COVID-19 Newsletter: The economy is hurtling down

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With the RBI clearly stating Covid-19 pandemic hanging “over the future, like a spectre,” the central banker has more or less confirmed the onset of a recession, in India and the rest of the world. Recessions characterized by a sharp deceleration in economic growth are often followed by a sharp acceleration, popularly known as “V-shaped recovery.”

An Oxfam study claims that a 20 per cent drop in income caused by COVID-19 recession will push half a billion additional people into poverty, globally. Over 547 million people in this world will be earning less than $ 5.50 (almost Rs 400) per day.

Given the sudden, severe and exogenous nature of the current downturn, forget the V-shaped recovery; the economy won’t bounce back quickly. Instead, the deep psychological scars are apt to linger, with a concomitant effect on behavior on the part of both consumers and businesses. The 2008 financial crisis ended in June 2009, but real gross domestic product didn’t exceed the 2007 peak until the second quarter of 2011. Economic growth is expected to take an even bigger hit this time around.

It took almost five years from the June 2009 recession trough for employment to get back to its pre-recession peak. Economists expect the global unemployment rate to easily exceed the post-World War II record. This time it might be worse. India, already saddled with huge unemployment will have some catching up to do. Firms will be keener to fire, not hire.

Following the Great Depression of the 1930s in the US, the personal savings rate soared as households came to appreciate the benefits of thrift. That is likely to happen again, once households have the wherewithal — a job and a paycheck — to start saving. Lavish, unwanted expenses will take a real long time to revive. Hospitality and fine dining will be pushed back to “somewhere in the future”.

COVID-19: What’s the buzz?

Fear of re-infection in recovered patients is also growing in China, where the virus first emerged last December, after reports that some tested positive again — and even died from the disease — after supposedly recovering and leaving hospital.

Now medical experts are warning of a second wave of infections either later this year or next year before a vaccine becomes available. The coronavirus may be “reactivating” in people who have been cured of the illness, according to Korea’s Centers for Disease Control and Prevention. About 51 patients classed as having been cured in South Korea have tested positive again. The virus may have been reactivated in these people, given they tested positive again shortly after being released from quarantine.

Fear of re-infection in recovered patients is also growing in China, where the virus first emerged last December, after reports that some tested positive again — and even died from the disease — after supposedly recovering and leaving hospital.

There’s little understanding of why this happens, although some believe that the problem may lie in inconsistencies in test results.

In India, however, incidents are increasing each day. The Centre has passed the buck on to the state governments to continue or end the lockdowns. It is likely that the lockdowns may continue till 30 April. But businesses can not afford to have complete lockdowns. Trucks, movement of raw materials and goods have to start, sooner than later.

Epidemiologists around the world are in a race to find out more about the virus that causes Covid-19.

The Economy: What’s likely to happen

The world is so integrally linked today, that the tremors of recession will reverberate throughout the planet. Effect of rising unemployment will be universal. Logistics setback in one part of the globe will echo in other part. Businesses, for their part, will likely replace business travel and the entertainment expenses. Video conferencing, skype, and instant messaging applications will become the order of the day. Disrupted global supply chains will take time to reconstitute or revamp. Firms are likely to see their costs for things like health care and paid sick leave rise.

Business fixed investment, which declined in the second, third and fourth quarters of last year in response to the trade war, is not going to ramp up either. Demand itself has been drying up, inventories are piling, where is the scope for fixed investment? The sudden onset of the nationwide lockdown, with no time to prepare, could trigger a wave of business failures and loan delinquencies that will have a snowball effect on lenders, borrowers and banks alike.

Agriculture: Trucking Blues

A nearly three-week national lockdown, likely to be extended by another fortnight, has kept India’s 1.3 billion people — including tens of thousands of truck drivers —- indoors, creating shortages of food and other critical products needed to fight the virus. Data reveal that only about three per cent of India’s 10 million plus vehicles were on the roads thanks to an acute shortage of drivers despite the government lifting restrictions on movement of non-essential commodities within six days of announcing the lockdown last month.

The Union home ministry had issued orders on March 24 that 50% of the workmen in the tea estates can resume their work. The southern states have outscored the eastern tea-growing states. Kerala and Tamil Nadu issued safety protocols. Assam failed. West Bengal chief minister Mamata Banerjee has given clear orders that the gardens of Darjeeling, Terai, and Doars region will remain closed as long as the lockdown continues. Consequently southern tea estates have started plucking tea leaves and resumed operations while Darjeeling and Assam tea are ripe but unattended.

Supply-chain disruptions, and not so much, production related problems, have led to volatility and increase in prices of essential items as well. Even organised sector companies like Unilever, Dabur, Nestle, etc. are lamenting the sudden dearth of labour, be it for loading and unloading trucks to managing warehouses, taking supplies from distributors and moving goods to the retailer. Besides labour, the other key break in the supply chain has been the transport lifeline – thousands of trucks stuck in jams at semi-sealed border entry points. Result: raw materials, too, are in short supply.

Metals: Caught between the devil and the deep sea

Indian steel companies not only have to cope with lower infrastructure spending by a firefighting government but also take on market under-cutting by China in the export market. A clear cut case of being caught between the devil and the deep sea!

The outlook for domestic steel appears even bleaker. Domestic steel prices, which had been trading at a premium to international prices, are bound to feel pressure as the lockdown is leading to a build-up of inventories. While steel production and allied activities such as mining are covered under the Essential Commodities Act, it has to be seen how long steel companies can continue producing with the demand being completely wiped out. Most auto majors and white goods producers have already downed shutters.

Shutting down blast furnaces are a costly affair for the overleveraged steel companies. Companies producing non-ferrous metals such as aluminium, copper, zinc, and lead with continuous processes such as smelters and potlines have urged the government to cover them under the E export market. A clear cut case ssential Services Maintenance Act like the steel industry.

Profit margins of most metal and mining companies are expected to fall, led by higher input prices and weaker steel pricing. For instance, the aggressive bidding in mine auctions in Odisha will keep iron ore costs high in the near term. Further steel companies generally store about one or two month of iron ore requirement close to the factory but may face difficulty in moving them through road as most state governments have restricted lorry movements.

In comparison, steel production in China has already started and Chinese companies are offering special incentives on exports even as other countries are busy fighting the pandemic with economic lockdown. China has increased VAT (value added tax) rebate on exports from 10 per cent to 13 per cent to boost steel production and dump it on other countries as their economy comes out of the virus attack.

So Indian steel companies not only have to cope with lower infrastructure spending by a firefighting government but also take on market under-cutting by China in the export market.

A clear case of being caught between the devil and the deep sea!

Gold in India is hovering between Rs.45,000 and Rs 46,000 per 10 grams. “It’s still a tug-of-war situation for gold between the virus and the equity markets; when equity markets further sell off, there is request for margin calls again,” Xiao Fu, an analyst at Bank of China International, told Reuters.

Energy: Too Little Too late

The bottom is fast falling out of energy demand, particularly in India, the third largest consumer of crude oil. India’s fuel consumption has dived by over 66 per cent in April 2020 as a nationwide lockdown halted economic activity and travel. The demand for fuel has just about evaporated. Aviation turbine fuel (ATF) consumption has collapsed by 90 per cent as most airlines have stopped flying.

The latest news is that both Russia and OPEC have finally decided to cut production by 10%. But if demand for fuel is eroding like Alzheimer’s memories, what price will the crude settle at? It might see some uptick, but unlikely to go beyond $30 a barrel. The oil market has faced an unprecedented, simultaneous demand and supply shock. The only light on the horizon is the fact that at some point, lower energy prices should act as a mechanism to stimulate demand, especially consumer demand in countries.

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