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Economy in Brief

Corona Clobbers PMIs; It's Here! Are YOU Next?
by Robert Brusca  March 24, 2020

We have known for some time that the impact of the coronavirus was coming and that it would hit data. Until now, few reports save last month's PMI for China gave any indication of the severity of the weakness that was encroaching. But with lockdowns and travel restrictions, it was very clear that something big was about to undercut economic reports. And here it is. It strikes in March, the month that comes in like a lion and out like a lamb...or vice versa. The Markit PMIs for manufacturing, services and the composite index, show incredible sudden weakness. Many areas are registering record drops. The flash data were released today. There will be more to come.

The EMU manufacturing gauge drops to 44.8 in March from 49.2 in February. The services gauge plummets to 28.4 from 52.6. The EMU composite drops to 31.4 from 51.6. There are sharp drops all around.

Now what?
Governments and central banks are gearing up all sorts of program to try to shore up people's lives as engineered activity shutdowns are engaged to stop the spread of the virus. While some have called this a macroeconomic shock, I completely disagree. This is an engineered program that drastically slows growth with the objective of stopping spread of the virus. I do not wish to call it a macroeconomic shock since that conjures up us traditional macroeconomic tools to fight it and nothing could be more wrong than that. The idea now is not to stimulate the economy but to provide a lifeline for those whose jobs disappear and who have lost income support and who need medical care because of these government run programs that are stopping growth and in some cases throwing people out of work. The macroeconomic POLICY here is to slow growth; it is not a SHOCK.

Make no mistake about it, if people go unemployed, or if businesses bust and if people wring their hands in despair of their degraded economic circumstances- blame government. Governments HAVE CHOSEN to put health officials in charge of economic policy and so economic systems are being shut down with the sole objective of stopping a virus from spreading one that gives you cold and flu-like symptoms but can also be deadly to a few known groups such as old people and those with pre-existing medical conditions. Rather than choosing to isolate these groups or give them special attention, authorities have opted to shut everything down in many cases. That decision is evident in the plunge of the PMI statistics in March.

And while some big spending/support programs are being announced offering monies to some… getting support to all the affected workers especially at small firms or free lancers is a job too big. Basic government support is not going to make these people whole; we can expect that, regardless of the size of the 'package,' people are going to fall through the cracks between these support programs.

For what purpose?
Is stopping the spread of 'flu' that important? Is it the risk of death to members of the special groups? If so, why not target THEM for special treatment and let economic growth continue under less drastic behavior modification than a lockdown? At some point, someone will come to their senses on this. I consider most of these policy-responses knee-jerk heath-official-inspired overkill. If this were Ebola or a Bubonic plague-type of disease, this response would make sense; in that case, in fact, it would be too-little and too late. But the risk/reward for these polices in this circumstance simply IS NOT THERE. Maybe the end of this shutdown will come because protests will mount by people who have run out of resources. The risk of some sort of groundswell of resistance to this policy increases each day that the lockdown strategy is in play.

So that is the real risk: severe social unrest. The risk is not depression or economic collapse unless policymakers turn the tourniquet too tight and keep it on for too long – and that is a risk. But long before irreparable economic damage will be done, there will be social backlash to this. Governments simply are not set up in most places to provide the scope of support needed by all displaced persons. Most help-programs support large corporations. Banks are always a focus of support. But small businesses, the gig economy, independent businesses, freelancers -all of whom have seen their numbers grow- these are the groups where the dissent will foment. So be sure to read the news and see the clues.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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