Barita Insights: Weekly Newsletter August 10, 2020

Analyst Insights

While this quip is generally used to describe the stock market, given the impact of COVID-19 on local and global economies, it is entirely appropriate: the economic fallout has been fast and sharp, and the rebound is likely to be slow and hard, you know, like climbing 100 flights of stairs. The deliberate shutdown of economies will likely lead to effects to be felt by many generations to come; the massive accumulation of debt is an example. But, to use a medical metaphor: like a critically ill patient, the economy was deliberately comatose, and now that it’s on the mend, we assess the various complications that will arise from the ‘medical procedure’. In other words, this week, we will examine ‘what is the Health status of the economy?’

The Global Economy
Within the last few weeks, a great deal of economic data has been released from major economies. For the second quarter (Q2) of the calendar year, the US had a decrease in annualized GDP of 32.9%; the eurozone saw a decline in GDP of 12.7% while China saw growth of 3.2% in GDP. This mixed signal showcases how diligent and deliberate China was in there attempt to manage the local outbreak of COVID-19, as they have successfully reopened the domestic economy and restarted international trade flows. China’s Purchasing Managers Index (PMI) was recorded at 52.8, which indicates expansion. Examining the US, they are having difficulties restarting their economy as a second wave has significantly hampered the ability reopen individual states. They are also in an election year which has been engulfed by ongoing unrest regarding social injustices among minorities within the nation. Last week the Nonfarm payroll data was released, which indicated the unemployment declined to 10.2% from 11.1% as there was a steady increase in hires predominantly in the leisure and hospitality space which was most affected. This despite the initial jobless claims increasing to 1.43 million, the 19th straight week this amount is above a million. What this mixed data shows is while there is employment in specific areas of the economy, individuals are still laid-off in other sectors of the economy. On the side of consumer spending, the two major political parties have been unable to agree on the next round of consumer stimulus bill. This bill is essential as the level of employment remains below pre-COVID levels, consumption will also be a week, and household consumption is an important component of GDP. The stalling of this bill leaves many households and individuals uncertain with regards to their ability to continue through this period of uncertainty as COVID-19 cases remain elevated with no end in sight.

Recently European Union (EU) leaders struck a historic €1.8 trillion package to help rebuild the eurozone bloc. These monies will be spent towards a recovery fund (€750 billion) while creating a new budget for 2021-2027 worth €1.1 trillion. These are necessary measures given the stagnant growth within the block and the stifled growth amidst economic lockdowns and the hampering of movements of capital within the borders. The largest economy of Germany saw a significant decline of 10.1% for Q2 as the automotive industry remains weak on the back of lower consumer spending. Germany’s auto industry is one of the largest globally and is one of the backbone industries for the bloc.

The Domestic Economy
Jamaica has had its fair share of setbacks as the COVID-19 cases have begun increasing by large numbers, relative to single-digit daily increases. The double digit increases within the recent weeks occurred as Jamaica has reopened its borders to international, albeit under control procedures. Since reopening its borders, the central government has seen higher than budgeted revenues at J$122.65 billion (6.9% higher than budgeted). This has been supported significantly by an increase in Tax revenue and Non-Tax Revenue. They have been prudent regarding expenditure as they are 1.0% below budget at J$148.08 billion. The net effect is a fiscal deficit of J$25.42 billion, 27.1% better than the budgeted deficit of J$34.88 billion. While on the surface, this is positive, the potential spike in cases within the recent weeks threaten the viability of this to continue. If another lockdown is implemented, stricter curfews or tightened border controls are introduced, this could set back Jamaica further than expected. Examining the releases of companies across our local industry has shown mainly positive indications of these entities resilience during the lockdown period. Yet, market activity remains subdued as investors remain cautious about the current rising cases and the implications on the future growth of our listed companies over the final half of the year.

Is a Recovery Insight?
In the absence of a vaccine, closing borders indefinitely is not a solution. Continued expansionary fiscal and monetary policy is necessary to aid both households and businesses. This creates the right environment for both consumption and production. To that extent, the potential pace of the recovery remains in question as to the ongoing debates over the level of employment, the level of fiscal stimulus needed to be provided, adoption of remote working, increased or decreased border controls, the reestablishment of international supply chains and improving domestic supply chains are key factors impacting the recovery. Notwithstanding the aforementioned, uncertainty has reduced, what remains is the ability for nations to operate with COVID-19 without eradicating gains made thus far and pressuring their health infrastructures.

Written by Haughton Richards, FRM, Senior Research Analyst