Time To Move On! 07 May 2020
Despite the April lockdown, there were still over 1.8k Dubai property sales transactions, valued at almost US$ 1.0 billion, bringing the YTD total to 12.3k, worth US$ 6.6 billion. According to Property Finder, the secondary market accounted for just 30% of total transactions, with Dubai Marina and Palm Jumeirah the top-selling locations. The majority of sales were in the off-plan sector, dominated by the communities of Villanova for villas and Dubai Creek Harbour for apartments. An interesting fact was that since the problems from Covid-19 worsened, the percentage of searches on the company’s app was skewed in favour of villas rather than apartments. Maybe that with the lockdown, apartment dwellers missed having gardens.
According to Valustrat, and no surprise to anyone, Dubai Q1 property rentals and sale prices continued their declines and could get worse in Q2, as the impact from Covid-19 gains traction; it is estimated that rents for villas and apartments declined by 8.0% and 9.4% over the quarter. Although off plan sales grew 18.2%, year on year, the Q1 return was 26.3% lower, compared to Q4 2019, as developers had already cut back on new projects because of the sector’s oversupply. On an annual basis, cash sales of ready homes climbed 30.4% – but were flat, quarter on quarter. The pandemic took its toll in April, with marked monthly falls in cash sales transactions, ready home sales and off plan sales of 50%, 74% and 32%. With business confidence falling, and many people worried about their economic future, the outlook is that prices will continue to move downwards, more so with salary reductions and job losses becoming more prevalent.
Severe measures have been taken by Nakheel to combat the effects of Covid-19 and its drag on cash reserves. As from 01 April, top management will be paid 50% less than before, with more junior staff having their salaries cut by 30% – 40%. Those earning less than US$ 1.1k (AED 4k) will continue to be paid at previous rates. Such drastic action was required to secure the continuity of the business by preserving cash reserves. It was also reported that Chief Executive Sanjay Manchanda had left the company on 01 March to pursue new opportunities. The developer, that had to close most of outlets in its shopping centres during the lockdown, was badly hit by the 2009 GFC and it is hoped that it is in better shape this time to weather an even bigger economic storm.
As part of the government’s initiative to assist SMEs and small investors, tenants at Dubai Healthcare City will be on the receiving end of “conditional” rent waivers for up to three months, along with deferred rental payments; furthermore, they will also see certain fees either reduced or waived during this difficult period. Those companies, including hospitals, education providers, retail stores, hotels etc, that have had to “close or significantly reduce operations to comply with national precautionary and preventive measures, resulting in reduced revenues and customer footfall”, will be eligible to claim.
Latest figures from the Central Bank reports that the country’s GDP grew by 1.7% in 2019, with the UAE hydrocarbon sector 3.4% higher, whilst non-oil activities had a softer 1.0% growth. Not surprisingly, the agency expects that Covid-19 will have a negative impact on 2020’s figures but notes that it is still too early to estimate the scale of how big this will be. The inflation level has been pushed into negative territory, driven by the uptick in the value of the greenback (and hence the value of the dirham heading north), sinking energy prices and almost double-digit reductions in residential rents.
It is reported that local banks have drawn down 75% of the US$ 13.6 billion liquidity facility arranged by the Central Bank to support individuals, small and SMEs and private companies impacted by COVID-19. Twenty-four of the country’s banks have now joined the scheme, with an increasing number of customers signing up for the Targeted Economic Support Scheme. The TESS liquidity facility will run until the end of the year by which banks will postpone interest payments and/or principal loans of customers over the time period agreed.
Dubai’s Q1 external trade topped US$ 88.0 billion, with imports accounting for US$ 51.5 billion, (58.5% of the total); reexports and exports were at US$ 25.1 billion and US$ 11.7 billion, accounting for 13.3% and 28.5% respectively. The figures were quite impressive considering that trade was disrupted because of the pandemic. Further segregation of the figures sees direct trade accounting for 58.2% of the total (US$ 51.2 billion), followed by free zones (41.2% – US$ 36.2 billion) and customs warehouse trade (0.6% – US$ 600k). Most of the trade was carried by air, followed by sea and land with totals of US$ 44.4 billion, US$ 31.6 billion and US$ 1.1 billion respectively. Dubai’s three most important trading partners remain China, India and the USA contributing US$ 9.8 billion, US$ 8.3 billion and US$ 5.3 billion to the total. Gold/jewellery/diamonds was again the top traded commodity, valued at US$ 25.1 billion, followed by phones (US$ 10.0 billion) and petroleum oils – US$ 4.4 billion.
Whilst agreeing that life protection is of prime importance, Khalaf Al Habtoor reckons that the country must return to work as soon as possible and “can’t wait for a vaccine until the end of the year.” Noting that his companies, like many others, are “bleeding”, he commented that the biggest risk is that of unemployment. To date, his companies, including seven hotels, car dealerships, schools and property, have yet to retrench but staff have taken unpaid or holiday leave. If Covid-19 does not abate, then he would have “no choice but to cut” positions. It seems that the longer the pandemic goes on, the economy will continue to deteriorate and will take longer to recover once normality returns.
Uber Eats will now merge into using Careem’s food delivery services, as it has decided to close the Uber Eats app in the country. The company, founded in 2017, believes that the change is in their best interest, not only as a cost-cutting measure but also as Careem’s food delivery operations are “better placed to serve our food delivery communities as it expands its app across the region.” Careem Now was first rolled out last October and has quickly become a leading player in the region’s food delivery sector. Uber Eats has also closed down in Egypt and Saudi Arabia, so now the parent company can once again focus on its core ride-hailing business.
As Careem has seen post Covid-19 business tank by up to 90% for its main revenue stream, ride hailing, and delivery down 60%, it has taken the inevitable decision to cut its workforce by 536 (31% of the total payroll). The Dubai-based firm, which operates in the MENA and Pakistan, and has seen losses mount up, with overall business 80% lower, has also temporarily shelved its mass transport ‘Careem BUS’ venture.
Despite the ongoing Covid-19 generated problems, yallacompare has raised over US$ 4 million in its fourth round of funding that sees Kuwait insurer Gulf Insurance Group become a 9.6% shareholder in the insurance aggregator; the four-year old company had already raised nearly US$ 12 million from the three previous funding rounds. Gig has a presence in its home country, as well as Bahrain, Egypt and Jordan. The money raised will be utilised to expand yallacompare’s regional presence.
After the shock of being terminated because of the impact of Covid-19, many are now worrying whether they will receive their full dues, as companies struggle with lack of funds to meet their staff obligations. It seems past norms, that gratuity payments are settled around termination date, will be thrown out of the window. There will be cases when the company has no funds to pay out end of service benefits and if no agreement can be arranged between the parties, the only recourse seems to be notifying the Ministry of Human Resources & Emiratisation or Dubai courts. That will probably take some time and money. So companies are in a quandary – do they not terminate employees now and put them on salary cuts and holiday leave and hope for the best in the future. The only problem is that if that future is some time away, the money spent on keeping staff on the payroll will result in the cash drying up completely, with even less in the kitty to pay final settlements.
Although its Q1 revenue only dipped 3.0% to US$ 324 million, Dubai-listed Aramex saw its profit slump by 37.6% to US$ 18 million, attributable to the Covid-19 impact on its international express and freight forwarding units., as flights and supply chains were disrupted. In line with its rivals, it will be difficult to ascertain the true cost of the pandemic will have on the business because of the problems of forecasting future consumer demands.
If March is anything to go by, the local bourses will continue to struggle to entice foreign investors to move funds to UAE’s stock markets; of the fifty-five listed companies, which have permitted foreign investment, including the likes of CBD, Air Arabia and DIB, the average non-local ownership is 10.32%. Even just before the pandemic outbreak, foreign selling was on the increase so that by March there was a record shortfall in investments of US$ 208 million. As Covid-19 gains traction, this is certain to exacerbate the problem. However, in the past, there had been steady overseas buying so that since January 2019, there had been a net inflow of US$ 599 million, with stocks bought totalling US$ 10.0 billion, including a US$ 3.4 billion increase in net investments of non-Arab foreign investors.
The bourse opened on Sunday 02 May and, 300 points higher (17.4%) over the previous four weeks, shed some of that, down 104 points (5.1%) to close on 1,923 by 07 May. Emaar Properties, having gained US$ 0.15 the previous four weeks, was US$ 0.07 lower atUS$ 0.67, whilst Arabtec, US$ 0.07 higher the previous four weeks, was down US$ 0.01 to US$ 0.18. Thursday 07 May saw the market trading at 182 million shares, worth US$ 51 million, (compared to 317 million shares, at a value of US$ 78 million, on 30 April).
By Thursday, 07 May, Brent, up US$ 4.01 (28.6%) the previous week, gained a further US$ 3.30 (12.5%), to close at US$ 29.78. Gold, down the previous week by US$ 51 (2.9%), regained US$ 36 (2.1%) on the week to close on Thursday 07 May, at US$ 1730.
Despite only having just accessed a US$ 371 million UK government backed loan, IAG, owner of BA, Iberia and Aer Lingus, is also set to receive a five-year US$ 1 billion loan from the Spanish government in state-backed loans for Iberia (US$ 750 million) and Vueling (US$ 250 million); the loan is conditional that the banks involved receive guarantees from state-owned Instituto de Crédito Oficial. It seems iniquitous that IAG’s chief executive, Willie Walsh, had earlier said that his company had sufficient liquidity to see it through the coronavirus pandemic and did not need government support. To add to its pandemic woes, in Q1, the group was hit by a US$ 1.4 billion charge from fuel and currency hedges.
Another airline is warning staff that it will have to cut payroll numbers to “act decisively to protect the future of the business”. Like all other global carriers, Qatar Airways is facing a turbulent and unsettling future and has notified staff that it “will need to make a substantial number of jobs redundant – inclusive of cabin crew.” The airline currently employs 45k and has a fleet of 240 planes; it is also a 25% shareholder in IAG, which, as indicated above, owns BA, Iberia and Aer Lingus.
Exxon Mobil Corp and Chevron Corp are planning massive investment cuts in the Permian shale basin, the country’s biggest oilfield, which will see 800k bpd pulled out of the market, as the demand for oil tanks on the back of growing numbers of company lockdowns. At the start of the year. production was ramping up to the one million bpd mark but things changed with the onset of Covid-19, when prices slumped by over 70%, (and at times even went into negative territory) and fuel demand was a third down due to travel and business lockdowns. A lot of money has been borrowed by many companies for shale productions. Many of these will go out of business and the knock-on effect will be felt by the US banks, who will inevitably be on the losing end and carrying billions of dollars of bad loans.
GE is set to cut its aviation workforce by 10%, with more (13k) to come, on the back of the distinct possibility of an extended slowdown of up to 85% in the global travel sector, as Boeing and BA announced recent cuts of 16k and 12k respectively. The US conglomerate has estimated that, to date, the virus has cost it at least US$ 1 billion.
It appears that Hertz is on the brink of filing for bankruptcy after failing to agree terms with some of its creditors to restructure their debt and obtain further credit extensions. The US car rental company’s Chapter 11 filing would allow it time to finalise its discussions with its lenders and try to turn the faltering business around. Currently, the US government has no plans in place to bailout such companies, (unlike the US$ 50 billion one in place for the airlines) so Hertz has been left to deal with its own liquidity problems, attributable to slumping demand, with too many vehicles in operation, and falling prices for used fleet cars. Prior to the lockdown, the 102-year old Florida-based company was operating in 12.4k locations.
Elon Musk has put his foot in it once again. After tweeting that Tesla’s share value was too high, the market reacted quickly, wiping off US$ 14 billion from its market cap, which in turn depleted his personal wealth by US$ 3 billion. Two years ago, he was fined US$ 20 million by New York stock market regulators for tweeting that he may take the company private which saw a marked swing in Tesla’s share price and this was adjudged by the SEC to be a market-moving comment.
Uber is a lead in Lime’s latest US$ 170 million funding round, which includes Bain Capital, GV (formerly known as Google Ventures) and Google’s parent Alphabet. This values the scooter hire firm at US$ 400 million – well down on the US$ 2.4 billion estimated at its previous funding round in February 2019. The money raised will be used for expanding Lime’s range within the micro-mobility sector. As part of this deal, Lime acquired Uber’s own e-bike hire business, Jump.
With the business already struggling prior to the onset of Covid-19, and now falling off a cliff, Uber has moved to cut 3.7k full-time staff members (about 14% of its workforce), which will cost US$ 20 million in severance pay. In line with its competitors, such as Lyft, its business has been badly hit by the fact that not only are more people working from home but also are avoiding such transport for fear of infection. Last year, it posted a massive US$ 8.5 billion loss, and reported that 23% of money spent on the platform emanated from just four metro areas, including New York and London – probably the two biggest global pandemic hotspots.
Airbnb is another travel-related company struggling to come to terms with the consequences of Covid-19. This week, the home rental company cut 25% of its current 7.6k work force to offset recent losses caused by its main revenue stream almost drying up. It expects this year’s revenue to come in more than 50% lower, at US$ 4.8 billion, than in 2019. As the twelve-year old company has decided to focus on its main business and reduce its investments in other non-core activities, it is suspending projects not only in luxury projects but also related to transportation and television production.
Q1 was no fun for Walt Disney Co as the pandemic cost the company US$ 1.4 billion in lost profit. The world’s largest entertainment company saw its theme-park division operating income slump 57.7% to US$ 639 million; revenue did increase by 21.0% to US$ 18 billion thanks mainly to its 21st Century Fox acquisition last year. The loss this quarter is set to worsen as in April, its parks remained closed, cruises were cancelled, cinemas were closed, and its ESPN network struggled with most live sport events being cancelled. The company has taken some major decisions to reduce costs, including executive pay cuts, furlough for staff, cancelling the US$ 1.6 billion annual dividend and slashing capex by US$ 900 billion.
Warren Buffett’s Berkshire Hathaway Inc confirmed that it had divested its entire shareholding in four of the US’s largest airlines, with the chairman noting that “the world has changed” for the aviation industry. His conglomerate had stakes of 11% in Delta, 10% in both American and Southwest, as well as 9% in United. His firm took a battering in Q1, posting a US$ 49.8 billion loss, compared to net earnings of US$ 21.7 billion a year earlier.
J Crew became the first major US retailer to fall foul of Covid-19 by filing for bankruptcy protection, resulting in its main creditors – Anchorage Capital Group, GSO Capital Partners and Davidson Kempner Capital Management – taking over control. At the same time, they have cancelled debts totalling US$ 1.7 billion and injected a further US$ 400 million financing package. The fashion firm, which has 500 stores which remain closed because of the pandemic, also owns denim clothing specialist Madewell, which it had planned to sell off.
As is the case in most of the western world, retail has been on its knees for some time, attributable mainly to on-line sales and rising property costs, and now Covid-19 has come along to deliver the knock-out punch. Two years ago, when Sears filed for bankruptcy protection, but subsequently survived, it had 700 outlets, now it has only 200. Likewise, JC Penney has been on the same slippery slope for some time and has divested 15% of its stores, now operating only 850.
Despite the pandemic onset, Q1 overall smartphone shipments were 20% higher, year on year, with total quarterly sales of 13.7 million units. Apple grabbed 55.5% of that total with sale figures of 7.6 million, compared to 6.2 million a year earlier. Its main rivals, Samsung and Garmin still trail far behind, accounting for just 13.9% and 8.0% of the 13.7 million smartphone sales, with the former posting an 11.7% rise to 1.9 million and the Kansas company increasing sales by 37.5% to 1.1 million.
There are reports that the proposed merger, between O2 and Virgin Media, owned by Spanish firm Telefonica and O2 respectively, has gone through but is subject to regulatory approval. The mobile operator is the UK’s largest phone company, with 34 million users, and the merger with a broadband giant like Virgin Media, (with three million mobile users and six million broadband and cable TV customers), has created the UK’s largest entertainment and telecoms firm, as well as causing rival BT some sleepless nights. In 2015, a US$ 19.3 billion merger deal between CK Hutchinson’s Three and Telefonica’s O2 was rejected on competition grounds by the EC regulators but this time approval seems to be a formality.
One business sector benefitting from the pandemic is the gaming industry, with reports that Q1 figures have skyrocketed, as more people are having to face lockdown; in these troubled times, the industry has posted record sales, as an increasing number of users turn to their entertainment services. Activision Blizzard’s posted Q1 net revenues from digital channels at US$ 1.4 billion, as player numbers of its games, the most popular of which are Call of Duty and Candy Crush, have been averaging 407 million a month; its latest CoD game, Warzone, has already interested 60 million users since its March launch. Electronic Arts is also “making hay while the sun shines”, with a higher number of users. Its latest edition of Fifa has attracted 25 million players, its Madden NFL 20 has recorded the highest online engagement numbers in the franchise’s history whilst newly released ‘Star Wars Jedi: Fallen Order’ already has ten million users.
Like most other countries, UK car registrations have taken a major blow since Covid-19 arrived on the scene. Year on year, registrations fell 97% in April from 161k to just 4k – a figure not seen since April 1946. The impact of the coronavirus lockdown measures saw dealerships all over the country closed for business so that most of the vehicles sold were company related. Despite these dismal numbers, sales are “only” expected to fall 27.0% to 1.7 million this year. The other side of the sector has seen car production grinding to a halt, as factories have been closed since early March and only now are slowly opening. Covid-19 is the last problem the industry wanted, having struggled in recent years with slowing sales, falling demand for diesel vehicles and expensive tough new emissions targets. When the pandemic dissipates, whenever that may be, who will be able – or would want – to buy a car in a deep recession?
It is estimated that India has 122 million people out of a job because of the pandemic and the Modi government imposing a 40-day lockdown. The country, with a 1.3 billion population, has seen its unemployment rate top 27.1%, most of whom were employed as daily wage workers and SME employees – both sectors mostly belong to the more vulnerable parts of Indian society.
As the number of jobs for the month ending 18 April fell by 7.5% (33% in accommodation and food services), almost one million Australian workers – out of a total of 13 million – have lost their jobs, with losses in Victoria (8.6%), Tasmania (8.0%) and South Australia (7.8%) worst hit. The RBA expects the economy to contract by 10% as a direct result of the pandemic and the unemployment rate to top 11% by the end of April. The Prime Minister, Scott Morrison, has confirmed that more than five million are receiving JobKeeper, which does not apply to casuals who have been with their employer for less than one year; problems with the scheme include bureaucratic complications and that employers have to pay staff upfront before receiving the government assistance. One worrying aspect of the labour crisis is that there had not been a decline in job numbers, but the curve was getting steeper, with a week on week decrease up fivefold to 1.5%.
Covid-19has already cost the US government a record US$ 3 trillion, which includes ‘helicopter’ pay-outs and health funding, bringing the national debt to a mouth-watering US$ 25 trillion. The 2020 figure, which is already almost triple the 2019 amount, is set to rise even further; it is also five times the amount spent at the height of the 2008 GFC and equates to 14% of the US economy. Last month, the US Congressional Budget Office forecast that the 2020 budget deficit would top US$ 3.7 trillion, at the same time the national debt climbed above 100% of GDP. Although recognising the increasing danger to the long-term future of the economy of such high spending, Fed Chief, Jerome Powell, said it was of prime importance to continue with high spending in order to cushion the economic fallout of the pandemic; since the beginning of April, the agency has bought more than US$ 1 trillion in treasuries.
By the end of the week, another 3.2 million Americans sought unemployment benefits: that brings the total of new applications to 33.3 million since mid-March, equating to about 20% of the country’s total workforce, compared to 4.4% in March. ADP (Automatic Data Processing) reported that US companies cut 20.2 million jobs in April, reacting to a lockdown of many factories, retail outlets, offices, construction sites and schools – the lifeblood of the world’s largest economy. The losses will obviously continue into this month, with an optimistic view that hiring will recommence slowly in July but will take at least two more years to return to February 2020 levels. Whilst larger companies shed 8.9 million jobs in April, more than 50% of the losses came from smaller entities employing less than 500. The leisure/hospitality sector reported a further 8.6 million cuts, followed by trade/transportation/utilities, with 3.4 million retrenched, construction 2.5 million jobs, manufacturers 1.7 million and the health care sector 1 million jobs. The scale of this downturn is no longer pointing to a “quick fix” but a much longer and slower “rebound”.
There is no doubt that the global stock markets, already on steroids prior to Covid-19, have become even more volatile, with a case in point being the Australian bourse. April had seen the ASX200 recording it its best month since June 2000, posting an 8.8% return. On Friday, 01 May, the ASX closed the day 5.0% lower to close on 5,245, with the All Ordinaries down 4.9%, whilst losing US$ 55 billion in the process, mainly attributable to dismal US employment figures and some profit-taking.
Latest 2020 forecasts from the EC indicate the bloc’s economy will fall 7.7%, with inflation down to 0.2%, as the so called PIGSs’ economies are expected to fare worse than most. Portugal’s GDP is expected to lose 8.0%, driven by shrinking fixed investment, a major downturn in its vitally important tourism sector and lower consumer spending. Italy, which is the EU country that has suffered most Covid-19 deaths, is forecast to witness a 9.5% decline this year and its budget deficit will balloon from 1.6% of its GDP in 2019 to an expected 11.1%; the country will see its public debt jump from 134.8% to 158.9% of GDP. Greece is the country forecast to contract most with a 9.7% dip in the country’s 2020 GDP. Meanwhile Spain’s budget deficit will also skyrocket from 2.8% to over 10.0%, as its economy declines by 9.4%. It is expected that, at the other end of the scale, countries including Luxembourg, Malta and Austria will come out a little better than average. On the macro level, investment will slump by 13.3%, budget deficits will jump from 0.6% to 8.5% of GDP and public debt will increase 16.7% to 102.7% of GDP in 2020.
Not all countries will come out of the recession the same way, or at the same time, as the depth of the recession will result in economies coming out in different manners and at different levels. For example, Germany has eased restrictions this week, whilst the UK has yet to decide; all things being equal point to the fact that Germany will come out of the recession the quicker of the two. Countries like Portugal are heavily reliant on tourism and indicators are that tourism will be slow to recover so the country may be slower to recover than say Luxembourg, with a much lower dependency on tourism. Germany was in a stronger economic position than Greece before the arrival of the pandemic and thus should be in a better position to recover quicker. The forecasts come with a caveat – the outcome could be a lot worse if Covid-19 runs longer and is more severe than currently envisaged. All bets will be off if the world is hit by a second wave.
Today, the BoE issued its direst ever warning on the state of the UK’s Cvid-19 hit economy and it does not make pleasant reading, warning that the country is heading towards its deepest ever recession. Assuming the lockdown is eased in June, it expects the economy to contract by 14% this year and that jobs and income will be dramatically reduced; activity will not come fully back until next summer. The agency’s latest Monetary Policy Report expects a 3% contraction in Q1, followed by a massively unlikely 25% slump in Q2. It was noted that the housing market had come to a standstill, (and house prices could fall 16%), whilst consumer spending had dropped 30% in April, with shopping in the High Street tanking by 80%. The unemployment level was expected to more than double from 4% to 9%, whilst inflation will start next year at zero. No wonder then that business confidence was “severely depressed”.
However, it must be noted that the BoE has history when it comes to a bit of scaremongering and getting predictions hopelessly wrong. In what seemed a political move at the time, the then governor, Mark Carney, came out in apparent support of the Remain camp ahead of the Brexit referendum vote. He indicated that there would be some sort of economic catastrophe if the UK pulled out of the European bloc, only to eat humble pie some months later, admitting that the BoE had got it wrong. In relation to the latest report, it seems highly unlikely that certain European nations will be that much better off than the UK post Covid-19.
One major – if not the most important – economic casualty of the pandemic could be the just-in-time concept, developed by the Japanese some fifty years ago, with the aim of reducing times within the production cycle, as well as cutting response times of suppliers and customers. Over time, JIT manufacturing has become widely known as lean manufacturing, but it is basically the same as it had always been – with the aim of saving time and money. Famously, Toyota, the main instigator of the concept, had early major problems in South Africa when a dock strike prevented raw materials reaching its plant ‘just in time’, resulting in the inevitable backlog. Improved logistics management, the introduction of the internet and the emergence of digital technology assured that JIT became an integral part of global economic progress.
With regard to inventory, the key to its success was that JIT delivery cut out the high cost of warehousing and the need to actually hold inventories for any longer than necessary. When first introduced on a global scale – mainly relating to production techniques and inventory management – it proved to be revolutionary and the best thing for the economy since sliced bread.
But the arrival of Covid-19 has turned the concept on its head and has left former experts scratching their heads to ascertain why such a finely tuned and complex system went haywire, potentially causing financial pandemonium worldwide. Carmakers have had to close their factories, because of shortage of materials, with tech giants and most of the world’s factories struggling for the same reason. The immediate solution would be to turn back the clock – try and source more domestic material – difficult if local factories had been closed long ago because they could not compete with overseas entities. If that were to happen it would be a severe dent to globalisation. Maybe, the new world, post Covid-19, may see a mix of both but it would also reduce the problem of global trade being held to ransom from the shenanigans of the two superpowers – USA and China.
Then along came the delivery couriers, Uber and Airbnb and before we know it a new term has entered the commercial vocabulary – the gig economy. This new category of worker does not have fulltime employee status as well as not being fully protected by the law, as is the case for full-time workers. Before we knew, it had crept into other sectors so that before the world realised everything seemed to have to be done just in time.
The gig economy, estimated to number 150 million in North America and Europe (including 1.3 million in the UK), treats people as independent contractors, not employees, and normally pays on piece rate, with a set payment to drive a person somewhere or to deliver a package. It often involves connecting the two stakeholders, customers and clients, through a third-party online platform. Zero-hour contracts also treat people as contractors, who are paid hourly with no set minimum. There was much concern about the ethical value of such arrangements prior to the advent of the pandemic, as “wages” paid were often below government minimum levels and lacked “normal” employment benefits such as holiday pay, public holidays and sick leave. In many ways, employment in the gig economy is similar to the traditional JIT inventory management – perhaps this could be known as JWN, i.e. using labour ‘just when needed’. There is no doubt that it enables companies to save costs and perhaps for them work more efficiently, by only using labour when required, usually to the detriment of the “worker”. (There is also the danger of a rising number of zombie workers becoming more isolated post Covid-19).
Take away the safety net of not working directly for an employer, then suddenly there is no money to pay the bills. The nature of the business is that persons working in the gig economy are often at the lower end of the food chain, especially working on a zero-hour contract, whilst others are involved in SMEs that often take time to build up a business. Many start-ups fail to get off the ground and many of those that do struggle to make ends meet in their early stages. There is no doubt that a post-pandemic review will see changes. The JIT process in this regard just does not work when the system is put under any sort of stress as so many individuals and SMEs have little or no cash reserves when their revenue stream disappears. Business bills have to be settled and people paid for their labour – if not, other businesses are pulled into the problem and end up with a liquidity problem with the same unfortunate ending of having no cash to settle liabilities. So the just in time money supply that used to keep the gig economy and small companies turning over has gone out of the window. What was once a manageable risk for the economy, because it could cope with individual ‘failures’, becomes a systemic one when there is a failure of the entire system of ‘just getting by’ because it no longer works.
Even before anyone had heard of Covid-19, too many households – and small businesses – were living hand to foot and carried little or no extra emergency cash, relying on maxing up on credit cards or availing of short-term loans. A recent study concluded that 25% of Australian households only had ‘savings’ of less than US$ 650. Last December, the country’s household debt (at US$ 220k) stood at 124.9% of nominal GDP, whilst the level of housing debt to income had jumped to a record high of 140.4%, mostly credit card-related, followed by home loans. The level of household debt to income has topped 191% for the first time, as the debt burden has almost trebled in the past thirty years. Australia is typical of what is happening worldwide.
As financial stress levels tighten in this segment of the economy, the consequences are felt in households where a reduction in cash leads to less consumer spending and a dilution in consumer confidence. If this spend accounts for 70% of some countries’ GDP, there has to be a negative and dangerous impact of less money circulating in the economy not only in retail but also by institutions such as banks, (when mortgages, loans and credit card payments suffer), educational institutions – when fees cannot be paid – utilities and insurance companies. Discretionary spending takes a battering so everything from motor vehicles, white goods, hotel stays and house purchases will see less custom.
All of a sudden, the ‘get out of jail’ credit card debt portal does not exist, and people cannot rely on topping up their credit card to purchase items. This then impacts not only on the merchants, who no longer have a sale, but also on banks that miss out on a lucrative revenue stream that used to return up to 20%. The banks also lose out on non-payment of loans, reduced mortgages, an increased rate of bad debts and a depletion in personal investments. Then what happens? Businesses also will have less access to bank loans as the money cycle tightens and the merry-go-round is completed by the government missing out on tax revenues which have been greatly reduced by lower company profits and less people paying income tax, VAT etc. On top of that, governments are forced to spend money on unemployment and other benefits, further depleting the state coffers. The whole economy is suddenly in a downward spiral when governments, banks, companies and people stop spending and the economic cycle stops working all because ‘just in time’ is no longer a viable concept. Now is time for just in Time To Move On!