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 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.

FocusEconomics Consensus Forecast - Commodities, July 2020

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 Bürkl, 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. 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 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)

A report and article from EPI entitled: 50 years after the Kerner Commission. African Americans are better off in many ways but are still disadvantaged by racial inequality, Report by Janelle Jones, John Schmitt, and Valerie Wilson, February 26, 2018.

Where do we stand as a society today? In this brief report, we compare the state of black workers and their families in 1968 with the circumstances of their descendants today, 50 years after the Kerner report was released. We find both good news and bad news. While African Americans are in many ways better off in absolute terms than they were in 1968, they are still disadvantaged in important ways relative to whites. In several important respects, African Americans have actually lost ground relative to whites, and, in a few cases, even relative to African Americans in 1968.

Following are some of the key findings:

- African Americans today are much better educated than they were in 1968 but still lag behind whites in overall educational attainment. More than 90 percent of younger African Americans (ages 25 to 29) have graduated from high school, compared with just over half in 1968—which means they’ve nearly closed the gap with white high school graduation rates. They are also more than twice as likely to have a college degree as in 1968 but are still half as likely as young whites to have a college degree.

- The substantial progress in educational attainment of African Americans has been accompanied by significant absolute improvements in wages, incomes, wealth, and health since 1968. But black workers still make only 82.5 cents on every dollar earned by white workers, African Americans are 2.5 times as likely to be in poverty as whites, and the median white family has almost 10 times as much wealth as the median black family.

- With respect to homeownership, unemployment, and incarceration, America has failed to deliver any progress for African Americans over the last five decades. In these areas, their situation has either failed to improve relative to whites or has worsened. In 2017 the black unemployment rate was 7.5 percent, up from 6.7 percent in 1968, and is still roughly twice the white unemployment rate. In 2015, the black homeownership rate was just over 40 percent, virtually unchanged since 1968, and trailing a full 30 points behind the white homeownership rate, which saw modest gains over the same period. And the share of African Americans in prison or jail almost tripled between 1968 and 2016 and is currently more than six times the white incarceration rate.

Read more at "50 years after the Kerner Commission"

African Americans are better off in many ways but are still disadvantaged by racial inequality, Report by Janelle Jones, John Schmitt, and Valerie Wilson, February 26, 2018.

Brent crude oil prices trended upwards in recent weeks, thanks to falling global output after OPEC+ extended production cuts and as consumption rebounded somewhat amid easing lockdowns in major economies. On 12 June, oil prices traded at USD 38.9 per barrel, which was 29.2% higher than on the same day last month. That said, the benchmark price for global crude oil was 36.3% lower than on the same day last year and was down 41.4% on a year-to-date basis. An ongoing rebalancing of supply and demand conditions supported global oil prices, pushing them to a three-month high in early June. On the demand side, healthier growth dynamics in China and gradually easing lockdowns in major economies—including the EU and the U.S.—supported global business activity and propped up domestic travel, in turn boosting oil prices through increased consumption. Moreover, on 6 June, OPEC+ extended its unprecedented output cuts until the end of July which, coupled with a sharp slowdown in drilling in North America, boded well for prices. That said, the deal failed to significantly boost prices as Gulf OPEC members have not extended extra voluntary oil cuts. The oil price outlook remained muted in June, as considerable uncertainty tamed improving demand prospects. On the one hand, demand should recover going forward amid a continued easing of global lockdowns which, coupled with constrained supply, is seen supporting oil prices through year-end. On the other hand, prospects of a rebound in production in Libya and the U.S. cloud the outlook, with the fragility of a post-pandemic economic recovery and a possible second wave of infections in H2 major downside risks to the prices. FocusEconomics panelists project prices to average USD 39.6 per barrel in Q4 2020 and USD 50.6 per barrel in Q4 2021. This month, 15 upgraded their projections for Q4 2020, although 4 panelists revised down their estimates. Meanwhile, 15 panelists left their projections unchanged. Highlighting the lingering uncertainty, panelists have markedly diverging views on the price outlook: For Q4 2020, the maximum price forecast is USD 50.0 per barrel, while the minimum is USD 24.9 per barrel.

West Texas Intermediate (WTI) rebounded strongly over the past month, propped up by dwindling global production amid OPEC+ supply cuts and as demand recovered somewhat thanks to easing lockdowns restrictions in most countries. WTI crude oil prices traded at USD 36.2 per barrel on 12 June, which was 40.7% higher than on the same day last month. However, the price was 29.1% lower than on the same day last year and was down 40.7% on a year-to-date basis. WTI prices hit three-month highs in early June, amid an improving demand backdrop and as the impact of global output cuts transmitted into oil markets. A healthier economic panorama in China and the lifting of lockdowns in Europe and the U.S. boosted prices thanks to recovering business activity and travel-related demand. On the supply side, on 6 June, OPEC+ extended its output cuts until the end of July, further supporting prices. That said, the decision by Gulf OPEC members to not extend extra voluntary oil cuts capped the upturn, with further downward pressure stemming from fears of rising production in the U.S. and Libya, as well a record build-up in U.S. inventories in the week to 5 June. The oil price outlook remained largely downbeat in June, although early signs of recovering demand added some optimism. A further rebalancing of supply and demand conditions should support prices through year-end, amid constrained global supply and as the easing of pandemicrelated restrictions pushes demand back closer to preCovid-19 levels. On a less positive note, the severity of the global economic downturn, a possible second wave of infections, geopolitical risks and supply volatility in Libya are all major risks to the price outlook. FocusEconomics panelists project prices to average USD 36.0 per barrel in Q4 2020 and USD 47.2 per barrel in Q4 2021. This month, 14 panelist upwardly adjusted their Q4 2020 forecasts and 12 analysts kept their estimates unchanged compared to last month. Meanwhile, 3 panelists cut their forecasts. Amid persistent uncertainty our panelists have markedly diverging views over the price outlook: The panelist forecast range for Q4 2020 spans from a minimum of USD 20.0 per barrel to a maximum of USD 45.0 per barrel.

The Netherlands has been slow to adopt an energy transition programme compared to other European countries. The Climate Plan, released by the government in late-June 2019, marked a clear turning point as it aims to reduce Dutch carbon emissions by at least 49% by 2030 compared to 1990. This ambition would turn the country from laggard to frontrunner. Energy transition plays a pivotal role as emissions from the energy sector need to be reduced by as much as 73% by 2030. The Dutch government wants to phase out coal in its energy mix by 2030 and natural gas by 2050. The plan has strong implications for the Dutch gas and electricity network operators as it requires exponential capital expenditure. Some network operators want their shareholders to inject new capital. While this would provide temporary relief, it needs to come with higher tariffs from the Dutch regulator ACM in order to finance investments with operating cash flow.

The share of renewables in the power generation mix accounted for 18% in 2019. We forecast this share to reach 25% in 2020 with the number expected to be 74% in 2030. The transformation to a low carbon economy requires increasing investment into the energy system from around €10bn a year in 2010 to an estimated €16bn a year in the period 2020-2030. Total investment in solar panels and wind farms will continue to fall as the assets become less expensive. However, investment in grids will continue to rise in order to accommodate the increasing share of renewables coming into the Dutch network systems. For the Transmission System Operators (TSOs) and the Distribution System Operators (DSOs), the adaptation to a low carbon economy translates into exponential capital expenditure plans. Already, a number of Dutch network operators are unable to cover operating costs and required investment by the cash flow they generate. The Dutch regulator ACM has set the rate of remuneration at among the lowest in Europe. TSOs and DSOs expect a methodology change for the new regulatory period starting in 2022.

Download the report here at ING Think

The economy is set to have suffered a severe blow in Q1 due to the coronavirus pandemic and associated containment measures, with the full brunt of the impact to be felt in Q2. The vital tourism sector, in particular, is already showing signs of extreme duress: In March, tourism revenues plunged by over 70% year-on-year, the sharpest fall ever, as air travel was suspended and businesses closed up shop. Meanwhile, the manufacturing PMI collapsed at an unprecedented rate in April, with output, new orders and employment declining the most since 1999 as the pandemic swept through the continent, shattering demand. As part of efforts to revive the tourism industry, some hospitality businesses started to reopen on 25 May, with hotels following suit on 1 June and direct flights resuming on 15 June. The government also announced a series of VAT cuts to stimulate consumption.

The economy is expected to fall into recession this year as the pandemic and lockdown measures take their toll, particularly as the economy’s high dependence on the tourism sector and large share of micro businesses make it more vulnerable to the Covid-19 shock. The country’s enormous pile of public debt and sour loans burdening the banking system cloud the outlook. FocusEconomics panelists see GDP contracting 8.4% in 2020, which is down 0.9 percentage points from last month’s forecast, and growing 5.7% in 2021.

Harmonized consumer prices fell 0.9% on an annual basis in April, the largest drop in nearly five years, after rising 0.2% in March. Price pressures are poised to remain muted ahead, capped by depressed activity. Our panel sees harmonized consumer prices falling, on average, 0.3% in 2020. In 2021, they see harmonized inflation at 0.7%.

Industrial output increased 0.6% year-on-year in working-day adjusted terms in March (February: -3.2% year-on-year), breaking a streak of five consecutive months of contraction. The upturn was primarily driven by a rebound in manufacturing production. Meanwhile, electricity supply output fell for the eleventh successive month in March. On a working-day adjusted monthly basis, industrial production rose 5.8% in March (February: +1.4% month-on-month). Meanwhile, the trend improved slightly, with the annual average variation in industrial production coming in at minus 1.4% in March, up from February’s minus 1.5%. FocusEconomics Consensus Forecast panelists see industrial production falling 8.5% in 2020, which is up 0.4 percentage points from last month’s forecast. In 2021, the panel sees industrial production growing 4.8%.

PMI Plummets
The IHS Markit manufacturing Purchasing Managers’ Index (PMI) plummeted from 42.5 in March to 29.5 in April, marking the lowest reading since data collection began in May 1999. Thus, the PMI fell deeper below the critical 50-threshold, indicating a deterioration in operating conditions in the manufacturing sector. April’s plunge mainly reflected stark contractions in production and new orders, with both falling at a record pace, as the spread of the Covid-19 pandemic led to a collapse in domestic and foreign demand as well as a sharp pullback in production capacity. Moreover, the resulting spare capacity and closure of factories led manufacturers to cut their workforce numbers at the sharpest rate in series history. On the price front, input costs declined markedly and goods producers slashed selling prices drastically in a bid to attract clients. Meanwhile, the bleak outlook for production and fears over a slow recovery led business confidence to decline to its lowest level since mid-2015. FocusEconomics Consensus Forecast panelists see fixed investment plummeting 11.9% in 2020, down 1.3 percentage points from previous month’s estimate. In 2021, the panel projects fixed investment to expand 7.5%.

Unemployment
The number of unemployed workers fell by 13,527 in February compared to January while the seasonally-adjusted unemployment rate inched down to 16.1% from the previous month’s revised 16.2% (previously reported: 16.4%), according to data released by the Hellenic Statistical Authority (ELSTAT). February’s reading was the lowest since March 2011 and below that of the same month in 2019 (February 2019: 18.4%). Greece’s unemployment rate has fallen steadily in recent years, since peaking at around 28% in the summer of 2013. However, it remains the highest in the Eurozone by far and is set to rise in the coming months as the Covid-19 crisis takes its toll. Meanwhile, youth unemployment—categorized by individuals between the ages of 15-24—came in at 35.6% in February, below February’s 2019’s 36.5%.

Given this backdrop, the Fed will leave the Fed funds target rate unchanged at 0-0.25% and we suspect they will refrain from offering much new forward guidance. Their Mainstream Lending Program is finally coming on stream and that will reinforce the view that Fed action will continue to support the economy in addition to numerous other lending facilities that are already operational.

Their quantitative easing has been tapered significantly with just $4 billion per day of Treasury purchases scheduled for the coming week versus $75bn at the peak. We suspect they will retain the language that they will continue the purchases “in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions”.

In terms of the outlook for policy, the new forecast summary of projections – the first published since December – will provide an insight into how the range of views within the committee is shaping up. We suspect that there is a decent chance they will pencil in one rate rise before the end of 2022, which may help to dispel some talk of the potential for negative rates. Fed officials have been dismissive of this as a tool and we do not expect it to be implemented.

One future option that is gaining traction is yield curve control – using QE to target specific yields to prevent borrowing costs rising too much too quickly. However, given the latest rise in yields is driven more by optimism in the recovery rather than excess supply related to ballooning issuance, the Fed will hold off for now. However, if the initial reopening bounce in activity wanes and the US economy hits one of the many potholes we foresee, this policy option will come up for active Fed discussion.

Read more at ING Think

A second GDP estimate confirmed the economy contracted at the sharpest rate since 2008 in the first quarter, and available data for the second quarter paints an even bleaker picture. In April, the unemployment rate sky-rocketed past the previous record high set in 1982, while initial jobless claims topped 40 million in the 10 weeks ending 28 May. Coupled with containment measures and limp consumer sentiment, this will be having a severe impact on private consumption—as suggested by a record decline in retail sales in April. Moreover, in the same month industrial production also plunged as firms shut down. On a brighter note, as of June virtually all states have begun to partially reopen, which, coupled with unprecedented fiscal and monetary stimulus, should help stabilize activity in the tail-end of the quarter.

The economy will contract sharply this year. Anemic household confidence and sky-high unemployment will suppress consumer spending, while investment and trade are set to decline. Fiscal and monetary stimulus should help cushion the blow, however. A possible second wave of infections, tensions with China and recent social unrest are key risks. FocusEconomics panelists see GDP contracting 5.8% in 2020, which is down 0.4 percentage points from last month’s forecast, before growing 4.8% in 2021.

The economy shrank at the sharpest rate since Q4 2008 in the first quarter as the pandemic and measures to contain it hammered activity. According to a second GDP estimate released by the Bureau of Economic Analysis, the economy contracted 5.0% in Q1 in seasonally-adjusted annualized terms (SAAR), even sharper than the first estimate of a 4.8% fall. In annual terms, GDP grew 0.3% in Q1, decelerating markedly from Q4’s 2.3% growth and matching the first estimate.

The economy shrank at the sharpest rate since Q4 2008 in the first quarter as the pandemic and measures to contain it hammered activity. According to a second GDP estimate released by the Bureau of Economic Analysis, the economy contracted 5.0% in Q1 in seasonally-adjusted annualized terms (SAAR), even sharper than the first estimate of a 4.8% fall. In annual terms, GDP grew 0.3% in Q1, decelerating markedly from Q4’s 2.3% growth and matching the first estimate. The largest drag on the economy in Q1 came from private consumption, which plunged 6.8% SAAR (Q4: +1.8% SAAR).

Moreover, the downturn in business investment, which has been underway since the second half of last year, intensified significantly (Q1: -7.9% SAAR; Q4: -2.4% SAAR) on a marked drop in equipment investment. Meanwhile, public outlays moderated in the quarter (Q1: +0.8% SAAR; Q4: +2.5% SAAR) on weaker defence spending and state and local expenditure. Turning to the external sector, exports of goods and services contracted 8.7% in the first quarter (Q4: +2.1% SAAR), led by a freefall in exports of services, while goods exports fell at a softer rate. Imports of goods and services shrank 15.5%, leading the external sector to contribute 1.3 percentage points to the headline figure (Q4: +1.5 percentage points). 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. James Knightley, chief international economist at ING, is downbeat about prospects: “We doubt that the US will experience a V-shaped recovery. The social distancing constraints, likely ongoing consumer caution until there is a vaccine plus the impact on aggregate demand from mass unemployment will limit the pace of the rebound.

Throw in the potential for long-term structural changes (think business travel and home working as examples) and it means at best we think the lost output in 1Q and 2Q won’t be fully regained until late 2022 at the very earliest.” FocusEconomics Consensus Forecast panelists expect GDP to contract 5.8% in 2020, which is down 0.4 percentage points from last month’s estimate. For 2021, the panel expects the economy to expand 4.8%.

The economy shrank at the sharpest pace since the global financial crisis in Q1, weighed on by lower consumption, investment and exports amid social distancing restrictions. The downturn in Q2 will be significantly steeper as the full impact of the national lockdown is felt. In April, retail sales plummeted at a record rate, employment and wages fell, and jobless claims increased roughly 70% to over 2 million. However, the economy now appears to have bottomed out, as both the manufacturing and services PMIs picked up somewhat in May, despite languishing deep in contractionary territory. Moreover, the extension of the wage subsidy scheme through October will prevent a more marked rise in unemployment, while the gradual easing of lockdown measures—non- essential stores are set to reopen in England from 15 June for instance— should support a recovery in domestic economic activity.


The economy will shrink markedly this year due to the impact of Covid-19 on private consumption, investment and exports, notwithstanding huge fiscal and monetary stimulus. A possible second wave of infections as the lockdown is lifted is a key risk to the outlook, while uncertainty over Brexit talks further clouds prospects.


The pound traded at USD 1.23 per GBP on 29 May, depreciating 1.0% month-on-month due to a decline in government bond yields and Brexit fears. Looking ahead, our panelists see the pound strengthening somewhat by year-end, although possible further monetary easing and a lack of clarity over Brexit negotiations could see downward pressure resume. Our panelists project the pound to end 2020 at USD 1.27 per GBP and 2021 at USD 1.33 per GBP.


GDP decreased 2.0% in the first quarter (Q4: 0.0% seasonally-adjusted quarter-on-quarter), marking the worst reading since Q4 2008. Private consumption contracted 1.7% in Q1 (Q4: -0.1% s.a. qoq), weighed on by social distancing measures and weak consumer sentiment. Public consumption fell 2.6% (Q4: +1.5% s.a. qoq) on lower non coronavirus-related health spending, and school closures reducing spending on education.


Meanwhile, fixed investment contracted 1.0% (Q4: -1.2% s.a. qoq) amid shrinking housing and public investment. Exports of goods and services fell 10.8% in the first quarter, which contrasted the fourth quarter’s 5.0% expansion, due to lockdowns around the world. Imports of goods and services dropped 5.3% (Q4: +0.4% s.a. qoq). As a result, the external sector subtracted 1.9 percentage points from growth, contrasting the 1.5 percentage-point contribution in Q4. On an annual basis, the economy contracted 1.6% in Q1, contrasting Q4’s 1.1% increase.


The economy is seen declining far more sharply in Q2 as the full impact of the nationwide lockdown declared in late March is felt. Looking further ahead, panelists see activity recovering somewhat in H2 as restrictions are lifted in the UK and around the world; however, the possibility of a second wave of infections—and subsequent reinstatement of lockdown measures—is a key risk.


James Smith, economist at ING, comments:


“The period between April and June will see a much steeper decline. It’s now very hard to imagine a rapid ‘V-shape’ recovery, and we don’t expect a return to pre-virus levels of activity until 2022 at the earliest.”


FocusEconomics panelists expect the economy to contract 7.6% in 2020, which is down 1.5 percentage points from last month’s forecast, and to expand 5.9% in 2021.


Industrial production dropped 4.2% month-on-month in seasonally-adjusted terms in March (February: -0.1% mom). March’s figure marked the worst reading on record. The weakening was driven by a sharp fall in manufacturing output. In addition, electricity, gas, steam and air conditioning supply output weakened. On an annual basis, industrial production fell at a more pronounced rate of 8.2% in March (February: -3.4% yoy). The reading marked the worst result since August 2009.


Meanwhile, the trend pointed down, with the annual average variation of industrial production coming in at minus 2.7% in March, down from February’s minus 2.0%. FocusEconomics Consensus Forecast panelists project that industrial production will decrease 8.4% in 2020, which is up 0.1 percentage points from last month’s forecast, and increase 5.7% in 2021.

"The Money Cloud"

As the economy re-opens initial jobless claim are starting to fall more quickly, but at 2.12 million for last week it remains horribly high. Hiring is happening, but it will be constrained by social distancing restrictions while the government’s own support efforts could hinder the pace of recovery

Jobless claims remain elevated, continuing claims not telling whole story. Initial jobless claims dropped to 2.12 million for the week of 23 May versus the 2.1mn consensus expectation. This brings the cumulative running total to 41.0mn. Intriguingly there is a steep decline in continuing jobless claims to 21.05mn from 24.9mn and this is well below the 25.7mn consensus forecasts. We doubt this is due to hiring and may reflect more the fact the continuing claims numbers are state benefits and don't include the people claiming the Pandemic Unemployment Assistance - they are not eligible for regular or extended unemployment benefits. As of the week of 9 May the total number of benefit claimants including Pandemic Unemployment Assistance was 31 million.


Swing states heavily impacted

Returning to initial claims, Michigan and Pennsylvania are important swing states and they have been much harder hit than most with initial jobless claims totaling more than 30% of the February employment level in their respective states. The latest polling suggest Joe Biden is leading Donald Trump by 4-7% percentage points and getting jobs created will be crucial to President Trump’s re-election hopes.


Hiring is happening

We are indeed starting to see some hiring going on as the individual states push on with their re-opening schedules. Unfortunately, re-hiring may not be especially rapid. Social distancing will limit the ability of many retail, restaurant and leisure firms to open properly and they may find it isn’t economically viable to do so with the constraints currently being placed on them – such as limiting customer numbers. Other businesses in various sectors may find that demand doesn’t return as quickly as hoped and may need to adjust employment levels in the months ahead.


Will expanded unemployment benefit hamper the recovery?

The profitability issue is being further brought into question by the temporary $600 weekly Federal boost to unemployment benefits (due to end in late July). This means that the national average weekly unemployment payment for recipients is nearly $1,000 and there are many industries in which this is substantially above what an employee could ordinarily receive in wages. In fact a paper from the University of Chicago estimates that 68% of benefit recipients are actually receiving a higher income as a result.

Many businesses will not be able to pay enough to compete with this, so while this additional payment is good news for individual incomes and cash flow, it may have the negative effect of hampering small businesses re-opening/recovery effort. One scenario is that when the $600 weekly bonus payment ends in two months’ time, we will see a collapse in incomes and fewer jobs available given numerous small businesses have failed. As such there will be significant pressure to taper it over months to try and mitigate the effects on spending while also offering more support for small businesses to tide them over.

ING Think- The Long Road To Recovery

Social distancing to contain the Covid-19 pandemic caused the economy to contract at the sharpest rate since the end of 2008 in the first quarter. Consumer spending and business investment plunged, while exports also shrank at a rapid clip amid disrupted global trade. Q1’s dismal result, however, will pale in comparison to the unprecedented contraction expected in Q2. Initial jobless claims topped 30 million in the six weeks ending 25 April.

In tandem, consumer confidence plummeted in April on elevated uncertainty over the economic situation and the frail labor market. As the true impact of the Great Lockdown continued to take shape, Congress passed its fourth economic relief package of USD 484 billion in late April which replenished the Paycheck Protection Program—a small business fund which dried up in mid-April—and provided additional funds for hospitals and testing.

The economy is entering a severe recession amid the Covid-19 economic shock. Social distancing and soaring unemployment will suppress consumer spending—the main growth engine, while investment and trade are set to decline.

Inflation fell to an over one-year low of 1.5% in March (February: 2.3%) amid a sharp drop in energy prices and the consumption void created by the Covid-19 pandemic. Inflation is projected to stay below target for the rest of the year on significant slack in the economy and low energy prices. Fiscal and monetary stimulus represent upside risks to prices.

At its 28–29 April 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 costs of the containment measures and spur a recovery when the economy reopens.

The dollar index slipped in recent weeks as global financial conditions improved. On 1 May, the dollar index traded at 99.0, depreciating 0.4% month-on-month. The evolution of the Covid-19 pandemic will continue to be a factor in the dollar’s performance moving forward.

Economy contracts at sharpest rate in over a decade in the first quarter

The economy shrank at the sharpest rate since Q4 2008 in the first quarter as the pandemic and measures to contain it hammered activity. The economy contracted 4.8% in Q1 in seasonally-adjusted annualized terms (SAAR), according to an advance GDP estimate released by the Bureau of Economic Analysis. On the heels of the 2.1% expansion registered in Q4 2019, the contraction was even worse than market expectations of a softer 3.5% drop and marked an abrupt end to the longest run of economic expansion in U.S. history. In annual terms, GDP grew 0.3% in Q1, decelerating from Q4’s 2.3% growth. The largest drag on the economy in Q1 came from private consumption, which plunged 7.6% SAAR amid social distancing measures, falling consumer confidence and mass layoffs, which began in earnest in March (Q4: +1.8% SAAR). Consumer spending on durable goods and services were particularly hard hit in the quarter.

Moreover, the downturn in business investment, which has been underway since the second half of last year, intensified significantly (Q1: -8.6% SAAR; Q4: -2.4% SAAR) on a marked drop in equipment investment. Moreover, public outlays moderated in the quarter (Q1: +0.7% SAAR; Q4: +2.5% SAAR) on weaker defense spending and state and local expenditure, while falling private inventories shaved off 0.5 percentage points from headline GDP (Q4: -1.0 percentage point). On the upside, residential investment growth surged to an over seven-year high in Q1. Turning to the external sector, growth in exports of goods and services contracted 8.7% in the first quarter (Q4: +2.1% SAAR), led by a freefall in exports of services, while goods exports fell at a softer rate.

That said, imports of goods and services shrank at the sharpest rate since Q2 2009, leading the external sector to contribute 1.3 percentage points to the headline figure (Q4: +1.5 percentage points). The first quarter’s contraction is likely just the tip of the iceberg in terms of gauging the economic impact of the pandemic. While an unprecedented synchronized fiscal and monetary stimulus drive 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 30 million Americans having filed for unemployment benefits in the six weeks ending 25 April, paired with the lockdown of large portions of the economy, will push the economy into a deep recession. Looking further ahead, economic activity should rebound in H2 as restrictions ease and businesses flicker back to life. Nevertheless, a V-shaped recovery is likely out of the question.

"Negative interest rates no longer a taboo"

For those who viewed negative interest rates as a bridge too far for central banks, it might be time to think again. Right now, in the United States, the Federal Reserve – supported both implicitly and explicitly by the Treasury – is on track to backstop virtually every private, state, and city credit in the economy. Many other governments have felt compelled to take similar steps. A once-in-a-century (we hope) crisis calls for massive government intervention, but does that have to mean dispensing with market-based allocation mechanisms? 

Blanket debt guarantees are a great device if one believes that recent market stress was just a short-term liquidity crunch, soon to be alleviated by a strong sustained post-COVID-19 recovery. But what if the rapid recovery fails to materialize? What if, as one suspects, it takes years for the US and global economy to claw back to 2019 levels? If so, there is little hope that all businesses will remain viable, or that every state and local government will remain solvent.

Kenneth Rogoff for Project Syndicate

Preliminary figures showed the economy suffered its worst contraction on record in the first quarter. The downturn came on the back of frozen business and household activity in the better part of March due to measures adopted by governments to contain the spread of the pandemic. According to data from national statistical institutes, Covid-19 wreaked havoc on both domestic and external demand in France, Italy and Spain, while contractions in smaller Eurozone economies were sizeable but less severe. Prospects for the second quarter are even bleaker, due to protracted lockdown measures, with a bigger blow to activity expected, as suggested by collapsing consumer and business confidence and a diving PMI reading in April. To cushion the economic impact of the coronavirus crisis, on 9 April Euro area ministers rolled out an emergency package worth EUR 540 billion; nonetheless, they remained deeply divided on post-crisis stimulus.

The pandemic will hammer the economy this year. Investment activity will tumble; household spending will plummet amid a surge in unemployment; and external demand will shrivel, also due to a freeze in tourism flows. Moreover, it will lead to a spike in banks’ bad loans and pose risks to debt sustainability in countries with strained public finances. The economy is seen contracting 7.0% in 2020, which is down 2.9 percentage points from last month’s forecast. In 2021, GDP is seen increasing 5.1%.

Harmonized inflation dropped to an almost four-year low of 0.4% in April, on plunging energy prices, from March’s 0.7%. Inflation thus moved further away from the ECB’s target of below, but close to, 2.0%. Going forward, the economic downturn and lower energy prices should keep inflation low, with downside surprises from lockdown-hit demand on the cards. Our panel sees inflation averaging 0.5% in 2020, before picking up to 1.2% in 2021.

On 30 April, the ECB further lowered the rates on long-term liquidity auctions and announced seven additional refinancing operations, as part of efforts to support liquidity conditions and preserve the smooth functioning of money markets. The deployment of further firepower is an attempt to respond to a situation of unprecedented economic collapse in the Euro area. Consensus projects the refinancing rate ending 2020 at 0.00% and 2021 also at 0.00%.

The euro gained some ground against the USD over the past month. On 1 May, the currency ended the day at USD 1.10 per EUR, up 0.8% from the same day in April. Easing safe-haven demand and the Fed’s measures to support dollar liquidity around the world put downward pressure on the USD. Going ahead, the euro is expected to hover around current levels. Our panel sees the euro ending 2020 at USD 1.12 per EUR and 2021 at USD 1.14 per EUR.

At the start of the year the US economy was in great shape. The uncertainty from US-China trade tensions was lifted by the deal signed between Presidents Trump and Xi while the lowest unemployment rate for over 50 years looked set to propel consumer spending ahead strongly. In fact, the Atlanta Federal Reserve Bank’s GDPNow model, based on data released for January and February, suggested the US was on course for 4% annualised growth in the first quarter. Instead, today’s GDP report confirms that the mid-March lockdowns that shut businesses and to date have seen 26.5 million Americans lose their jobs, crushed economic activity in the final few weeks of March. Today’s 4.8% annualised GDP contraction is the worst reading since 4Q 2008 and the depths of the financial crisis (-8.4% annualised). The details show that household consumption was the weakest area, falling 7.6% annualised. We had already seen retail sales fall 8.7% month-on-month in March, with expenditure on hotels and travel falling even more. Business investment also fell (non-residential fixed investment dropped 8.4%), despite typically long lead times between making a decision and the money actually hitting the ground. Inventories were run down and subtracted half a percentage point from headline GDP. There were some positives though. Residential investment surged 21% while net foreign trade actually added a full 1.3 percentage points to headline growth as imports plunged more than exports. These strong positive contributions won’t be repeated in 2Q. Rounding out the numbers, government spending rose at a 0.7% annualised rate.

2Q GDP to fall at a 40% annualised rate While today’s reading is bad, the 2Q report is going to be far worse. We have pencilled in a 40% annualised contraction (-10% quarter-on-quarter) which, following the 1Q fall (4.8% annualised is roughly 1.2% QoQ), means that US economic output will be down 13% peak to trough. This is on a par with the downturn experienced as World War II concluded, but that occurred over three years, not two quarters as is happening today. We must remember the lockdowns only really came into effect in mid-March, so total consumer spending through April will be well down on March. Even if we assume the bulk of the lockdowns start to ease from mid-May, ongoing social distancing, consumer caution and the legacy of 30 million unemployed Americans will ensure spending through June remains well down on the levels of January and February. Travel restrictions will remain in place, limiting the scope for a recovery in the airline, hotel and hospitality industries while social distancing measures may make many restaurants and bars unprofitable and force their closure. With many businesses in different industries warning they will need to restructure, millions of people who have lost their jobs will struggle to find work quickly. Investment, particularly in the oil and & gas sector, will plunge in 2Q. Moreover, with manufacturing output falling substantially, there is little need to invest in expanding production facilities. Export growth will be constrained by the gradual re-opening processes expected elsewhere.

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