The COVID-19 pandemic has taken a lot of wind out of the economy, however economists at Old Mutual believe there is light at the end of the tunnel and that there is a silver lining somewhere in the economic plunge.
Through an atypical virtual meeting held two days before the national lockdown, listeners were told that the economic outlook over the mid-term and long-term is not all doom and gloom. A whole lot, however, depends on how and when the virus will peak, and the period of national lockdowns, both globally and locally.
Organised by Old Mutual Investment Group, the virtual meeting saw Chief Economist, Johann Els, delved into the current economic environment, while Portfolio Manager, John Orford, unpacked his market expectations.
With uncertainties around the cycle of COVID-19 infections, both globally and locally, including the duration of lockdowns, among other factors, the speakers gave a forecast that was inconclusive, in the sense that it was before the national lockdown was effected and had several “ifs” hanging over it.
Els conceded that it was “very difficult to make a forecast under these conditions”, however, he presented the analysis he had made before the lockdown.
Oil price cuts
Els calculated that the Coronavirus’ impact on the national budget, decimated the budget plan.
“We are heading towards a ten percent deficit, or even more, depending on what further fiscal measures the government might have towards supporting the economy. Inflation is heading towards three percent in the next couple of months, given the substantial fall in the petrol price that I anticipate,” he presaged.
Another factor that needed careful attention, according to the local economic forecast, was consideration of the oil war between the United States of America and Saudi Arabia in relation to its effect on the price of the viscous liquid itself.
“Given the uncertainty around the virus cycle and the impact on the global economy, I expect many rate cuts to come through. But we must focus a little bit on the oil price as well. The significant fall in the oil price would further downside risk. It will act as a huge global tax cut in terms of policy support for the global economy. We see the US petrol price falling heavily, in South Africa, that’s going to be the same case. That will help in cushioning some of the negative impacts from this global down cycle,” said Els.
With the inflation rate heading towards three percent in the next couple of months, or maybe even lower, it leaves more room for the South African Reserve Bank (SARB) to cut rates.
The interest rate cuts, and lower petrol price will help consumers in South Africa, even though they will collectively be travelling less in the near future. This will benefit their individual wallets in the long run.
Els said that the global economy will be in a deep recession for the first half of 2020, and the forecast expects this to be a V-Shaped recession.
In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession, as the strength of economic recovery is typically closely related to the severity of the preceding recession. V-shaped recovery is a type of economic recession and recovery that resembles a “V” shape in charting.
“The world economy experienced negative growth for the first and second quarters. China experienced negative growth in the first quarter, and a strong recovery in the second quarter as it is ahead of the world in terms of the infectious cycle. For the world economy, it is a negative growth cycle this year,” Els said.
He, however, threw caution to wind. He clarified that, “the global economic recovery (forecast) absolutely assumes that the virus fazes out over the next three months or so; with social distancing and the lockdowns helping in ending the spread of the virus and that there is no second wave, which is a huge risk even though Chinese production is starting to pick up again. A second wave of infections is a huge risk, not only to China but to other parts of the world as well. A strong V-shaped economic recovery is possible, but it is heavily dependent on those factors.”
2021 market expectation
Orford told listeners that, “When we look to 2021, we should expect the virus should have peaked by then, given the measures that we have seen in Asia, with them being more aggressive earlier. That aggression is now being matched in Europe, in terms of locking down the economy to slow down the spread of the disease. In 2021, we should see a recovery from 2020. This year is going to be a weak year for the global economy, perhaps as weak a year as we have seen since the Second World War. Looking into that, we are obviously getting extreme stimulus, and there is going to be a significant inventory rebuild across all the businesses that have been brought to a standstill.”
The markets are expected to give great returns in the coming year due to the current, and sudden, nosedive.
“Markets trade on change, and once we are through this crisis, markets will trade on that change,” concluded Orford.