No Fly Zone

Last week, regional airline Flybe went into administration, putting 2,000 jobs at risk and casting a shadow over regional economies across the UK. This was due to a combination of factors, but there is no doubt that the coronavirus outbreak tipped it over the edge.

Unfortunately, Flybe isn’t likely to be the only casualty.

The International Air Transport Association (IATA) has called upon governments to help embattled carriers. It estimates that the coronavirus outbreak could cost global airlines over $100bn of lost revenues in 2020. This reflects a sudden sharp fall in passengers due to fears about coronavirus, but also government containment measures. Many airlines are now cutting capacity, some by 25%.

However, the IATA forecasts actually understate the economic impact of the coronavirus outbreak. This is because lower passenger numbers also impact airports and companies providing shopping services at these sites, along with companies that provide ground handling services to the airlines.

In addition, while the aircraft manufacturers have long-term order books, airlines could delay ordering due to the coronavirus hit. The industry was already struggling due to the widely reported problems with the Boeing 737 Max. Both these issues have in turn hit their suppliers. Oil producers have also been under pressure as the oil price has fallen with lower demand for jet fuel. (See below)

With challenges for the airlines and aircraft manufacturers and their global supply chain it is not hard to see why coronavirus is likely to have a short, sharp adverse effect on the world’s economy.

The positive news from this could be the earth’s climate – with fewer planes flying there should be less carbon emissions. One hopes that Greta Thunberg is smiling.

What have we been watching?

Coronavirus continued to cast a shadow over global markets which have plummeted this morning due to the added concern about an oil price war between Saudi Arabia and Russia. Lower oil prices are good news for consumers and many businesses but this may be countered by credit default risk within the oil industry and lower capital investment. The economic data from China (see below) provides an example of the short-sharp shock some countries could suffer in their attempts to deal with coronavirus with Italy being a prime candidate with 16 million now in lock-down.

Despite supportive comments and actions from central bankers, the concern remains that things will get worse before they get better. As if to reinforce this point, the OECD cut its global economic growth forecast for 2020 by 0.5% to 2.4%, the lowest rate of growth since the 2008-09 financial crisis. The OECD warned that the global economy risks an outright contraction in the first quarter. However, the OECD is forecasting a pick up in global growth to 3.3% in 2021.

Central bankers have been making supportive comments and cutting interest rates while some governments such as the US and South Korea have announced emergency fiscal stimulus packages while the World Bank and IMF are also providing emergency funding.

Encouragingly, the rate of new coronavirus cases in China continues to slow and it has today reported the lowest number of new cases. However, outside China new cases are growing at a faster rate and the total number has now surpassed 110,000 for the first time. In the UK, the ‘best guess’ of the Chief Medical Officer of Wales is that coronavirus cases could peak in May or June while the government is planning for a worse case scenario where 20% of the workforce is stuck at home. Italy is now adopting more lock-down measures in an attempt to combat coronavirus and other countries including the UK may have to follow a similar path.

The Australian Reserve Bank became the first central bank to cut interest rates, lowering by 0.25% to a record low of 0.5%. Meanwhile, G7 Finance Ministers and Central Bank Governors issued a joint statement in which they reaffirmed their commitment to use all appropriate policy tools and that they stand ready to co-operate further on timely and effective measures. The US Federal Reserve (Fed) then followed this up by cutting interest rates by 0.5% to a range of 1% to 1.5%. However, interest rate cuts look a blunt tool in the face of a potential global pandemic. More helpful is the World Bank, which has committed $12bn in emergency aid for developing countries to help them deal with the economic impact of the coronavirus outbreak. The IMF has also announced $50bn of support for countries hit by coronavirus. In South Korea, the government has pledged an ‘extra budget’ of $9.8bn to fight coronavirus and mitigate the economic fallout. The US has also announced an $8bn emergency spending package in response to the coronavirus epidemic. The new governor of the Bank of England Andrew Bailey has called upon the UK government to offer emergency financial support in this week’s budget.

In the UK, the manufacturing PMI activity indicator touched a ten-month high in February but there was supply chain disruption and weaker order intake from Asia. This week’s Budget is expected to include more fiscal stimulus measures and support for the NHS to cope with coronavirus but has been overshadowed by the fall in oil prices and global stock markets.

In Europe, the manufacturing PMI activity indicator contracted for the thirteenth month in a row.

In the US, the manufacturing PMI activity indicator fell slightly towards stagnation territory with supply chain disruption starting to affect a number of sectors. The ISM non-manufacturing activity indicator hit a one-year high driven by new orders.

In China, the economic impact of coronavirus containment measures was reflected in new car sales which fell by 80% in February. With businesses shut down and global supply chain disruption China’s exports fell by over 17% in the first two months of the year.

Brent oil plummeted over 20% to $36 as Saudi Arabia launched an all-out price war with the biggest cut in its prices in the last twenty-years. A meeting of OPEC+ had been expected to agree to deeper cuts to production to counter the economic impact of coronavirus. However, Russia refused to tighten supply with some suggesting it is looking to restrain US shale oil output. This triggered a completely unexpected reaction from Saudi Arabia which plans to ramp up production in April above 10 million barrels a day.

Finally, the WHO has warned banknotes may be spreading coronavirus. Meanwhile, sales of hand sanitiser jumped by 255% last month in the UK as fears about coronavirus grew. Supermarket shelves have also been emptied of pasta and toilet rolls. It seems investors are not the only ones gripped by panic.

Read Last Week’s Alpha Bites – Don’t Panic

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