World Economy Review - March 2020
The coronavirus crisis is crushing global economic growth, according to Fitch Ratings in its latest quarterly "Global Economic Outlook” (GEO). "The level of world GDP (gross domestic product) is falling. For all intents and purposes we are in global recession territory," said Brian Coulton, chief economist at Fitch.
The firm has nearly halved its baseline global growth forecast for 2020 to just 1.3 per cent from 2.5 per cent in the December 2019 GEO. The revision leaves 2020 global GDP US$850 billion lower than in the previous forecast. “But we could very easily see an outright decline in global GDP this year if more pervasive lockdown measures have to be rolled out across all the G7 economies.
“Emergency macro policy responses are purely about damage limitation at this stage but should help secure a `V-shaped` recovery in 2H20, although this assumes that the health crisis eases.” Fitch said the shock to the Chinese economy had been very severe.
“GDP is likely to fall by over five per cent (not annualised) in 1Q20 and to be down by one per cent year-on-year. Falling GDP in China is virtually unprecedented and, in the near term at least, these numbers look worse than most previous hypothetical `hard-landing` scenarios.”
The good news is that the daily number of new Covid-19 cases in China has fallen very sharply, which should pave the way for a marked economic recovery in 2Q19 - high-frequency indicators already point to this starting in March.
Nevertheless, Fitch said the delayed impact of supply-chain disruptions and lower Chinese demand on the rest of the world would continue to be felt profoundly for some time, particularly in the rest of Asia and the eurozone.
The interruptions to economic activity seen in China - and now in Italy - are on a scale and speed rarely seen other than during periods of military conflict, natural disasters or financial crises. Even though Fitch expects a recovery in China from 2Q20, Chinese growth is expected to fall just 3.7 per cent for the year as a whole, down from 6.1 per cent in 2019.
“We forecast Italian GDP to fall by teo per cent this year and Spanish GDP by almost one per cent,” it added. Fitch said its baseline forecasts do not yet assume that full-scale lockdowns take place in across all the major European countries or the US (forecasts were finalised on 16 March).
”But even on this basis we now expect eurozone growth to be minus 0.4 per cent this year. The baseline forecast for US growth is one per cent in 2020 compared with a pre-virus outlook of two per cent and GDP is expected to fall by 0.5 per cent (or two per cent annualised) in 2Q20.“
It expects global growth to fall to 1.3 per cent in 2020 from 2.7 per cent in 2019, which would be weaker than global downturns in the early 1990s and in 2001. Fitch`s oil price forecast has been lowered to US$42/bbl (Brent) for 2020 (annual average) from US$62.5/bbl in the December GEO.
“With the collapse of `OPEC+` co-operation boosting prospects for OPEC supply, we now expect oil prices to average US$48/bbl in 2021 compared to our previous forecast of US$60/bbl,” it said.
Economy of the United States
U.S. gross domestic product (GDP) increased at an annual rate of 2.1 percent in the fourth quarter in the third or final estimate, unrevised from previous estimates, the U.S. Commerce Department reported. GDP growth slowed to 2.3 percent in 2019, compared to 2.9 percent in 2018, primarily reflecting decelerations in nonresidential fixed investment and the PCE and a downturn in exports.
As the number of COVID-19 cases in the United States continues to climb, more and more state and local officials have closed nonessential businesses and ordered residents to stay home to slow the spread of the virus, effectively shutting down a significant part of the economy.
While revising its forecast for the US real GDP, Goldman Sachs recently mentioned, “We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in q/q annualized terms.” It`s worth mentioning that the bank earlier estimated -6.0% and -24.00% reductions in the economic output figures. Further, the bank anticipates the unemployment rate rising to 15% by midyear.
The Federal Reserve said that industrial production - including factories, utilities and mines - rose 0.6% in February, reversing drops in December and January. Industrial production has been flat over the past year. Manufacturing production rose 0.1% as busier auto plants offset a drop in production of civilian aircraft, reflecting Boeing`s decision to suspend production of the troubled 737 Max airliner. Factory production is still down 0.4% from February 2019. Utility output shot up 7.1% as unseasonably warm January gave way to colder weather last month. Mining output slid 1.5% but was up 2.1% over the past year. In the same period, Capacity Utilization improved to 77% from 76.6%.
The overall U.S. trade deficit narrowed in February to the lowest level in more than three years as imports declined more than exports did, the U.S. Commerce Department reported. The trade deficit in goods and services fell by 12.2 percent to 39.9 billion U.S. dollars in February from a revised 45.5 billion dollars in January, the department said. It marked the smallest trade gap since September 2016. Exports fell by 0.4 percent to 207.5 billion dollars in February, while imports fell by 2.5 percent to 247.5 billion dollars, led by fewer imports of capital goods, industrial supplies and materials, and consumer goods, according to the department.
Consumer prices in the US rose in February, topping economists` forecasts, and keeping the annual rate of inflation close to multi-month highs. The headline consumer price index rose 0.1 per cent during February, matching January`s advance, and topping the median forecast among economists for zero growth. The annual rate eased to 2.3 per cent from January`s 15-month high of 2.5 per cent, but was still better than the 2.2 per cent Wall Street expected.
Core inflation, which strips out volatile food and energy prices, climbed 0.2 per cent, matching January`s increase and coming in line with market forecasts. The annual pace of core inflation quickened by 0.1 percentage points to 2.4 per cent, the highest level since September last year. Economists forecast a 2.3 per cent rise.
Nonfarm payrolls dropped by 701,000 in March, according to Labor Department numbers that only begin to show the economic damage wrought by the coronavirus crisis. It was the first decline in payrolls since September 2010 and came close to the May 2009 financial crisis peak of 800,000. Some two-thirds of the drop came in the hospitality industry, particularly bars and restaurants forced to close during the economic shutdown.
The unemployment rate rose to 4.4% - from 3.5% - its highest level since August 2017 as employers just began to cut payrolls ahead of social distancing practices that shut down large swaths of the U.S. economy in order to stop the virus`s spread. An alternative measure that captures discouraged workers and those holding jobs part time for economic reasons jumped from 7% to 8.7%, its highest since March 2017.
Those higher unemployment rates come amid a tumble in the labor force participation rate to 62.7%, a 0.7 percentage point fall and the lowest since August 2018 for a number that had been gradually rising. Despite the other bad numbers, wages continued to rise, increasing 3.1% year over year, slightly better than expected. Economists surveyed by Dow Jones had been looking for a payroll decline of 10,000 and for the unemployment rate to rise to 3.7%.
Economy of the European Union
Seasonally adjusted GDP rose by 0.1% in the euro area (EA19) and by 0.2% in the EU27 during the fourth quarter of 2019, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2019, GDP had grown by 0.3% in the euro area and by 0.4% in the EU27.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.0% in the euro area and by 1.2% in the EU27 in the fourth quarter of 2019, after +1.3% and +1.6% respectively in the previous quarter. For the year 2019 as a whole, GDP grew by 1.2% in the euro area and by 1.5% in the EU27, after +1.9% and +2.1% respectively in 2018.
In January 2020 compared with December 2019, seasonally adjusted industrial production rose by 2.3% in the euro area (EA19) and by 2.0% in the EU27, according to estimates from Eurostat. In December 2019, industrial production fell by 1.8% in the euro area and by 1.6% in the EU27. In January 2020 compared with January 2019, industrial production decreased by 1.9% in the euro area and by 1.5% in the EU27.
The first estimate for euro area (EA19) exports of goods to the rest of the world in January 2020 was ˆ184.0 billion, an increase of 0.2% compared with January 2019 (ˆ183.7 bn). Imports from the rest of the world stood at ˆ182.7 bn, a fall of 0.2% compared with January 2019 (ˆ183.0 bn). As a result, the euro area recorded a ˆ1.3 bn surplus in trade in goods with the rest of the world in January 2020, compared with +ˆ0.6 bn in January 2019. Intra-euro area trade fell to ˆ164.2 bn in January 2020, down by 1.6% compared with January 2019.
The first estimate for extra-EU27 exports of goods in January 2020 was ˆ166.5 billion, up by 0.4% compared with January 2019 (ˆ165.8 bn). Imports from the rest of the world stood at ˆ169.0 bn, down by 0.2% compared with January 2019 (ˆ169.3 bn). As a result, the EU27 recorded a ˆ2.6 bn deficit in trade in goods with the rest of the world in January 2020, compared with -ˆ3.4 bn in January 2019. Intra-EU27 trade fell to ˆ255.3 bn in January 2020, -0.9% compared with January 2019.
Euro area annual inflation is expected to be 0.7% in March 2020, down from 1.2% in February according to a flash estimate from Eurostat.
Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in March (2.4%, compared with 2.1% in February), followed by services (1.3%, compared with 1.6% in February), non-energy industrial goods (0.5%, stable compared with February) and energy (-4.3%, compared with -0.3% in February).
The euro area seasonally-adjusted unemployment rate was 7.3% in February 2020 – the month before COVID-19 containment measures began to be widely introduced by Member States –, down from 7.4% in January 2020 and from 7.8% in February 2019. This is the lowest rate recorded in the euro area since March 2008. The EU unemployment rate was 6.5% in February 2020, stable compared with January 2020 and down from 6.9% in February 2019. This remains the lowest rate recorded in the EU since the start of the monthly unemployment series in February 2000. These figures are published by Eurostat.
Eurostat estimates that 13.984 million men and women in the EU, of whom 12.047 million in the euro area, were unemployed in February 2020. Compared with January 2020, the number of persons unemployed decreased by 62 000 in the EU and by 88 000 in the euro area. Compared with February 2019, unemployment fell by 784 000 in the EU and by 663 000 in the euro area.
Economy of Japan
Japan`s Cabinet Office says the country`s GDP for the October-to-December period in 2019 has been revised downward to an annualized contraction of 7.1 percent in real terms. The preliminary figure announced in February was a contraction of 6.3 percent. The period coincided with the consumption tax hike. The revision puts the number close to the minus 7.4 figure that followed the previous tax increase in 2014.
Lower capital expenditure was the main factor behind the revision. It was changed from minus 3.7 to minus 4.6 percent. Personal consumption, which accounts for more than half of GDP, was minus 2.8 percent as the tax hike weighed on consumer spending. Analysts believe that GDP for the January-to-March period will also shrink due to the coronavirus outbreak.
Japan`s industrial output rose 0.4 percent in February from a month earlier, the government said in a report, although looking ahead it will likely slump as factories shutter operations and supply chains have been disrupted by the coronavirus outbreak. According to the Ministry of Economy, Trade and Industry, the seasonally adjusted index of production at factories and mines stood at 100.2 against the 2015 base of 100.
The index of Japan`s industrial shipments in February, meanwhile, rose 2.6 percent to 99.8, the ministry also said. Inventories, meanwhile, decreased 2.0 percent to 103.8, in the recording period. Looking ahead, manufacturers surveyed by the ministry said they predict industrial output to decrease 5.3 percent in March and rise 7.5 percent in April.
Japan`s trade surplus widened to JPY 1.11 trillion in February 2020 from JPY 0.33 trillion in the same month a year earlier and beating market expectations of a JPY 0.92 trillion surplus. It marked the first trade surplus in four months, as exports fell 1 percent year-on-year to JPY 6.32 trillion, whereas imports shrank 14 percent to JPY 5.21 trillion.
Japan`s inflation rate slowed down to 0.6 percent in February from a year earlier, reflecting decreases in crude oil prices and concerns over global economic growth due to the outbreak of the new coronavirus that causes COVID-19, government data showed.
The nationwide core consumer price index, excluding volatile fresh food items, marked the 38th straight monthly increase, the Ministry of Internal Affairs and Communications said, but remained far below the Bank of Japan`s 2 percent inflation target. It had risen 0.8 percent in January.
Overall energy prices dipped 0.2 percent as gasoline prices saw slower increases due to the economic impact of the COVID-19 pandemic while reductions in electricity and gas prices expanded.
This reflects declines in crude oil prices seen around September to November last year when trade frictions between the United States and China escalated. Gasoline prices increased 4.8 percent, but the growth was smaller than 6.3 percent in January.
A report released by the Japanese government showed that the jobless rate in the country has remained unchanged in February at 2.4 percent in the middle of a labor crunch, the figures are still unaffected by the negative effects of the coronavirus outbreak.
The Japanese Ministry of Internal Affairs and Communications said that the number of people without jobs in the period on a seasonally adjusted basis came in at a total of 1.66 million, an increase of 20,000 people or 1.2 percent compared to a month ago.
A total of 730,000 people have quit their jobs, 10,000 more compared to the previous month, 410,000 people were discharged by their employers, increasing 40,000, as 390,000 people were new job seekers, a decrease of 10,000 people.
Economy of Russia
Russia`s GDP expanded 2.1 percent year-on-year in the fourth quarter of 2019, accelerating from a downwardly revised 1.5 percent advance in the previous period and in line with market expectations. It was the highest GDP growth since Q4 2018, as gross fixed capital formation went up 12.1 percent, compared to a 3.2 percent increase in Q3. Meantime, household consumption climbed 2.5 and government expenditure rose 2.3 percent, both unchanged from the prior quarter. On the other hand, net foreign trade contributed negatively to growth, as exports slumped 2.5 percent (vs -0.8 percent in Q3) while imports rose 10.1 percent (vs 4.5 percent). Considering full 2019, the economy grew 1.3 percent, in line with preliminary estimates and slowing from a 2.5 percent expansion in 2018. The Russian economy is expected to slip into recession in 2020 amid low oil prices and the coronavirus outbreak.
Industrial production in Russia rose 3.3 percent year-on-year in February 2020, accelerating from a 1.1 percent gain in the previous month and well above market expectations of a 1 percent increase. It was the highest gain in industrial activity since September 2019, as output advanced faster for manufacturing (5 percent vs 3.9 percent in January) and rebounded for extraction of raw materials (2.3 percent vs -0.4 percent). On the other hand, output fell for water, sewage (-1.4 percent vs 1 percent) and production and distribution of electricity, gas (-0.2 percent vs -4.7 percent). On a monthly basis, industrial production edged down 0.6 percent, following a 17.3 percent plunge in January.
The trade surplus in Russia shrink to USD 12.48 billion in January 2020 from USD 14.41 billion in the same month a year earlier and compared with market expectations of USD 13.7 billion. Exports fell 4.3 percent on the back of sales to non-CIS countries declined 4.4 percent and those to CIS countries dropped 3.5 percent. Meanwhile, imports increased 3.7 percent as purchases from non-CIS countries rose 4.3 percent while those from CIS countries decreased 1.4 percent.
Russia`s inflation rate edged down to 2.3 percent year-on-year in February 2020 from 2.4 percent in the previous month, in line with market expectations. That was the lowest rate since June 2018. On a monthly basis, consumer prices increased 0.3 percent, also matching forecasts.
Russia`s jobless rate edged down to 4.6 percent in February 2020 from 4.7 percent in the previous month and below market forecasts of 4.7 percent, as the number of unemployed declined to 3.425 million from 3.482 million in January.