Despite all the praise on how Germany has handled the COVID-19 crisis, the country is not immune to the economic impact either.

Germany’s Economy Slumps

As a result of the pandemic’s effects, the German economy shrank by 2.2 percent in the first quarter of 2020, when coronavirus restrictions largely brought German business to a standstill. Germany’s gross domestic product even fell as sharply as last time in 2009.

Germany has thus plunged into a recession as a result of COVID-19 and its economic implications. According to data from the Federal Statistical Office, Germany’s gross domestic product decreased by 2.2 percent in the first quarter compared to the previous quarter of October to December, 2019.

The pandemic spread across Europe in March. Exit restrictions closed borders and businesses largely brought economic life to a standstill. Compared to the first quarter of 2019, the decrease was 1.9 percent.

German’s Second-Biggest Decline Since 1990

According to preliminary data from the Federal Office, the slump at the beginning of the year was the most significant quarterly decline since the global financial and economic crisis in 2009 and the second-largest since German reunification in 1990.

Unsurprisingly, foreign trade also collapsed due to the pandemic, with exports decreasing by 3.1 percent and imports decreasing by 1.6 percent. Since the strict containment measures due to the corona pandemic only started in mid-March, the lockdown is likely to slow the economy down further in the current second quarter than at the beginning of the year.

Accordingly, Germany’s government expects the worst recession in the post-war period in 2020 with a 6.3 percent decrease in the country’s GDP.

Investment Falls

Already companies were investing significantly less in machinery, equipment, vehicles, etc. (a 6.9 percent drop). Only an increase in construction investments (plus 4.1 percent) and government spending (plus 0.2 percent) prevented an even bigger crash.

Already in the final quarter of 2019, the economic performance had declined by 0.1 percent compared to the previous quarter, according to the latest calculation by statisticians. What does not sound like a high figure, could yet become what economist call a “technical recession”, if the economic output was to decline for more than two consecutive quarters.

The German Council of Economic Experts seeks to present an updated forecast of the development of the economy in late June or early July. The council stated that the somewhat optimistic scenario that had been presented by the end of March was based on the assumption that the lockdown in Germany would not last that long.

The minus 5.5 percent of their risk scenario was, therefore, more likely, but arguably still too optimistic. Nevertheless, the actual minus should not exceed the single-digit range, as the effects of Germany’s economic stimulus programs still had to be taken into account, the council concluded.

Unfounded Optimism

The German Council of Economic Experts assumed a five-week shutdown of the economy at the end of March as the most likely scenario – a forecast that turned out to be tremendously inaccurate and borderline naïve. For the five-week shutdown, Germany’s gross domestic product was forecast to decrease by only 2.8 percent in 2020.

In the meantime, however, Germany’s government and economic institutes are expecting a more profound economic slump as a result of COVID-19. In fact, the federal government expects GDP to decline by more than six percent this year, while The Kiel Institute for the World Economy forecasts a 7.1 percent slump.

At the beginning of June, the federal government plans to present its stimulus package. However, despite its general extremely healthy economy, Germany has thus not been impervious to the impact of the pandemic – though it might be able to cope with the fallout better than others.

While the final impact of COVID-19 is still hard to quantify, Germany’s economy will arguably be equipped for almost anything. However, it may soon become a matter of how inclined German taxpayers are to compromise for the greater good.

L'articolo Germany’s Economy is Not Impervious to COVID-19 Either proviene da InsideOver.

March 11, 2020 marked the official end of the longest bull market in history. The Dow Jones went down 20.3% from the record high of 29,568 points it had reached exactly a month ago. Panic and uncertainty engulfed the markets as the coronavirus pandemic continued to wreak havoc in Europe and begin its rapid approach to America’s coasts. Governments across most continents moved at varying paces to intervene in terms of public health and the economy.

The US Economic Situation

One month ago there was an unemployment rate of only 3.5% in the United States and comparatively good economic growth of 2.3% according to the US Bureau of Economic Analysis. The stock market was at record highs. Currently, full employment has ended, with predictions of the unemployment rate more than doubling in the coming weeks and reaching up to 30% in the coming months. Just last week, there was a record number of 3 million new jobless claims. As the Federal Reserve and the US government tried to calm things down with their announcements of economic measures, the stock market appeared to somewhat settle and managed to stop its declining streak, thus ending the shortest bear market in history.

The Federal Reserve moved aggressively and — perhaps in its haste to do good — proceeded incautiously with its announcement of a 50-basis point rate cut on March 3. One week later it dropped it effectively to zero. The message to the markets was that the worst is yet to come.

Congress’ Massive Stimulus Package

Nevertheless, after the stimulus package from Congress began to take shape, markets slowed down their downwards trend. The bill that made its way from Congress to the US President’s desk was worth $2 trillion, the largest ever in the world. And if the word of the Senate minority leader Chuck Schumer is any indication, another, even larger package is to follow. The President himself recently announced his intention to put forward a $2-trillion infrastructure bill.

According to the stimulus bill, individuals earning less than $75,000 per year are expected to receive $1,200 in cash payments, for a total of $300 billion. Families will also receive $500 per child. For those filing for unemployment, the government will provide $600 per week on top of whatever these individuals receive from the states. This is expected to last for four months. Moreover, 13 weeks of unemployment insurance are foreseen under the bill, with the possibility to request extensions. Freelancers, who normally cannot apply for unemployment, now can, thanks to a new government program.

Covid-19 Expenses Will Now All Be Covered

The legislation also makes all Covid-19 related medical expenses covered under private insurance. Furthermore, $10 million is the total sum of grants for small businesses, which can request up to $10,000. The small business administration can provide up to $10 million in forgivable loans per business, for a total of $350 billion. There are loans for big corporations as well, valued at $500 billion. $58 billion are reserved for airlines, whereas $100 billion for hospitals, $98 billion for drugs and vaccines and $1.32 billion for community centers. Worth 10% of GDP, there is no doubt that it is a comprehensive package. As the Senate Majority Leader Mitch McConnell pointed out though, it is actually a relief package, not a stimulus package. This is a very important difference.

In addition to the fiscal, demand-side policies, the Fed has restarted its quantitative easing (QE) program and promised unlimited monetary stimulus. As the Spanish economist Daniel Lacalle explains, it is obvious that this stimulus is not unlimited. It is, in fact, limited by the $13 trillion dollar shortage that exists currently in the world. It has increased due to other countries, especially emerging ones, having dollar-denominated debt, and soon these countries will need dollars to pay those debts. This has been a long advantage of the US dollar’s status as the world currency reserve and a safe haven.

The Economic Situation in Europe

On March 18, the European Central Bank announced an $820 billion (EUR 750 billion) asset purchase program, named the Pandemic Emergency Purchase Program, that will last until the end of the year. This came after the new ECB Chief Christine Lagarde caused the biggest fall in the Italian stock market history with her declarations that it was not the ECB’s job to close the spread between bonds’ rates. Having realized her gaffe’s devastating consequences — not only on the stock market and bond yields but also on the ECB’s credibility — she apologized. Market participants reacted positively to the new program announced, maybe because it was the only concrete package from the EU. The member states of the Union still today, as April begins, have not reached an agreement as to how best proceed. The debates on establishing the so-called corona-bonds or finding other ways to help European individuals and companies still continue without any success. Chaos is the message that comes from Brussels. The threat of incompetence from the ECB‘s current leader is what makes market participants anxious.

Europe’s Lose-Lose Economic Dilemma

To make matters worse, in addition to a lack of a proper response, the economic situation in Europe is far worse than in the US. Whereas, the American labor market was strong and the economy growing steadily when the pandemic hit, the Eurozone has been plagued with high unemployment, weak economic growth and high debt levels. This has to do not only with the lack of a common response, but also with the actual implementation of the wrong type of measures to the crisis of 2012. And that is an important lesson to learn for the current situation. If we do not identify the problem correctly, it will be impossible to implement the right solution. This is precisely what is happening around the world.

While it is true that the United States has been much quicker than Europe in preparing for a coming recession, their measures are also not enough. The US is stronger than the Eurozone, there is no doubt about it. The economic measures implemented by Donald Trump, like cutting taxes and deregulation, have helped strengthen the economy further. Consumer confidence and business sentiment have been in their highest points. Nevertheless, this does not mean the US will not be hit by a recession. The way it behaves now will be crucial to how it weathers the storm. Even in its weak state, the EU has the possibility to reverse the course it is currently in by adopting measures that work. There is no doubt that it will be hit much harder than the United States.

If the US can afford to provide helicopter money and trillion-dollar relief bills, Europe does not have the same luxury. It is highly indebted, badly managed with inefficient markets. Its labor market is highly inflexible compared to the American one. Government interventionism is high and frequent. This has done more harm than good to the economies of the Eurozone. Decades of Keynesian economics have failed in bringing more prosperity, leaving Europe with deep economic scars. In 2019, many of the major economies in Europe were already close to a recession.  What the US and especially Europe need is to produce. This cannot be achieved through demand-side policies, especially when the blow is not from the demand side.

The Coming Storm Isn’t About Demand-Side Shock

Currently, the crisis that is about to hit most countries has been misidentified as being caused by demand side shock. In reality, however, it is a supply-side shock that is hitting economies everywhere. Companies are being forced to close due to government mandates. It isn’t generally because they are in bad financial health, nor is it primarily due to consumers fearing to spend. This is the starting point of the crisis. Obviously, shutting whole sectors of the economy down will inevitably lead to a recession. Supply chains will also probably shift, because both emerging and developed countries are shutting down. Fiscal packages passed by governments are not effective and cannot serve as a stimulus. Why a company that is being forced to shut down, but is in good financial health, should take loans and inflate its debt?

On the other hand, can companies with high leverage ratios afford to increase their debt? How will they repay this debt when they do not know when they will resume normal activity? These companies do not suffer because they lack access to credit, which has been accessible at very low cost for some time now. They suffer due to forcibly closing their activity. So, the problem in its origin is not on the demand side. Nevertheless, due to consumers being forced to stay at home, and because of bars, restaurants, hotels, some shops etc. being closed, this may turn also into a demand side problem.

Printing More Money Isn’t Going to Fix This

Only once the problem is appropriately assessed, can the right solutions be implemented. Printing money and giving it to people will not stimulate the economy, while the relief will be only temporary. Nor will it ensure that the private sector is ready to start the engines of the economy once the pandemic is over. In the current situation, finding ways to increase consumer spending is not going to be enough to push the GDP up. Sure enough, government spending can. However, with the condition that Europe is currently in, it cannot afford to increase its debt by incredibly high values, because the consequences after the pandemic will be catastrophic. Many companies and banks in Europe are in the same boat as the governments when it comes to debt. In Europe there are banks with high NPLs that cannot afford to risk increasing it any further.

Governments have overspent during expansionary times, and central banks have dropped rates to negative levels, limiting the effectiveness of these tools immensely. So, what should be done? First, the governments should eliminate all unnecessary spending. They should revise their budgets and drop all expenses for the year that are not essential. Secondly, they should immediately open companies that produce in the industry sector. In many countries, most firms in the services sector can do smart working. A suggestion that economists like Lacalle have made is that governments can provide lines of credit to companies that need to finance their working capital. If the governments are going to spend money at low costs, they can do so in a way that produces results. It must be paramount that economic activity be steadily reawakened.

Thirdly, governments should decrease taxes at least by half for all companies. For those companies that are not working, corporate taxes should be zero for the whole FY 2020. Moreover, payroll taxes should also be eliminated, as well as local taxes. It is paramount that the cost of hiring is reduced so that the recovery can start.

Follow the South Korean Model

Many people may argue that health is more important and being locked in our houses is necessary even at the risk of burning down our economies. The reply to that is the South Korean model should be followed not the Italian one. They performed massive tests to most of the population and it worked. If the government wants to spend money, let them spend it on tests for the virus. Then they can isolate the infected without risking the whole world economy. People need to go back to work, because they cannot live otherwise. Death by recession is as awful as death by corona. We are still in time to stop a health crisis from turning into a recession of Biblical proportions.

As the US President said, we cannot risk the cure being worse than the virus itself.

L'articolo Erroneous Response to Economic Crisis Could be Devastating proviene da InsideOver.

On March 15 the US Federal Reserve announced that it will slash interests rates to zero to cushion the American economy from the impact of the coronavirus pandemic. This will put interest rates in the range of 0 to 0.25 percent down from the range of 1 to 1.25 percent. Among those who applauded the move was president Donald Trump who said “That’s really great for our country. It’s something that we are very happy, I have to say this, I’m very happy.”

The Fed’s Goal: Prevent a Recession

The move by the Fed comes just days after UK’s Bank of England cut interest rates and the Chancellor of the Exchequer introduced a stimulus package to shield the economy from descending into a recession inspired by the coronavirus pandemic.

The Fed’s announcement came hot on the heels of Goldman Sachs’s revelation that the US economy would shrink by 5% in the second quarter after zero gross domestic growth in the first three months of the year. This will be as a result of businesses and consumers cutting down spending. The eventual outcome according to Goldman, would be a serious recession.

Earlier before Goldman’s warning, US Treasury Secretary Steven Mnuchin downplayed the possibility of the economy descending because of coronavirus, even though he admitted that the economy would slow down as businesses shut down temporarily. “Later in the year, obviously the economic activity will pick up as we confront this virus,” Mnuchin told ABC.

Although some people among them President Trump have long urged the Fed to reduce rates further to negative, Jerome  Powell the chair of the Board of Governors of the Fed ruled out this saying, “we do not see negative policy rates as likely to be an appropriate policy response here in the United states.” Instead the Fed will try to maintain zero percent rates until US economy comes out of the coronavirus instigated economic crisis.

The Central Bank Crisis Playbook: Cut Rates, Then Cut Them Some More

Reducing interest rates to encourage spending has long been the favored by Central Banks in responding to threats of deflation and recession. Lower interest rates means its cheaper for families and businesses to borrow money thus promoting investment and spending. This could be a family spending money on holiday or buying a new car, or it could be a company building a new factory. For instance during the 2008 global recession the Bank of England quickly lowered Bank Rate from 5% to 0.5% to prop up the UK economy.

However, it reaches a point where normal market operations aimed at lowering short term interest rates become ineffective especially when the rates are at or approaching zero. In this case Central Banks will switch to a new policy to boost economy by buying a certain amount of assets. This policy is known as Quantitative Easing or simply QE.

QE is described as a process whereby a central Bank such as the Bank of England or the Federal Reserve purchases existing government bonds in order to inject money directly into the financial system .

“A large scale purchases of government bonds lower the interest rate or yields on those bonds,” says the Bank of England. “This pushes down on the interest rates offered on loans (eg mortgages or business loans ) because rates on government bonds tend to affect other interest rates in the economy.”

What Does Quantitative Easing Accomplish?

QE mainly achieves two goals. First it makes it cheaper for businesses and households to borrow money, in order to boost spending and investment. Secondly, it can stimulate the economy by boosting a wide range of financial asset prices. Quantitative easing is normally a last resort to stimulate spending in an economy when interest fail to work because they have reached minimums.

For instance because interest rate cuts announced are at about zero, the Federal Reserve also introduced a QE program under which it will buy $700 billion worth of bonds as part of its plan to shield the economy from the impact of coronavirus. Of the $500 billion of the $700billion will be US Treasury bonds while the rest will be mortgage-backed securities to stabilize home loans.

Wall Street Reacts to the Fed’s Decision

Wall Street financial experts gave varied opinions on the new measures introduced by the Federal Reserve.
“Well, if this doesn’t work, the Fed will presumably do even more QE, provide more explicit forward guidance, and perhaps experiment with target credit measures and the like. I find it hard to believe that any of those measures .. will work if today’s actions don’t, however,” said Eric Winograd , senior vice-president and US economist at AllianceBernstein told Business Insider.

“Broad fiscal spending and rate cuts are blunt instruments for dealing with short term economic impact of the virus , but should provide investors with some confidence that growth can be strong once the recovery gets underway,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

Chief market analyst at Avatrade Nadeem Aslam told CNN that this is the Fed’s biggest card to play, “The world is facing a pandemic situation this extraordinary time, we need extraordinary measures. The Fed cutting the interest rate to zero and restarting the quantitative easing package is the biggest nuclear bazooka.”

L'articolo What You Need to Know About the Fed’s Interest Rate Cuts proviene da InsideOver.

Coronavirus is pushing the UK to the brink of recession according to Goldman Sachs, a leading global investment banking, securities and investment management firm. The American firm is predicting the UK’s economy to shrink by -0.2 by the end of March because of coronavirus. This will be the second time the country’s economy will be registering negative growth in two consecutive quarters.

What Defines a Recession?

Technically recession is described as two consecutive negative growths. Therefore if Goldman Sachs’ prediction is right, then UK is likely to descend in recession unless concrete measures are introduced and implemented.
According to the bank’s analysts, the UK is highly vulnerable to global activity such as terrorism and epidemics . Tourism is a major sector and with the coronavirus spreading steadily, the repercussion on the economy will be significant.

Major tourist hotspots are already reporting a decrease in the number of visitors as cases of coronavirus rise. Places such as Oxford Street which are normally bustling with shoppers are almost empty, and tubes and airports are operating at minimum capacity.

‘The Virus Outbreak is Expected to Push the UK Economy to the Edge of Recession’

Last week, the outgoing Governor of the Bank of England Mark Carney said the Bank was coordinating with the Treasury to make sure British businesses are protected from the economic impact of coronavirus.

In advising the Bank of England, Goldman Sachs’s economist had suggested an easing policy which involves the central banks buying predetermined amounts of government bonds or other financial assets in order to pump money directly into the economy in order to encourage lending and investment.

“The virus outbreak is expected to push the UK economy to the edge of recession, the hurdle for action is low and the [rate setting ] Monetary Policy Committee (MPC) has sufficient policy space to join other major central banks in easing policy,” said the economist.

Will the Bank of England Follow the Fed’s Lead?

The US Federal Reserve had already began implementing an easing policy to combat the impact of coronavirus by introducing interest rate cuts in February. Its aim is to push interests rates to zero by April, and to begin issuing forward guidance to show “commitment to low rates.”

Last week, however, the Governor of the Bank of England refused to comment on whether he could carry out similar measures. He said the Bank’s Monetary policy committee (MPC ) “is assessing the economic impacts and considering the policy implications of various possible scenarios.”

“We are also coordinating with the Treasury to ensure that any initiatives are complementary and that they will collectively have maximum impact consistent with our independent responsibilities,” he said at University College London.

However a few days later, he hurriedly convened a press conference to announce emergency measures taken in response of the potential impact coronavirus could have on the economy. The interest rates were reduced from 0.75% to 0.25%. This is set to reduce borrowing costs to the lowest in history.

How Central Banks Respond to Potential Recessions

Reducing short term interests rates to encourage spending has always been favored by Central Banks in responding to threats of deflation and recession.

The interest rate cuts were agreed at an emergency meeting of the Bank’s Monetary Policy Committee held on Tuesday this week. “It forms part of a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19,” the Bank said. “These measures will help to keep firms in businesses and people in jobs and help prevent a temporary disruption from causing longer lasting economic harm.”

Among other measures announced include A new $129bn funding scheme aimed at maintaining bank and building society lending to small and medium sized businesses, and cutting the counter cyclical buffer to enable banks to access £190bn they can lend to people and businesses. A directive has also been issued to lenders not to hike dividends and bonuses on the aforementioned money.

Hours later Chancellor Rishi Sunak unveiled additional measures to support UK’s economy through the coronavirus outbreak. In announcing the budget, he said the virus will have a significant impact on the UK economy but added that “it will be temporary.”

Among the key policies include the abolition of business rates for small businesses for one year. “Over the next twelve months , nearly half of all business properties in England will not pay a penny of business rates,” Sunak said. He also announced a coronavirus business interruption loan scheme which will enable banks to lend loans of up to £1.2 m to small and medium sized businesses.

There will also be support for the self employed and those in an unstable employment. The minimum income floor in universal credit will be removed and a £500m hardship fund created for assistance to the needy by the local authorities.“Taken together, the extraordinary measures I have set out today represent £7bn to support the self -employed businesses and vulnerable people,” the Chancellor summarized.

While many have agreed with the measures taken, others have accused the Chancellor of spending like a drunkard. However the Chancellor has insisted  that these are just temporary measures meant to cushion the economy from the impacts of the Coronavirus.

Despite the fear of UK descending into economic meltdown, the Governor of the Bank of England has ruled out a major recession similar to that of 2008, saying “There is no reason for this shock to turn into the experience of 2008, a virtual lost decade in a number of economies, if we handle this well.”

L'articolo Fear of Coronavirus Pushing UK into Recession proviene da InsideOver.

Hong Kong is officially in a recession, according to third-quarter results released Thursday. It contracted 3.2 per cent from July to September, a stark contrast to the 0.5-per cent downturn in the previous three-month period. On a larger scale, the recession contacts with a 2.9-per cent decline in the third quarter as the recession, the first in a decade for the city, appears to have no end in sight. 

No Optimism

“Frankly, there is no room for optimism,” said Hong Kong Chief Executive Carrie Lam. The government will release its updated GDP projection next month.

Protests, now in their fifth month, are the root cause of the trading epicentre’s economic woes. Exports, impacted by both the protests and US-China trade war, spiralled downward seven per cent over last year, which was the largest downturn in a decade.

“Much of the pressure is now coming from the political unrest. The trade war itself would cause Hong Kong’s GDP growth to slow but not a contraction, while the political unrest could,” said Tommy Wu, a Hong Kong-based economist at Oxford Economics.

The tourism industry has endured a large portion of the damage with hotels, which were routinely full, at only two-thirds capacity. At one point, flights were suspended at the international airport, complicating travel arrangements. The retail industry has also seen reduced spending and even store closures due to the civil unrest. Some stores have closed early or completely closed shop in the wake of citywide demonstrations. In a few cases, activists have vandalized storefronts, banks, and restaurants.

Lam’s government has taken measures in an attempt to safeguard the economy, but those have proved inadequate at preventing longterm damage. Two rounds of stimulus packages and subsidies at $255 million unveiled in August and $2.4 billion announced last week to aid small companies and workers. Last week, Financial Secretary Paul Chan revealed further economic measures, including rent reductions at buildings leased by the government and transportation subsidies for taxi companies and ferries. Li Ka-shing, the city’s richest man, even pledged $128 million to businesses affected by the protests, declaring the economy “is facing unprecedented challenges.”

Longterm Hope

Even amid the economic turmoil, Lam sees the potential for a bright, longterm future for the economy through partnerships with mainland China. 

“Hong Kong is playing an active part in our country’s two far-reaching initiatives, the Guangdong – Hong Kong – Macau Greater Bay Area, and the Belt and Road,” she told those gathered at the Asia House Future of Trade Conference. She gave went on to give the opening speech at the 2nd China International Import Expo Thursday.

Hong Kong is represented at the event, lasting until Tuesday, by 200 companies and the Hong Kong Trade Development Council. The Bay Area project is designed to turn the region into a Silicon Valley rival by 2035. The area was predominantly agriculturally-focused since 1980, but grew in technology and financial sectors as the most populous urban area in China.

Civil unrest continues to overshadow these projects, however. None of the initiatives will find strong footholds in Hong Kong until protests abate, which shows no sign of happening anytime soon. For Lam, the answer to satisfying protestors begins with them stopping their demonstrations and economic disruption.

“Once calmness returns, we are committed to finding solutions to some of those deep-seated problems revealed by the extensive protests over the past [five] months,” Lam said. “We will not rest, I will not rest until we have found a peaceful, harmonious, and inclusive path for Hong Kong.”

Despite continued public demonstrations and local economic downturn, the stock markets are holding up, minor blips notwithstanding. The Hang Song Index is up four per cent year-over-year and investment money continues to pour in. Anheuser-Busch InBev opened its IPO on the Hong Kong Stock Exchange, drawing $5 billion, which was the second-largest of 2019 next to Uber. It drove the stock market to third-largest in terms of money raised for the year.

Hot Seat

The stock market is only one indicator of the economy, however, and the average Hong Konger is likely to continue to feel the microeconomic effects of protests even as it holds relatively steady. Lam’s position is a precarious one as she must answer to the mainland Chinese government and both are in the international spotlight. While she agreed to withdraw the extradition bill and promised it would not return, that satisfied only one of the five demands by protestors. Even if Lam wanted to give in to all the conditions, she has her hands tied by Beijing.

Even so, the task falls upon her shoulders to quell the demonstrations. Beijing cannot roll in with tanks as it did during the Tiananmen Square massacre because of the modern spread of information. While the international community is not standing with Uighur Muslims imprisoned in concentration camps, while those atrocities committed by Beijing are not enough to be the final straw, a military suppression of Hong Kong likely would be enough as it would have economic ramifications.

L'articolo Hong Kong in a Recession but Stock Market Holds Steady proviene da InsideOver.

For many economists and political commentators, Latin America was the utopia in the mid-2000s when the region was experiencing unprecedented growth and democracy seemed to have more or less consolidated in several countries. 

From Brazil – which saw its aggregate GDP grow by a multiple of over five to $2.616 trillion in 2011, from $508 billion in 2002 – to Venezuela that was cheerfully raking in hundreds of billions of dollars through oil exports, Latin America appeared to be the model continent on a first glance, at least economy-wise, for much of the 2000s and early 2010s as well. 

But cracks began to appear, especially over the past month or so, as the region saw protests erupting almost all across. Be it the socialist Bolivia under Evo Morales or the neoliberal Chile under Harvard-educated economist Sebastián Piñera, hardly anyone has been spared from the wave of angry citizens. 

What started as a brief trailer in Argentina against the food crisis this September eventually transformed into a full movie in other parts of the continent. In Ecuador, it was the government rolling back fuel subsidies as part of fiscal consolidation measures under the International Monetary Fund programme that brought people to the streets. This first forced President Moreno to flee the capital, Quito, before finally withdrawing from the multilateral bailout and restoring old prices. 

Similarly, Chile – often hailed as the free-market oasis in the desert of a socialistic continent – saw huge demonstrations, killing 20 people as per last count, after the government raised the subway fares in the capital by 30 pesos. The president, in response, initially declared a state of emergency and imposed curfew which agitated the public more, thus forcing him to adopt a more reconciliatory tone that has since seen a cabinet reshuffle. He has also promised to put in place social reforms including an increase in minimum wage and state pensions. 

Meanwhile, questions over the fairness of elections in Bolivia, which saw incumbent president winning yet another term, was the main cause behind the agitation. Other regional countries urged for an audit which was agreed upon, with a 30-member Organisation of American States delegation expected to do the review.  

From stability to chaos

The journey from rising living standards and an emerging middle class to being done with their respective governments hasn’t been as drastic as one would imagine even though some have been quick to blame Venezuela’s infamous Nicolas Maduro for exporting this unrest across the borders. The seeds of discontent were sown long ago and have just gotten ripe. 

As the fruits of the post-commodity boom – which saw economic growth thanks to significant investments – became scarcer, the region started showing early signs of a slowdown. Consequently, average per capita income in South America has fallen from $11,170 in 2011 to current levels of $8,160. 

A major chunk of this decrease has been led by Brazil where GDP in current dollar terms has contracted to $1.87 trillion. Likewise, Argentina – the second biggest country – witnessed growth rates alternating between negative and positive 2.5%, both leading to unpredictable developments in their respective elections.

However, an economy stumbling on aggregate basis doesn’t explain the case of individual countries well enough. After all, Bolivia is currently growing at 3.9% and Chile at 2.5%, which is not half bad in the backdrop of global recessionary fears. 

Considering two of the three protests had to do with price increases, one is naturally inclined to immediately seek the cause in inflation, but the data show that there has been a downward trend in consumer prices across the three states. 

Part of the explanation also lies in the growing inequality, an area in which the continent already fares the worst. The Gini coefficient for Latin America and Carribean countries was at 44.06 in 2015 – higher than other grouping – with Chile leading the charts consistently as it outperformed the regional average by 3.64 points. 

Some argue that this doesn’t go far enough, since all three countries have successfully reduced income inequality over the past decade, raising questions if this is the right place to look into. But citizens’ opinions are not perfectly aligned with data and just the perception of inequality is enough to cause unrest, and that seems to be the case as well. 

Any disaggregated analysis of different indicators is based on the assumption that individual parts combined must add to their sum, but the public sentiments work quite differently. Take Chile for example, where disenchantment over the country’s hardcore neoliberal policies had been brewing for a while. Its listed corporations had been doing well for several years while youth unemployment rates touched close to 19%, creating winners and losers of the system. Hence the increase in fares was the boiling point which took people out and as history tells us, the streets have no leader, but faceless voices. 

L'articolo Down With the System: Latin Americans Take to the Streets proviene da InsideOver.

“The economy is booming”, a Trump tweet read on Friday, just before the Treasury Department announced the latest deficit figures. One of President Trump’s promises had been to reverse the federal deficit within eight years. After his second completed fiscal year, however, the deficit has reached its apogee since 2012.

The budget deficit of the US government has risen to its highest level in seven years: In the fiscal year 2019 (which ended in late September), the deficit increased by $205 billion to $984 billion (The Federal Deficit Marks the Highest Since 2012 as $885 billion) – a spike of 26 per cent – according to the Treasury Department.

These figures corresponded to a deficit ratio – i.e. a ratio of gross domestic product – of 4.6 per cent. Although the revenue increased by 4 per cent to $3.462 trillion, while, at the same time, government spending increased by 8 per cent to $4.447 trillion.

It is the second full financial year under Trump who has taken office in times of prosperity. The deficit reached $1.4 trillion in 2009 when the deficit reached almost 10 per cent, the highest since World War II. Trump’s predecessor President Obama and Congress enacted measures to shrink the deficit to 2.4 per cent in 2015 and reduced the overall deficit to $585 billion by the end of his second term in 2016. Insufficient for Republicans, who demanded more significant reductions at the time.

After taking office, President Donald Trump aimed to eliminate the deficit within eight years. Not only did he introduce a comprehensive tax reduction program, particularly for the benefit of businesses, his version of Reaganomics or Supply-side Economics, Trump also increased spending in critical areas such as the Defense Department (+9 per cent). Moreover, inter alia, debt service expenditures also contributed to the increase in the deficit while interest payments grew by ten per cent or a volume of $51 billion.

In June 2017 the Congressional Budget Office predicted that the revenue shortfalls caused by Trump’s tax cuts would be mitigated by the growth impetus generated by the reform, i.e. the tax revenues from growing economic activity and employment. However, despite the continued substantial growth rates so far, it has not been possible to compensate for the increase in spending and the congressional projection remains shy by $400 billion. Finance Minister Steven Mnuchin nevertheless assessed the budget balance as proof that Trump’s economic agenda was “working”, before urging Congress to stem “wasteful and irresponsible spending.”

The spending spree since 2016 has ballooned the deficit to now 4.6 per cent again. Even the most partisan politicians should be cognizant of these following facts, however: Circumstances since the last significant deficit spike are different. The unemployment rate is at a historic low, and the economy has been growing for 11th years straight– a record. Nonetheless, it would be dishonest not to give President Trump some credit for these achievements, as his deregulation policies have evidentially helped the economy.

However, the growing fears about a possible recession amongst Americans will not decrease after the deficit news has become public, and Trump, twelve months away from the election, might be facing yet another conundrum. The economy has been his signature reelection bid – besides political victimhood – and the current situation demands answers for a plan beyond 2020. Even more so, if the rumoured recession ought to materialise.

A focus on a Democratic “witch hunt” and his – at best – incoherent foreign policy will likely not be sufficient to obtain a second term – no matter how hard the Democrats have been trying to alienate moderate voters lately.

Furthermore, while Trump has certainly kept his word on some relevant and needed plans, a prison reform nor strengthening the borders will suffice once his impervious base feels the effects of a potential economic crisis. Promises made. Promises kept?

L'articolo Tired of Winning Yet? The Federal Deficit Hits Highest Level Since 2012 proviene da InsideOver.

We’re in the calm before the storm. Soon, dark clouds of economic misery will burst, and a tidal wave of poverty will consume the planet. That’s what the experts are saying, anyway. A new global recession is in the offing, analysts believe, a reaction to a uniquely noxious cocktail of financial agitators – the US/China trade war, the threat of a no-deal Brexit, contagious slowdowns in some of the world’s biggest economies, and lingering effects of the last big collapse. The global economy is resilient, and could weather any one of these. But combined, a wide scale downturn seems unavoidable. 

Months of dire financial rumblings came to a head on August 14, investors’ worst day of the year. Britain’s FTSE fell by 1.4%. CAC, the French market index, leaked 2.1 points, while Germany’s DAX fared even worse, sliding 2.2%. But it was the 2.5% tumble on the US Dow Jones that caused most concern. From the Wall Street Crash of ‘29 to the Great Recession eighty years later, history tells us one thing: when the American economy slumps, the world follows.

It should be heartening then that, by a number of measures, US finances are doing fairly well. Now in its eleventh consecutive year, America’s current economic expansion is the longest running period of growth on record. Employment rates are at their highest in fifty years, wages are rising, credit is easy to acquire, and oil remains affordable. Furthermore, the heady financial exuberance and industry bubbles – like dot-com in 2000, or housing in 2007 – that often foreshadow a crash aren’t apparent.     

But dig a little deeper, and experts say there’s reason to be worried. A downward trend in some global economies is becoming contagious, Morgan Stanley’s chief economist Chetan Ahya warned recently, adding that “the wheels for a slowdown are in motion”. 

“Even as we have been revising our growth projections lower, we continue to highlight that the risks remain decidedly skewed to the downside,” he wrote in a note to clients last week. “We expect that if trade tensions escalate further… we will enter into a global recession”. 

He’s not alone in his rebuke of Washington’s divisive trade war with China. Convinced of Beijing’s unfair commercial practices, Mr Trump has made mounting tariffs a hallmark of his presidency. Duties of up to 25% cover a wide range of products, from handbags to railway equipment. Responding in kind, China has imposed tariffs on hundreds-of-billions of dollars worth of US exports. 

More than the levies themselves, Trump’s erratic policy-by-tweet approach is confounding American business. An unpredictable Oval Office makes it difficult for firms to plan their operations, with no clear indication whether tariffs will rise, fall, or remain steady for weeks, months or even years. This confusion is having an adverse effect on global investment – Standard & Poor, a financial services group, estimates some $6 trillion is being sat on by wary companies unwilling to spend amid the trade war’s uncertainty.

Hamstrung by the commercial conflict, China’s domestic economy is faltering also. The growth of industrial production has slowed to levels unseen in 17 years, mirroring an overall decay in Chinese economic expansion. Dependent on the Far East market, economies elsewhere are feeling the effects. Germany, Europe’s largest exporter, is in recession. Sales of its machine tools, trucks and cars have spiralled thanks to a collapse in Chinese demand. Berlin has now recorded two consecutive quarters of GDP decline, causing business confidence to fall to its lowest level since the 2008 financial crash.

The UK’s desperate situation is doing little to calm nerves on the continent. With neither London nor Brussels willing to compromise on their Brexit demands, a no-deal departure on October 31 seems all but inevitable. Fearing this eventuality earlier in the year – before eleventh hour interventions pushed Brexit back – British businesses built up stockpiles. These have since been run down, greasing the wheels for an economic contraction – the first the UK has experienced since 2012.      

Worst still, analysts say no-deal brinkmanship is fuelling financial anxiety and hurting investment. “Brexit uncertainty is limiting appetite to expand, but contingency planning activities ahead of 31 October may also limit resources available for possible investment projects,” said James Smith, Developed Markets Economist at ING, a bank. “Sentiment among shoppers has remained fairly depressed, hinting at a reduced willingness to make bigger ticket purchases,” he added.  

A world recession need not be inevitable, however. Accepting the premise that a global slowdown would start in America, it’s surely there that one could be prevented. The dialling down of the US/China trade war is an obvious place to start. Negotiations are ongoing – that’s the good news – but there’s no sign of conciliation, with more tariffs being added weekly.

Tax cuts have also been mooted by the president, with employee payroll and capital gains duties earmarked for the chop. Neither are confirmed however, with Mr Trump championing cuts one day, only to row-back the next. A reduction in tax would, theoretically, spur greater spending and investment, keeping the economy buoyant. 

A third target could be interests rates. The Federal Reserve, America’s central bank (and Trump’s favourite economic bogeyman) has been facing renewed attacks from the Oval Office over interest levels. In the hope of kick-starting growth and calming jittery financial markets, the president wants rates lowered. But with interest as low as it currently is – 2.25% – some worry that further cuts would reduce the US’s capacity to fight a recession if one emerges.    

And with the world’s two largest economies at loggerheads, the imminent – and unprecedented – withdrawal of an EU member state, and a number of countries slipping into slowdown, the onset of a worldwide slump doesn’t seem far fetched. Acknowledging this, the IMF last month cut forecasts for global growth to 3.2%, the weakest rate of expansion since 2009. The weather hasn’t quite turned yet, but storm clouds are certainly gathering.

L'articolo A Global Recession is Coming, Experts Warn proviene da InsideOver.

The last few years of this decade have seen some surprises in terms of political victories, and 2019 is no exception. Australian Prime Minister Scott Morrison’s victory in Saturday’s elections prove that yet again, conservatives have defied the polls and won a shock majority. Exit polls had predicted a Labor victory for the first time in six years and the party’s leader, Bill Shorten, resigned in the wake of his party’s defeat. As the Liberal-National Coalition has won, their honeymoon could be short-lived. There is trouble brewing Down-Under, and it seems likely Australia will not be immune to the effects of a recession, like it was in 2008.

Australia has not had a recession in 30 years. Australian banks were well-capitalised and survived the 2008 Recession well. Whilst the rest of Europe and the US faced high budget deficits that year, Australia was debt-free, its economy was growing strongly and running budget surpluses. They also negotiated favourable trade deals prior to the crash, like the US-Australian trade deal.
Stephen King of Essa credited the four-pillars banking policy of the Hawke-Keating government in 1990 for saving Australia’s banks prior to 2007-08. This policy prevents mergers between the country’s four largest banks- Commonwealth Bank, Westpac, ANZ and NAB. An IMF paper argues that Australia and Canada’s banking systems coped with the 2008 Recession because there was mid-competition between banks in those nations.

Australia also had more effective regulation than European nations and the US. Regulation matters and it is important for governments to ensure there are common sense rules that do not hinder competition whilst protecting consumers from exploitation. Even Adam Smith believed regulation was necessary, and Australia served as a good example of how to regulate an economy efficiently. Belratti and Stulz, in a paper for the European Corporate Governance Institute, found that banks with the highest returns in 2006 had the worst returns in 2008. They concluded restrictions on banking activity; strict oversight of bank funding; and regulatory independence, all raised the likelihood that a bank would survive in 2008. Australia had implemented sensible regulations during the 2000s and the government ensured there was funding in place to prevent a run on smaller banks.

However, the Australian miracle of economic prudence may be reaching a conclusion. As King wrote, “it is worth remembering these factors, because the 2008 Great Financial Crisis was not the first crisis to hit the Australian financial system, and it will not be the last.” Nick Hubble of Southbank Investment Daily has discovered how lending standards have become incredibly lax. For example, he said banks have been fabricating mortgage documents. Bank employees are over-selling mortgages to people who can’t afford them.

In February, Royal Commissioner Kenneth Hayne urged the Government to implement rules to prevent the big four banks from abusing their power. This includes outlawing customer fees for services they never received, preventing superannuation of products not in the customer’s best interest, and a compensation scheme for consumers to allow them to have their cases heard in court. But weeks before the recent elections, the Government retreated from the Commission’s recommendation to clamp down on what ABC call “liar loans” – based on inaccurate information that they have been massaged to help the borrower receive a bigger loan than they are eligible for. It was these types of practices that caused the 2008 Recession.

Australia must return to the common-sense regulation that made it the envy of the world in the 2000s. As Kit Winder of Southbank Investment Daily wrote, house prices have recently fallen by 10 per cent, approaching a 30-year record. The Liberal-National Coalition has had an unexpected win, but if they want another one, they need to clamp down on bad banking practices that could lead to the equivalent of the 2008 Recession for them.

L'articolo Trouble Down-Under: Why Australia Could be Heading for a Recession proviene da InsideOver.

Not long ago, the French Finance Minister mouthed off about the “recession in Italy and its threat to Europe“. Italy is technically in a recession, but not by very much. Meanwhile, the European Central Bank (ECB) is sabre-rattling about the threat of recession in the rest of Europe.

But the predictions are not particularly dire: Fitch Ratings, the credit agency, is predicting 1% growth in Europe in the coming year, and domestic economies are still performing well.

Philip Lane, who has been named the next chief economist at the ECB says that the slowdown in Europe will be “limited.” “Europe is not in a super fragile situation,” he adds.

Wealth managers – the people who need to guess correctly about the global economy, because they manage so much money all over the world – just don’t see a major recession coming. “Based on the current prices of assets, I see a real case for optimism,” writes Brad Conger of the $100 million-assets-under-management firm Hirtle Callaghan.

Growth is slow, but certain

There has been endless gloom-and-doom in the press about Europe, and Italy in particular, but it’s just not justified by the facts.

The International Monetary Fund sees global growth at 3.5 per cent in 2019, rising to 3.6 per cent in 2020. The biggest destabilizing factors, according to the IMF, are the current disruptions in international trade, which have slowed investment.

“Europe continues to enjoy respectable growth fuelled by domestic demand, supported by high employment and wage growth,” the IMF says.

Granted, a slowdown is coming, but growth will continue afterwards. “Compared with the previous forecast by the International Monetary Fund, growth has been revised downward in about half of the countries in Europe. The downward revisions reflect weaker external demand and higher energy prices. Nevertheless, growth is expected to remain above potential in most countries in the region,” the IMF concludes.

Certainly, the disruption of international trade and some political concerns have affected Europe sharply – along with the endless issue of Brexit.

But FocusEconomics sees “headwinds to growth as moderating somewhat by year-end. Industrial production is expected to normalise after one-off shocks, while external political uncertainty could also take a step back if the EU and the UK finalise a way forward in March and if the U.S. and China strike a trade agreement. A solid labor market and accommodative monetary policy will continue to drive growth, while consumers should also benefit from contained inflation and lower-than-expected oil prices.”

Economists at S&P chime in with this forecast, as they see growth in Europe as benefiting from a number of factors: “We see domestic demand as the main driver of activity. Consumption will benefit from falling unemployment, rising wages, and lower energy prices. Business investment will benefit from solid credit growth, boosted by loose financial conditions and high capacity utilization. The weakness in the third quarter of this year was temporary in our view (with the German economy contracting, weighed down by a sharp decline in automobile production), and we are forecasting growth of 1.6 percent for 2019, from 1.9 per cent this year.

Italy should recover rapidly

There has undoubtedly been turbulence in the Italian economy that has led to the slight technical recession, but the capacity for and expectation of recovery is clear.

Despite all the conflict in international trade, Italy has retained its competitive position, as its exports are sound, according to economists at ING bank.

“There was a consolidation of employment gains over the summer and growing evidence of tentative wage pressure,” the ING economists say.

What is very encouraging, according to ING, is that Italian exports have performed well despite the poor economic environment. “Net exports provided a marginally positive contribution to quarterly growth, thanks to a decent export performance, which materialised in spite of an already deteriorating international backdrop,” ING writes.

Moreover, ING expects a swift turnaround in 2019. “We do not buy into this story about prolonged recession, as some of the pending uncertainties weighing on 2019 might hide positive surprises,” ING economists write, adding that, certainly, there is a good chance for a reversal of fortunes for the Italian economy in 2019. “The fundamentally more sound demand component looks set to be private consumption, supported by employment, which has stabilised at around pre-crisis highs, and by a likely recovery in real disposable income related to the energy-price-driven drop in headline inflation,” they add.

When will recovery start?

It’s difficult to pinpoint when recovery may be expected to start, as Brexit continues to weigh on Europe’s economic fortunes.

But, factoring in that there will in fact be a solution of some sort to this quandary, the ECB can be expected to support a recovery with low interest rates.

Klaas Knot, Dutch central banker and a prime candidate to replace Mario Draghi as ECB president, said in December that the ECB will probably take steps to support the recovery.

“Talk about a crisis, or a recession, is premature,” Knot says. “Slowing growth makes sense after years of economic expansion. We’ll see a couple of quarters with somewhat slower growth, and that’s mostly due to external trade, but domestic demand is still holding up in Europe,” he said.

S&P economists also expect support from the ECB to trigger a recovery around mid-year. ~The ECB’s monetary stance will remain accommodative, with the reinvestment of maturing assets from its bond-purchase program and keeping open-end supply in liquidity to banks through the full allotment procedure. Liquidity provision might happen at shorter duration,” S&P concludes.

L'articolo Recession in Europe? Not So Much, Not Even in Italy proviene da InsideOver.