Editorial: The Global Economy Recovers Fast… But a Swallow Does Not Make a Summer
The latest global economy data have been more encouraging than expected, making it possible for a V-shaped recovery to take place. However, one swallow does not make a summer, so we will have to wait for further data until we can determine if this first rebound ends up consolidating in a V-shape or if it turns out to resemble the square root symbol.
The market is a believer and it hopped on the euphoria train with an impressive rally around the planet that has not only reached global shares but also the emerging debt. High yield bonds shrank the spread in both sovereign and corporate curves. Proof of this frenzy is that even tourism companies battered by the pandemic have managed to get financing over the last few days. In the same line, our financial conditions index improved 94.9 points in May, boosted by improvements in the foreign market.
What surprised everyone was the US labor market. On Friday, most analysts were expecting unemployment to reach 19%. However, it stopped at 13.3%. The gap was 10 million jobs: the analysts’ consensus was expecting the destruction of 7.5 million jobs, but 2.5 million were unbelievably created. The flexibility of the American market is astounding, but it is not something new, it should have been already discounted by the experts.
On Friday, the Nowcast (the live economy forecast) made by the Federal Reserve of New York showed its best record in the last 5 weeks. The expectations for industries and service providers improved strongly in May compared to April. But not all that glitters is gold: some indicators, such as construction permits and retail sales, are still in decline, which means we should not automatically get on the V-shaped recovery euphoria.
In the Eurozone, lead indicators such as the PMI index improved in May. The services PMI took a big leap from 12 points in April to 30.5 in May, and the manufactures one went from 33.4 to 39.4 points. Business confidence is still (logically) in the negative zone, but less pessimistic in May than in April. Same goes for the consumer confidence indicator. An interesting fact is that Italy and France recorded particularly good improvements in the PMI, two countries that are not amongst the most dynamic in Europe.
In China, industrial activity had already started growing again in April. It grew 3.9% y/y when the market expected just a 1% improvement. This was the first positive record of the year, although the +6% levels from Q4-2019 have not been yet regained.
In Brazil, the data is less obvious. Although some indicators such as May’s PMI turned out better than expected and better than in April, the latest FOCUS survey (estimations of economists released weekly) shows that down expectations for this year worsened: in one week, they went from -6.25% to -6.48% on the FOCUS that was published today. According to a survey made by the Central Bank, Brazil’s growth expectations went down 1 point last month. In Chile, where the pandemic is causing much more harm than what was initially expected, with 134,000 cases and over 2,100 deaths, businessmen were also less pessimistic in May than in April.
In Argentina, the feeling is that we hit rock bottom in April. Cement production, CAME’s sales, new vehicle registrations, Debits and Credits Tax revenue, and the recent PMI made by UADE all show better results in May than in April. The ongoing quarantine poses some limitations on activity improving during the coming weeks, but anyhow we expect the trend to stay positive.
What’s coming up this week…
On Thursday INDEC will release May’s price index. We expect it to be slightly 1.6% over April’s, resulting in a 43.5% inflation for the past 12 months. That figure would be the smallest since September 2018
Big Growth of Monetary Aggregates in May
– Assistance to the Treasury (via CB profits) was again the monetary bas e’s main expansionary factor; as of May, it has already totaled over a trillion pesos, or 3.6% of GDP, and 4.3% would still be pending to be transferred to the Treasury
– Sterilization efforts were made, because although the assistance to the Treasury surpassed a trillion pesos, the monetary base grew scarcely ARS 236 billion as of May
– Monetary assistance was made evident in a strong growth of monetary aggregates; as for deposits, they grew 6.8% monthly; deposits in sight accounts increased mainly due to the Emergency Family Income (IFE in Spanish), reaching a 120.3% annual pace
– Credit in pesos to the private sector grew 4.4% during the month, less than deposits; the most favored sector were loans to businesses, boosted by the program of subsidized credits for SMBs, while consumption credits (personal and credit cards) dropped
– In view of the great banking liquidity, the CB decided to set a floor for the interest rate
In a context in which tax revenues experienced a great fall consequence of the preemptive and mandatory social isolation, CB’s assistance to the Treasury kept accelerating in May and has already totaled ARS 1.052 trillion this year (3.6% of GDP). Thus, considering the CB’s 2019 balance, 46% of the total potential assistance to the Treasury would have been granted, with still a peak ARS 1.2 trillion to go, which equals 4.3% of GDP.
In May, the monetary base grew ARS 264 billion, mainly in concept of assistance to the Treasury via profits (ARS 430 billion). Conversely, ARS 147 billion were absorbed through Leliqs, around ARS 150 billion were absorbed via “other operations of the National Treasury” (including interest payment of bonds held by the CB, among others), while USD 679 million in currency sales contracted the base ARS 46 billion. Thus, the monetary base closed the month at ARS 2.131 trillion (7.4% of GDP), and it accumulated a ARS 236 billion growth as of May. Considering that assistance to the Treasury totaled over a trillion pesos, the CB’s sterilization effort via Leliqs (ARS 553 billion) and reverse repos (ARS 272 billion) is remarkable.
In May, the CB concentrated its efforts on boosting the granting of credits to sustain economic activity amid the economic crisis caused by the COVID19 pandemic. Thus, credit to the private sector went up 4.4% monthly (on average) in May. Within the SMBs and healthcare providers program, ARS 217 billion were disbursed at a 24% subsidized rate co-signed by the State, in the context of the economic emergency. In addition, ARS 36 billion were approved in zero-rate loans for monotributistas (single-system taxpayers) and self-employed workers, ARS 11.6 billion of which have been granted. This way, the item that has been most favored by the State measures has been credit to businesses, which was used to cover checks, wage payments, and working capital. In the case of consumer credit, it showed itself weak due to the strong contraction in income given the economic crisis, which made it contract 1.7% (on average) during the month. Credit to the private sector closed the month with a 38.6% annual growth rate.
As for the private sector’s deposits, in May they increased 6.8% monthly (on average). During the month, the Emergency Family Income (policy that costs ARS 87 billion per month) made an impact on savings accounts, added to the greater preference for liquid assets in a context of uncertainty due to the pandemic. Thus, sight accounts grew 120.3% yearly, while total deposits grew at a more moderate rate, 72.5%. As for money held by the public, it grew 74.1% yearly, considering that recipients of the IFE tend to use more cash. These two factors (preference for cash and IFE disbursement) impacted directly on the growth of private M2 (cash holdings, current accounts, and savings accounts), whose growth rate was 100.5% yearly.
In turn, the monetary entity tried to uphold the interest rate by imposing a 26.6% floor (2.2% monthly rate) for time deposits of any amount on May 18. This rate differs from how much other free rates pay, such as the 19% of 1day reverse repos or the call rate between private banks at 15.3%, meaning that the financial system has high liquidity. Conversely, the Badlar and TM20 private rates ended May around the 26.6% floor. Consequently, time deposits grew 7.1% during the month, both retail and wholesale, also favored by the strong FX controls which limit dollarization.
Revenues Sank Again in Real Terms in May
– They amounted to ARS 499.5 billion and grew scarcely 12.4% compared to May 2019, slumping 22% in real terms
– The main taxes which are automatically transferred to provinces, linked to the domestic market, deteriorated strongly: VAT-DGI grew scarcely 3.7% y/y, Income Tax 9.5%, and Social Security 11.6%
– The lower volume of trade led to nominal falls in export taxes (35.6%), import taxes (-3.4%), and VAT-DGA compared to one year ago
– The accumulated revenue from the first five months of 2020 grew scarcely 28.3% compared to the same period from one year ago
Tax revenues again reflected the negative impact of the deeper economic recession and the decline of the labor market amid the mandatory quarantine, in addition to a very weak performance from the foreign sector. In this scenario, revenues amounted to ARS 499.5 billion in May, scarcely 12.4% over its record one year ago, which meant a fall in real terms around 22%. Particularly, VAT-DGI and Income Tax, which make up almost half of total revenues, recorded a 25% real decline on average.
Taxes linked to the domestic market, the ones which constitute practically all of the base that is transferred to provinces, grew again way below inflation. In particular, VAT has still not recorded positive real variations so far this year and grew 3.7% in nominal terms compared to one year ago. In addition to the lower consumption due to the quarantine, VAT was also negatively affected, though to a lesser extent, by the increase in compensations to other taxes, such as Income Tax or Fuels.
Despite the maturities faced in May by societies who close their balance sheets in December ─which are the vast majority─ and adjust for inflation considering 2019’s record, which was the greatest since the 90s, the revenues from Income Tax were scarcely 9.5% over its level one year ago. Though it is true that last year’s incomes were less in real terms than the previous year, the main factors that affected this item were the increase in the non-taxable base, the update in the rates tables, and the smaller advances for individuals, together with the reduction in the rate for societies.
As for Social Security, it recorded an 11.6% y/y rise after growing 10% in April, falling around 22% in real terms. This fall was mainly due to the twomonth time extension for the payment of employer contributions laid out by the Government for the sectors most struck by the crisis, the reduction in the rate for the healthcare sector, reliefs for employees who received lower wages than usual, and greater layoffs in sectors which had already been displaying a strong recession.
As for the tax on Credits and Debits, it grew 22% compared to one year ago, managing to partially moderate the negative effect from weaker consumption and achieving one of the most dynamic results within taxes levying the domestic market thanks to the widespread use of e-payment.
Despite the trend from the previous months, taxes linked to foreign trade displayed a worse performance compared to the ones levying the domestic market due to the fall in traded volumes. Export taxes were affected by fewer operations due to the greater FX spread (averaging 86% in May), which made exporters continue to stall their sales waiting for an eventual correction and rise of the official exchange rate. It is worth highlighting that, despite the increase in rates compared to May 2019, the comparison base from one year ago included revenues from a record-breaking gross harvest. In effect, export tax revenue fell 35.6% y/y, their worst performance since January 2018.
As for import taxes, they recorded their worst y/y performance since April 2015, falling 3.4% in a month in which imports plummeted, while VAT-DGA fell 1.1%. Apart from the weak economic activity, over the coming months it will get even harder to import, as the CB decreed that businesses must use currency they have declared abroad in order to make foreign-currency payments, without gaining access to the FX market.
Lastly, among the taxes that contributed to improving the y/y performance of tax revenue, the tax on personal goods stands out, growing over 1,000% due to the increase in rates and the payment on account made by contributors owning goods abroad corresponding to the 2019 fiscal period, and also does the P.A.I.S. tax, which amounted to ARS 11.9 billion, led by the increase in dollar purchases for hoarding and payments of foreign services.
In this scenario, automatic transfers to provinces totaled ARS 171.6 billion in May, growing scarcely 6.6% compared to one year ago, implying a real fall around 26%.
This way, during the first five months of the year tax revenue increased 28.3% compared to the same period in 2019. Taxes linked to foreign trade grew 30.5% on average, while the ones linked to the domestic market were 28% over their level from January-May 2019. The deep fall experienced by revenues in real terms will also be reflected in June’s data, although we expect it to ease down as the Government keeps on loosening the quarantine and activity in the various provinces starts resuming, especially in the Metropolitan Area of Buenos Aires (AMBA).
Record Falls of the Industry in April: 18.3% Monthly and 33.5% Year-on-Year
– In April, the industry slumped 18.3% m/m according to the Manufacturing Industrial Production Index made by INDEC -seasonally adjusted series-, recording its greatest monthly fall in the historical series
– In turn, the official indicator was 33.5% below its level from a year ago, also representing the steepest fall in the series
– Among the main sectors, the greatest falls were recorded by the automotive sector (-87.9% y/y), the producer of equipment, devices, and instruments (-75.1% y/y), the textile sector (-72.2% y/y), and the non-metallic minerals and basic metal industries (-67.4% y/y)
– Thus, industrial production accumulated a 13.5% during Q1-2020 compared to the same period in 2019
The paralysis in April’s activity had a deep effect on industrial production. In fact, during the first full month of the quarantine only a third of productive establishments were able to function normally, while the rest could not even operate or were highly limited according to the latest industrial activity report released by INDEC.
In this context, according to the Manufacturing IPI ─seasonally adjusted series─ calculated by INDEC, industrial production sank 18.3% m/m after falling 17.3% in March, recording its greatest monthly fall and standing again at its lowest level in the current historical series (starting in 2016). In y/y terms, industrial activity went down 33.5%, also the highest record in the series, with widespread drops in all the main sectors.
The automotive sector recorded the steepest fall (-87.9%), given that not a single kind of motor vehicle was produced in the entire month and the only significant production was the one of non-motorized vehicles destined to be used in essential sectors. In fact, according to INDEC, 72% of businesses did not record any productive activity and the remaining 28% operated partially.
Following came the sector that produces equipment, devices, and instruments (-75.1%) and the textile sector (-72.2%), also severely affected due to the closure of stores. In addition, non-metallic minerals and basic metal industries slumped 67.4%, facing a remarkably low demand of materials for construction, which recorded a historical fall during the month according to ISAC-INDEC.
Also affected by the sanitary restrictions, production in the furniture and other manufactures sector dropped 56.2%, while the metal products, machinery, and equipment sector (which devotes great part of its production to the battered automotive sector and construction) scored a 54.4% reduction.
Drops were also recorded, though relatively lower ones since some of them include essential activities, in the petrochemical sector (-20.2%), the producer of wood, paper, editing, and printing (-8.7%), and the food, beverages, and tobacco sector (-2%). In fact, had tobacco not been included, the latter would have fallen scarcely 1%.
Thus, industrial production decreased 13.5% during the first quarter of 2020 compared to the same period a year ago. The food, beverages, and tobacco sector was the only one that grew, though scarcely 1.0%.
In May, activity in several industries was resumed, including the textile industry, the electronic industry, and the automotive industry, complying with a strict sanitary protocol. That is why we expect industrial activity to have hit its floor in April, although the production levels will probably remain quite low until the sanitary situation goes back to normal.
Activity in Construction May Have Hit Its Floor in April
– In April, the first full month of quarantine, construction sank 51.5% compared to March, according to the seasonally-adjusted series by INDEC
– With a 75.6% fall, activity in the sector was at a quarter of its levels in April 2019, when it was already in a tight spot due to the exchange crisis
– May’s preliminary data offers a ray of hope: the “Construya” index cut its y/y fall and cement sales grew 56.5% during the month according to AFCP
During the first month of quarantine, which comprised the last days of March and most of April, the social isolation measures were at their tightest and relatively uniform across the country. It comes as no surprise then that activity in most sectors hit its floor in April. Construction, a characteristically pro-cyclical sector and one that is not considered an essential service, underwent an almost complete paralysis.
Thus, the ISAC index that INDEC releases since 1993, plummeted 75.6% compared to one year ago and hit its historical floor, with activity levels even below the ones recorded after the Convertibility collapse. With more days of lockdown, April recorded a 51.5% monthly fall according to the seasonally adjusted series, surpassing March’s 37.9% collapse.
Although the use of all main materials underwent a significant contraction, there were heterogeneous results among those linked to private works. Cement demand decreased 14.9% during the month and sank 55.2% in y/y terms, standing out together with lime as one of the materials with the best relative performance. On the other end hollow bricks consumption declined 82.9% between March and April and finished 87.1% below its level a year ago.
After the adjustment in capital expenditure that began with the previous administration, public works were in stand by waiting for an agreement with creditors that would allow definitions on the 2020 budget: the 35.6% monthly reduction in the use of asphalt shows that they were still halted during the first month of the quarantine. In addition, its demand fell 86.5% compared to April 2019.
The lack of activity was felt in employment: around 17,000 registered jobs in construction were lost in March alone. In a sector with great informality, those numbers, which will undoubtedly worsen in April, are not representative of the total impact.
Seeking to strengthen the re-opening of the economy and contain unemployment, government officials have made ambitious announcements regarding public works over the last few weeks, emphasizing both housing and infrastructure projects far from large cities.
The preliminary data suggests that private initiative also revived in May. The Construya index made by the namesake group, a sort of proxy for ISAC, recovered 183.4% during the month and moderated its y/y fall to 62.3% (it had been 74.3% in April). According to the association of cement producers (AFCP), the amount of dispatched tons grew 56.5% in May. Although the magnitude of the variations can be misleading, since the starting points are very low values, they indicated a marked shift in trend that was also seen in other sectors.
For the second consecutive month, INDEC clarified that due to the sanitary crisis it was impossible to gather information regarding the granting of construction permits for new private works.
During the first four months of 2020, construction accumulated a 40.2% contraction compared to the same period last year, its hardest fall since the 2001-02 crisis. With the sector resuming its activity in the interior of the country, the recovery we have already seen in some indicators could consolidate. In the Metropolitan Area of Buenos Aires, a certain degree of flexibility has been granted as well, but the sanitary situation will most likely hamper construction from operating at full throttle during the coming months.