The Single Greatest Logistical Challenge

Later this week the government will be updating us on lockdown restrictions. It is widely expected that these will be the first measures aimed at unlocking the country.

Five key tests have been identified, including if there is sufficient testing capacity and if there is enough PPE equipment in hand to meet future demand.

Do we or don’t we wear facemasks? Notably in public places and especially on public transport?

The lack of personal protective equipment (PPE) for the NHS and care workers is a topic that will no doubt continue to rage. Until a vaccine becomes commercially available, global demand for PPE is going to remain at extreme levels for the foreseeable future to protect front line health workers, but potentially for many people going about their daily lives.

The speed with which British manufacturers have worked together to address the ventilator capacity challenge is impressive. At the same time, hundreds of ‘cottage industries’ have sprung up, with people sewing hospitals scrubs at home or making 3D printed face masks. While truly inspiring, the amount of PPE required amounts to billions of items and means a wartime response is required.

Getting the right amount of kit and then getting it to the right people is key. It is re-assuring to see that the government has therefore enlisted the help of the army. General Sir Nick Carter, the chief of defence staff has called the UK’s PPE situation as ‘the single greatest logistical challenge’ he has ever experienced -there are over 200 hospitals and 50,000 care homes requiring deliveries. There is also a multitude of UK and overseas PPE suppliers as well as new providers. For example, the Royal Mint has started to produce 150,000 medical visors with a target of 2million.

Globalisation has been a theme of recent decades with UK manufacturers off-shoring some of their production to regions of the world with cheaper labour. The global car industry has perhaps been at the fore-front of this with ‘just- in- time’ global supply chains. President Trump kicked off the global trade tariff war with China by placing ‘America First’ and encouraging US companies to re-onshore manufacturing to the US. When the Covid-19 crisis is over, many governments and businesses will need to carefully assess their global supply chains and how they can be made more secure. This must surely include medical grade PPE.

The UK government has released a draft plan for businesses to ease lockdown restrictions involving staggering shift times and maximising home-working. However, it is clear many businesses may require PPE to comply with the new draft guidelines and to protect workers and not risk being sued. Companies and trade unions are also concerned that if they purchase PPE, they will be competing with the NHS for scarce and essential supplies.

Another factor in the global supply chain will be President Trump’s threats of more tariffs as he steps up his attacks on China over the Covid-19 crisis and makes it a major issue for his November re-election campaign. US Secretary of State Mike Pompeo said there was ‘enormous evidence’ that Covid-19 originated in a lab in China.

What have we been watching?

Easing of lockdown restrictions in a number of countries (Italy, France, Belgium, Spain) together with ongoing central bank stimulus helped support the rally in markets. In addition, Gilead Sciences Remdesivir drug was found to cut the duration of Covid-19 symptoms from 15 days to 11 days in US clinical trials. Highly respected infectious disease expert Dr Anthony Fauci said the results proved a drug can block this virus.

However, the re-opening of economies remains a challenge even for those with the best testing procedures. For example, Germany has seen its Covid-19 infection rate increase from 0.7 to 1.0 after it eased lockdown restrictions. An infection rate at this level is still appears to be considered an acceptable risk as it would still allow for the development of ‘herd immunity’ while allowing the German health service to cope. However, an infection rate above one could mean the rate of new cases would again grow exponentially. By comparison, Denmark which was the first European country to begin easing lockdown measures said that while there has been an uptick in infections that the overall number of Covid-19 infections has continued to fall.  In the UK, the PM said that ‘we’re moving to the second phase of battle’ with lockdown changes ‘in days’ as he confirmed that the UK is ‘past the peak’.

Certainly, more quoted companies are test piloting operations using social distancing guidelines. Following the housebuilders and DIY stores, Greggs which has more than 2,000 shops in the UK, said it plans to open 20 stores in Newcastle on 4^th May as part of a controlled trial with a limited product range and shorter trading hours. The plan is to re-open all stores by 1^st July when the government’s job retention scheme is due to end. Some wag has already suggested that pavements may need to be widened to accommodate queues but will we really enjoy queueing outdoors in the rain? What about winter? (Greggs has since postponed opening plans due to worries about customer numbers – a good example of the social distancing challenges some companies will face). Meanwhile, three-quarters of restaurants have warned they cannot survive with social distancing measures in place.

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In the UK, the EY Item Club estimated that the economy would contract by 6.8% in 2020 with a 7.5% fall in consumer spending and a 14% drop in business investment. It is forecasting the economy to grow by 4.5% in 2021 but does not expect the UK to get back to where it was before Covid-19 until 2023. We know businesses are being impacted by Covid-19 lockdown in different ways with many UK employees being furloughed. However, the economic cost of Covid-19 was reflected by the announcement from British Airways that it is looking to reduce its 42,000 work-force by 12,000 as it does not see passenger demand reaching 2019 levels for several years.

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In Europe, the eurozone economy contracted by 3.8% in the first quarter of 2020 with the final month seeing containment measures more widely implemented. Despite this, there appears to be a lack of action from the European Central Bank. While it has added flexibility to its support measures, the size of the overall stimulus package has not changed.

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In the US, consumer confidence collapsed in April, although this was only to be expected given the Covid-19 crisis. The US economy contracted by 4.8% in the first quarter of 2020 -the fastest pace of decline since 2008. However, far worse is expected in the second quarter with the full effect of lockdown with some forecasts of up to a 30% decline. Federal Reserve Chair Jerome Powell emphasised how the US economic recovery from Covid-19 is set to be a long drawn out process and warned of the danger of further outbreaks. However, markets were re-assured by his comments about existing stimulus measures, with further new programmes to be added soon, that could be in place for at least a year.

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The Bank of Japan has ramped up stimulus even further with a pledge to buy government bonds at an unlimited rate to maintain long-term interest rates at zero.

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In China, the April PMI economic activity indicator saw the manufacturing sector still slightly into contraction territory.

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Oil prices fell further last week. In the US, West Texas Intermediate (WTI) plunged 25% in one day while at one point, Brent oil dropped below $20 before recovering to $25. Global fuel demand is estimated to be down by 30% due to Covid-19 lockdown measures, while 85% of global onshore oil storage is full. The pain from the oil glut was reflected by the announcement from Royal Dutch Shell that it was cutting its dividend by 66% -the first cut since 1940!

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Finally, its May 4^th which means it’s Star Wars Day – ‘May the fourth be with you’.

 

Read Last Week’s Alpha Bites – Boris is Back

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.