Coronanomics (2) - Easing Out of a Crisis

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Sunday, June 07, 2020 05:00 PM / by Proshare Content / Header Image Credit:  EcoGraphics


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As far as viral pandemics go one seems to occur every hundred years. In 1720 the world saw a massive plague that wiped out more than 100,000 French men, women and children (the great plague of Marseille). In 1889, another viral pandemic occurred called the great Flu pandemic in Europe killing over a million people. In 1918, the Spanish Flu became one of the modern world's most potent pandemics infecting about 500m people from the South Seas to the North Pole. Roughly 100m people died from the virus, which despite its name did not start in Spain. Since the turn of the century, the world has passed through a series of minor epidemics ranging from the avian flu in 1957 to the AIDS pandemic and epidemic in 1981 to the H1N1 Swine Flu pandemic in 2009 and the Ebola epidemic in 2014.

 

The emergence of the novel coronavirus or COVID-19 that was identified to have started in the city of Wuhan China in December 2019 has since led to panic, uncertainty and supply-chain disruptions that have negatively affected global markets in 2020. Not only did the virus affect global markets, but it also resulted in the loss of lives across. Available statistics suggest that all continents across the globe except Antarctica, have reported at least one case of the virus.

 

The rapid rate of spread of the virus has led to many countries forging differently calibrated policies to cushion the impact of economic contagion and to slow down the drop in demand and production. The Central Banks of most advanced nations like the USA Federal Reserve, the Bank of England, and the Peoples Bank of China etc. have announced interest rate cuts to strengthen liquidity in both their money and capital markets. Although economic experts have argued that cutting rates in itself has limited effectiveness as it would not likely tackle the main problem of production and service supply chain disruptions and the implosion of product and service sector demand, most Central Banks have seen rate cuts as the first instinctive policy of choice. To further strengthen the US economy and complement the easing of its monetary policy, the country's President, Donald Trump, signed a US$484bn coronavirus relief bill to boost small businesses, hospitals and Covid-19 testing (as at April 24, 2020).

 

The coronavirus (COVID-19) has had damaging impact on a variety of economic sectors ranging from manufacturing, travel and tourism, to sports, automobile and the healthcare sector. It has also created uncertainty in global stocks and commodities markets as investors have retained a sober outlook steeped in pessimism over global growth prospects in 2020, and perhaps 2021.

 

The restrictions on the movement of goods and labour have had adverse effect on top manufacturing countries such as China, the USA (the new epicentre of the disease), Germany and South-Korea. USA, Germany and South Korea recorded a decline in their PMI in April 2020, caused mainly by disruptions to global and domestic supply chains. In an effort at curbing the spread of the virus large gatherings at sporting events such as Football matches, NBA and Formula one competitions, have either been postponed or suspended indefinitely in countries such as Italy, England, the USA etc.


Several nations globally are on selective lockdown such as the US while some nations are beginning to ease the lockdowns such as China to boost economic recovery, this is to prevent further spread of the virus while many airlines have restricted travels to areas with large incidences of the virus. International Air Transport Association forecast that airlines globally will lose passenger revenues of up to US$113bn in 2020.

 

The Oil market has not been left out of the crisis. Since the outbreak of COVID-19, there has been a cascading fall in oil demand within China and the Asia Pacific region, which collectively represent one of the largest blocs of global crude oil importers. The fall in oil demand has resulted in the excess global supply of the product and led to an undisguised global battle for market share by the largest oil producers in the world namely; Saudi Arabia and Russia. To bolster oil prices amid falling oil demand, oil-exporting nations under the umbrellas of OPEC and OPEC+ discussed the possibility of cutting oil supply a notch or two further but the effort was sideswiped by Russia's refusal to agree to steeper cuts than those that had been agreed at an earlier meeting in the year. But the initially agreed cut in oil supply by 10 million barrels per day, had yet to make any significant impact in reversing the downward trend in international oil prices. Indeed forward contracts saw prices falling below US$1 per barrel as the world suddenly found itself swimming in an ocean of oil that could not be stored, thereby creating a hitherto unthinkable situation of forwarding traders not being able to close out their deals and forcing them to think of taking and storing the underlying physical oil assets. However, we are seeing a gradual reversal of the oil price, with OPEC and OPEC+ coming to an agreement and economies opening up gradually, thereby increasing the demand in oil inversely affecting the price of oil. (as on 22nd May the price of oil was $35 per barrel.


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The Nasty Economics of a Deadly Virus

 

With demand falling off as buyers of goods in China and the rest of Asia hold back from new orders, production cycles have been scaled back as manufacturers steer away from increasing their inventories and engaging in new spending on raw and semi-processed materials (see illustration 1 below).

 

The new world with and after the COVID-19 will be one of Just-In-Time (JIT) manufacturing processes, greater production efficiency with fewer blue-collar workers and more machine applications. White-collar jobs will equally become thinner as artificial intelligence (AI), Big Data, and Informatics take over the old roles of front office and middle-level managers. The whole labour market will be thrown into a new phase of wage renegotiations, reimagined and reframed job descriptions, workday /work hour redefinition, and skill requirement resets.

 

The digital workplace will become the new normal and physical distancing will become the new way of life and not, as currently perceived, an aberration. The redesign of work will ensure that the next global pandemic will meet a much more prepared labour market. The new economic order would be governed by data, algorithms and programming. Data gathering, organizing, analyzing, interpreting, and presentation for decision-making will be amongst the most valued skills on the planet.

 

Writing codes that drive applications will be perhaps more vital than being a petroleum engineer, even though, contrary to present narratives, oil will still be a major industry for years to come as the world continues to guzzle on black fuel and gas.

 

But back office book-keeping functions will disappear as software applications that learn-on-the-job and build recursive algorithms prepare routine accounting statements customized for activities of each type of business. Tax obligations, fees and fines and other statutory payments would be instantly calculated with alerts integrated into the reporting framework to keep companies abreast of due statutory bills. Indeed, AI (based on agreed budget milestones) could prepare a business plan for the year and manage its implementation and suggest strategies for keeping the operational activities on course.

 

The economics of the emerging business landscape places data at the centre of corporate competitiveness and organizational sustainability. Banks and other lending institutions presently have more data than ever before on individuals and their credit patterns/histories to provide AI with the raw information needed to assess creditworthiness and the inherent risk of default per customer and by extension per economic sector.

 

Digital platforms such as debtors.africa.com will be plugged and played as it performs an increasingly important function of filtering delinquent debtors and providing lending institutions deeper insights into specific debtor characteristics and histories. To be sure, the emerging state of the loan payment practice for each debtor or group of debtors across the African continent will be reframed in favour of creditors.


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Sector Gainers and Losers

Some of the top sectors likely to record gains during the pandemic include but are not limited to the following; e-commerce, healthcare/pharmaceuticals, online entertainment, Info-tech, FinTech and online gaming businesses. While auto-industries, tourism/hospitality, airlines, small and medium enterprises, the entertainment industry and electronics sector are likely to record a fall in patronage and a reversal of profits and a stumble into operating losses (see Illustration 2).

 

Despite the increase in the spread of the virus, some technology companies such as Facebook, Microsoft, Zoom and Google recorded growths in their Q1 2020 earnings. Facebook recorded a revenue of $17.74bn representing a rise of +18% from $15.08bn posted in Q1 2019, following a similar pattern Microsoft generated $35bn in revenue, which was up +15% from the previous year, Zoom also recorded $622m in total revenue, up by  +88%  year-on-year.

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Countries with the Highest Reported Cases of Coronavirus

USA is now the epicentre of the disease overtaking Italy and China as the country with the highest number of confirmed cases of COVID-19 infections with over 1.71m people infected as of 26th May 2020 with deaths totalling 99,909. The top five countries with the highest number of confirmed cases are the USA, Spain, Italy, United Kingdom and Russia (see Table 1).

 

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Related Reports (PDF)

1.     Download the Full PDF Report - Coronanomics and the Nigerian Economy, June 06, 2020

2.     Executive Summary PDF - Proshare, June 06, 2020

 

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