What happened:
The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO) and several European countries have released worrisome economic forecasts:
The WTO estimates that global trade will contract by 32 percent in 2020, which is the biggest contraction since records began. The organisation sees global trade growing by 13 percent in 2021.
Germany’s GDP is expected to contract by 10 percent in the second quarter and 4.2 percent for the full year. The Banque de France estimates that every two weeks of lockdown will see France’s GDP shrink by 1.5 percent.
Spain is the worst hit by the crisis. Unicredit estimates a GDP contraction of 15.5 percent, pushing the budget deficit to GDP ratio to 12.5 percent for the year. (The Maastricht criteria stipulate this ratio should not exceed 3 percent).
These numbers make clear the need for the Eurozone’s finance ministers to reach an agreement when they resume talks. European Central Bank (ECB) president Christine La Garde warned that every month of shutdown would cost the Eurozone between two and three percentage points of its GDP. Lagarde pleaded with Eurozone finance ministers to come to an agreement on a fiscal rescue package.
Oil prices rallied on the expectation that OPEC+ ministers would agree on production cuts in a virtual meeting late Thursday. The question is whether any cut will be sufficient to have a sustained impact on prices in light of the enormity of reduction in demand.
Why it happened:
The failure of Eurozone finance ministers to reach agreement on a rescue package was reflected in Italian and Spanish government bonds adding to the yield differential across the spectrum.Leaving the mutualization of debt via the issuance of Coronabonds aside, the argument between ministers revolved around the conditionalities of financing via the European Stability Mechanism, which would allow countries to borrow on their books.
The highly indebted Southern countries oppose stringent conditionalities such as those imposed on Greece during the 2012 Eurozone crisis. Most countries have agreed that this was not the time for conditionalities, but the Netherlands insisted. Germany’s finance minister assured German broadcaster ARD that he favored minimal conditionalities.
This issue might threaten the very existence of the EU.The trade figures were grim but not surprising for 2020. Whatever shape the recovery takes — V, U, or W — the current crisis will have a major impact on global trade. Some countries may become more protectionist when it comes to medical/protective equipment and medicines, as well as agricultural produce.
The lockdown and subsequent gradual restarting of economies will certainly affect the supply chain and, in parts, lead to a regionalization of it. We can expect a reconfiguration of the global supply chain in many sectors.
Where we go from here:
Most observers expected OPEC+ to reach an agreement on production cuts in Thursday’s virtual meeting. A headline number floated is 10 million bpd. Sources say Russia might agree to cut production, but it is unclear by how much. Russia’s unwillingness to cut was the stumbling block in last month’s inconclusive OPEC+ meeting and the opening shot to the Saudi Arabian-Russian fight for market share. The baseline for cuts has huge ramifications for KSA, which produced 9.7 million bpd during the first quarter and 12.3 million bpd in April. KSA and Russia are not willing to take the whole burden of the cut, bringing us to-non-OPEC+ participation — Canada, Norway, Brazil, Mexico and the US — which will be discussed if not at the OPEC+ meeting then at the G-20 meeting of energy ministers.
The Texas Railroad Commission is the only US authority that could, in theory, introduce some measure of production limitation in the US — export restrictions being another (unrealistic) option.Whatever happens in the meeting, uncertainty remains over how deep the cuts would have to be in order to have a sustained impact. This will remain a difficult question as long as there is no clear visibility of the total demand reduction.
Demand in India (the third-highest consumer of oil in the world) alone has plummeted by 70 percent since the COVID-19 outbreak. The headline number of 10 million b/d has been baked into the current price expectation.
Anything below that would, in all probability, be bad for prices.The world is running out of storage for both product and crude — something that will eventually enforce production cuts.
US jobless claims for the week ending April 3 came in at 6.6 million -- considerably above the expected 5 million.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairman and CEO of business consultancy Meyer Resources.Twitter: @MeyerResources
