This week, amid the ongoing COVID-19 disruption of industry, business and global supply chains, the Supply Chain Matters blog will feature for our readers, select capsule reviews of reported Q1-2020 global economic outlooks, and both industry and individual corporate financial performance results. Our goal is to provide readers broader perspective from a supply chain management lens as to what to expect in the post COVID-19 sense of a product demand and supply network operating environment.
While some might argue that there is no real sense of what the post-COVID future will bring, we advocate that there needs to be a form of an operating plan in the time windows of best or least confidence.
We begin this mini-series with first quarter global economic as well as April’s reported manufacturing and supply chain activity as depicted by various global PMI indices.
Global Economic Forecasts
There should be little question that the COVID-19 coronavirus is causing significant disruptions to global economies, the question being how long-lasting and a sense of recovery timelines. Early indications are clearly pointing a longer-term, possibly multi-year disruption.
In mid-April, the International Monetary Fund revised the organization’s prior forecast of an expected 3.4 percent of economic growth this year, to a revised projection reflecting global growth to decline by 3 percent. Speaking at a new conference, the Managing Director of the organization indicated that the revised forecast represented a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period of time. Specifically noted:
“This makes the great lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis. Assuming the pandemic fades in the second half of 2020, and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, we project global growth in 2021 to rebound to 5.8 percent.”
The agency’s latest forecast for growth in advanced economies is projected at minus 6 percent, emerging market and developing economies which typically have normal growth levels well above advanced economies are also projected to have negative growth of minus 1 percent; and minus 2.2 percent if China’s data is excluded.
The Director had earlier warned that all but a handful of the organization’s 189 member states will suffer falling standards of living this year as a result of the worst global economic crisis since the pre-World War Two period.
Some other Economists are predicting that the downturn could extend into 2021. Regardless, supply chain and integrated business planning management teams need to hunker down toward assumptions of likely extended economic disruption.
April’s production and supply chain activity levels reflected by the J.P. Morgan Manufacturing PMI points to unprecedented declines in global activity levels.
This survey index was reported to be 39.8 in April, compared to the 47.6 reported in March, a 7.8 percentage point decline. Excluding the bounce back from China, the April index would have been 35.8, representing an 11.8 percentage point decline. As noted in the below figure, the precipitous decline is a visual reminder to what occurred in the last global wide recession in 2008/09:
According to the report authors : “Rates of contraction in output and new orders were among the steepest registered in the 22-year survey history and the worst since the global financial crisis of 2008/09.”
Regrading outlook, accompanying comments from a Global Economist at J.P. Morgan, indicate in part: “Only time will tell how permanent the damage to global supply chains is, although moves in many nations to loosen lockdowns may provide a guide over the coming weeks and months.”
China was the first country impacted by the virus at the beginning of 2020, and subsequently had major economic and manufacturing impacts in January and February.
Q1-2020 GDP has been reported as having declined 6.8 percent, which is a rather significant shock for the country. Reports of April PMI indices, while now returning to marginal growth, reflect steep declines in new export orders and increasing pessimism as to any manufacturing and economic growth in the coming months.
The Caixin China General Manufacturing PMI®, an index weighted toward private industry and smaller businesses, was reported as 49.4 in April, compared to 50.1 in March. According to the authors, the decline was marginal and much softer than that reported in February. Concerning however, was that new export business fell at the steepest since December 2008.
China’s Bureau of Statistics government assimilated PMI, weighted toward state-owned and larger industry, was reported as 50.8 in April, down from the 52.0 reported in March. According to reporting, while factories increased output, the figure was dogged by pessimism among companies involved in exporting and importing.
Across the Eurozone region, which was impacted by widespread lockdown measures during February and March, GDP reportedly declined by 3.8 percent. The block’s economy declined by 14.4 percent with indications from Economists that the region could be facing its deepest economic downturn since World War II.
Countries significantly impacted such as Italy, Spain and France are undergoing precipitous declines. Italy’s GDP reportedly fell by 17.6 percent and Spain’s declined by 19.2 percent. The European Central Bank (ECB) and individual countries have launched a series of safeguards including loan guarantees to keep businesses solvent, along with programs to backstop wages of furloughed workers while they continue to be listed on payrolls.
The IHS Markit Eurozone Manufacturing PMI® for April 2020 was reported as 33.4, the lowest ever recorded since this series began in June 1997. Output, new orders, export sales and purchasing activity were each reported as declining at record rates. According to the authors, among individual countries, levels deteriorated either at record lows or readings only surpassed during the worst of the prior global financial crisis. Regarding future outlook, Chris Williamson, Chief Business Economist at IHS Markit, indicated in-part:
“With virus curves flattening and talk now moving to lifting some of the pandemic restrictions, April will have hopefully represented the eye of the storm in terms of the virus impact on the economy, meaning the rate of decline will now likely start to moderate. Barring any second wave of infections, which would throw any recovery off course, the news should start to improve as we see more people and businesses get back to work.”
“However, the PMI is indicating an industrial sector that has collapsed at a quarterly rate of decline measured in double digits, and any recovery will be frustratingly slow. Steps needed to keep workers safe will mean even businesses that are able to restart production will generally be running at low capacity, and most will be operating in an environment of greatly reduced demand. Not only will household spending remain historically weak, not least due to ongoing shop closures, but business spending on inputs and machinery and equipment will also remain subdued for some time.”
Across the United States the virus has resulted in over one million infected citizens, with the death toll exceeding 60,000 thus far. The economy reportedly has declined by 4.8 percent in the first quarter, one of the steepest contractions since the last global financial crisis. Widespread lockdowns which generally began in March and April, remain in effect, with increasing pressures from individual states to re-open general business activity.
Unemployment levels have reached upwards of 30 million, described as the worst employment crisis since the Great Depression. Where employment is occurring is in upwards of up to one million workers being hired to supplement online buying and food delivery needs. Individual consumer spending, which accounts for the bulk of U.S. economic output, reportedly fell 7.5 percent in March, with many, many small businesses on the verge of financial peril, some supported by government stimulus.
The April 2020 Manufacturing ISM® Report on Business®, reported an April PMI of 41.5, down 7.6 percentage points from the March reading, placing U.S. activity solidly in contraction conditions. Commenting on the report, Chair of ISM, Tim Fiore indicated to reporters: “This is the fastest rate of change in economic activity in modern times.” Fiore further indicated to reported to The Wall Street Journal that it will take some time for consumers to feel comfortable buying again, meaning it will take some time for demand for factory goods to pick up.
The sub index related to manufacturing production was noted as falling to the lowest levels in records dating back to January 1948, while the sub index of employment declined to a 1948 post World War Two level. The contrasting IHS Markit index reflecting U.S. manufacturing was reported as 36.1 for April, and even lower value, noted as the lowest in 11 years.
An adage often related to hard times is that the news is often quite bad before any signs of what will likely be recovery appear. Certainly, the first half of 2020 will challenge global-wide supply chain and integrated business planning teams with such bad news and with consequent challenges.
As we have noted in prior commentaries, expect cascading disruptions or challenging condition for both the product demand and supply aspects of networks. Those industries and individual companies whose products will remain in somewhat high demand, such as cleaning, testing, medical suppliers and others, can assume ongoing challenges in maintaining or scaling-up reliable supply and transportation needs. Be realistic in assumptions related to consumer or business buying intentions, especially as global countries continue with efforts to find methods to mitigate the virus impact in added treatment, medicines, work practices and eventually an effective vaccine.
Learning or observations garnered from the 2008/09 global financial crisis point to the playbook. Remember that challenged markets can provide new opportunities. Leveraging agile capabilities such as scenario-based and continuous planning while narrowing planning to day-to-day operational as well as quarterly tactical windows will likely be of most value. Key supplier risk assessment and assistance are critical as is protecting valued people resources.
The analogy that this is the first 10 minutes of a 90-minute soccer game is appropriate. There are many more shoes to drop and endurances to take-in before the tide turns in demand and supply.
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