|
|
|
|
Was this email forwarded to you? Sign up here.
In this edition:
|
Recovery in China’s manufacturing sector continues though risks abound
- China’s official manufacturing purchasing managers’ index (PMI) rose to 50.9 in June from 50.6 in May, suggesting that the country’s economic recovery is continuing.
- The manufacturing PMI’s sub-indexes offer additional details: a moderate improvement in orders and an uptick in export orders suggest a temporary stabilization in the manufacturing sector in the coming weeks.
- Nonetheless, the recovery remains uneven. The gap between the PMI’s production sub-index and order sub-index rose to 2.5 from 2.3, indicating that overall inventory levels are likely to rise.
Our view: China’s continued economic recovery is mainly being driven from the supply-side by fiscal stimulus. In contrast, momentum on the demand-side remains feeble: 54.7% of firms surveyed by the government claim that market demand remains inadequate, and the manufacturing PMI employment index remains in contractionary territory. In addition, while the economic reopening of major western markets has offered Chinese exporters a reprieve, the resurgence of COVID-19 infections in some countries poses serious questions about whether the recovery in exports can be sustained.
Business implications: Firms should not be complacent about China’s rosy manufacturing PMI number, as China’s economic recovery remains uneven. Instead, they should focus on maintaining their resilience in the face of potential headwinds from still-weak external demand. To ensure their businesses are well-positioned to navigate the dynamics of a fragile recovery, firms should expect continued pricing pressure amid elevated inventory levels and prioritize resources toward higher-growth sectors such as pharmaceuticals, electronics and telecommunication equipment.
Boyang Xue, Analyst for Northeast Asia
FrontierView clients: See our more recent China 2020 Outlook Update for further insights
|
|
|
U.S. state and local governments under pressure to cut spending
- The recession caused by COVID-19 is causing significant spending cuts, primarily in education and public services, as state and local governments face growing fiscal constraints. Since March, governments have cut 1.5 million jobs.
- Low revenues have contributed significantly to this tightening, and delayed income tax deadlines have exacerbated the uncertainty of future revenue streams.
- State governors requested US$ 500 billion in April but have yet to receive additional funding. States' fiscal needs are likely higher now, and, while it is not certain that states will receive more funding, the next round of fiscal support would likely come in late July.
Our view: Any additional federal funding will likely be too late to overcome the damage caused by COVID-19 and is unlikely to prevent additional spending cuts. The sharp declines in revenues and tax collection will lead to continued cuts in state and local spending and employment. A similar trend occurred following the 2008 financial crisis, when the fiscal stimulus boosted government consumption but state and local spending stayed in contractionary territory for several years. We expect state and local governments to continue to reduce spending in the coming years, resulting in job loss, cut public services, and slow economic recovery.
Business implications: Firm should expect low investment from state and local governments, and, where possible, tap into federal government resources instead. Firms should continue to monitor Congressional debates about a new fiscal package. Firms should focus operations on sectors that are less dependent on government spending and shift away from sectors with high government involvement, such as public services and education.
Lindsay Jagla, Junior Analyst for Global Practice
|
|
Argentina gets closer to a debt restructuring deal with latest offer
- Argentina unveiled its latest external debt restructuring offer late last weekend. Bondholders will have until August 4 to decide on it.
- We believe that this is a substantially improved offer compared to previous versions. On one hand, the net present value of the swapped bonds will be over 53.3 cents on the dollar, up from approximately 32 cents in the original April proposal. The deal would also allow bondholders of the 2005 swap to adhere to those same legal indentures, which was a very contentious item for certain creditors.
- Argentina must begin semi-annual coupon payments in September 2021 and principal payments in 2023. The coupon rate itself, which will step up to 5.0% in some of the bonds, is also an enhancement from the original offer.
- The government needs an average of 66.6% of bondholders (the specific hurdle varies by the bond) to approve of the offer to complete the restructuring.
 Our view: We have been steadfast in our expectations that the two sides would reach a deal by the end of July; our conviction is now higher that this will occur. The main risk at this point is that bondholders are frustrated by the length and unorthodox nature of the negotiations. In other words, bondholders might vote against the proposal simply because they are frustrated by the government’s tactics up until now. However, the distance that the government made up with this latest offer significantly reduces the potential that one of the two sides walks away completely, which would commence costly legal proceedings.
Business implications: Firms should expect a temporary boost to market sentiment following the potential accord but must understand that this deal would not mend all of Argentina’s economic imbalances. The government will need to reckon with increasing inflation pressures and the widening gap between official and unofficial exchange rates. If the government does not take advantage of this potential debt accord to correct macroeconomic imbalances, then there could be yet another credit restructuring in the next two to three years.
Alex Schober, Senior Analyst for the Southern Cone
FrontierView clients: See our recent Argentina Outlook for 2020-2021- May 14 Webinar for further insights
|
Economic performance will vary in Western Europe
- Western Europe relaxed most of the COVID-19 containment measures initially enforced in March, including mass gatherings and cross-border travel. However, certain countries and sectors with high exposure to tourism are set for a much slower recovery.
- Although spikes in new COVID-19 cases and local outbreaks are the new normal as economies reopen, we do not expect multi-country nationwide lockdowns again as governments are under pressure to support struggling economies. They are likely to be using their improved capabilities in tracking, tracing, and isolating cases to contain outbreaks instead.
 Our view: Despite the relaxation of containment measures, Western Europe is one of the most severely affected economies globally. Economic growth will contract by 6.0% YOY in 2020 and see only a moderate recovery of 3.1% YOY in 2021. The region will not return to pre-COVID-19 levels before early 2023. Germany and Central Europe are positioned to recover faster than the rest of Western European markets thanks to their lower exposure to tourism and greater reliance on manufacturing. Across Western Europe, information technology, food products, FMCG, finance and insurance, and pharmaceuticals will present opportunities in 2020-2021, whereas mining, durables, transport equipment, construction, and hospitality will suffer disproportionately until the end of 2021.
Business implications: Businesses should optimize their regional and segment portfolios and make efforts to further consolidate costs, while investing in digital customer engagement and sales, where possible.
Athanasia Kokkinogeni, Senior Analyst for Western Europe
FrontierView clients: Review our recent Europe Recovery Report and our WEUR Market Monitor
|
Share this newsletter with your network
   
|
About DuckerFrontier
DuckerFrontier provides unrivalled market research and executive advisory services based on decades of experience supporting the strategic decisions of more than 700 companies. To learn more, please visit our website.
Copyright © 2019, All rights reserved. Update your email preferences
Share this newsletter with your network
|
|
|
|
|
|
|
