The economy shrank at the sharpest pace since the global financial crisis in Q1, weighed on by lower consumption, investment and export...





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 ...


"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.

Social distancing to contain the Covid-19 pandemic caused the economy to contract at the sharpest rate since the end of 2008 in the fir...



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 b...



"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.


Preliminary figures showed the economy suffered its worst contraction on record in the first quarter. The downturn came on the back...




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 be...



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.

The coronavirus pandemic led the economy to log its worst economic performance since, at least, 1992 in the first quarter. All GDP compon...



The coronavirus pandemic led the economy to log its worst economic performance since, at least, 1992 in the first quarter. All GDP components likely nosedived in Q1 due to the implementation of social distancing and other quarantine measures. Although industrial production and urban fixed investment data improved somewhat in March, retail sales remained depressed, suggesting that it will take a long time before consumers’ shopping appetite returns. Exports plummeted in March as the pandemic spread among China’s main trading partners. Plans of a rumored largerscale stimulus have yet to materialize, although pro-growth measures could be announced during the National People’s Congress. The allimportant meeting, which sets the economic targets and was originally planned for March, has been postponed due to the outbreak

Despite success in containing Covid-19, hopes of a sustained recovery are waning. Consumers remain wary amid fears of a second infection wave and economic uncertainties, while policy stimulus has been relatively contained so far. Moreover, a sharp fall in external demand due to the rapid spread of Covid-19 is a key downside risk to the outlook. FocusEconomics panelists see the economy growing 1.9% in 2020, which is down 1.9 percentage points from last month’s forecast, before accelerating to 7.4% in 2021.

Inflation decelerated further in March, falling from 5.2% in February to 4.3%. This mostly reflected Covid-19 hammering domestic demand and lower prices for oil. Inflation should moderate further in the coming months as the impact of the swine fever on meat prices fades away and the economy feels the impact of weak demand and low oil prices. FocusEconomics panelists forecast that inflation will average 3.3% in 2020, which is unchanged from last month’s estimate, and 2.1% in 2021.

The People’s Bank of China (PBOC) cut its main interest rates again in recent weeks in order to shore up economic growth. On 20 April, the PBOC slashed the one-year prime lending rate by 20 basis points to 3.85%. Although further monetary stimulus could be in the pipeline, it will mostly be in the form of cuts to the reserve requirement ratio and injections into the banking system. Panelists project the one-year deposit and loan prime rates to close 2020 at 1.29% and 3.62%, respectively, and 2021 at 1.36% and 3.59%.

Despite a dire economic outlook, the yuan was broadly stable in recent weeks. This mostly reflected PBOC’s efforts to maintain the yuan stable against the greenback in order to alleviate any fear of a financial crisis. On 24 April, the yuan traded at 7.08 CNY per USD, depreciating 0.3% month-on-month. Looking forward, the yuan is expected to remain at around current levels. Our panelists see the yuan ending 2020 at 7.02 CNY per USD and 2021 at 6.99 CNY per USD.


Hotel properties have the highest share of late payments in April Source: Trepp, Goldman Sachs Global Investment Research as of 17Apr2...

Hotel properties have the highest share of late payments in April


Source: Trepp, Goldman Sachs Global Investment Research as of 17Apr2020

In another busy morning for the Federal Reserve we have seen it expand its tool kit further by announcing a US$2.3 trillion package, in...



In another busy morning for the Federal Reserve we have seen it expand its tool kit further by announcing a US$2.3 trillion package, including loans for small businesses and municipalities to help bridge the economic disruption caused by the Covid-19 pandemic. We have also heard directly from Fed Chair Jerome Powell in a webcast about the importance of fiscal policy working together with monetary policy at this current time of crisis. Powell argues that the Fed's direct responsibility is “providing a measure of relief and stability… and by using our tolls to ensure that the eventual recovery is as vigorous as possible”. In this regard he focuses on the policy measures of rate cuts and asset purchases in an effort to “safeguard financial markets in order to provide stability to the financial system and support the flow of credit in the economy”.

More at ING Economics

Recent Federal Reserve balance trends

In what could be the first of many blows to Chinese manufacturing dominance, Japan moves to shore up the home front. - CH Japan has ...




In what could be the first of many blows to Chinese manufacturing dominance, Japan moves to shore up the home front. - CH

Japan has earmarked ¥243.5 billion of its record economic support package to help manufacturers shift production out of China as the coronavirus pandemic disrupts supply chains between the major trading partners. The extra budget, compiled to offset the devastating effects of the pandemic, includes ¥220 billion for companies shifting production back to Japan and ¥23.5 billion for those seeking to move production to other countries, according to details posted online. The move coincides with what should have been a celebration of friendlier ties between the two countries. Chinese President Xi Jinping was supposed to make a state visit to Japan this month, but the summit, which would have been the first of its kind in a decade, was postponed a month ago as the virus began to spread through Japan. No new date has been set. China is Japan’s biggest trading partner under normal circumstances, but Chinese imports sank by nearly half in February as the contagion shuttered its all-important factories, starving Japanese manufacturers of parts. That has renewed talk of reducing Japan’s reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the idea of shifting manufacturing of high-added-value products back to Japan, and for production of other goods to be spread across Southeast Asia.

Read the rest at The Japan Post

Link: Overview of the Supplementary Budget for FY2020

As a decade of job growth in the US comes to an end, a recession is not the correct word of what we are currently witnessing. It is an ...



As a decade of job growth in the US comes to an end, a recession is not the correct word of what we are currently witnessing. It is an abrupt stop of economic activity, from 100 to zero in just a few days or weeks. A virus-driven ice age. Today's US employment report broke the run of 113 consecutive monthly job gains, but the timing of collection meant it missed the carnage of the past two weeks. Covid-19 containment measures means shuttered businesses and an unemployment rate could easily hit 15% by May.

The US lost 701,000 jobs in March, far worse than expected, but it will be ignored. It merely appears that the lay-offs started a little earlier than thought as Covid-19 containment measures led businesses to close, particularly bars and restaurants, with staff laid off. This is just the start and it will get much, much worse. The cut-off for this report was the week of 12 March and we know from initial claims data that around 10 million people have registered for unemployment benefits in the last two weeks of the month. Within the details a net 459,000 people in leisure and hospitality lost their jobs, which reflects the orders for restaurants and bars to close while temporary help fell 50,000. It is less clear why 76,000 people lost their job in education and healthcare – presumably support staff who are required to be at the buildings as remote learning increasingly kicked in. We saw the unemployment rate rise to 4.4% while wages surged 0.4%, which could reflect a computational issue – low income workers predominantly being fired and therefore the average wage of those in employment being skewed higher.

In terms of where we could get to, Treasury Secretary Mnuchin warned of a 20% unemployment rate, which President Trump later clarified as a worst-case scenario. But with at least 10 million people having lost their job over the past couple of weeks and more job losses likely in the next few weeks as the Covid-19 containment measures spread and intensify – we could see a further 8-10 million job losses in the subsequent two weeks – we should be braced for a 10-11% reading for April unemployment unemployment rate with 15% conceivable for May. To put this in context the Global Financial Crisis saw unemployment peak at 10%, while the post-war high was 10.8% in 1982. We also have to remember the data won’t pick up undocumented workers who are paid in cash and cannot claim benefits. The Department for Homeland Security estimates that 3% of the population are undocumented migrants so around 11-12 million. If we then make an assumption that two-thirds of those are working in some way – the rest either being children or caring for children that would imply around 8 million workers. You would have to assume they are going to be incredibly vulnerable to losing their jobs. When we finally get through the crisis and we can head on the path towards “normality”, unemployment will not fall as rapidly as it spiked. There is likely to be a rolling withdrawal of the restrictions, meaning a slow return to business as usual. Many companies will not make it through the crisis due to the plunge in demand and others will restructure and come out requiring a smaller workforce. In this regard we worry about physical retail stores and by extension commercial real estate. Furthermore, with businesses now knowing that remote working and meetings can be done, it could have longer term implications for business travel, hotels and hospitality. As such the prospect of additional fiscal support for affected households and businesses appears a virtually certainty.

Continue reading: US jobs report - how bad could it get? @ ING Economics

United States Economic Outlook (April 2020) The economy has taken a marked turn for the worse in the first quarter, as the Covid-19 pa...



United States Economic Outlook (April 2020)
The economy has taken a marked turn for the worse in the first quarter, as the Covid-19 pandemic has been pervasive throughout all sectors of the economy: ravaging global supply chains and trade; closing businesses; halting tourism; and severely restricting consumers’ discretionary spending. Initial jobless claims surged to 3.3 million in the week ending 21 March—the highest level since October 1982—following the 230,000 reported in the prior week. This was well above the figures recorded during the global financial crisis and virus-related mass layoffs will likely reach unprecedented levels in the weeks to come. As the number of cases continues to increase across the United States, stricter mitigation controls will stifle economic activity. Exacerbating matters, the Saudi Arabia-Russia oil price rout, which sent WTI prices below USD 20 a barrel in recent days, spells trouble for the energy sector. In an extraordinary response to the pandemic, Congress passed a USD 2 trillion coronavirus relief package on 27 March.

The U.S. is now expected to enter a recession, ending the 11-year-record expansion. Consumer spending will contract due to social distancing and rising unemployment, while investment is set to decline. Fiscal and monetary stimulus should provide some relief but will not prevent a recession. An uncontrolled outbreak is the preeminent risk, while hefty corporate debt clouds the outlook. FocusEconomics panelists see GDP contracting 1.8% in 2020, which is down 3.5 percentage points from last month’s forecast, and 3.1% in 2021.

Inflation slipped to 2.3% in February from 2.5% in January. Moving forward, inflation ought to ease further as social distancing and lockdown measures drag on demand for a range of goods and services; the Covid-19 labor market shock drags on wages; and amid ultra-low energy prices. That said, the Fed’s marked loosening will partly offset downside risks. FocusEconomics panelists see inflation averaging 1.2% in 2020, which is down 0.8 percentage points from last month’s estimate, and 1.8% in 2021.

On 15 March, the Fed slashed the target range to its effective floor of 0.00%–0.25%. Since then, the FOMC has ramped up its monetary stimulus measures, expanding its purchases of security assets and making available a number of facilities. The Bank will likely continue interventions at an unparalleled-scale in the wake of the coronavirus crisis.

Congressional Stimulus
After days of heated negotiations, U.S. policymakers passed a historic stimulus package on 27 March amounting to roughly USD 2 trillion (close to 10% of GDP), in efforts to combat the severe economic fallout from the coronavirus pandemic. The major facets of the spending plan are direct transfers and expanded unemployment benefits for American individuals and families, financial assistance to embattled sectors, loans to small businesses, and funding for hospitals. The deal follows the approximately USD 100 billion bill passed in mid-March, which expanded funds for food programs, Medicaid and paid leave, and the early March USD 8 billion package, which included measures for vaccine research and free virus testing. Although the massive fiscal stimulus should provide some relief, it will ultimately not be enough to fully offset widespread damage and may not go far enough for businesses or households when factoring elevated corporate and household debt into the equation. The USD 2 trillion package is broken down into three main components. The first deals with relief for American households and includes direct deposits of USD 1,200 to individuals earning USD 75,000 or below and an additional USD 500 per child and smaller payouts for incomes above that threshold. In addition, the plan also expands jobless benefits, providing 13 extra weeks of unemployment pay, and extends the benefits to gig workers and freelancers. The second major feature of the package deals with economic relief for companies. It provides a USD 500 billion lending program for companies in struggling sectors—with USD 60 billion earmarked for a bailout of commercial airlines, which have reeled in the wake of travel restrictions worldwide—and an additional USD 350 billion in federally-guaranteed loans for small businesses. Lastly, the package allocates USD 100 billion in direct funding for hospitals severely impacted by the virus. Commenting on the effectiveness of the stimulus, Leslie Preston, senior economist at TD Economics, noted that the measures will “do little to boost near-term demand, and as such won’t boost our near-term estimate of GDP growth”. That said, looking further ahead, Preston went on to say that: “it will help ensure that there are more businesses to spend money at once the pandemic subsides. […]

This should help ensure that the U.S. economy is able to bounce back more readily once the worst of the pandemic passes and social distance measures come to an end.” Despite the recent passage of this fiscal package, lawmakers are already expecting to introduce another round of stimulus in the coming weeks or months. Given the looming slump in economic activity, coupled with the size of the fiscal package, the budget deficit will widen markedly this year, with FocusEconomics panelists now projecting a shortfall well above 5% of GDP. Moreover, public debt is expected to reach 115% of GDP. Addressing the implications for the fiscal deficit, James Knightley, chief international economist at ING, noted: “In arguably the most benign case whereby the economy contracts around 3%, that still implies a fiscal deficit of around 12% of GDP. A deeper, more prolonged economic dislocation that requires significantly more fiscal support can quickly get you up to a fiscal deficit well in excess of 20% of GDP. This truly is comparable with wartime. make lowering deficits and debt levels much more challenging relative to post World War 2.”

FocusEconomics Consensus Forecast panelists see the fiscal deficit widening to 7.6% of GDP in 2020, which is down 2.9 percentage points from last month’s estimate, and project a fiscal shortfall of 7.4% in 2021.

Economics Outlook World The global economy will take a severe hit this year as the coronavirus pandemic has brought economic act...




Economics Outlook

World
The global economy will take a severe hit this year as the coronavirus pandemic has brought economic activity to a screeching halt across large swatches of the globe, including in Asia, Europe, and the United States. Uncertainty over the outlook is elevated, given the constant evolution of the pandemic and lack of clarity regarding when widespread lockdowns will be lifted.

Canada
The economy is now seen contracting this year, as a spike in the unemployment rate weighs on private consumption and business investment declines. Moreover, depressed oil prices will likely pummel the energy sector. That said, stronger monetary and fiscal stimulus should limit the downturn. A worsening outlook for the U.S. economy poses a significant downside risk.

Euro Area
Economic activity is set to be severely hit this year as the pandemic disrupts supply chains, hits tourist flows and dampens both domestic and external demand. In addition, the outbreak could exacerbate the frailties of those banking systems which are burdened by a high stock of bad loans as well as strain debt sustainability in countries with heavy public debt-to-GDP ratios.

Japan
The economy will take a significant hit this year as the coronavirus pandemic hampers activity, which was already set to be dragged on by the sales tax hike of last October. That said, increasingly accommodative fiscal and monetary policy should cushion the blow.

United Kingdom
The economy is seen shrinking this year due to the impact of Covid-19 on private consumption, investment and exports. However, huge fiscal and monetary stimulus should cushion the fall. A possible lengthy lockdown and a worsening of the viral outbreak pose downside risks.

United States
The U.S. is now expected to enter a recession, ending the 11-year- record expansion. Consumer spending will contract due to social distancing and rising unemployment, while investment is set to decline. Fiscal and monetary stimulus should provide some relief but will not prevent a recession. An uncontrolled outbreak is the preeminent risk, while hefty corporate debt clouds the outlook.

Switzerland
Switzerland is now expected to fall into recession this year. Consumer spending will be strained by the containment measures; investment is projected to decline; and the external sector will likely remain depressed. Moreover, the postponement of major sporting events will limit services exports this year.


Fiscal Stimulus 

Canada
Government steps in to protect economy from Covid-19 pandemic In recent weeks, the government has announced fiscal stimulus measures worth roughly CAD 227 billion (USD 162 billion) to support the economy as it reels from the fallout of Covid-19. The package is mainly comprised of wage subsidies, state-backed loans, tax deferrals and direct support measures, and amounts to approximately 10% of GDP as of 27 March.

Euro Area
European Commission suspends budget rules in fight against coronavirus On 20 March, the European Commission (EC) suspended the Stability and Growth Pact—a set of fiscal rules designed to prevent Eurozone countries spending beyond their means—in order to allow government budget deficits to temporarily exceed the 3.0%-of-GDP limit without triggering an excessive deficit procedure. As part of efforts to shield their economies from the severe economic fallout from the coronavirus pandemic, all Eurozone governments have adopted a combination of additional financing for their health care systems; measures to sustain wages and incomes; liquidity support for businesses; and public guarantee schemes for bank loans to companies.

Japan
Olympics postponed as government eyes enormous fiscal stimulus On 24 March, Prime Minister Shinzo Abe announced the postponement of the Tokyo 2020 Olympic Games until July next year. The postponement has also made the passing of fiscal stimulus measures even more pressing. As such, on 28 March PM Abe announced that the government is preparing a package bigger than the one Japan used to counter the global financial crisis in 2008— which was worth JPY 57 trillion (USD 528 billion)—to be approved at the earliest possible date. 

United Kingdom
Chancellor opens the spending taps to prop up sinking economy In recent weeks Chancellor Rishi Sunak announced a host of policies running into hundreds of billions of pounds aimed at supporting economic activity and avoiding permanent damage to the economy from the Covid-19 fallout. While the measures should certainly alleviate the impact of the collapse in domestic and external demand from widespread shutdowns around the world—including in the UK— the negative impact of Covid-19 on the economy this year will still be significant. The budget deficit and public debt are expected to widen markedly as a result. 

United States
Congress approves USD 2 trillion coronavirus stimulus deal After days of heated negotiations, U.S. policymakers passed a historic stimulus package on 27 March amounting to roughly USD 2 trillion (close to 10% of GDP), in efforts to combat the severe economic fallout from the coronavirus pandemic. The major facets of the spending plan are direct transfers and expanded unemployment benefits for American individuals and families, financial assistance to embattled sectors, loans to small businesses, and funding for hospitals.


Thank you Focus Economics

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complac...



The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

As the COVID-19 spread and policy reactions have disrupted markets, bankers on both sides of the Atlantic have called for relaxation of accounting standards introduced in the wake of the Great Financial Crisis, known as expected credit loss provisioning. These calls, like much bank lobbying on capital regulation, should be ignored by public authorities and accounting standard-setters. There is no perfect accounting thermometer for credit risk in banks’ loan books, but breaking the current thermometer in the midst of a crisis would do far more harm than good.

Since there are two main sets of accounting standards in the world, the debate on expected credit loss provisioning is actually two different debates echoing each other. In the United States, accounting standards are set by the US Financial Accounting Standards Board (FASB), a non-profit body under oversight by the US Security and Exchange Commission. The relevant FASB standard is Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments” (The credit loss component is also referred to in US accounting discussions as “Topic 326” or “ASC 326,” where ASC stands for Accounting Standards Codification.). ASU 2016-13 just entered into force for large listed banks, since it is to be applied on financial statements starting on or after 15 December 2019. Following a further update in November 2019 by the FASB, the corresponding date for smaller banks (all large US banks being publicly listed) is 15 December 2022. In the rest of the world, most large banks use the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB), a global standard-setting body hosted by the non-profit IFRS Foundation. The relevant IFRS standard is IFRS 9 on Financial Instruments, issued by the IASB in November 2013 and endorsed three years later by the European Union, among other jurisdictions. IFRS 9 has been implemented for some time since it became effective for annual periods starting on or after 1 January 2018. Whereas IFRS 9 and ASU 2016-13 are not identical, both are variations of the same principle of expected loss provisioning.

This article originally appeared on Bruegel March 24, 2020 by NICOLAS VÉRO

SBA to Provide Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19) SBA’s Economic Injury Disaster Loans off...



SBA to Provide Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19)

SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance for a small business. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.

Process for Accessing SBA’s Coronavirus (COVID-19) Disaster Relief Lending

The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19). Upon a request received from a state’s or territory’s Governor, SBA will issue under its own authority, as provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by the President, an Economic Injury Disaster Loan declaration.

Any such Economic Injury Disaster Loan assistance declaration issued by the SBA makes loans available to small businesses and private, non-profit organizations in designated areas of a state or territory to help alleviate economic injury caused by the Coronavirus (COVID-19).

SBA’s Office of Disaster Assistance will coordinate with the state’s or territory’s Governor to submit the request for Economic Injury Disaster Loan assistance.

Once a declaration is made for designated areas within a state, the information on the application process for Economic Injury Disaster Loan assistance will be made available to all affected communities.

These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses without credit available elsewhere; businesses with credit available elsewhere are not eligible. The interest rate for non-profits is 2.75%.

SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.

SBA’s Economic Injury Disaster Loans are just one piece of the expanded focus of the federal government’s coordinated response, and the SBA is strongly committed to providing the most effective and customer-focused response possible.

Usage: Funds made available must be used for certain purposes. Acceptable purposes include working capital, paying fixed debts, payroll, accounts payable, and paying other bills that could have been paid had the disaster not occurred. It is NOT acceptable to use loans to replace lost sales, enhance profits, refinance long-term debt, or fund expansion opportunities.

- Loan limitations: The statutory limit of SBA loans is $2 million. The amount of each loan is further limited to the economic injury determined by SBA after subtracting business interruption insurance and other capital recoveries up to the administrative lending limit. The SBA will also consider potential contributions that are available from the business and/or its owner(s) or affiliates. can waive the $2 million statutory limit if the business is a major source of employment.

- Interest Rate: The interest rate for small businesses is 3.75% and for private nonprofit organizations is 2.75%.

- Maximum loan term: The maximum term is 30 years; however, terms are determined on a case-by-case basis based on each borrower’s ability to repay.

- Collateral: The SBA requires collateral for all loans over $25,000. Real estate is acceptable as collateral. SBA has said it will not decline a loan for lack of collateral, but it will require the borrower to pledge collateral that is available.

- Economic injury: If applying for disaster declarations related to the coronavirus outbreak, only select “Economic Injury” when inquiring about your business losses.

* (The above is from SBA)

The fastest way to apply is online at https://www.sba.gov/page/disaster-loan-applications

Economic activity plummeted at the start of the year owing to the coronavirus (Covid-19) outbreak, with retail sales, urban fixed-in...




Economic activity plummeted at the start of the year owing to the coronavirus (Covid-19) outbreak, with retail sales, urban fixed-investment and industrial production all plunging at the sharpest pace in at least three decades in January–February. Consequently, authorities will likely trim the GDP growth target for this year to around 5% from the around 6% target agreed at a top meeting in December. Meanwhile, although the pandemic is slowly receding in China, with new infections dropping significantly in recent weeks due to the government’s aggressive response, risks loom on the horizon: The infection is now hitting key trading partners, consumption remains subdued and there are increasing fears of a second wave of infections. Although monetary and fiscal stimulus have been modest so far, Chinese officials suggested that the government could unveil a massive program in the coming weeks.

GDP is set to post the worst performance in decades in the first quarter due to the coronavirus outbreak. Although many analysts predict a V-shaped recovery, with growth returning in annual terms in Q2, this year China will likely log its weakest growth rate since 1990. Further down the road, government stimulus and a gradual return to normalcy should spur economic activity. FocusEconomics panelists see the economy growing 3.8% in 2020, which is down 1.8 percentage points from last month’s forecast, before decelerating to 6.7% in 2021.

Inflation decelerated from 5.4% in January to 5.2% in February, with core inflation falling to a near one-decade low. The moderation mostly reflected Covid-19 hammering domestic demand. Looking forward, inflation will moderate further as the impact of the swine fever on meat prices subsides and the economy feels the impact of restrained demand due to the virus outbreak. FocusEconomics panelists forecast that inflation will average 3.3% in 2020, which is up 0.1 percentage points from last month’s estimate, and 2.3% in 2021. • The People’s Bank of China (PBOC) continued to ease its monetary policy in order to support the economy. On 13 March, the PBOC slashed the reserve requirement ratio for commercial lenders. The Bank also offered CNY 100 billion via its one-year medium-term lending facility on 16 March but left the rate unchanged at 3.15%. Panelists project the one year deposit and loan prime rates to close 2020 at 1.43% and 3.78%, respectively, and 2021 at 1.60% and 3.75%.

Despite progress in the containment of the coronavirus and signs that companies are slowly getting back to work, an uncertain economic situation continues to weigh on the yuan. On 20 March, the yuan traded at 7.10 CNY per USD, depreciating 1.0% month-on-month. The yuan is expected to remain at around current levels further down the road. Our panelists see the yuan ending 2020 at 7.02 CNY per USD and 2021 at 6.99 CNY per USD.

Monetary
China to unveil further policy stimulus to rekindle economic growth The coronavirus outbreak decimated economic activity in China at the start of the year, with most indicators recording record lows in January–February. However, boding well for the economy ahead, the health situation has significantly improved since, after the Chinese authorities locked down 60 million people in Hubei province and imposed outdoor restrictions across most of the country. In fact, in recent days the new confirmed cases in China were mostly imported from overseas, according to the country’s National Health Commission. Nevertheless, the new cases are mostly from Chinese expatriates returning to the country as the pandemic spreads across Europe and the United States, which has sparked fears of a second wave. The policy response has been rather moderated to date compared to that implemented in the wake of the Global Financial Crisis in 2008. The People’s Bank of China cut some key policy rates in mid-February, while it also reduced the reserve requirement ratio for selected banks on 13 March. 

In this regard, analysts expect that the PBOC will likely ease its monetary policy. Iris Pang, Greater China economist at ING, noted that her baseline scenario includes: “A deferred rate cut of 10bps in April (we expected it in March) as a targeted RRR cut suppressed interbank rates, which will reduce banks’ interest expense if they lend out more inclusive finance. Further targeted RRR cuts in April or May are possible if global demand continues to weaken.” Meanwhile, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, stated: “We expect more financial relief and monetary/credit easing measures in coming months, including further liquidity injections through channels such as the MLF, TMLF and RRR cuts, more rate cuts, using lending facilities such as PSL to fund loan extensions and reductions in interest payments. With rate cuts across the world, the PBoC has more room to cut rates. Specifically, we expect the PBoC to cut the 1yr benchmark deposit rate and 1yr MLF rate each by 25bp in coming weeks in our base case.” In terms of fiscal policy, the measures adopted included tax reliefs, reduction in VAT for small- and medium-sized enterprises, among others. Collectively, the measures amount to CNY 1.25 trillion (around 1% of GDP). 

That said, further fiscal stimulus could be in the pipeline as suggested by Yi David Wang, head of China economics at Credit Suisse: “On the policy front, we repeat our view that China will likely implement a stimulus package amounting to 2.5-3.5% of nominal GDP. […] We also anticipate more fiscal support for SMEs and households (e.g., unemployment benefits, subsidy for low-income individuals, possibly direct tax rebates).” However, some analysts warn that Chinese authorities have limited policy space. Analysts at Nomura, for example, comment that the stimulus plan is constrained in two ways. “First, COVID-19 represents both a supply and a demand shock, and conventional policy efforts to stimulate demand may not work effectively in such a unique situation. Second, surging debt (including foreign debt), a much lower return on capital, the smaller current account surplus and falling FX reserves (as a consequence of several rounds of massive stimulus over the past two decades) are all factors constraining Beijing’s available policy space.” Panelists expect GDP to expand 3.8% in 2020, which is down 1.8 percentage points from last month’s estimate. In 2021, the panel foresees lower economic growth of 6.7%.

Manufacturing PMI nosedives to all-time low in February due to coronavirus The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) plummeted from January’s 50.0% to 35.7% in February. The print was well below the 45.0% expected by market analysts. As a result, the index fell well below the 50.0% threshold that separates contraction from expansion in the manufacturing sector, with February’s reading representing the lowest print on record. February’s print reflected much lower readings for all the sub-components, with new orders and production leading the pack. Export orders also slumped significantly. February’s dismal performance reflects the spread of the coronavirus, which has halted operations in large swaths of the country and also disrupted supply chains. Although authorities reported that, as of 25 February, 78.9% of the companies surveyed had returned to work, the manufacturing PMI could remain depressed in March. Yi David Wang, head of China economics at Credit Suisse, added that the main factor to watch is the shortage in labor: “We repeat that the key near term uncertainty facing the Chinese economy is when labor input can be restored to the pre-outbreak norm. The fact that PMIs, trade, FAI, retail sales will eventually display V-shape rebounds is irrelevant at this point. Instead, we need to be wary of the rising probability that the supplyside shock from labor input reduction might trigger a new round of negative demand shock even after the virus is contained. Such a scenario can even lead to an increase to China’s natural rate of unemployment.”

Industrial
Industrial production nosedives at the start of the year due to Covid-19 outbreak Industrial production plummeted 13.5% year-on-year in the first two months of the year, the sharpest contraction since records began in January 1990. The print contrasted the 6.9% rise in December and was well below the 3.0% contraction that market analysts had expected. On a month-on-month seasonally-adjusted basis, industrial production plunged 26.6% in February, exceeding the 2.8% drop in January. Annual average growth in industrial production, meanwhile, tumbled from 5.7% in December to 4.0% in January-February. Industrial production is expected to remain lackluster in the coming months. 

Against this backdrop, Iris Pang, Greater China economist at ING, comments that: “As China’s coronavirus cases subside, the rest of the world has more confirmed cases, including China’s manufacturing partners in Europe, the rest of Asia and the US. This means supply chains are broken. Equally important, demand from these economies will shrink substantially when people avoid shopping and gathering at restaurants, just like the experience of China during the past two months. This is another severe hit for China’s factories and exporters, as orders should pull back.” FocusEconomics Consensus Forecast participants expect industrial production to rise 3.5% in 2020, which is down 1.5 percentage points from the previous month’s forecast. In 2021, the panel sees industrial production growth at 5.8%.

April 2020 Asia Economics, Focus Economics

Global economy hit by severest shock since 1930s LONDON, March 20 (Reuters) Recessions often start with a small drop in activity which t...


Global economy hit by severest shock since 1930s


LONDON, March 20 (Reuters)
Recessions often start with a small drop in activity which then progressively deepens over subsequent months as the second and higher-round effects on the economy start to occur. 

But the current business cycle downturn looks very different. In terms of its scale and sudden onset, there is no parallel since the end of the Second World War. The initial shock from the coronavirus outbreak and the shutdown of much of the transportation and business system is both large and sudden. 

There are no government statistics yet on the scale of the current downturn, but taking the oil industry as a proxy for economic demand, consumption appears to have fallen by around 10 million barrels per day, or 10%, within the space of a single month. 

The first-round shock to the system is enormous even before any second and third-round impact on business and consumer spending. In 1945, demobilisation and the conversion from wartime to peacetime production caused industrial output to drop by 30-35% progressively over 12 months. In the 1974/75 recession, U.S. industrial output fell by around 15% over roughly 20 months, according to data from the Federal Reserve. 

In 2008/09, U.S. industrial output declined by almost 20% from its pre-recession peak, but the decline was stretched over a period of roughly 18 months. 

All these magnitudes and durations are approximate because peaks and troughs in industrial production do not correspond precisely with the official business cycle dates, which take into account other factors as well. But the current downturn could easily prove the steepest since 1945. In scale and sudden onset, it looks more like the dynamics of the 1930s Depression or the violent business busts of the late 19th and early 20th centuries.


INITIAL SHOCK

Recessions can be a lot like epidemics in that a small initial disturbance -- the infection of a single patient or failure of a single business/sector -- grows exponentially as it is transmitted through the rest of the system.

In recent years, economists have drawn on research from epidemiology to understand how a single bank or business failure can set off a cascading failure as it spreads across the economy.

The initial infection or business failure may be relatively inconsequential; it is the network of connections by which it is transmitted across the population or the economy that turns an isolated problem into a pandemic or recession.

In the case of the economy, recessions are transmitted through real changes in the flow of spending and income, namely sales, orders, employment, wages and debt payments.

But transmission can be accelerated by changes in the stories individuals and businesses construct about the immediate future and the impact on their decision-making.

Economist John Maynard Keynes called them “animal spirits” (“General Theory of Employment, Interest and Money”, 1936). For Robert Shiller, they are “narratives” or “stories” (“Narrative Economics”, 2017).

By whatever name we call them, narratives have the power to amplify and accelerate the transmission of recessionary or expansionary forces through the economy because they can become self-fulfilling.


TRANSMISSION

In most cases, it is the shape and structure of the network, and its behaviour when shocked, rather than the scale of the original disturbance, which determines the magnitude of the eventual epidemic or recession.

Some major shocks have failed to produce recessions or only mild ones. Some minor shocks, singly or in combination, have resulted in major business downturns.

Stock market crashes. Real estate bubbles. Bank failures. Credit contractions. Poor harvests. Sharp sudden changes in oil prices. Policy errors. All have been blamed singly or in combination for triggering recessions.

Awkwardly, these same disturbances have sometimes occurred without being followed by a downturn, illustrating the difficulty of modelling and forecasting a highly networked economy.

It is the lack of a simple, obvious, proportional relationship between the cause of a downturn and its eventual size and duration that is the main reason why business cycles have proved so hard to explain, model and predict.

And in most cases, it is the second and third-round effects of a business downturn on wages, investment, confidence and lending that are the most important in determining the length and depth of the slump.

The more tightly coupled the system is, the more leverage is applied, and the smaller the shock absorbers, the more severely an initial disturbance is likely to cascade across the network.


POLICY RESPONSE

With the current shock, the policy response from central banks and finance ministries is the fastest on record, which could help reduce second and third-round effects and prevent the crisis worsening.

In the same way social-distancing is designed to reduce or eliminate the person-to-person transmission of an epidemic, monetary and fiscal policy can reduce or prevent second round effects of an economic shock.

Policy responses aim to reduce the level of immediate financial interdependency across the economy, creating shock absorbers or firebreaks to prevent cascading failures.

As with health policies intended to control the spread of an epidemic, the faster and more comprehensive the monetary and fiscal response, the greater the probability of controlling the eventual recession.

Coronavirus and the measures introduced to suppress the epidemic have created an economic shutdown that has no precedent for 90 years.

Now central banks and governments will have to find similarly unprecedented measures to support the economy until normal business and transportation activities can resume.

John Kemp
Senior Market Analyst
Reuters
Twitter: @JKempEnergy
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Spain has been hit hard by Covid-19, with latest figures showing about 14,000 infections and over 600 deaths. It is the second most-...




Spain has been hit hard by Covid-19, with latest figures showing about 14,000 infections and over 600 deaths. It is the second most-affected European country after Italy. While the government already announced fiscal policy action, we expect the economic impact to be large.

Lockdown
The Covid-19 outbreak started on 1 February and the number of infections started to rise fast by the beginning of March. Since last Saturday the country is in lockdown. People need to stay home until 28 March, unless they have to buy food or medicine or go to work or the hospital. Shops, except food shops and pharmacies, schools, museums, libraries, hotels and restaurants are closed and sporting and cultural events are prohibited. These measures can be extended with parliamentary approval, which is likely given the high number of infections. Spanish minister for transport, José Luis Ábalos, already warned last Monday that the lockdown will last longer.

Economy
Spanish economy sensitive to such a shock As with every economy that is affected by the spreading of Covid-19, output will contract due to a negative labour supply shock (e.g. as schools close parents cannot go to work), a negative labour demand shock (e.g. firms need to close due to lockdown measures) and a demand shock (less consumption and investment). The importance of the tourism and travel sector – it account for 15% of Spanish GDP – make the Spanish economy particularly sensitive to a pandemic.  And it looks like this sector will be hard hit. We already see that prices for flights to Spain and hotel prices for the Easter period drop significantly, implying a sharp fall in demand. The economic crisis can be amplified by stress in financial markets. The 10Y government bond spread with Germany already more than doubled. Today it equals about 150 basis points, whereas it was only 60 basis points in the beginning of the year. We observe similar movements in other government bond markets, such as the Italian, Portuguese and Greek markets. The higher interest rate can make it harder for business to obtain a loan, making liquidity problems more likely and in the worst case bankruptcy. Government action In this crisis it is crucial that business are provided with liquidity to weather the storm and that employees with an income loss are assisted so that consumption is supported. The national government yesterday announced a relief package of €200 billion, 20% of GDP, to do just that. The measures include: public guarantees to ensure liquidity for businesses (half of the relief package), some mortgage and utility payments will be delayed, and some social security contributions will be suspended. It will also become easier to temporarily suspend work, instead of being fired, and retain all the benefits. Employees who need to take care of dependent relatives may reduce their workday by as much as 100%. Last week, the ECB also announced some measures. We expect, however, that the ECB will announce more in the coming weeks, such as a deposit rate cut with enforced measures to combat the negative side effects and an extra €100 billion of quantitative easing. Conclusion This crisis will have a large effect on economic activity in Spain, even though the government took some unseen measures to combat it. If the spreading of the virus can be stopped soon, then the economy could bounce back sharply in the second quarter already. If it lasts longer, then a prolonged crisis is possible. For now, we hypothesize that the measures taken to combat the virus will be effective and that the spreading of the virus will ultimately follow a similar path as in China. This implies that the spreading will be managed by mid-April. The second quarter could therefore see a less negative year-on-year growth figure compared to the first quarter. There is a risk, however, that tourists cancel their summer holidays and that the third quarter is still negatively affected. We downgrade our GDP growth forecast to -2.8% in 2020. Earlier this year we expected a growth rate of 1.3%. Spanish GDP contracted by 3.8% in 2009 due to the financial crisis and by 3.0% in 2012 due to the Eurozone crisis. We are close to these dramatic figures, but for now we think that they will not be crossed during this current crisis. If, however, the spread of Covid-19 is not halted by mid-April, then things could get worse.

Read more at ING

Global commodity prices fell 7.7% over the previous month in February, worsening from January’s 1.5% dip and marking the sharpes...








Global commodity prices fell 7.7% over the previous month in February, worsening from January’s 1.5% dip and marking the sharpest contraction since December 2018. The escalating coronavirus fallout sent global commodity prices sliding in February, as energy prices plunged amid feeble oil demand, while severe disruptions to industrial activity in China depressed base metal prices. That said, mounting fears of a global recession due to the coronavirus outbreak boosted prices for precious metals as demand for safe-haven assets soared. Meanwhile, agricultural prices dipped for the first time in three months in February.

Energy prices slumped 10.1% month-on-month in February, after falling 3.0% in the opening month of the year and marking the sharpest contraction in eight months. Global oil prices plummeted throughout February as the fastspreading coronavirus pandemic severely disrupted business activity in China and caused increasing economic havoc in the EU and U.S. In response to a hastening economic downturn, oil demand plummeted sharply in the month, which, coupled with growing fears of a global recession in the months ahead and stillelevated oil production levels, sent oil prices tumbling. Similarly, natural gas prices fell markedly in February on soft demand amid warmer-than-usual weather. The oil price outlook deteriorated further in early March, after global oil prices crashed on news of a price war waged between OPEC and Russia. The dispute is set to flood global markets with cheap oil, with booming U.S. oil production further exacerbating global oversupply conditions. The demand-side outlook was similarly bleak amid mounting fears of a global recession due to the increasing fallout from the coronavirus pandemic.

Base metals fell 5.1% on a monthly basis in February, after inching up 0.3% in the first month of this year. February’s result marked the sharpest drop in prices since July 2018. Flagging industrial activity in China due to the worsening coronavirus outbreak led to marked downturns in its major metal-consuming industries in February, weighing severely on the prices of most base metals. Slumping prices for zinc, iron ore, nickel and copper led the overall downturn amid a darkening metal demand outlook, although disruptions to global supply chains led to a shortage of some base metals, thus softening the overall contraction. As the pandemic started to extend more rapidly outside of China at the end of February, mounting fears of a global recession depressed base metal prices further.

Precious metal prices increased 3.3% month-on-month in February, on the heels of January’s 6.5% jump and marking the third consecutive month of rising prices. Uncertainty over the full impact of COVID-19 and falling global interest rates sent investors flocking to safe-haven commodities in the first two months of this year. In February, the fast-spreading virus increasingly dented global economic activity while global central banks eased their monetary policy stances, in turn shoring up demand for bullion. Silver and platinum prices edged down in the period on lower industrial demand, although palladium prices surged for the sixth consecutive month in February amid sustained supply tightness.

Agricultural prices dipped 2.0% month-on-month in February, after rising 2.2% at the outset of the year and marking the first contraction since November. February’s dip was spearheaded by plummeting palm oil prices, which were hit hard by fears of a marked downturn in global demand for biofuels in the wake of a dive in crude oil prices. In a similar fashion, coronavirus-related demand weakness in China weighed on coffee prices, whereas soybean prices fell chiefly due to elevated supply in Brazil. However, prices for cocoa and sugar were a notable exception in February, softening the overall decline.


Report from Focus Economics

Chinese government announces measures to support financial and economic stability Monetary Policy: ・The 5 Monetary Authority Divi...




Chinese government announces measures to support financial and economic stability

Monetary Policy:

・The 5 Monetary Authority Divisions announced policies to deal with 30 monetary aspects (Feb 1) (Supply adequate liquidity, refinance, prevent withdrawal of loans and reluctance to lend to impacted companies, etc.)

・The People’s Bank of China to refinance 300 billion renminbi (Feb 1). Issued instructions to keep market lending rates below 3.15% (LPR rate is 4.15%)

・Liquidity supply (1.2 trillion renminbi (Feb 3) + 0.5 trillion renminbi (Feb 4))

・Cut the (7-day and 14-day) reverse repo rates (Feb 3)

・Suspension of night time futures trading and short selling from February 3 (Feb 2)

・Moves to lower the interest rates on loans to small companies at major banks and regional banks

・Monetary Authorities in regional areas such as Shanghai announce intent to loosen “tolerance levels” for non-performing loans

・Cut MLF interest rate (3.25%, 3.15%, Feb 17)

Tax Policy:

・Subsidized interest payments (50% of the lending rate for refinancing. Anticipate real interest rate burden of below 1.6%) and enhanced credit guarantee service (simplified and more efficient administration, special proxy repayments, etc.)

・Regions that meet the criteria to secure funds to compensate for lending risk, promoting compensation for the portion of loans by financial institutions to small companies which have become non-performing

・Regional governments (Suzhou, Shanghai, Beijing) to reduce the cost burden, particularly for small companies (Postpone payment of social insurance premiums, tax exemptions and postponed payments, rent reductions or exemptions, etc.)

・Additional 800 billion renminbi in advanced issuance of local government bonds (total of about 1.85 trillion renminbi, of which 1.29 trillion renminbi is local government bonds)

Employment:

・Ease restrictions with partial refunds of unemployment insurance premiums to companies that maintain employment

・Introduce nearby employers to farmers who have constraints on moving long distances and job creation by the government


+ Thank you Mizuho Research Institute

Potential: An existing therapy for coronavirus may exist in the drugs Ritonavir or Hydroxychloroquine, both have been used in pa...




Potential: An existing therapy for coronavirus may exist in the drugs Ritonavir or Hydroxychloroquine, both have been used in patients with mild coronavirus disease (COVID-19).

As for another therapy, Ciclesonide: "the National Institute of Infectious Diseases (NIID) reported that Ciclesonide was given to patients with the new coronavirus disease, COVID-19, after being found to have some effect in the treatment of Middle East Respiratory Syndrome (MERS), which is caused by another type of coronavirus. The drug is said to control inflammation and block multiplication of the virus. - The Mainichi

The Tax Cuts and Jobs Act raised the bar on who will itemize, as you now must surpass the 2019 standard deduction of $12,200 for singles...


The Tax Cuts and Jobs Act raised the bar on who will itemize, as you now must surpass the 2019 standard deduction of $12,200 for singles or $24,400 for married filing jointly. “Tax-filing strategies have been reduced partially because the standard deduction is about two times what it was beforehand,” said Eric Bronnenkant, the head of tax at financial company Betterment. “People used to have more ability to optimize their deductions.”

The Tax Cuts and Jobs Act (TCJA) increased the standard deduction from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint returns, and from $9,550 to $18,000 for heads of household in 2018.

Itemization:
Now single's have up to $12,000.00 and married couples filing jointly have up to $24,000.00

The U.S. stock market rout triggered by a deadly coronavirus outbreak suggests President Donald Trump is in grave danger of losing the ...



The U.S. stock market rout triggered by a deadly coronavirus outbreak suggests President Donald Trump is in grave danger of losing the November election, according to a forecasting model by Moody's Analytics, a leading Wall Street research firm.

The U.S. stock market rout triggered by a deadly coronavirus outbreak suggests President Donald Trump is in grave danger of losing the November election, according to a forecasting model by Moody's Analytics, a leading Wall Street research firm. That's a big change from what the model showed using data from February, when higher stock prices and Trump's steady approval rating pointed to the Republican president coasting to victory with 351 votes in the U.S. Electoral College to 187 votes for a Democratic challenger. But financial markets have since plunged with the spread of the virus disrupting economic activity around the world and sparking fears of a global recession.

A drop in the Standard & Poor's 500 stock index to 2,500 points - roughly Thursday's closing level - would signal enough economic anxiety to cost Trump the election, Bernard Yaros, an economist at Moody's Analytics, said on Friday. "The S&P 500 would need to be 2,500 or less for Trump to lose," Yaros told Reuters in an email. He did not elaborate on the expected electoral college results in that circumstance. U.S. companies are already reporting layoffs due to the health crisis but most economic data that will reflect that - and which experts use to make forecasts - won't be available for weeks.

That has Moody's Analytics, a leading forecasting firm, relying more on financial market movements which respond quickly to signs of economic trouble. After plunging into bear market territory on Thursday, the S&P 500 recovered a small slice of its losses on Friday, finishing higher at 2,711 points after Trump declared a national emergency over the coronavirus. The U.S. Federal Reserve, seeking to prop up the economy amid the crisis, slashed interest rates to near zero on Sunday in an emergency move. The coronavirus causes the COVID-19 respiratory disease and has killed at least 60 Americans and more than 6,000 worldwide. Researchers have long found presidential incumbents do better at the polls during a strong economy but because voters also weigh other matters, many forecasters factor presidential approval ratings into their prediction models. Yaros said his model's latest predictions, including the scenario he outlined to Reuters on Friday, use Trump's most recent Gallup approval rating of 47% in late February. That was a near-record high for his presidency after rising during impeachment proceedings in the Democratic-controlled House of Representatives.

The Republican-controlled Senate acquitted him on Feb. 5 after a weeks-long trial. In a report to clients on Thursday, Yaros said a decline in Trump's approval rating to 37% and the S&P 500 at 2,700 points would point to a Democratic candidate narrowly winning the Electoral College with 279 votes to Trump's 259. U.S. voters pick their president through an indirect vote, selecting electors at a state level. To win the presidency, a candidate must win at least 270 votes from the 538 electors in the Electoral College. Gallup is expected to release an updated approval rating for Trump this week. The president has come under fire for his response to the crisis and for initially downplaying the severity of the outbreak. Voter opinions about the coronavirus response so far remained divided along party lines, according to a Reuters/Ipsos poll from March 2-3, with Democrats more likely than Republicans to see the outbreak as an imminent threat to the United States and to say there were taking steps to be prepared. While forecasters at U.S. universities and on Wall Street use sophisticated statistical models to predict election results, they do not have a pristine track record. Many forecasting groups, including Moody's Analytics, failed to predict Trump's victory in 2016. Moody's Analytics said its failure in 2016 appeared due to higher-than-normal voter turnout in the U.S. Midwest. The coronavirus, which is currently making many Americans afraid to leave their homes, is another wild card for turnout in November.

(Reporting by Jason Lange, Editing by Soyoung Kim and Diane Craft) Thomson Reuters Foundation

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