Significant drop in Irish PMI. US lift trade tariffs
“We are looking for stabilisation, but there has been a real underestimation from the start.”
In Ireland, construction and availability of real economy data in terms of leading indicators is limited. The AIB manufacturing Purchasing Managers Index (PMI) is used as an Irish leading indicator on real economy performances and their latest survey was published yesterday. This index fell to 45.1 from February’s 51.2, its worst reading since May 2009. The figure was well below the 50 mark that separates expansion from contraction.
What is clear, is that further sharp falls in all PMIs globally are likely over the next couple of months. Another thing to note in terms of leading indicators is yesterday, Tottenham Hotspurs made a 20% pay cut across their non-playing staff. Sometimes this sort of information gives a good indicator of the impact on the real economy. Data and stats are starting to be released highlighting how deep and potentially how prolonged this recession is going to be. Denmark has forecast a 10% fall in GDP, which could be an anchor point for a lot of countries before real information becomes available. Denmark is also forecasting a corresponding unemployment rate within this range of 10%. Sweden and some other Scandinavian countries took a completely different view to the recent pandemic, treating Covid-19 with a more laid-back approach which is starting to backfire on them significantly. One negative outcome from this Swedish model, which was paying people as normal, is that the amount of bankruptcies has gone up exponentially.
Likewise in some Scandinavian counterparts and also European neighbours, this highlights the different approaches and the impact of these different approaches during Covid-19. We are looking for stabilisation, but there has been a real underestimation even from the start, in terms of the impact on the real economy. There is one good day in ratio to three to four bad days. Now while we may see signs of stabilisation soon, it is way too soon to predict the real impact this will have on the real economy.
Last night, US President Donald trump announced a lifting of trade tariffs. This is a big move by Trump, indicating he thinks the health impact on the US is far more important than his trade war with China. Also in amongst this announcement, is the amount of increased debt the US expects from Covid-19. The US debt is at $25 trillion already, and this is only likely to increase.
This reinforces the view that the world underestimated the impact of Covid-19. As a leading world economy, the US play a vital role, no matter who leads the country. No matter how different policy makers have behaved, some power hungry, some being behind curve like Trump, or Europeans (like Ireland) trying to be ahead of the curve, Covid-19 has boosted popularity of all policy makers. For elections coming up, which impact markets and economies, the incumbents tend to gain huge support under these circumstances.
Linking the real economy, policy makers and markets is the banks and companies approach to paying dividends. Policy makers in Europe have asked banks and other companies to consider stopping the payment of dividends. The reason is that dividends tend to inflate share prices. Typically, companies borrow money from markets at a cheap rate, buy back dividends driving their share prices up. It isn’t just shareholders that benefit from this but management too. As share prices goes up management start to lock in large amounts of share options.
Interestingly, it is a real technical decision taken by policy makers to actually stop companies paying out dividends Typically policy makers do not ask companies to stop paying dividends, but what they are trying to do is firstly, avoiding artificially inflating prices, and instead push cash out to the real economy. Mostly, policy-makers want to get markets working in the proper way again.
We are going to see a lot of these subtle changes in markets now with policy. We have a lot of data coming out again in the next week or two and a lot of forecasting coming out from economists on the real economy. We may see some stabilisation of Covid-19 over the next two weeks as a result of this lockdown which will aid forecasting how long the recession will last. In turn, markets should get more confident again.