The federal deficit has reached historic levels in recent years, even before Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020. Join us for a conversation with Lawrence H. Summers, former Secretary of the Treasury, and Maya MacGuineas, President of the Committee for a Responsible Federal Budget, on whether the growing federal deficit is sustainable for the United States economy. Betsey Stevenson, professor of economics and public policy, will moderate the discussion. Panelists will discuss the growing debate among economists and policymakers about whether the federal deficit presents a danger to the overall health of the U.S. economy. 

Maya MacGuineas is the president of the bipartisan Committee for a Responsible Federal Budget. Her areas of expertise include budget, tax, and economic policy. As a leading budget expert for the past twenty years and a political independent, she has worked closely with members of both parties and serves as a trusted resource on Capitol Hill. MacGuineas testifies regularly before Congress and has published broadly, including regularly in The Washington Post, The Wall Street Journal, The New York Times, The Financial Times, The Atlantic, and numerous other outlets. She also appears regularly as a commentator on television. 

MacGuineas oversees a number of the Committee’s projects including the grassroots coalition Fix the Debt; the Committee’s Fiscal Institute; and FixUS, a project seeking to better understand the root causes of our nation’s growing divisions and deteriorating political system, and to work with others to bring attention to these issues and the need to fix them. Her most recent area of focus is on the future of the economy, technology, and capitalism. Previously, MacGuineas worked at the Brookings Institution and on Wall Street, and in the spring of 2009 she did a stint on The Washington Post editorial board, covering economic and fiscal policy. MacGuineas serves on a number of boards and is a native Washingtonian. 

Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus of Harvard University. During the past two decades, he has served in a series of senior policy positions in Washington, D.C., including the 71st Secretary of the Treasury for President Clinton, Director of the National Economic Council for President Obama and Vice President of Development Economics and Chief Economist of the World Bank.

He received a bachelor of science degree from the Massachusetts Institute of Technology in 1975 and was awarded a Ph.D. from Harvard in 1982. In 1983, he became one of the youngest individuals in recent history to be named as a tenured member of the Harvard University faculty. In 1987, Mr. Summers became the first social scientist ever to receive the annual Alan T. Waterman Award of the National Science Foundation (NSF), and in 1993 he was awarded the John Bates Clark Medal, given every two years to the outstanding American economist under the age of 40.

He is currently the Charles W. Eliot University Professor at Harvard University and the Weil Director of the Mossavar-Rahmani Center for Business & Government at Harvard’s Kennedy School.

This event is sponsored by the Ford School and co-sponsored by the Gerald R. Ford Presidential Foundation and the West Michigan Policy Forum. 

OVERVIEW | Global commodity prices dip in September Global commodity prices fell 2.5% over the previous month in September, contrasting August’s 3.9% increase and marking the first decline since April. September’s downturn was chiefly driven by a broad-based decline in prices for energy and precious metals. The recovery in oil prices was stopped in its tracks at the end of Q3 amid muted global demand, while prices for gold, silver and platinum dived for the first time in five months as safe-haven demand shifted to the strengthening U.S. dollar. That said, robust Chinese demand continued to fuel price growth for base metals, while agricultural prices rose at the strongest pace in over a year in September, thus softening the overall downturn. FocusEconomics panelists expect global commodity prices to contract 16.1% year-on-year in Q4 2020 (previous edition: -16.4% year-on-year). Plunging energy prices are set to spearhead the downturn, due to a sharp decline in prices for oil and its derivatives. That said, soaring prices for precious metals should soften the overall drop. Meanwhile, base metal prices are seen finishing this year at close to the previous year’s levels. Global commodity prices are projected to recover next year, mostly led by a rebound in energy prices.

ENERGY | Energy prices dive in September on weak demand Energy prices plunged 5.8% in September, swinging from August’s 4.1% month-on-month increase and marking the first slump in prices since the height of the global lockdowns in April. The recovery in energy prices stalled at the end of Q3, derailed by a weaker-than-expected recovery in demand amid soaring numbers of new Covid-19 cases across the world and a gradual rise in global supply levels. In a similar fashion, prices for oil derivatives slid on a worsening consumption outlook following the end of summer driving season in the northern hemisphere. Natural gas prices also slipped amid lingering oversupply conditions. That said, prices for thermal coal and coking coal edged up in the month. The energy price outlook remained grim in September, with the global surge in Covid-19 cases continuing to weigh on short-term demand prospects. As such, FocusEconomics panelists forecast a 26.2% year-on-year dive in Q4 2020 (previous edition: -25.4% yoy). Energy prices are expected to regain some lost ground next year, however, as the global economic recovery gathers steam. That said, uncertainty over the course of the pandemic, geopolitical risks stemming from the U.S. elections, trade wars and tensions in the Middle East, and volatile global oil supply levels all cloud the outlook. Our panelists see energy prices growing 16.1% in annual terms in Q4 2021.

BASE METALS | Base metal price growth remains upbeat in August Prices for base metals rose 4.7% on a monthly basis in August, softening slightly from July’s 6.6% jump, yet still marking the fourth consecutive month of growth. Base metal prices continued to rise in September, albeit at the slowest pace in four months, as strong industrial demand in top consumer China was partly offset by moderating economic momentum in most other major economies. A sustained economic recovery in China, growing optimism over the country’s future infrastructure projects and a stronger yuan bolstered demand for base metals, especially steel, at the end of Q3. Uncertainty over an additional U.S. fiscal stimulus package, geopolitical risks and a reintroduction of lockdown restrictions in some countries capped the overall upturn, however. The outlook for base metal prices improved further at the end of Q3, chiefly thanks to a healthy demand outlook in top metals consumer China amid the government’s fiscal spending program, which includes plans for massive infrastructure projects. As a result, FocusEconomics panelists project prices rise 1.7% annually in Q4 2020. Turning to next year, prices are seen edging up further as the global economy shrugs off the constraining effects of Covid-19, although frail economic conditions, a possible flareup of trade tensions and volatile supply conditions all cloud the outlook. Our panelists project prices to edge up 0.8% in Q4 2021.

PRECIOUS METALS | Precious metal prices decline in September Precious metal prices fell 1.9% month-on-month in September, contrasting August’s 8.7% upturn and marking the first fall in prices since March. The plethora of factors sent shivers throughout markets over the past month, as hopes of another U.S. stimulus package faded rapidly, following the Fed’s call for further fiscal stimulus amid economic headwinds. Moreover, a more dovish ECB and a resurgence in Covid-19 cases in Europe also raised economic uncertainty. Consequently, investors sought safety in the USD and away from precious metals as prices tend to fall in times of heightened uncertainty. Gold, silver and platinum prices all tumbled in September, although palladium prices remained upbeat due to still-strong demand from the automotive sector. The outlook for precious metal prices remains robust, with FocusEconomics panelists projecting prices to jump 30.7% annually in Q4 2020 (previous edition: +26.9% yoy). The bullish outlook chiefly reflects sufficient safe-haven demand for gold due to the pandemic and geopolitical tensions, and widespread interest rate cuts by major central banks. Next year, silver and platinum prices are seen rising further on a recovery in industrial demand. 

AGRICULTURAL | Agricultural prices surge in September Agricultural prices rose 6.8% month-on-month in September after falling 0.2% in August, marking the strongest increase since June 2019. Septmeber’s price jump was largely driven by higher prices for corn, soybeans and wheat, likely due to solid demand conditions and downbeat supply outlooks. Moreover, cocoa, coffee and cotton prices also received a boost thanks to stronger demand, partly due to the ongoing recovery in economic activity. That said, wool prices continued to fall amid still-subdued demand from Chinese buyers. FocusEconomics panelists project agricultural prices to decline 2.0% year-on-year in Q4 2020 (previous edition: -4.2% yoy). Tepid demand for wool, sugar and palm oil, amid weaker global retail sales and a softer appetite for biofuels, will likely drive the overall fall. Next year, prices should rise due to stronger economic output, although uncertainty regarding U.S.–China trade tensions remains a key risk to the outlook. Our panelists forecast agricultural prices to rise 2.8% in annual terms in Q4 2021.

FocusEconomics - Commodities - October 2020

Outlook
On the heels of the worst economic downturn in over a decade in Q2 owing to the Covid-19 fallout, recent data hints at a fragile recovery in Q3. After two months of robust gains as the economy reopened, industrial production cooled markedly in July in monthly terms as output in the mining and manufacturing sectors lost stride. Additionally, despite a strong rebound in June, merchandise exports contracted again in both July and August amid still-subdued foreign demand. Leading data also shows a slight retreat in sentiment, with business confidence edging lower in September as views over the general business situation deteriorated. Similarly, the manufacturing PMI slipped in the same month on signs of demand losing strength. Complicating matters, Moody’s cut the country’s credit rating deeper into junk from B1 to B2 on 14 September, citing increasing risks of a balance of payments crisis. 

GDP is seen tumbling at the sharpest pace since the 2009 global financial crisis this year as the pandemic and associated restrictions take their toll. Fiscal stimulus should help to cushion the contraction somewhat, however, and the economy should recover strongly next year. Elevated inflation, a depreciating currency and a fragile external position all cloud the outlook. FocusEconomics Consensus Forecast panelists project the economy to contract 3.3% in 2020. In 2021, GDP growth is seen at 4.4%, which is down 0.5 percentage points from last month. 

Price pressures remained high in August, with inflation coming in at July’s 11.8%, in part stoked by continued lira weakness. Inflation should subside gradually ahead, weighed on by tepid aggregate demand and subdued energy prices. Potential further depreciation of the lira poses an upward risk, however. FocusEconomics Consensus Forecast panelists see inflation ending 2020 at 11.8% and 2021 at 10.5%, which is up 0.4 percentage points from last month. • At its 24 September meeting, the Central Bank raised the one-week repo rate by 200 basis points to 10.25%, taking market analysts by surprise and tightening policy for the first time since the 2018 currency crisis. The move was aimed at quelling elevated inflation and propping up a sliding lira. Most of our panelists expect the Bank to tighten policy further by year-end. FocusEconomics Consensus Forecast panelists see the one- week repo rate ending 2020 at 11.52% and 2021 at 11.02%. 

On 2 October, the lira traded at TRY 7.77 per USD, depreciating 5.0% month-on-month. Although the Central Bank’s unexpected rate hike sent the lira rallying, concerns that Turkey could get more involved in the Azerbaijan-Armenia conflict erased those gains. Depleted FX reserves and low real interest rates weighed further. The lira is seen remaining under pressure ahead. FocusEconomics Consensus Forecast panelists project the lira to end 2020 at TRY 7.63 per USD and 2021 at TRY 8.04 per USD.

Central Bank unexpectedly raises interest rate in September
At its 24 September meeting, the Central Bank’s Monetary Policy Committee (MPC) took market analysts by surprise and raised the one-week repo rate by 200 basis points to 10.25% from 8.25%. Market analysts had largely expected the Central Bank to stand pat, but the MPC instead delivered the first rate hike since the country’s currency crisis in 2018.

In deliberating the decision, the Bank took into account the higher-thanexpected inflation readings and as such opted to tighten financial conditions in the market to cool price pressures. The MPC noted that it had expected “demand-driven disinflationary effects” as domestic demand has been weakened by the pandemic; however, the strong credit impulse and the fiscal and monetary policy action taken so far have fueled a robust economic recovery in the third quarter. This, in conjunction with continued lira weakness, put upside pressure on prices. The move to aggressively hike the interest rate was likely also aimed at stemming the lira’s slide and appeasing international financial markets to an extent. On 23 September, the currency was down 4.7% month-on-month and 22.8% year-to-date against the U.S. dollar amid renewed geopolitical tensions with Greece in the Mediterranean. Moreover, in mid-September, Moody’s downgraded Turkey’s credit rating to B2 and maintained the negative outlook in part due to deteriorating government finances and the fact that the country’s institutions “appear to be unwilling […] to effectively address” increasing credit profile risks. 

In the press release, the Bank struck a largely unchanged tone, reaffirming its belief that “a cautious monetary stance” is needed to sustain a disinflationary process. Commenting on the potential policy direction ahead, Gökçe Çelik, senior CEE economist at Unicredit, noted: “The CBRT’s outright rate hike might support the TRY against further depreciation in the short term. However, the re-acceleration of COVID-19 infection rates and uncertainty surrounding the upcoming US presidential election could deteriorate sentiment in financial markets, hurting risky assets in 4Q20. Meanwhile, annual inflation is likely to trend upward from 11.8% in August, and towards 13% by the end of 2020, driven primarily by the exchange-rate pass through. […] We see inflation ending next year at 10.8%. These factors call for the central bank to carry on with monetary tightening strongly.” The next monetary policy meeting is scheduled for 22 October.

FocusEconomics Consensus Forecast South-Eastern Europe

Whoever is inaugurated on January 20, 2021, will face many fiscal challenges over his term. Under current law, trillion-dollar annual budget deficits will become the new normal, even after the current public health emergency subsides. Meanwhile, the national debt is projected to exceed the post-World War II record high over the next four-year term and reach twice the size of the economy within 30 years. Four major trust funds are also headed for insolvency, including the Highway and Medicare Hospital Insurance trust funds, within the next presidential term.

The national debt was growing rapidly before the necessary borrowing to combat the COVID-19 crisis, and this trajectory will continue after the crisis ends. Fiscal irresponsibility prior to the pandemic worsened structural deficits that were already growing due to rising health and retirement costs and insufficient revenue.

The country’s large and growing national debt threatens to slow economic growth, constrain the choices available to future policymakers, and is ultimately unsustainable. Yet neither presidential candidate has a plan to address the growth in debt. In fact, we find both candidates’ plans are likely to increase the debt.

Under our central estimate, we find President Donald Trump’s campaign plan would increase the debt by $4.95 trillion over ten years and former Vice President Biden’s plan would increase the debt by $5.60 trillion. Debt would rise from 98 percent of Gross Domestic Product (GDP) today to 125 percent by 2030 under President Trump and 128 percent under Vice President Biden, compared to 109 percent under current law.

Based on our low-cost and high-cost estimates, Trump’s plan could increase the debt by between $700 billion and $6.85 trillion through 2030, while Biden’s plan could reduce debt by as much as $150 billion or increase it by as much as $8.30 trillion.

These estimates are based on our best understanding of the candidates’ proposals, assume policies are enacted immediately, and exclude any COVID-19 relief proposals.1

What do the Candidates Propose and How Do the Numbers Add Up?

President Donald Trump has issued a 54 bullet point agenda that calls for lowering taxes, strengthening the military, increasing infrastructure spending, expanding spending on veterans and space travel, lowering drug prices, expanding school and health care choice, ending wars abroad, and reducing spending on immigrants. He also has proposed a “Platinum Plan” for black Americans, which increases spending on education and small businesses.

Meanwhile, Vice President Joe Biden has proposed a detailed agenda to increase spending on child care and education, health care, retirement, disability benefits, infrastructure, research, and climate change, while lowering the costs of prescription drugs, ending wars abroad, and increasing taxes on high-income households and corporations.

Under our central estimate, both plans would add substantially to the debt. Specifically, we find the Trump plan would add $4.95 trillion to the debt over the 2021 to 2030 budget window, while the Biden plan would add $5.60 trillion.

While these costs exclude the effects of spending to address the current pandemic and economic crisis, they include other one-time spending – such as infrastructure investment – that doesn’t add to deficits in future decades. Excluding these temporary policies, the Biden plan would cost $2.35 trillion and the Trump plan $2.45 trillion under our central estimate.

These findings come with a large degree of uncertainty, both because the estimates themselves vary and because the details of the candidates’ proposed policies are often unclear. This is especially true for the Trump campaign, whose agenda contains very little detail. Therefore, we generated low-cost, central, and high-cost estimates for each candidate.2

Under our low-cost estimate, which in many cases relies on campaign-provided figures, we estimate the Trump plan would increase deficits by $700 billion, while the Biden plan would reduce deficits by $150 billion.

Under our high-cost estimate, we find the Trump plan would increase deficits by $6.85 trillion, while Biden’s proposals would increase deficits by $8.30 trillion.

In terms of details, we estimate Biden would spend $2.70 trillion on child care and education, $2.05 trillion on health care, $1.15 trillion on Social Security, Supplemental Security Income (SSI), and retirement, and $4.45 trillion on infrastructure, environment, and other domestic spending under our central estimate. We also estimate that Biden’s defense and immigration policies would save $750 billion, while his tax policies would raise $4.30 trillion and interest costs would increase by $300 billion.

Meanwhile, we estimate Trump would increase spending on education and child care by $150 billion, increase infrastructure and other domestic spending by $2.70 trillion, and security and immigration enforcement spending by $300 billion under our central estimate. He would cut taxes by $1.70 trillion, reduce federal health spending by $150 billion, and leave Social Security and retirement spending unchanged. We estimate $250 billion of interest costs under the Trump agenda.

Want more? Have a look at the Committee for a Responsible Federal Budget 

 

United Kingdom

The economy appeared to rebound in Q3, following a record collapse in GDP in Q2 due to a pandemic-induced fall in domestic demand. GDP rose strongly in July as Covid-19 restrictions were loosened, while industrial production also grew in the same month. However, the labor market remained weak in July and August. Moreover, PMIs for both services and manufacturing dropped in September, indicating a potential slowdown in private sector momentum towards the end of the quarter. This comes amid the recent snap-back of some restrictions due to a second wave of cases. In other news, Chancellor Rishi Sunak scrapped plans for an autumn budget, instead revealing a job support package to replace the current furlough scheme which ends in October: The government will contribute a maximum of 22% of wages for employees who are working fewer than normal hours, in an attempt to stem further job cuts. The economy is set for a sharp downturn this year, as the pandemic inhibits domestic demand. However, fiscal and monetary stimulus should support a rebound in 2021. That said, increased restrictions amid rapidly rising infection rates, rising unemployment and Brexit-related uncertainty all pose downside risks to the outlook. FocusEconomics panelists project GDP to contract 9.9% in 2020, and to expand 6.5% in 2021, which is up 0.2 percentage points from last month’s forecast. • Inflation fell to 0.2% in August, down from 1.0% in July and moving further below the Bank of England’s 2.0% target rate. Going forward, our panelists see inflation remaining substantially below target due to low prices for oil and other commodities, and depressed consumer spending. FocusEconomics panelists forecast inflation to average 0.9% in 2020 and 1.5% in 2021, which is unchanged from last month’s forecast. In September, the BoE kept the Bank Rate at a record low of 0.10% and made no changes to its asset purchase program amid a gradually improving economic panorama. Most panelists see rates unchanged in the short- to medium-term, although Covid-19 and Brexit make the outlook uncertain, and some panelists do see rates being lowered further. FocusEconomics Consensus Forecast panelists see the Bank Rate ending 2020 at 0.10% and 2021 at 0.08%. The pound traded at USD 1.27 per GBP on 25 September, down 3.1% month-on-month as the greenback experienced an uptick in safe-haven demand and spiking Covid-19 cases in the UK weighed on GBP sentiment. Looking ahead, our panelists see the pound appreciating, although this is likely contingent on a smooth Brexit transition. Our panelists project the pound to end 2020 at USD 1.31 per GBP and 2021 at USD 1.37 per GBP.

United States

Economic activity appears to have recovered robustly in Q3, after GDP contracted at the fastest pace on record in Q2 due to a plunge in domestic demand amid Covid-19 containment measures. In August, the unemployment rate dropped 1.8 percentage points from the month prior while non-farm payrolls continued to rise, although they were still down 11.5 million compared to February. Moreover, retail sales continued to grow in August, albeit at the softest pace in four months as additional weekly unemployment benefits for roughly 25 million unemployed people expired at the end of July. Nevertheless, private consumption should have still rebounded firmly in Q3 compared to the previous quarter. That being said, consumer confidence remained downbeat in August, which, coupled with uncertainty over the timing of another coronavirus relief package, should limit retail sales growth ahead. The economy is expected to contract notably this year due to a higher unemployment rate and anemic consumer confidence weighing on private consumption. Next year, GDP should rebound on the back of monetary and fiscal stimulus and as the impact of the pandemic fades. U.S.–China trade tensions are a key downside risk, however. FocusEconomics panelists see GDP contracting 4.7% in 2020 before growing 3.8% in 2021, which is down 0.2 percentage points from last month’s forecast. Inflation increased to 1.3% in August (July: 1.0%). It will likely remain well below 2019’s average for the rest of the year on depressed demand. Next year, inflation is seen rising due to stronger economic activity and vast monetary stimulus. FocusEconomics panelists see inflation averaging 1.1% in 2020 and 1.8% in 2021, which is up 0.1 percentage points from last month’s estimate. At its 15–16 September 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. After the Fed announced a move to more flexible inflation and employment targeting in August, most panelists now see rates unchanged until at least 2023. Our panelists project the federal funds rate to end 2020 at 0.25% and 2021 at 0.25%. The dollar index rose over the past month as concerns over an increase in new Covid-19 cases and the pace of the economic recovery globally increased safe-haven demand. On 25 September, the dollar index traded at 94.6, appreciating 1.7% month-on-month. The evolution of the pandemic at home and abroad should determine the greenback’s performance ahead.

Euro Area
Lockdowns struck an unprecedented blow to the economy in Q2, with domestic demand tumbling amid frozen business and household activity, and with the external sector also taking a hit. Available indicators for Q3 point to an underwhelming recovery: Industrial production and retail sales cooled, exports shrank and the unemployment rate rose again in July. Moreover, both business and consumer sentiment remained downbeat in August, while the manufacturing sector lost ground in August−September following July’s spike. Additionally, outbreaks of the virus in big players France and Spain threaten the regional recovery, while S&P Global Ratings warned that European banks have increased their exposure to sovereign debt, which could result in higher “doom loop” risks. On the political front, EU finance ministers delayed any debate over the timing of the reimposition of budgetary restrictions in a bid to spur the recovery. The economy will shrink at the fastest pace on record this year as lockdowns to contain the spread of Covid-19 lead to business closures, higher unemployment, income losses and elevated uncertainty. In 2021, the economy is expected to rebound and recover some of its lost output. Further waves of infections, high levels of public debt and trade tensions pose downside risks. The economy is seen contracting 8.1% in 2020. In 2021, GDP is seen increasing 5.5%, which is down 0.1 percentage points from last month’s forecast. Harmonized consumer prices fell 0.2% in annual terms in August, swinging from July’s 0.4% increase. Inflation thus moved further below the European Central Bank’s target rate of near, but under, 2.0%. Inflation will decelerate this year compared to 2019 on the back of low oil prices and falling GDP, before accelerating in 2021 on recovering activity. Our panel sees inflation averaging 0.3% in 2020, before picking up to 1.0% in 2021. On 10 September, the European Central Bank (ECB) reaffirmed its quantitative easing program and maintained rates unchanged at all-time lows. Moreover, ECB President Christine Lagarde announced that the Governing Council will take into account the impact of future movements of the exchange rate on the inflation outlook. The monetary stance is set to remain ultra-loose ahead. Our panelists project the refinancing rate to end both 2020 and 2021 at 0.00%. The euro lost some ground against the U.S. dollar over the past month. On 25 September, the currency ended the day at USD 1.16 per EUR, down 1.7% from the same day in August. Going forward, the euro is seen hovering around current levels, although new waves of infections could put downside pressure on the common currency. Our panel sees the euro ending 2020 at USD 1.19 per EUR and 2021 at USD 1.21 per EUR.

FocusEconomics Consensus Forecast Major Economies
Tuesday September  29, 2020

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.

FocusEconomics September 2020

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 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 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 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. 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

Analysis From Focus Economics

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 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

--

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 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 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 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 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.