Analysts looking at linear factors are predicting at least two quarters of flat or negative growth in gross domestic product (GDP). By definition that’s a recession. Where economic stimuli planned are dictated not by the markets nor the macroeconomy but by COVID-19’s manic depressive behavior, then combined with the logistics of wrangling government agencies on lockdown mode, what effects economic stimuli might have could very well be belated, or worse, too little and too late.
Our faith in our economic mangers however remains steadfast.
A recession is certain. Two consecutive quarters brings us right into the eve of 2021 between October to November. Those months are the inventory stock-up season for manufacturers and retailers in anticipation of the high-demand holidays. With the six-month period at yearend we might likely be facing an economic contraction by New Year’s Day.
In anticipation, we see certain agencies preparing to at least give the economy some breathing space through which it might inhale some life-sustaining gasps of air. We’ve heard from the economic managers that medium-scale enterprises will be prioritized since they’ve been the most afflicted by the nearly total suspension of businesses.
Repayment schedules, interest payments, rentals, annuities and amortizations, for the most part, have been suspended or recalibrated to alleviate fixed costs in income statements and current liabilities in balance sheets. The macroeconomy has been given a breather as bank reserves were kept low as were key policy rates. Never mind that low fractional reserves increase money supply.
This would otherwise be inflationary had not the rate been tempered by the global fall in oil prices and the local price freeze on essential goods.
Reserve management allowed more money for lending at lower rates to reduce debt burdens. Imagine the strings of an archer’s bow being pulled back to create potential energy before launching an arrow. The rationale being that businesses would have the wherewithal to jumpstart operations, reemploy and start catching up on stalled production.
Extending the archer metaphor, the bullseye for these pump-priming efforts would be GDP growth to counteract what contraction the pandemic inflicts.
Akin to backtracking COVID-19 to its infernal cradle in a live animal-infested wet market in Wuhan, allow us to look at the GDP drivers and using the expense method, see in which addends of the GDP formula a recession is likely to originate.
By identifying origins we can focus where efforts are critical. While stock market trades have mostly been sideways and not exactly as bearish as one might expect, in the parlance of the capital markets we need to transform a bear into a bull. This requires knowing where within its anatomy we need to do some genetic engineering.
Let us first put out there what exactly the GDP expense formula looks like. There are other formulae but this is the easiest to explain. The formula is GDP = C+I+G+(X-i).
C is consumer or household spending. I is investor spending on capital goods, these being assets that generate capital. G is government spending on goods and services, while (X-i) represents exports minus imports.
It is obvious were focus is critical. Consumer spending can fall from 7 percent to 10 percent in a pandemic. Given C is 68 percent of our GDP, that hurts.
Pandemic volatility has pushed back investments. External trade has paused where global manufacturing stalled and little are exported or imported. In fact the Purchasing Manager’s Index, a diffusion index for manufacturing productivity, fell from 52.3 to 39.7. Anything below 50 is considered a contraction.
Only government spending continues. But that’s only 21.7 percent of GDP.
Fortunately all this bearishness might be bull. History provides hope. In the last 100 years, recovery and bounce from tragic bear markets have been getting shorter as economies develop the equivalent of anti-bodies, immunities and resiliencies such as the sound fundamentals our economic mangers have long intubated into our macroeconomy.