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OUTLOOK MODERATES The economic recovery continues to gain traction, despite a challenging external environment, mostly due to solid dynamics...




OUTLOOK MODERATES
The economic recovery continues to gain traction, despite a challenging external environment, mostly due to solid dynamics at home. Retail sales returned to growth in August as consumers gradually came back and cross-provincial travel increased. Investment activity improved in the same month, reflecting gains in both traditional and new infrastructure projects. The new infrastructure initiative, which was rubberstamped during May’s National People’s Congress, seeks to upgrade China’s industries and accelerate digital transformation. Industrial production growth also picked up in August, led by gains in advanced technologies. Although the external sector continued to fare well in August, risks are looming on the horizon as some of China’s main trading partners are suffering heavily from the consequences of the pandemic. • Growth prospects have been improving in recent months, reflecting a stronger-than-expected recovery. Looking forward, the economy will benefit from strong overseas demand for medical products and technological devices as well as solid new infrastructure investment. A re-escalation of trade tensions with the U.S. and a second wave of Covid-19 are the main downside risks. FocusEconomics panelists see the economy growing 2.0% in 2020. GDP growth will accelerate to 7.6% in 2021, which is down 0.1 percentage points from last month’s forecast. • Inflation fell to 2.4% in August from 2.7% in July. The moderation mostly reflected a base effect from last year when pork and meat prices surged due to the African swine fever outbreak. Looking forward, inflation is expected to remain broadly at current levels. The drop in factory gate prices continued to narrow due to higher prices for some raw materials. FocusEconomics panelists forecast that inflation will average 2.8% in 2020 and 2.1% in 2021, which is unchanged from last month’s estimate. • The People’s Bank of China (PBOC) has refrained from adding monetary stimulus in recent weeks as the economy appears to be on a path to recovery. The PBOC uses a complex system to implement monetary policy, including key benchmark rates and reserve requirement ratios. Panelists project the one-year deposit and loan prime rates to end 2020 at 1.48% and 3.68%, respectively, and 2021 at 1.47% and 3.65%. • The yuan appreciated in recent weeks and it is currently trading at levels last seen in May 2019. This reflects China’s solid economic recovery compared to other major economies. On 18 September, the yuan traded at 6.77 CNY per USD, appreciating 2.3% month-on-month. Looking forward, the yuan could depreciate slightly due to an uncertain global economic backdrop. Our panelists see the yuan ending 2020 at 6.96 CNY per USD and 2021 at 6.94 CNY per USD


REAL SECTOR  
Manufacturing PMI inches down in August The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) fell slightly from 51.1% in July to 51.0% in August. The print was a notch below the 50.2% expected by market analysts. As a result, the index remained above the 50.0% threshold that separates expansion from contraction in the manufacturing sector. August’s decrease was the result of lower readings for output and inventories. Conversely, new orders and job prospects gained some ground, while the supplier delivery time index was unchanged compared to the previous month. Despite remaining below the 50% threshold, export orders increased again in August, reflecting the easing of the global lockdown. Meanwhile, input prices—a reliable leading indicator for producer inflation—jumped to a nearly two-year high. Panelists expect GDP to expand 2.0% in 2020, which is up 0.1 percentage points from last month’s estimate. In 2021, the panel foresees much stronger economic growth of 7.6%, which is down 0.1 percentage points from last month’s projection. REAL SECTOR | Industrial output posts quickest growth since December 2019 in August Industrial output grew 5.6% compared to the same month of the previous year in August, which was above July’s 4.8% increase. The reading marked the best result since December 2019 and exceeded the 5.1% increase that market analysts had expected. Looking at the details of the release, manufacturing output was steady in August, while energy output gained steam and the mining sector posted a healthy rebound. On a monthly basis, factory output grew 1.0% in seasonally-adjusted terms in August, which matched July’s expansion. Meanwhile, the trend improved slightly, with the annual average growth of industrial production coming in at plus 1.6%, up from July’s 1.5% reading. In light of recent developments, some panelists upgraded their view on the Chinese economy. Raymond Yeung, Greater China Chief Economist at ANZ, comments that: “We have revised upward our forecast for China’s GDP growth to 2.1% (+0.3ppt) for 2020 on the back of a robust recovery in the services industry, thanks to news that China will have COVID-19 vaccines ready by year-end. In addition, the macro data suggest that GDP growth actually expanded 0.8% over the first eight months, or for two-thirds of the year.” FocusEconomics Consensus Forecast participants expect industrial production to rise 1.9% in 2020, which is down 0.1 percentage points from the previous month’s forecast. In 2021, the panel sees industrial production growth at 7.5%, which is up 0.1 percentage points from last month’s projection.

MONETARY SECTOR 
New loans increase in August In August, Chinese banks distributed CNY 1.28 trillion (USD 187 billion) in new yuan loans. The reading came in above both the CNY 993 billion recorded in July and the CNY 1.22 trillion that market analysts had expected. In the 12 months up to August, new yuan loans totaled CNY 19.2 trillion (12 months to July: CNY 19.2 trillion). Total social financing (TSF)—a broader measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments— rose from CNY 1.69 trillion in July to CNY 3.58 trillion in August. Market analysts had expected a softer increase in TSF to CNY 2.59 trillion. Annual growth in M2—the broadest measure of money supply in China— decreased from July’s 10.7% to 10.4% in August. The result was below the 10.7% increase that market analysts had expected. The slowdown in M2 growth reflected more targeted monetary policy in order to prevent bubbles in assets like real estate and stocks. FocusEconomics Consensus Forecast participants expect M2 to expand 11.0% in 2020, which is up 0.1 percentage points from last month’s forecast. In 2021, the panel sees M2 growth of 8.8%, which is unchanged from last month’s projection.

EXTERNAL SECTOR
Export growth continues to accelerate in August as lockdowns ease across the world In August, exports expanded 9.5% over the same month in the previous year, following July’s 7.2% rise. Moreover, the print exceeded 7.1% expansion that market analysts had expected. Meanwhile, imports fell 2.1% in annual terms in August. The print followed the 1.4% drop in July and contrasted the 0.1% increase that market analysts had projected. August’s solid export result reflects the gradual easing of the global lockdown as well as a favorable base effect from last year. As a result of the stronger expansion in exports, the trade surplus jumped from USD 34.7 billion in August 2019 to USD 58.9 billion in August 2020 (July 2020: USD 62.3 billion surplus). The 12-month moving sum of the trade surplus rose from USD 431 billion in July to USD 455 billion in August. Our panelists forecast that exports will contract 3.8% in 2020 and imports will drop 3.9%, bringing the trade surplus to USD 406 billion. In 2021, FocusEconomics panelists expect exports will expand 7.5%, while imports will rise 8.3%, leaving the trade surplus at USD 421 billion.

From The BBC: First and foremost, the EU wants the UK to sign up to strict rules on fair and open competition, so if British companies are g...






From The BBC: First and foremost, the EU wants the UK to sign up to strict rules on fair and open competition, so if British companies are given tariff-free access to the EU market, they cannot undercut their rivals. These are known as level playing field guarantees and they have been a constant theme in the EU's negotiating position for nearly two years. Most importantly, its negotiating directives, adopted on 25 February 2020, say a future partnership must "ensure the application" in the UK of EU state-aid rules on subsidies for business. The UK would also be required to stay in line with the EU's rules on environmental policy and workers' rights in a way that would "stand the test of time". But the government has now rejected this approach entirely. The political declaration it agreed with the EU last year did speak of level playing field commitments but, armed with a big majority in the House of Commons, it has toughened up its language. In a document outlining the UK's approach to negotiations published on 27 February 2020, it said: "we will not agree to any obligations for our laws to be aligned with the EU's". Instead, Boris Johnson has said he would create an independent system that would uphold the UK's international obligations and not undermine European standards. "There is no need for a free-trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment or anything similar," he said. He has also pointed out that there are areas such as maternity rights in which the UK has higher standards than the EU and that the UK spent far less money on state aid than Germany or France.

Essentially a Canada deal?

Bill 177 2019-21 (as introduced); As Originated in the House of Commons, session 2019-21; 

A bill to make provision in connection with the internal market for goods and services in the United Kingdom (including provision about the recognition of professional and other qualifications); to make provision in connection with provisions of the Northern Ireland Protocol relating to trade and state aid; to authorise the provision of financial assistance by Ministers of the Crown in connection with economic development, infrastructure, culture, sport and educational or training activities and exchanges; to make regulation of the provision of distortive or harmful subsidies a reserved or excepted matter; and for connected purposes.

A bill to make provision in connection with the internal market for goods and services in the United Kingdom (including provision about the recognition of professional and other qualifications); to make provision in connection with provisions of the Northern Ireland Protocol relating to trade and state aid; to authorise the provision of financial assistance by Ministers of the Crown in connection with economic development, infrastructure, culture, sport and educational or training activities and exchanges; to make regulation of the provision of distortive or harmful subsidies a reserved or excepted matter; and for connected purposes.

Read A Copy of The UK Internal Market Bill Here

EGYPT: PMI dips marginally in August, remaining in contractionary territory Egypt’s Purchasing Managers’ Index (PMI)—which measures business...







EGYPT: PMI dips marginally in August, remaining in contractionary territory Egypt’s Purchasing Managers’ Index (PMI)—which measures business activity in the non-oil private sector—inched down to 49.4 in August from 49.6 in July. The figure thus ended three consecutive months of increasing readings following April’s nadir of 29.7, which remains the lowest point on record since the current survey began in April 2011 and reflected the effects of Egypt’s first full month with strict coronavirus restrictions.




ISRAEL: Economy registers record contraction in Q2 GDP contracted at a quicker pace of 28.7% in seasonally-adjusted annualized terms (SAAR) in the second quarter, below the 6.8% contraction logged in the first quarter and marking the worst reading on record. On the domestic front, the downturn reflected contractions in private consumption and fixed investment. 

ISRAEL: Composite State of the Economy Index expands meekly in July The Bank of Israel’s Composite State of the Economy Index increased 0.15% month-on-month in seasonally-adjusted terms in July, which contrasted June’s 0.04% contraction. The figure marked the first expansion since January. However, the increase was only mild, suggesting a muted start to Q3 amid the reinstatement of lockdown measures. 




SAUDI ARABIA: Non-oil PMI declines in August as tax hike leads to demand woes The Purchasing Managers’ Index (PMI), produced by IHS Markit, decreased to 48.8 in August after stabilizing at 50.0 in July. Consequently, the index came in below the 50-threshold, indicating worsening business activity in the non-oil private sector over the previous month. August’s result reflected a larger fall in new orders as survey respondents highlighted higher value-added tax (VAT) rates weighed heavily on demand levels. 

SAUDI ARABIA: Oil prices lose some steam in early September Oil prices were down from the previous month in early September, weighed on by softer demand from China and relatively high global supply levels. On 4 September, the OPEC oil basket traded at USD 43.4 per barrel, marking a 2.1% fall from one month ago. Moreover, the price was 26.5% lower than on the same day in 2019 and down 36.2% from the start of the year. 

UAE: PMI drops to contractionary territory in August The IHS Markit Purchasing Managers’ Index (PMI) dropped to 49.4 in August, after remaining above the 50-threshold in July at 50.8. August’s fall was driven by record job losses as businesses attempted to cut costs and reduce prices to increase sales, although output and new orders continued to expand.

Downward pressure on oil has continued, with ICE Brent closing more than 5% lower yesterday, and crucially below the US$40/bbl level. There ...




Downward pressure on oil has continued, with ICE Brent closing more than 5% lower yesterday, and crucially below the US$40/bbl level. There was no clear catalyst for the move, however, a stronger USD and weaker equities would have done little to help sentiment, not just for oil, but the broader commodities complex. Looking at fundamentals, and while stalling demand has been a concern for most in the market for a while, it is becoming more evident. Time spreads continue to edge deeper into contango, while the physical market is weaker - over the last few days we have had both Aramco from Saudi Arabia and Adnoc from the UAE cutting official selling prices for their crude oil. Both of their flagship grades are now at discounts to their benchmark, which is not a great signal for demand. On the supply side, with OPEC+ easing cuts we are seeing oil supply growing. Looking just at OPEC, output from the group has grown by around 1.5MMbbls/d since June, and obviously, if you factor in the “+” members, such as Russia, supply growth would be even stronger, with Russian oil supply having grown by around 500Mbbls/d over the same period. If this downward pressure on the market continues, OPEC+ will become increasingly concerned, and there is always the potential that the group look to re-implement the deeper cuts that we saw between May and July. The OPEC+ Joint Ministerial Monitoring Committee are scheduled to meet on the 17th September, so be ready for plenty of noise in the lead up to and around the meeting on what the group may or may not do.

ING Economics 


  Aluminium: Macro, fundamentals and uncertainty Expectations of a bear trend may be misplaced this autumn. Instead, the risk to prices is m...


 


Aluminium: Macro, fundamentals and uncertainty Expectations of a bear trend may be misplaced this autumn. Instead, the risk to prices is more skewed to the upside in a reflationary macro environment. Fundamentals do have room to play out, but there is uncertainty in the shortterm and China's market is still key 

For producers, the strength in prices suggests few are losing money Aluminium continued its upward march during August, with LME 3M prices shooting over USD$1,800/t last week, erasing all of the losses so far this year. Prices are running above most of the marginal producers’ costs, which is in stark contrast to the surplus market and weak demand (ex-China) post-pandemic. Shanghai aluminium prices have been leading the rally in the aftermath of the lockdowns, and they are above the average smelters' costs, which are believed to be at the high end of the industry curve on a cash basis. Most of the smelters are receiving positive cash margins, including those without a captive grid.


The main drivers haven’t changed, but the tailwinds from the macro side may be having a stronger impact on the overall industrial metals sphere. In the meantime, China has been holding on to the demand recovery narrative and has continued to import both primary aluminium and alloys, easing the glut from the market outside the country. The inventory gains are somewhat below expectations amid a seasonal lull, but there have been growing expectations for more robust demand from China entering September. A rise in alumina prices has also helped to spark optimism.


Elsewhere, signs of demand recovery add to optimism It is not all about China. The global recovery path has been asymmetric and economic indicators have suggested a continued recovery of industrial activity from other major economies. Regional premia may partially tell a story of aluminium demand recovery from some regions. In Asia, the latest reports indicated that some buyers had agreed on the 4Q20 premium with an increase of 11% to $88/t after it settled at a four-year low in 3Q20. In Europe, physical premia have also been creeping up, with higher premiums reported in Rotterdam P1020 aluminium, while there are also signs of better premia readings from Brazil. Nevertheless, rising premium in the ex-China market may tell a different story. Over the last couple of months, stocking financing seems to be offering a consistent annualised return, particularly considering a world of nearly zero interest rates. There may be a big discrepancy between what is readily available to purchase on the spot market and what inventories numbers are suggesting. As a result, the physical premia would need to match the profit margin from what the LME contango carry trade could offer. In the meantime, stock financing has been helping to lock away some excess supply, but pressure could still remain over the medium term.



Key factors to unfold over the short-term We tend to believe that expectations of a bear trend may still be misplaced this autumn. Instead, the risks are still skewed to the upside in a reflationary macro environment. As a real asset, of course, the fundamentals do have room to play out. However, there are some uncertainties in the short-term fundamentals, and China still plays a key role in this market. First, supply is set to accelerate, which could see higher production growth, and in theory, current margins should incentivise new capacity to switch on as quick as possible. August and September saw intensive commissioning of new capacity, together adding up to around 1.5mn of capacity against a total estimated 2.8mn tonnes of additional capacity scheduled for 2020. • Second, on the demand side, there have been expectations for more robust demand during September and October after a relatively dull August. It remains to be seen which factor is more important and the net effect may be reflected in inventories. A bull case scenario that demand outweighs supply growth would lead to a destocking process, and there may be another leg higher. This scenario assumes that capacity ramps up at a slower pace so that more production doesn't hit the market too quickly. It could be that this case is pushed out towards the end of this year.


Analysisfrom ING Think, 3 September 2020

OUTLOOK IMPROVES GDP contracted at the fastest pace on record in Q2 following a plunge in domestic demand amid Covid-19 containment measures...






OUTLOOK IMPROVES
GDP contracted at the fastest pace on record in Q2 following a plunge in domestic demand amid Covid-19 containment measures. The external sector contributed positively to the reading, although this was due to a collapse in imports. Turning to Q3, activity is recovering as lockdown measures have eased since May, but the reopening has varied across states due to the uneven spread of new cases. In July, the unemployment rate dipped 0.9 percentage points, while retail sales edged higher, albeit at a softer pace than in May–June. Moreover, the fall in industrial production eased slightly in July and the IHS Markit manufacturing PMI hit its highest level since January 2019 in August. That said, consumer confidence dipped to a multi-year low in August due to the uncertainty surrounding the pandemic, while the lack of political agreement on further fiscal stimulus risks hurting the economy ahead. 

The economy will decline notably in 2020. The elevated unemployment rate will hamper consumer spending, while investment and exports are set to suffer. While announced fiscal and monetary stimulus should help to cushion the downturn, possible further lockdowns and the lack of additional fiscal measures pose significant downside risks to the outlook. FocusEconomics panelists see GDP contracting 5.2% in 2020, which is up 0.3 percentage points from last month’s forecast, before growing 4.0% in 2021. 

Inflation increased to 1.0% in July (June: 0.6%). It will likely remain well below 2019’s average for the rest of the year on depressed demand and relatively subdued energy prices. An economic recovery in H2 and vast monetary stimulus represent upside risks to the inflation outlook. FocusEconomics panelists see inflation averaging 0.9% in 2020, which is up 0.1 percentage points from last month’s estimate, and 1.7% in 2021. 

At its 28–29 July meeting, the Fed maintained the target range at its effective floor of 0.00%–0.25% and reaffirmed its commitment to using its full range of tools to spur the economy. At its annual Jackson Hole meeting on 27 August, the Fed announced a move to more flexible inflation and employment targeting. Panelists see rates unchanged this year and next. Our panelists project the federal funds rate to end 2020 at 0.25% and 2021 at 0.25%. 

The dollar index slipped over the past month as economic conditions improved globally, which raised investors’ risk appetite. On 28 August, the dollar index traded at 93.0, depreciating 1.6% month-on-month. The evolution of the Covid-19 pandemic at home and abroad should determine the greenback’s performance moving forward.

REAL SECTOR 
Second estimate confirms GDP contracted at historic rate in Q2 The economy declined at the sharpest rate on record in the second quarter as the pandemic and measures to contain it toppled activity. According to a second estimate GDP estimate released by the Bureau of Economic Analysis, the economy contracted 31.7% in Q2 in seasonally-adjusted annualized terms (SAAR), after shrinking 5.0% in the previous quarter. In annual terms, GDP plunged a titanic 9.1% in Q2, contrasting the first quarter’s 0.3% growth. The main headwind in Q2 came from private consumption, which plunged 34.1% SAAR (Q1: -6.9% SAAR). Moreover, the downturn in business investment intensified significantly (Q2: -26.0% SAAR; Q1: -6.7% SAAR) on a marked drop in equipment investment. That said, government consumption growth accelerated in the quarter (Q2: +2.8% SAAR; Q1: +1.3% SAAR). Turning to the external sector, exports of goods and services dived 63.2% in the second quarter (Q1: -9.5% SAAR), led by a freefall in exports of goods, while imports of goods and services shrank 54.0% (Q1: -15.0% SAAR). The external sector thus contributed 0.9 percentage points to the headline figure (Q1: +1.1 percentage points). Commenting on the second quarter’s performance, James Marple, a senior economist at TD Economics, noted: “We’ve had some time to digest the unprecedented decline in economic activity that took place earlier this year. Attention is now on the pace of the comeback. While there are signs of slowing in activity through the summer months as the virus spread, the switching on of the economy in May and June will still show up in double-digit annualized growth (likely in the neighborhood of 25% to 30% annualized) in the third quarter.” 

FocusEconomics Consensus Forecast panelists expect GDP to contract 5.2% in 2020, which is up 0.3 percentage points from last month’s estimate. For 2021, the panel expects the economy to expand 4.0%.

ISM manufacturing index continues to rise in July The Institute for Supply Management (ISM) manufacturing index increased from 52.6 in June to 54.2 in July, beating market expectations of 53.6 and marking the highest reading since March 2019. Consequently, the index moved further above the 50-threshold that separates expansion from contraction in the manufacturing sector. July’s result was driven by strong expansions in production and new orders, while employment improved slightly—but continued to point to a deterioration. Moreover, new export orders and backlogs of work rebounded in July relative to June. FocusEconomics Consensus Forecast panelists expect industrial production to decline 9.0% in 2020, which is up 0.3 percentage points from last month’s forecast. In 2021, panelists see industrial production rising 5.1%. Building materials and food services—also known as core retail sales—rose 1.5% in July, after growing 7.7% in the month prior. The rise in retail sales came as certain parts of the country carried on easing lockdown restrictions. Retail sales of electronics and appliances jumped 22.9% in July, while clothing and accessories, and gasoline purchases also jumped notably. Nevertheless, spending on building and equipment services and motor vehicles dipped in July. In annual terms, retail sales increased 2.7% in July, better than June’s 2.1% rise. Meanwhile, the annual average variation in retail sales growth was stable at June’s 0.3% in July. FocusEconomics Consensus Forecast panelists see private consumption falling 5.7% in 2020, which is down 0.1 percentage points from last month’s forecast. For 2021, the panel sees private consumption increasing 4.3%.

Labor market continues to improve in July Total non-farm payrolls surged 1.8 million in July, beating market analysts’ expectations of a 1.5 million climb. This follows June’s record-breaking 4.8 million payroll rise. Employment in the retail, leisure and hospitality, and healthcare and social assistance sectors increased notably, as containment measures continued to ease in most parts of the country. The unemployment rate decreased to 10.2% in July from 11.1% in June, while the labor force participation rate dipped marginally from 61.5% in June to 61.4% in July. Hourly earnings ticked up 0.2% month-on-month in July (June: -1.3% month-on-month), while annual wage growth decelerated slightly from 4.9% in June to 4.8% in July. Commenting on July’s reading, Sri Thanabalasingam, senior economist at TD Economics, noted: “It is encouraging that the labor market continued to improve in July, but high frequency indicators that do a good job in tracking monthly employment suggest that the recovery may have stalled or even reversed since the Bureau of Labor Statistics (BLS) administered July’s employment survey.” FocusEconomics panelists expect the unemployment rate to average 9.3% in 2020, which is down 0.3 percentage points from last month’s forecast, and 7.6% in 2021.

Home price growth slows in June The S&P/Case-Shiller 20-city composite home price index—excluding Detroit due to reporting delays—eased to 0.2% month-on-month in June, down from May’s 0.4% rise. When adjusted for seasonal factors, home prices were flat in June, after rising a modest 0.1% in May and missed market expectations of a 0.1% rise. Home prices grew 3.5% in annual terms in June, which was slightly softer than May’s 3.6% increase. Gains continued to be the strongest in Phoenix for the twelfth month running, followed by Seattle and Tampa. Overall, all 19 cities—Detroit data was unavailable in the index in June—registered price growth in June with five cities accelerating relative to May. Our panel expects home prices to increase 3.1% in 2020, which is up 0.1 percentage points from last month’s forecast. For 2021, panelists see home prices rising 1.3%.

Consumer confidence falls to the lowest level since May 2014 in August The Conference Board’s consumer confidence index decreased to 84.8 in August from 91.7 in July. Therefore, the index plunged further below the 100-threshold that separates pessimism from optimism. August’s result fell significantly short of market expectations of 93.0 reading and likely reflected increased concerns over the evolution of the pandemic domestically and as some states refrained from easing lockdown measures due to elevated numbers of new Covid-19 cases. American households’ assessment of the current state of the economy deteriorated sharply, while their assessment of short-term outlook for income and business conditions also worsened in August. Lynn Franco, senior director of economic indicators at the Conference Board, noted: “Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.” 

MONETARY SECTOR
Inflation increases in July Consumer prices rose 0.59% over the previous month in July, slightly stronger than June’s 0.57% rise. Core consumer prices—which exclude volatile items such as energy and motor vehicle prices—drove the monthly increase. Inflation accelerated to 1.0% in July, from 0.6% in June. Meanwhile, core inflation increased to 1.6% in July from 1.2% in June. The core personal consumption expenditures price index—a gauge of household spending closely tracked by the Fed—ticked up to 0.8% in June, the latest month for which data is available, from 0.5% in May and moved closer to the Fed’s 2.0% target. FocusEconomics Consensus Forecast participants expect inflation to average 0.9% in 2020, which is up 0.1 percentage points from last month’s forecast. For 2021, the panel expects inflation to average 1.7%. 

Fed keeps rates at effective floor and sustains its commitment to expanding its balance sheet At its 28–29 July meeting, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The Fed decided to keep the target range at its effective floor due to poor economic prospects amid the ongoing public health crisis, which are expected to keep employment and inflation levels depressed in the short term. Measures to contain the spread of the virus have battered employment, while low oil prices and weak demand have undermined inflationary pressures in recent months. To ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed will maintain its purchases of Treasury securities, and agency residential and commercial mortgage-back securities, at its current

The recovery trend remained intact in July following the solid rebound in Q2, benefiting from a reopening of the global economy and ...




The recovery trend remained intact in July following the solid rebound in Q2, benefiting from a reopening of the global economy and robust demand for health products. Exports of goods accelerated markedly in July and growth in industrial production stabilized despite flooding along the Yangtze river. The domestic economy is gathering steam, even with persistent weakness in household spending. Retail sales declined for the seventh month in a row in July, mostly reflecting social distancing measures. However, the drop in nominal fixed investment narrowed in January-July due to robust property investment and strength in some service sectors.

In the political arena, planned talks between China and the U.S. to evaluate the progress of the Phase One trade deal were postponed. Both sides cited scheduling conflicts and the aim to give China more time to meet its commitments under the deal. • Although China will post its weakest growth in decades in 2020, the outturn will not be as bad as previously expected due to a relatively fast recovery from the pandemic. The main downside risks are a re-escalation of trade tensions with the U.S., a prolonged global economic downturn and a second wave of Covid-19. Conversely, more aggressive policy support could spur growth.

FocusEconomics panelists see the economy growing 1.9% in 2020, which is up 0.4 percentage points from last month’s forecast, before accelerating to 7.7% in 2021. • Inflation ticked up from June’s 2.5% to 2.7% in July. The increase mostly reflected higher prices for pork and fresh vegetables as floods disrupted food supply. Looking forward, inflation is expected to remain at current levels. Meanwhile, the drop in producer prices softened in July as prices for raw materials increased.

FocusEconomics panelists forecast that inflation will average 2.8% in 2020, which is unchanged from last month’s estimate, and 2.1% in 2021. • The People’s Bank of China (PBOC) has refrained from adding monetary stimulus in recent weeks as the economy appears to be on a path to recovery. The PBOC uses a complex system to implement monetary policy, including key benchmark rates, open market operations and reserve requirement ratios. Panelists project the one-year deposit and loan prime rates to end 2020 at 1.44% and 3.64%, respectively, and 2021 at 1.43% and 3.64%. • The yuan strengthened in recent weeks and it is currently trading at levels last seen in January, reflecting a stronger recovery compared to other major economies. On 21 August, the yuan traded at 6.92 CNY per USD, appreciating 0.9% month-on-month. A challenging global economic backdrop, however, will prompt the yuan to depreciate by year-end. Our panelists see the yuan ending 2020 at 7.06 CNY per USD and 2021 at 7.03 CNY per USD.

The above analysis was compiled by Focus Economics of Barcelona, Spain

Political instability may be a contributor in the coming decade The next decade is likely to be a period of growing instability in the Un...

Political instability may be a contributor in the coming decade

The next decade is likely to be a period of growing instability in the United States and western Europe, which could undermine the sort of scientific progress you describe in the Opinion collection of ‘2020 visions’. Quantitative historical analysis reveals that complex human societies are affected by recurrent — and predictable — waves of political instability (P. Turchin and S. A. Nefedov Secular Cycles Princeton Univ. Press; 2009). In the United States, we have stagnating or declining real wages, a growing gap between rich and poor, overproduction of young graduates with advanced degrees, and exploding public debt. These seemingly disparate social indicators are actually related to each other dynamically. They all experienced turning points during the 1970s. Historically, such developments have served as leading indicators of looming political instability. Very long ‘secular cycles’ interact with shorter-term processes. In the United States, 50-year instability spikes occurred around 1870, 1920 and 1970, so another could be due around 2020. We are also entering a dip in the so-called Kondratiev wave, which traces 40-60-year economic-growth cycles. This could mean that future recessions will be severe. In addition, the next decade will see a rapid growth in the number of people in their twenties, like the youth bulge that accompanied the turbulence of the 1960s and 1970s. All these cycles look set to peak in the years around 2020. Records show that societies can avert disaster. We need to find ways to ameliorate the negative effects of globalization on people’s well-being. Economic inequality, accompanied by burgeoning public debt, can be addressed by making tax rates more progressive. And we should not expand our system of higher education beyond the ability of the economy to absorb university graduates. An excess of young people with advanced degrees has been one of the chief causes of instability in the past.

- Peter Turchin Department of Ecology and Evolutionary Biology, University of Connecticut
- Link to report @ nature.com

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What about the Kondratiev wave? Long-wave theory is not readiy accepted by econmists for a few reasons, but let's ignore that and take a deeper look at the theory.  The Kondratiev wave theory (named for Nikolai Kondratiev) has three phases in the cycle: expansion, stagnation and recession along with a turning point. Kondratiev proposed this in his 1925 book The Major Economic Cycles (1925).

Proposal:
1790–1849, with a turning point in 1815.
1850–1896, with a turning point in 1873.
Kondratiev supposed that in 1896 a new cycle had started.

The long cycle supposedly affects all sectors of an economy. Below, a "rough schematic drawing showing growth cycles in the world economy over time according to the Kondratiev theory." 






CC license: image license info


Silver broke the $28 level during the trading session on Monday breaking a resistance barrier. The grey metal is finally receiving lo...





Silver broke the $28 level during the trading session on Monday breaking a resistance barrier. The grey metal is finally receiving long overdue attention.

Kitco: According to analysts looking at the latest trade data, the gold market appears to be struggling to find momentum as hedge funds liquidating their long positions and adding to their bullish bets. The Commodity Future Trading Commission (CFTC) disaggregated Commitments of Traders report for the week ending Aug. 25 showed money managers reduced their speculative gross long positions in Comex gold futures by 5,961 contracts to 145,055. At the same time, short positions rose by 2,628 contracts to 58,206. During the survey period, the long liquidation helped to push gold prices to a one-week low. Gold's net length now stands at 86,849 contracts, down 9% from the previous week. "A further attempt to regain or indeed rise above the $2,000 mark is likely to be no easy undertaking, as there is insufficient investor interest at present," said analysts at Commerzbank. They also noted that speculative interest in gold is at its lowest level since May 2019. Ole Hansen, head of commodity strategy at Saxo Bank, said that a recovery in the U.S. dollar, after falling to a two-year low and higher bond yields prompted speculative investors out of gold last week.


Saxo: Overall we maintain a bullish outlook for gold and silver with loose monetary and fiscal policies around the world supporting not only gold and silver but potentially also other mined commodities. Real rates - as highlighted earlier - remains by far the biggest driver for gold and the potential introduction of yield-curve control combined with the risk of rising inflation – as the U.S. authorities are looking to overstimulate the economy - should see those rates remain at record low levels, thereby supporting demand for metals. An increasingly fraught U.S. elections season combined with current U.S. – China tensions are likely to add another layer of support through safe-haven demand. The potential for even lower real rates should also support a continued weakness of the dollar, thereby creating the trifecta of drivers that should support investments in precious metals. Silver’s roller-coaster year from $18.5/oz in February to $12/oz in March and now $28/oz highlights the often extreme volatility that this semi-precious metal can produce. Silver’s strong surge has apart from the strong momentum attracting new investors, been driven by a combination of its relative cheapness to gold – now removed – and the tailwind coming from rising industrial demand.

Soft Commodity Report August 2020 Global Harvest / Planting United States: Planting: Early March through June Harvest: Early July through ea...


Soft Commodity Report August 2020









Global Harvest / Planting

United States:
Planting: Early March through June
Harvest: Early July through early December

China:
Planting: Late February through June
Harvest: July through mid-October

European Union:
Planting: Mid-April through May
Harvest: Mid-September through November

Brazil:
Planting: October through June
Harvest: March through December

Argentina:
Planting: Mid-September through early December
Harvest: March through May


Cocoa
Prices jumped notably in recent weeks, rebounding from their near two-year low in early July. The stark fall in the USD in late July, coupled with concerns over dry weather in Cote d’Ivoire, likely supported prices. On 7 August, the spot price was USD 2,357 per metric ton, which was 13.8% higher than on the same day last month. While the price was down 4.1% on a year-to-date basis, it was 6.3% higher than on the same day last year. Looking ahead, prices are expected to be somewhat gloomy due to relatively weak demand prospects. Nevertheless, extremely volatile weather conditions in West Africa remain a key upside risk to prices. Our panelists forecast prices to average USD 2,251 per metric ton in Q4 2020 and USD 2,270 per metric ton in Q4 2021.


Coffee
Coffee prices have been on the rise over the past month, likely due to temporary tightness in supply and a weaker USD. On 7 August, Arabica coffee traded at USD 105 cents per pound, which was 17.6% higher than on the same day last month. That said, the price was down 17.8% on a yearto-date basis, but was 6.9% higher than on the same day last year. Prices are expected to rise over the remainder of the year due to a recovery in demand, although larger Brazilian crops pose a downside risk to prices. Our panelists expect prices to average USD 110 cents per pound in Q4 2020 and 110 cents per pound in Q4 2021.


Cotton
Cotton prices fell over the past month, likely due to relatively tepid demand and despite a weaker USD. On 7 August, cotton traded at USD 61.9 cents per pound, which was down 2.9% from the same day last month. The price was 10.4% lower on a year-to-date basis but was up 5.6% from the same day last year. This year, prices are expected to remain fairly downbeat due to soft global demand prospects and ample U.S. output. U.S.–China trade negotiations pose a key risk to the outlook. Our panelists project prices to average USD 64.2 cents per pound in Q4 2020 and USD 69.7 cents per pound in Q4 2021.


Corn
Corn prices fell in recent weeks and traded at USD 308 cents per bushel on 7 August, which was 10.4% lower than on the same day a month earlier. Moreover, the price was 20.6% lower on a year-to-date basis and was 24.3% lower than on the same day last year. The rampant spread of coronavirus in the U.S. recently has raised concerns that demand for corn could take a hit because of tighter restrictions that reduce ethanol consumption, thus weighing on prices. In addition, the USDA released fresh data showing exports from September 2019 to July 2020 remained substantially down in annual terms. Moreover, the USDA once again predicated in July a bumper global corn crop in the season ending next year. Corn prices should remain relatively low this year, as ample supply and bearish demand prospects keep prices depressed. That said, lower global soybean stockpiles—a substitute good—this year should support prices. FocusEconomics analysts see prices averaging USD 343 cents per bushel in Q4 2020 and USD 363 cents per bushel in Q4 2021.


Soybeans, Soya
The price of soybeans fell slightly in recent weeks. Soybeans traded at USD 866 cents per bushel on 7 August, which was 3.5% lower than on the same day last month. While the price was down 8.2% on a year-to-date basis, it was 1.4% higher than on the same day last year. Heavy rain and flooding in the south of China at the end of June appeared to trigger fresh new cases of African swine fever, the disease that led to the culling of hundreds of millions of pigs in China last year. This likely weighed on the price of soybeans, a staple for pigs. A new USDA report containing forecasts of a larger global soybean supply than previously expected in the harvest ending next year also seemingly dampened prices. The price of soybeans is seen gradually rising in the coming months. However, coronavirus-related demand concerns and U.S.-China trade policy uncertainty are key risks to this outlook. Panelists see the price of soybeans averaging USD 896 cents per bushel in Q4 2020 and USD 931 cents per bushel in Q4 2021.


Wheat
Prices for wheat rose marginally over the last month amid a weaker USD and as healthy U.S. exports pointed to stronger demand. On 7 August, wheat traded at USD 496 cents per bushel, which was 0.1% higher than on the same day in the previous month. That said, the price was down 11.3% on a year-to-date basis, although it was 1.5% higher than on the same day last year. Wheat prices rose in recent weeks, as U.S. wheat exports and shipments were above their weekly pace needed to meet the USDA’s projections for the 2020–2021 period. Moreover, U.S. supply projections remained downbeat, as unfavorable weather conditions, which are expected to continue, hampered harvesting operations. In addition, lower-thanexpected production coming out of the EU and the Black Sea region likely boosted prices. While a slight recovery in demand prospects should prop up prices by year-end, uncertainty over ongoing U.S.– China trade commitments will cap price gains. That said, a deteriorating supply outlook—particularly out of the EU and Russia—poses an upside risk to the market. Panelists forecast prices to average USD 529 cents per bushel in Q4 2020 and USD 532 cents per bushel in Q4 2021.




Argentina: Argentin strikes deal with creditors, setting stage for crucial negotiations with IMF. On 4 August, the Argentinian government re...




Argentina: Argentin strikes deal with creditors, setting stage for crucial negotiations with IMF. On 4 August, the Argentinian government reached an agreement with its biggest creditors to restructure around USD 65 billion in foreign debt. The deal would allow Argentina to avert default, setting the stage for negotiations with the IMF over a loan arrangement struck by the previous administration in 2018. However, daunting economic challenges remain.


Brazil: Manufacturing PMI hits record high in July. The manufacturing Purchasing Managers’ Index (PMI), produced by IHS Markit, jumped to 58.2 in July from 51.6 in June, marking the strongest reading since records began in February 2006, amid the continued lifting of coronavirus-induced restrictions.


Brazil: COPOM axes SELIC rate to new record low in August At its 4–5 August meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously voted to cut the benchmark SELIC interest rate by 25 basis points, taking it to a new record low of 2.00%. The move marked the ninth consecutive cut since July 2019.


Chile: Contraction in economic activity softens but remains sharp in June. In June, the IMACEC economic activity index fell 12.4% on an annual basis, beating market expectations of a sharper 14.5% dive and following a 15.3% contraction in May which had marked the largest drop on record.


Chile: Central Bank leaves monetary policy rate at technical minimum and maintains unconventional stimulus in July At its monetary policy meeting on 15 July, the board of the Central Bank of Chile (BCCh) left the monetary policy rate unchanged at 0.50%, its lowest point since 2009. The decision, which was unanimous, came in line with analysts’ expectations and included the continuation of unconventional liquidity measures.


Colombia: BanRep cuts policy rate to new record low in July On 31 July, Colombia’s Central Bank (BanRep) decided to cut the benchmark interest rate by 25 basis points to a new record low of 2.25%. The move matched market analysts’ expectations and marked the Bank’s fifth consecutive cut.


Mexico: GDP contracts at record place in Q2 as Covid-19 ravages activity. According to a preliminary reading, GDP collapsed 18.9% yearon-year in Q2, more severely than the 1.4% contraction tallied in Q1. The heavy contraction was due to the suspension of nonessential activities during April and May as part of the measures enforced to contain the spread of Covid-19.


Peru: Economic activity drops heavily in May. Economic activity tumbled 32.8% year-on-year in May. Despite being a smaller contraction than April’s historic 40.5% decrease, May’s reading was still the second largest fall in activity on record.

A little August vacation reading - CH What is the state of play?  The Covid-19 pandemic led to a temporary suspension of trade talks earlier...







A little August vacation reading - CH

What is the state of play? 
The Covid-19 pandemic led to a temporary suspension of trade talks earlier this year. Despite this, an extension to the transition period has been ruled out by the UK side. In recent weeks, negotiations between the UK and EU have intensified and faceto-face contact has resumed, but the two sides do not seem to be on the verge of reaching a deal. 

What are the key sticking points? 
A key area of disagreement is on “level playing field” provisions: the ability of the UK to diverge from EU regulations while still maintaining market access for its goods and services. The EU is keen for the UK to remain closely aligned to the bloc on areas such as workers’ rights, environmental regulations and state aid, while the UK wants greater flexibility to set its own rules and standards. Other points of friction include fishing rights—an issue of limited economic importance but sensitive politically—and the governance mechanism for the future trade deal. In particular, the UK wants to avoid the European Court of Justice becoming the ultimate arbiter of any deal.


What will happen when the transition period ends?
Despite the seeming lack of progress at present, most of the panelists we polled do see a basic free trade agreement (FTA) being reached by the end of the year. The political and economic incentives to reach such a deal and avoid a hard exit are strong. In the UK for instance, the government is already under pressure over its handling of Covid-19. Moreover, a hard exit would likely cause significant economic hardship—particularly for many poorer parts of the country represented by Conservative MPs since the December general election. Such an FTA will likely focus mainly on goods, and leave many issues still to be resolved. As analysts at Goldman Sachs state: “We maintain our base case that the EU and the UK will strike a ‘thin’ free trade agreement by the end of the transition period on 31 December. De jure, the UK government will be able to claim that a zero-tariff/zero-quota deal was done in the promised timeframe — despite the disruption from Covid-19. De facto, we expect that deal to involve a lengthy implementation phase, during which some current EU-UK arrangements are preserved (in data, aviation and security, for example) until further negotiations have run their course.”


Daniel Vernazza, economist at UniCredit, concurs:

“Both the short time to reach a deal and the red lines drawn by the UK government and the EU mean that only a limited trade deal that ensures zero tariffs and zero quotas is feasible. There will be very little in terms of harmonization or recognition of nontariff barriers, which are particularly important for services.” Dennis Shen, director at Scope Ratings, takes an even dimmer view of the comprehensiveness of any FTA reached this year: “Right now, with such limited time before year-end for a subject as complex as the EU-UK future relationship, we expect only some form of very high-level agreement to be reached between the two sides by December that basically extends the implementation period in all but name.” That said, some panelists see both sides failing to reach a deal at all, and forecast a hard exit—albeit with some sector specific agreements aimed at avoiding severe economic disruption. According to Kallum Pickering, senior economist at Berenberg: “We still do not expect a deal in time for the year-end. Instead, we expect the two sides to agree on some modest stopgap measures in order to prevent a disorderly hard exit. Instead of one big cliff edge, where the UK-EU economic relationship suddenly shifts from open single market rules to the much more restrictive World Trade Organization rules for trade, we expect the two sides to see to it that the switch occurs in a series of smaller steps.”


What would a comprehensive trade deal look like? 
Assuming the UK leaves the transition period with a “barebones” agreement in place, talks will then continue over a more comprehensive agreement. However, given the UK government’s insistence on the right to regulatory divergence, a comprehensive FTA will likely still significantly raise market barriers. Panelists expect the services sector will be subject to greater restrictions than the manufacturing sector, likely due to the EU’s comparative advantage in goods and stronger negotiating position. Regarding financial services, a key UK export, the new trading regime is likely to fall notably short of current market access. As Daniel Vernazza, economist at UniCredit, comments: “The UK recently published a draft text for a trade agreement that effectively would maintain single-market access with an in-built consultation process and binding joint procedures for withdrawing access, but as the UK is not going to back down from its “taking back control/sovereign state” red lines, this is almost surely wishful thinking.”


What will happen to the economy?
Failure to reach a deal, and a consequent hard exit at end-2020, would have a significant negative impact on an economy still reeling from coronavirus, hitting investment and exports. The pound would likely weaken materially, pushing up inflation and dampening consumption. According to Andrew Goodwin, chief UK economist at Oxford Economics: “If talks break down, leaving the UK and EU to trade under WTO rules from 2021, UK output growth would be weaker over both the short- and long-term. Our Brexit study found that the level of UK GDP would be around 0.8pp lower over the longer-term than under our baseline forecast [of a deal being reached].” Even if an FTA is reached, market access to the EU will likely still be restricted notably compared to current levels, dragging on growth prospects, while the limited scope of any provisional deal could prolong economic uncertainty. Moreover, implementation will be key: the more gradually the FTA is phased in and the more time firms have to adjust to the new arrangements, the less economic disruption there should be.







Overview Global commodity prices regain further lost ground in June Global commodity prices jumped 15.4% over the previous month in June, on...





Overview
Global commodity prices regain further lost ground in June Global commodity prices jumped 15.4% over the previous month in June, on the heels of May’s 16.4% upturn and marking the second largest increase since our records began in January 2007. Sustained improvement in demand conditions propelled global commodity prices at the end of Q2 amid the lifting of lockdowns in Europe and the U.S. and as private-sector activity in most of the world’s major economies began to bounce back from record lows in May–June. Recovering energy prices once again lead the upturn, followed by a marked increase in base metal prices. Furthermore, agricultural and precious metal prices edged up in June.


Energy

Brent Crude Oil
Brent crude oil prices continued to regain lost ground over the past month, as the lifting of lockdowns globally somewhat reinvigorated consumption while global production cuts increasingly transmitted into oil markets. On 10 July, oil prices traded at USD 43.4 per barrel, which was 3.8% higher than on the same day last month. That said, the benchmark price for global crude oil was 34.4% lower than on the same day last year and was down 34.6% on a year-to-date basis. Sustained upward pressure amid an ongoing rebalancing of supply and demand sent Brent prices rising to an over fourmonth high at the outset of Q3. The lifting of lockdowns and signs of rebounding private-sector activity in Europe and the U.S. boded well for oil consumption in recent weeks, in turn supporting crude prices. As a result, Saudi Arabia raised pricing for August oil shipments, fueling optimism of stronger demand ahead. Meanwhile, supply remained constrained and all eyes are on OPEC+ as production cuts are set to expire on 31 July. That said, price gains were limited by rising crude inventories and as coronavirus cases flared up in several parts of the world in mid-July. The oil price outlook remains muted in July. On the one hand, demand is expected to recover further through yearend as the global economy rebounds from the Covid-19- related contraction while, further boding well for oil prices, supply is likely to remain constrained. On the other hand, the recent burst of Covid-19 cases globally including in the U.S. has fueled fears of a prolonged health crisis, thus clouding the outlook. In addition, geopolitical risks amid elections in the U.S., supply volatility in Libya and a likely relaxation of OPEC+ output cuts loom in the background. FocusEconomics panelists project prices to average USD 42.3 per barrel in Q4 2020 and USD 52.9 per barrel in Q4 2021. 


WTI Crude Oil
West Texas Intermediate (WTI) continued trending upwards over the past month, supported by constrained production and gradually improving demand conditions as the lifting of lockdowns globally propped up a rebound in consumption. WTI crude oil prices traded at USD 40.6 per barrel on 10 July, which was 2.6% higher than on the same day last month. However, the price was 32.7% lower than on the same day last year and was down 33.7% on a year-to-date basis. WTI prices climbed to an over four-month high at the outset of Q3, against the backdrop of a somewhat healthier global demand backdrop. The easing of lockdown measures globally, a stronger Chinese economy and recovering private-sector activity in Europe and the U.S. somewhat reinvigorated oil consumption in recent weeks, in turn supporting crude prices. That said, rising crude inventories in the U.S. in the second week of July restrained the oil price upturn, largely offsetting upward pressures stemming from OPEC+ production cuts which are due to expire at the end of the month. Rapidly rising coronavirus infections globally and in the U.S. further weighed on prices in recent days. The oil price outlook remains largely muted at the outset of Q3. Although demand should recover further in H2 as the global economy shrugs off the Covid-19-related downturn, the recent global surge in Covid-19 cases including in the U.S. clouds the outlook amid fears of prolonged lockdowns. On the supply side, the picture is similarly unclear largely owing to uncertainty over sustainability of OPEC+ cuts. In addition, geopolitical risks amid elections in the U.S., supply volatility in Libya and the U.S., and the fragile global economy are further risks to the outlook. FocusEconomics panelists project prices to average USD 39.1 per barrel in Q4 2020 and USD 49.2 per barrel in Q4 2021.


Thermal Coal
The price for Australian thermal coal fell in recent weeks amid a gloomy outlook owing to import restrictions in China as well as an uncertain outlook for the global economy. On 10 July, the commodity traded at USD 52.4 per metric ton, which was down 1.2% from the same day last month. Furthermore, the price was 22.7% lower on a year-to-date basis and was down 30.6% from the same day last year. Prices for thermal coal fell as import restrictions tightened and despite a gradual improvement in manufacturing operating conditions in China—which suggests the Chinese economy is recovering slowly which bodes well for demand. Certain ports in China began to conduct spot checks of thermal coal imports, as import quotas for the year have been exceeded. Moreover, there has been in a shift in China away from imported coal towards domestically produced thermal coal to cover summer requirements. This follows earlier measures to limit imports after inbound shipments jumped in the first quarter. Looking ahead, prices for Australian thermal coal are expected to increase on the back of a gradual recovery in the global economy. That said, the outlook remains uncertain and forecasts regarding prices differ notably across the panel. In addition, Chinese demand should wane further due to authorities’ focus on domestic production and an attempt to substitute Australian imports amid tense diplomatic relations. This, coupled with the global push towards cleaner sources of energy, will likely cap price gains. 

Coking Coal
Prices for Australian coking coal climbed in recent weeks, likely due to a pick-up in steel production amid the gradual reopening of the global economy. On 10 July, Australian coking coal traded at USD 116 per metric ton, which was 5.3% higher than on the same day of the previous month. However, the price was down 15.3% on a year-to-date basis and was 38.1% lower than on the same day last year. Operating conditions in China’s manufacturing sector continued to improve, which should have supported demand and, in turn, prices. This comes despite import restrictions on Australian goods in China and the Chinese government’s focus on domestic output. Prices have also been supported by a tightening of supply amid production curbs and likely seasonal supply disruptions due to the southern hemisphere’s winter.



The economy is expected to have contracted sharply in the second quarter due to Covid-19. In April, industrial output fell at the steepest c...






The economy is expected to have contracted sharply in the second quarter due to Covid-19. In April, industrial output fell at the steepest clip since at least the early 1990s, particularly on the back of weakness in the manufacturing sector amid the global lockdown weighing on foreign demand. The composite PMI, furthermore, remained in contractionary territory throughout the quarter on broad-based weakness in the private sector. Meanwhile, boding ill for household spending, the unemployment rate continued to rise in May while retail sales plummeted in April. More positively, the composite PMI rose in May and June, suggesting activity recovered somewhat towards the end of the quarter following the lifting of lockdown restrictions. In other news, the government announced fresh stimulus of EUR 130 billion in early June. Partly financed through net new borrowing, the package focuses on reducing the tax burden and further liquidity support. 

GDP is expected to contract steeply this year due to the global health crisis and associated containment measures weighing heavily on domestic and foreign demand. On the other hand, the government’s loose fiscal stance should cushion the fall somewhat, paving the way for a strong recovery next year. A prolongation of the crisis is a key downside risk, however. FocusEconomics Consensus Forecast panelists project the economy to contract 6.1% in 2020, which is up 0.2 percentage points from last month’s projection, and to grow 4.8% in 2021. 

Harmonized inflation moderated to 0.5% in May from 0.8% in April, due to low oil prices and as government-imposed restrictive measures weighed on demand. Price pressures should remain soft this year due to still-low oil prices and weaker demand. Supply chain disruptions could provide upward pressure, however. Our panelists project average inflation of 0.6% in 2020, which is down 0.1 percentage points from last month’s projection, and 1.4% in 2021.

FISCAL

Government opens spending taps further in June to boost the economy In early June, the German government announced fresh stimulus of EUR 130 billion to kickstart the economy, bringing the total fiscal stimulus up to around EUR 1.2 trillion (roughly equivalent to around 35% of 2019 GDP) which has been unleashed as part of efforts to buttress the economy against fallout from Covid-19. The new stimulus equals around 4% of GDP and encompasses numerous measures, including reducing the tax burden through temporarily lowering VATs until the end of this year, as well as further liquidity and loan support of around EUR 25 billion for SMEs through August, conditional on at least a 60% annual drop in sales in April and May. In addition, the government announced extra one-off child allowance; a EUR 50 billion fund focused on combating climate change; capping social contributions until at least next year.

The economy is expected to have contracted sharply in the second quarter due to Covid-19. In April, industrial output fell at the steepest clip since at least the early 1990s, particularly on the back of weakness in the manufacturing sector amid the global lockdown weighing on foreign demand. The composite PMI, furthermore, remained in contractionary territory throughout the quarter on broad-based weakness in the private sector. Meanwhile, boding ill for household spending, the unemployment rate continued to rise in May while retail sales plummeted in April. More positively, the composite PMI rose in May and June, suggesting activity recovered somewhat towards the end of the quarter following the lifting of lockdown restrictions. In other news, the government announced fresh stimulus of EUR 130 billion in early June. Partly financed through net new borrowing, the package focuses on reducing the tax burden and further liquidity support. 

GDP is expected to contract steeply this year due to the global health crisis and associated containment measures weighing heavily on domestic and foreign demand. On the other hand, the government’s loose fiscal stance should cushion the fall somewhat, paving the way for a strong recovery next year. A prolongation of the crisis is a key downside risk, however. FocusEconomics Consensus Forecast panelists project the economy to contract 6.1% in 2020, which is up 0.2 percentage points from last month’s projection, and to grow 4.8% in 2021. 

Harmonized inflation moderated to 0.5% in May from 0.8% in April, due to low oil prices and as government-imposed restrictive measures weighed on demand. Price pressures should remain soft this year due to still-low oil prices and weaker demand. Supply chain disruptions could provide upward pressure, however. Our panelists project average inflation of 0.6% in 2020, which is down 0.1 percentage points from last month’s projection, and 1.4% in 2021. Outlook improves LONG-TERM TRENDS | 3-year averages Germany 2016-18 2019-21 2022-24 Population (million): 82.6 83.0 82.8 GDP (EUR bn): 3,241 3,410 3,727 GDP per capita (EUR): 39,229 41,129 45,016 GDP growth (%): 2.1 -0.3 1.6 Fiscal Balance (% of GDP): 1.4 -2.8 -0.5 Public Debt (% of GDP): 65.5 67.5 66.4 Inflation (%): 1.3 1.1 1.6 Current Account (% of GDP): 7.9 6.6 6.2 Jan Lammersen Economist FOCUSECONOMICS Germany FocusEconomics Consensus Forecast | 36 July 2020 to benefit net income; and financial support for local governments struggling with reduced tax income. Taken together, the fiscal response of the German government should pave the way for a strong economic recovery next year. However, the outlook hinges not only on domestic developments, especially the possibility of a serious second wave of infections, but also on the return of foreign demand, which helped Germany overcome previous crises and currently seems unlikely to provide a significant boost to the economy. Carsten Brzeski, chief Eurozone economist at ING, noted: “it is not only the size of the packages which is remarkable but also the fact that the German government has made a complete U-turn in its approach to fiscal policy.” FocusEconomics Consensus Forecast panelists expect the economy to enter a deep recession, with GDP contracting 6.1%, which is up 0.2 percentage points from last month’s forecast. For 2021, the panel expects the economy to rebound, with GDP growing 4.8%. 


REAL SECTOR 

Industrial production contracts at sharpest pace on record in April Industrial output slid 17.9% on a calendar-adjusted month-on-month basis in April (March: -8.9% mom). April’s figure marked the steepest contraction on record. The reading was largely due to a dive in intermediate, consumer and capital goods output. Looking at sectors, production in the automotive industry collapsed at a particularly steep pace. Construction sector production fell, while energy output declined at a softer rate than in March. On a year-on-year basis, factory output fell at a more pronounced rate of 25.3% in April (March: -11.3%). The reading marked the worst result on record. Accordingly, the trend pointed down, with the annual average variation of industrial production coming in at minus 6.0%, down from March’s minus 4.1%. The reading was heavily influenced by the government-imposed restrictive measures to curb the spread of Covid-19. Going forward, the slump in the industrial sector should ease somewhat given the gradual lifting of lockdown measures at home and abroad; however, foreign demand is likely to remain weak, and it will take some time before the sector fully recovers. Panelists polled by FocusEconomics expect that industrial production will fall 11.3% in 2020, which is down 1.8 percentage points from last month’s forecast. For 2021, the panel sees industrial production increasing 5.5%.


OUTLOOK 

Consumer sentiment to remain pessimistic in July despite strong rise Consumer confidence is expected to recover further from the Covid-19 shock at the opening of the third quarter; however, sentiment is forecast to remain pessimistic. The forward-looking GfK Consumer Climate Index is projected to rise from June’s minus 18.6 to minus 9.6 in July—the third lowest value ever recorded in the history of the index. The expected uptick reflected healthier backward-looking data for June, which is released at the same time and underpins the July estimate. Economic expectations returned to positive territory for the first time in four months and marked the highest level since January 2019. The notable swing is due to the government’s strong fiscal response to the Covid-19 crisis, with stimulus now amounting to roughly EUR 1.2 trillion (around 35% of 2019 GDP). By extension, income expectations improved markedly and also returned to positive territory. This comes despite increasing short-time work and unemployment, depressing incomes. Given the above, propensity to consume rose as well. According to Rolf B├╝rkl, GfK consumer expert: “The extensive support provided by the economic stimulus packages, such as the announcement of a temporary reduction in value-added tax (VAT), is certainly a contributing factor [behind improved consumer sentiment]. Provided that retailers and manufacturers also pass these reductions on to consumers, it can be assumed that one or two planned purchases will instead be made in the second half of 2020, thereby supporting consumption this year.” FocusEconomics Consensus Forecast panelists expect private consumption to fall 5.7% in 2020, which is up 0.1 percentage points from last month’s estimate. For 2021, panelists see private consumption growing 4.9%.

The economy likely contracted at an even sharper pace in the second quarter as Covid-19 induced lockdowns weighed heavily on activity...





The economy likely contracted at an even sharper pace in the second quarter as Covid-19 induced lockdowns weighed heavily on activity. In May, the unemployment rate ticked down from April’s near 40-year high, but was still roughly 10 percentage points higher than its pre-crisis level. Moreover, despite jobless claims dipping slightly in recent weeks the number of people receiving benefits was over 15% of the labor force, which will be hammering private consumption. Meanwhile, although the downturn seems to have bottomed out, some parts of the country have tightened restrictions as the seven-day moving average of daily new Covid-19 cases accelerated in recent days, boding ill for hopes of a smooth economic recovery. Furthermore, a re-emergence of tensions with China has fueled market uncertainty in recent weeks and could lead to a new round of escalation.

The economy will shrink notably this year. Elevated unemployment will suppress consumer spending, while investment and trade are set to decline. Fiscal and monetary stimulus should help cushion the blow, however. A second wave of infections and tensions with China are key risks.

At its 9–10 June meeting the Fed maintained the target range at its effective floor of 0.00%–0.25%. More importantly, the FOMC reaffirmed its commitment to employing its full range of policy tools to mitigate the economic fallout and spur a recovery. The next meeting is set for 28–29 July. Our panelists project the federal funds rate to end 2020 at 0.25% and 2021 at 0.28%. The dollar index dipped over the past month as economic conditions continued to improve globally, which raised investors’ risk appetite. On 26 June, the dollar index traded at 97.2, depreciating 2.6% month-on-month. The evolution of the Covid-19 pandemic will continue to determine the dollar’s performance moving forward.

REAL SECTOR
ISM manufacturing index picks up from 11-year low in May The Institute for Supply Management (ISM) manufacturing index increased from 41.5 in April to 43.1 in May, virtually meeting market expectations of 43.0. Nevertheless, the index remained below the 50-threshold that separates contraction from expansion in the manufacturing sector. May’s result was driven by softer deteriorations in new orders, production and employment, but remained sharp nonetheless. Moreover, new export orders and backlogs of work also declined at a weaker pace in May relative to April. The first quarter’s contraction is likely just the tip of the iceberg in terms of the economic impact of the pandemic. While unprecedented fiscal and monetary stimulus should soften the blow, FocusEconomics panelists project the economy to contract in Q2 at the sharpest rate since the Great Depression. Extensive damage to the labor market—with over 40 million Americans recently having filed for unemployment benefits—will be hitting private consumption hard. Moreover, lockdowns abroad will be weighing on exports. Looking ahead, the manufacturing sector will likely remain subdued as anemic economic activity weighs on demand. Moreover, recent social unrest, which resulted in lockdown measures—unrelated to the virus outbreak—poses a downside risk to domestic demand for U.S. manufactured goods. FocusEconomics Consensus Forecast panelists expect industrial production to decline 9.2% in 2020, which is unchanged from last month’s forecast.

In 2021, panelists see industrial production rising 5.2%. FocusEconomics Consensus Forecast panelists expect GDP to contract 5.6% in 2020, which is up 0.2 percentage points from last month’s estimate. For 2021, the panel expects the economy to expand 4.6%.

REAL SECTOR
Retail sales jump at the fastest pace on record in May Nominal retail sales surged at the fastest rate in the series’ near three-decade history in May, jumping 17.7% in month-on-month seasonally-adjusted terms. The result contrasted April’s 14.7% plummet and was significantly better than market expectations of an 8.0% increase. Retail sales excluding cars, gasoline, building materials and food services—also known as core retail sales—soared 12.4% in May, rebounding from April’s 15.2% plunge. The historic rise in retail sales came as large sections of the country eased lockdown restrictions. Retail sales of clothing and accessories skyrocketed 188.0% month-on-month in May (April: -75.3% month-on-month). Moreover, retail sales of food services increased notably as restaurants came back online in May, while purchases of sporting goods, furniture, electronics and motor vehicles all surged in May after contracting sharply in April. In annual terms, retail sales declined 6.1% in May, considerably softer than April’s 19.9% dive. Meanwhile, the annual average variation in retail sales growth fell to 0.4% from 1.2%. Lastly, for the first five months of the year retail sales were down 4.7% compared to the same period last year, but were down 10.5% in March–May—the start of the pandemic—compared to the same three months last year. Commenting on May’s reading, Sri Thanabalasingam, an economist at TD Economics, noted: “One-time checks and expanded unemployment insurance, provided by the CARES Act, has more than offset losses in employment income for most households. This helped support the rebound in retail sales. With expanded unemployment payments set to expire in July, households could see a significant drop in income if unemployed members have not returned to work. The turnaround in the labor market in May was promising, but if it stalls, Congress should stand ready to provide additional support to American households.” FocusEconomics Consensus Forecast panelists see private consumption falling 5.8% in 2020, which is up 0.5 percentage points from last month’s forecast.








REAL SECTOR
Labor market unexpectedly posts gains in employment in May Total non-farm payrolls surged 2.5 million in May, increasing at the sharpest rate since the series began in 1939, and baffled market analysts’ expectations of an 8.0 million decline. This follows April’s 20.7 million payroll cut—the starkest on record—driven by the Covid-19 pandemic and measures to contain the virus. Employment in the leisure and hospitality, construction and retail sectors increased notably in May, as containment measures gradually eased. The unemployment rate decreased to 13.3% in May from 14.7% in April, while the labor force participation rate ticked up from 60.2% in April to 60.8% in May. Hourly earnings fell 1.0% month-on-month in May (April: +4.7% monthon-month), while annual wage growth decelerated from 8.0% in April to 6.7% in May. Despite a positive reading in May, total non-farm payrolls are still down nearly 20 million since February. Going forward, the labor market should gradually improve as lockdown measures continue to ease, but our panelists expect the unemployment rate will remain elevated for the remainder of this year.

Commenting on May’s reading, James Knightly, an economist at ING, noted: “There will naturally be some doubt lingering about these figures given they are telling such a different story to all other data on the labour market, but these are the official ones and on the face of it are fantastic. It suggests the American economy can bounce back very vigorously and we all need to massively revise up our economic projections.” FocusEconomics panelists expect the unemployment rate to average 9.8% in 2020, which is down 0.5 percentage points from last month’s forecast, and 7.8% in 2021.

REAL SECTOR
Labor market unexpectedly posts gains in employment in May Total non-farm payrolls surged 2.5 million in May, increasing at the sharpest rate since the series began in 1939, and baffled market analysts’ expectations of an 8.0 million decline. This follows April’s 20.7 million payroll cut—the starkest on record—driven by the Covid-19 pandemic and measures to contain the virus. Employment in the leisure and hospitality, construction and retail sectors increased notably in May, as containment measures gradually eased. The unemployment rate decreased to 13.3% in May from 14.7% in April, while the labor force participation rate ticked up from 60.2% in April to 60.8% in May. Hourly earnings fell 1.0% month-on-month in May (April: +4.7% month-on-month), while annual wage growth decelerated from 8.0% in April to 6.7% in May. Despite a positive reading in May, total non-farm payrolls are still down nearly 20 million since February.

Going forward, the labor market should gradually improve as lockdown measures continue to ease, but our panelists expect the unemployment rate will remain elevated for the remainder of this year. Commenting on May’s reading, James Knightly, an economist at ING, noted: “There will naturally be some doubt lingering about these figures given they are telling such a different story to all other data on the labour market, but these are the official ones and on the face of it are fantastic. It suggests the American economy can bounce back very vigorously and we all need to massively revise up our economic projections.” FocusEconomics panelists expect the unemployment rate to average 9.8% in 2020, which is down 0.5 percentage points from last month’s forecast, and 7.8% in 2021.




**Electric Vehicles Go- Briots Go Full Monty* LONDON, June 30 (Reuters) - Britain’s transition from petroleum to electric...


**Electric Vehicles Go- Briots Go Full Monty*







LONDON, June 30 (Reuters) - Britain’s transition from petroleum to electricity in road transport is accelerating, albeit from a low base, and will start to have a significant impact on oil consumption towards the end of the decade.


Ultra-low emission vehicles (ULEVs) accounted for nearly 7% of all new cars registered in Britain during the first quarter of 2020, up from just over 2% in the same periods in 2019 and 2018.


ULEVs, mostly battery electric and plug-in hybrid electric vehicles with a smaller number using hydrogen fuel cells, emit less than 75 grammes of carbon dioxide from the tailpipe per kilometre travelled.


There are now almost 280,000 ultra-low emission cars registered, up from less than 100,000 three years ago (“Vehicle licensing statistics”, U.K. Department for Transport, June 30).

At the end of March, there were almost 110,000 battery electric cars and 155,000 plug-in hybrid electric cars, with small numbers using other ULEV technologies.

Policy support is gradually switching from hybrids to pure battery electric cars to maximise the reduction in tailpipe emissions (“Electric vehicles and infrastructure”, House of Commons, March 25).

In the past year, registrations of battery electric cars have overtaken hybrids for the first time, which should result in a further electrification of the fleet over the next few years.

Ultra-low emission cars of all types still make up less than 1% of the 32 million cars registered but the proportion has almost tripled in the last three years.

New registrations for ultra-low emission cars have been rising at an annual rate of 30-40% compared with growth of just 1-2% for all cars, which implies rapidly rising market penetration (https://tmsnrt.rs/3eNmf7E).


S-CURVE
New technology products (motor cars, refrigerators, and televisions) and services (gas, electricity, telephones, water and sewerage) have tended to spread through a population following an S-shaped logistic curve.

The initial invention is often followed by decades of small-scale use and trial-and-error, before the technology rapidly diffuses on a much larger scale. Eventually the market becomes saturated, limiting further spreading.

Fitting S-curves to emerging new technologies is risky: some subsequently fail to reach take-off or are overtaken by rival technologies and end up reaching only a fraction of the potential number of users.

Estimating the diffusion rate that underlies the logistic curve is especially prone to error in the early years when the number of current users is very low and growth rates are volatile.

Nonetheless, there are good theoretical reasons to assume the transition to electric vehicles will follow a logistic curve, and the observed growth in ULEV market share in Britain does appear to fit a logistic curve.

If ultra-low emission cars diffuse through the population following the fitted logistic curve, they will account for about 25% of all new registrations by 2027, 50% by 2031 and 75% by 2035.

The implied transition to electric-powered vehicles is broadly consistent with the government’s stated ambition of ensuring at least 50%, and as much as 70%, of all new car sales are ultra-low emission vehicles by 2030.

The ambition was set out by the Department for Transport two years ago in a major strategy paper (“The Road to Zero: Next steps towards cleaner road transport and delivering our industrial strategy”, July 9, 2018).

The timetable for the transition is also consistent with the government’s announced plan to prohibit the sale of gasoline and diesel cars from 2040.

The ban on gasoline and diesel car sales could be brought forward to 2035 under proposals the government has published for consultation (“Decarbonising transport: setting the challenge”, U.K. Department for Transport, March 26, 2020).

Given the current trajectory of ultra-low emission vehicle sales, this timetable appears realistic, requiring only a modest amount of policy intervention to force the transition.



FUEL USE
Even if ultra-low emission cars reach 50% of all new registrations by 2031, their share of the total fleet will still be much lower because of the number of older vehicles still in use.

But there is still likely to be a small, significant oil consumption by the end of the decade, becoming much larger and more significant by the end of the 2030s, given the turnover in the vehicle fleet.

Britain’s oil consumption represents a very small and diminishing share of the world total, just 1.5%, so the implied transition from petroleum to electric cars is too small to matter on a global scale.

But the transition is likely typical for a range of other high-income countries in Europe, which will have a big impact in aggregate.

More important is whether the big three petroleum markets (China, the United States and India) see a similar shift towards electric vehicles over the next two decades.

China is likely to electrify road transport at least as fast as Britain, given its limited domestic oil production and dependence on imports, which policymakers have identified as a top strategic vulnerability.

Beijing has made the production and diffusion of electric vehicles a priority on both national security and environmental grounds to reduce oil imports and greenhouse gas emissions.

The transition in the United States remains more uncertain, given the country’s large domestic oil production and political disagreements over energy policy.

Future Democratic administrations are likely to accelerate the uptake of electric vehicles while future Republican administrations may offer less policy support.

India, which is the smallest but fastest growing of the big three petroleum markets, seems more likely to follow China given its similar dependence on imported oil.

For petroleum producers, including OPEC, the international oil majors and U.S. shale firms, the transition to electric vehicles is unlikely to have a significant impact on consumption and prices in the next five years (2021-2025).

But the transition will emerge as a small but significant factor in petroleum markets over the five-to-10 year time frame (2026-2030) and a decisive factor in the following decade (2031-2040).

by John Klemp, Reuters Energy Analyst
(Editing by Emelia Sithole-Matarise)




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