reduction in the second quarter. But the European Central Bank may introduce a €750 billion ($820 billion) program to buy the bonds of governments that are spending heavily to support their economies.

In the Middle East, Saudi Arabia announced several economic measures. Various operational and capital expenditures for government agencies will be cut, extended or postponed. Provisions for other major project and initiatives, such as the economic diversification program, will also be reduced. Starting in July 2020, there will be an increase in the countries value added tax from 5pc to 15pc.

Kuwait has instituted a 20-day lockdown through 30 May given a recent rise in virus cases. The government is holding a session later this week to re-examine its budget given the challenges of lower oil prices and the spread of covid-19. Kuwait’s budget for the fiscal year that began on 1 April forecast oil and gas revenues of 12.9bn Kuwaiti dinar ($42.42bn), or 87pc of overall revenues. This was based on a crude price of $55/bl, nearly double the current level.

Asia-Pacific

China’s GDP contracted by 6.8pc in the first quarter, the National Bureau of Statistics of China reported. This marked the first quarterly GDP drop that China has experienced since official reporting started in 1992. Industrial production fell by 8.4pc in the quarter compared with the same period last year. The first quarter’s total value of imports and exports dropped by 6.4pc from a year earlier. Domestic retail sales fell by 15.8pc in March, following a 20.5pc decline in the two months prior. The March unemployment rate was 5.9pc, 0.3 percentage points higher than in February. Economists estimate that roughly 80mn people have lost their jobs or are unable to return to work. To put that in perspective, Germany’s estimated population is 83mn. Economist Larry Hu from the Macquarie Group said that Chinese joblessness will rise by another 10mn if no stimulus package is enacted. Many are skeptical that a fiscal stimulus will be coming soon.

China’s industrial profits fell by 36.7pc, or Yn781.5bn ($110bn), in the first quarter compared to the 2019 first quarter. Profits at 39 of China’s 41 industrial divisions decreased, the National Bureau of Statistics of China said. The largest year-on-year drop was at foreign funding industrial enterprises, which fell by 46.9pc.

India has extended its national lockdown for the second time since it was first implemented in late March. It now will last until 18 May. Although some low-risk areas have already eased restrictions, most economic activity remains on hold. Unemployment shot up by 14.8 percentage points from 8.7pc in March to 23.5pc in April, according to the Centre for Monitoring Indian Economy.

Both Barclays and the IMF predict that India’s GDP will take a major hit in 2020 and 2021. The IMF projects that India’s 2020 GDP will grow at 4.2pc, down from its recent projection of 5pc. It also lowered its forecast for India’s 2021 GDP growth rate to 1.9pc from 5.8pc. In 2022, the IMF expects that India’s GDP growth will spike up to 7.4pc. Barclays has gone as far as dropping India’s GDP growth rate to 0pc for 2020 from its earlier prediction of 2.5pc growth. Considering global economic disruption and a country-wide lockdown, Barclays estimates that India’s GDP this year will fall by $234.4bn, or 8.1pc.

Japan’s fiscal policies enacted to counter the effects of the coronavirus will have a total budgetary impact to about 3.5pc of 2020 GDP. Japan’s overall GDP will contract by 2.7pc in 2020, ratings agency Fitch said. This GDP forecast combined with several others says that Japan’s general government deficit will equal be 8pc of 2020 GDP.

The IMF said that the Japanese economy will contract by 5.2pc in 2020 while the Japan Center for Research estimates a first quarter GDP contraction of 4.06pc. Japan is in a state of emergency that runs through 6 May.

Just as South Korea was set to re-open, the country was hit by a slight resurgence in coronavirus cases. The South Korean government extended closures of bars and nightclubs for another month. Korean schools saw reopening pushed to 20 May for older students while remaining classrooms are expected to gradually resume in the weeks going into June.

South Korea has passed fiscal aid around $80bn, yet it has made no concrete decisions about how the funds will be allocated. GDP relies heavily on exports from such big producers as Hyundai and LG. Large companies have shut some overseas facilities, cut pay and furloughed employees. Sales and production have tumbled, striking a massive blow to GDP. Exports account for just under half of South Korea’s GDP. The country is waiting for an effective economic policy decision from the government to boost activity.

South Korea’s GDP fell by 1.4pc in the first quarter from the previous quarter, according to the Bank of Korea. Exports and imports fell by 2.0pc and 4.1pc, respectively. The fall in exports is mainly attributed to a decline in motor vehicles, machinery and chemical products. The drop in imports was due to lower imports of crude oil and motor vehicles. Manufacturing fell by 1.8pc, driven by lower production of transportation equipment. A drop in the wholesale and retail trade, accommodation and food services and transportation and storage caused the service sector to fall by 2.0pc.

Comments

Leave a reply

Required
Please fill in your name
The name is not correct (only letters allowed)

Related blog posts

13 April 2020

Podcast – From the Economist's Chair: Forget 2020, save 2021

Argus Media Chief Economist David Fyfe reviews last week's Opec+ and G20 meetings and the resulting, highly-anticipated crude oil production cut agreement.

Filter:

Crude oil Global Africa Asia-Pacific Europe FSU Latin America and Caribbean Middle East North America English

26 March 2020

Podcast: The impact of the coronavirus on Middle East supply chains, petrochemical shipping and aviation markets

Sentiment is bearish among Middle East producers as the coronavirus pandemic is impacting the demand in key export markets globally.

Filter:

Petrochemicals Oil products Freight & Transportation Asia-Pacific Middle East English

24 March 2020

Podcast - From the Economist’s Chair: How might coronavirus alter markets?

Argus Chief Economist David Fyfe considers more broadly the changes this cruel coronavirus episode might force upon international commerce, global relations and the commodity markets.

Filter:

Crude oil Oil products Global English Africa Asia-Pacific Europe FSU Latin America and Caribbean Middle East North America Coal Fertilizer LPG/NGL Metals Natural gas/LNG Petrochemicals Freight & Transportation