World Economy Review - June 2020
The International Monetary Fund slashed its economic forecasts once again on Wednesday and warned that public finances will deteriorate significantly, as governments attempt to combat the fallout from the coronavirus crisis.
The IMF now estimates a contraction of 4.9% in global gross domestic product in 2020, lower than the 3% fall it predicted in April.
The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast, the IMF said in its World Economic Outlook update.
The fund also downgraded its GDP forecast for 2021. It now expects a growth rate of 5.4% from the 5.8% forecast made in April (the positive reading reflects that economic activity will be coming from a lower base following 2020′s heavy contraction).
The Washington-based institution explained that the downward revisions were due to social distancing measures likely remaining in place during the second half of the year, with productivity and supply chains being hit. And in those nations still grappling with high infection rates, the fund expects that longer lockdowns will dent economic activity even more.
The IMF cautioned that the forecasts are surrounded with unprecedented uncertainty and economic activity will depend on factors such as the length of the pandemic, voluntary social distancing, changes to global supply chains and new labor market dynamics.
The steep decline in activity comes with a catastrophic hit to the global labor market, the IMF said, indicating that the global decline in work hours in the second quarter of the year is likely to be equivalent to a loss of more than 300 million full-time jobs.
The hit to the labor market has been particularly acute for low-skilled workers who do not have the option of working from home. Income losses also appear to have been uneven across genders, with women among lower-income groups bearing a larger brunt of the impact in some countries, the IMF said.
Looking at country forecasts, the United States is expected to contract by 8% this year. The IMF had estimated a contraction of 5.9% in April. Similarly, the fund also downgraded its forecasts for the euro zone, with the economy now seen shrinking by 10.2% in 2020. Brazil, Mexico and South Africa are also expected to contract by 9.1%, 10.5% and 8%, respectively.
In order to mitigate some of the economic impact from the pandemic, governments across the world have announced massive fiscal packages and new borrowing. As a result, public finances are seen deteriorating significantly as a result.
The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year, the fund said.
Under the IMF`s base case, global public debt will reach an all-time high in 2020 and 2021 at 101.5% of GDP and 103.2% of GDP, respectively. In addition, the average overall fiscal deficit is set to soar to 13.9% of GDP this year, 10 percentage points higher than in 2019.
There have been more than 9 million confirmed infections worldwide from Covid-19, according to Johns Hopkins University. The United States, Brazil and Russia are currently the nations with the highest number of cases globally.
Economy of the United States
The U.S. economy shrank at a 5.0% rate in the first quarter with a much worse decline expected in the current three-month economic period, which will show what happened when the pandemic began spread across the U.S. The Commerce Department reported that the decline in the gross domestic product, the total output of goods and services, in the January-March quarter was unchanged from the estimate made a month ago.
The 5% drop was the sharpest quarterly decline since an 8.4% fall in the fourth quarter of 2008 during the depths of the worst financial crisis since the Great Depression. The first quarter period captured just two weeks of the shutdowns that began in many parts of the country in mid-March. Economists believe that GDP plunged around 30% from April through the end of this month.
U.S. industrial production rose by less than forecast in May after a record slump a month earlier, indicating a gradual recovery for manufacturing as coronavirus-related shutdowns continued to restrain demand. Output at factories, mines and utilities increased 1.4% from the prior month after a revised 12.5% plunge in April that was the largest in records back to 1919, Federal Reserve data showed. The median projection in a Bloomberg survey of economists called for a gain of 3%. Factory production rose 3.8% in May, compared with the median estimate for a 5% advance.
Industrial production in May was 15.4% below its pre-pandemic level in February. Capacity utilization, which measures the amount of a plant in use, increased to 64.8% from 64% in April; it was 76.8% in February. The increase in factory output was led by motor vehicles and parts, which more than doubled from the prior month as plants reopened. Auto production was nonetheless down almost 63% from the same period last year. The Fed`s report showed utility output decreased 2.3%, while mining dropped 6.8%. Oil and gas well drilling plunged 36.9%, as a decline in energy prices continued to weigh heavily on producers.
The U.S. trade deficit surged in April as the COVID-19 pandemic upended the global flow of goods and services, pushing exports to a 10-year low. The Commerce Department said the trade deficit jumped 16.7% to $49.4 billion. Economists polled by Reuters had forecast the trade gap increasing to $49.0 billion in April.
In April, exports dropped a record 20.5% to $151.3 billion, the lowest since April 2010. Goods exports plunged 25.2% to $95.5 billion, the lowest since September 2009. Exports of motor vehicles and parts fell to $3.8 billion, the lowest since March 1992. Shipments of consumer goods dropped to $10.4 billion, the lowest since April 2006.
Imports dropped a record 13.7% to $200.7 billion, the lowest since July 2010. Goods imports fell 13.6% to $167.4 billion, the lowest since November 2010. In April, imports of automotive vehicles, parts, and engines dropped to $13.3 billion, the lowest since July 2009. Consumer goods imports fell to $43.8 billion, the lowest since August 2013. Petroleum imports declined to $6.1 billion, the lowest since June 1999.
U.S. consumer prices fell for a third straight month in May and underlying inflation was weak as demand remained subdued amid a recession caused by the COVID-19 pandemic. The Labor Department said its consumer price index dipped 0.1% last month after plunging 0.8% in April, which was the largest decline since December 2008. In the 12 months through May, the CPI gained 0.1%. That was the smallest year-on-year rise since September 2015 and followed a 0.3% increase in April. Economists polled by Reuters had forecast the CPI would be unchanged in May and gain 0.2% year-on-year.
Excluding the volatile food and energy components, the CPI slipped 0.1% in May after decreasing 0.4% in April, the largest drop since the series started in 1957. The so-called core CPI fell in March for the first time since January 2010. May marked the first time that the core CPI has dropped for three consecutive months. In the 12 months through May, the core CPI rose 1.2%, the smallest gain since March 2011. The core CPI increased 1.4% year-on-year in April.
The US unemployment rate dropped to 13.3 percent in May 2020 from 14.7% in April which was the largest in records back to 1939 and below market expectations of 19.8 percent, as the economy gradually reopened. The number of unemployed persons fell by 2.1 million to 21.0 million as those who were on temporary layoff decreased by 2.7 million to 15.3 million. Among those not on temporary layoff, the number of permanent job losers increased by 295,000 to 2.3 million. The number of employed rose by 3.8 million to 137.2 million and the labor force participation rate increased to 60.8 percent, after hitting the lowest since January 1973 the month before. Since February, the unemployment rate was up by 9.8 percentage points and the number of unemployed persons increased by 15.2 million.
Economy of the European Union
Seasonally adjusted GDP decreased by 3.6% in the euro area and by 3.2% in the EU during the first quarter of 2020, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. These were the sharpest declines observed since time series started in 1995. In March 2020, the final month of the period covered, COVID-19 containment measures began to be widely introduced by Member States. In the fourth quarter of 2019, GDP had grown by 0.1% in both the euro area and the EU.
Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 3.1% in the euro area and by 2.6% in the EU in the first quarter of 2020, after +1.0% and +1.2% respectively in the previous quarter. These were the sharpest declines since the third quarter of 2009 (-4.5% for euro area and -4.4% for EU).
In April 2020, the COVID-19 containment measures widely introduced by Member States continued to have a significant impact on industrial production. The seasonally adjusted industrial production fell by 17.1% in the euro area and by 17.3% in the EU, compared with March 2020, according to estimates from Eurostat. These are the largest monthly falls recorded since the start of the series, significantly higher than the 3% to 4% drops seen in late 2008 and early 2009 during the financial crisis.
In April 2020 compared with April 2019, industrial production decreased by 28.0% in the euro area and by 27.2% in the EU. These are the largest annual falls recorded since the start of the series, exceeding the -21.3% in the euro area and -20.7% in the EU observed in April 2009. Overall, industrial production in the euro area and EU has fallen to levels last seen in the mid-1990s.
In April 2020, the COVID-19 containment measures widely introduced by the Member States continued to have a significant impact on international trade in goods. The first estimate for euro area exports of goods to the rest of the world in April 2020 was 136.6 billion, a decrease of 29.3% compared with April 2019 (193.3 bn). Imports from the rest of the world stood at 133.7 bn, a fall of 24.8% compared with April 2019 (177.8 bn). As a result, the euro area recorded a 2.9 bn surplus in trade in goods with the rest of the world in April 2020, compared with +15.5 bn in April 2019. Intra-euro area trade fell to 112.4 bn in April 2020, down by 32.2% compared with April 2019.
The first estimate for extra-EU exports of goods in April 2020 was 125.4 billion, down by 28.2% compared with April 2019 (174.7 bn). Imports from the rest of the world stood at 125.1 bn, down by 22.7% compared with April 2019 (161.8 bn). As a result, the EU recorded a 0.2 bn surplus in trade in goods with the rest of the world in April 2020, compared with +12.9 bn in April 2019. Intra-EU trade fell to 175.2 bn in April 2020, -32% compared with April 2019.
In May 2020, a month still marked by COVID-19 containment measures, euro area annual inflation rate was 0.1%, down from 0.3% in April. A year earlier, the rate was 1.2%. The European Union annual inflation was 0.6% in May 2020, down from 0.7% in April. A year earlier, the rate was 1.6%. These figures are published by Eurostat.
The lowest annual rates were registered in Estonia (-1.8%), Luxembourg (-1.6%), Cyprus and Slovenia (both -1.4%). The highest annual rates were recorded in Poland (3.4%), Czechia (3.1%) and Hungary (2.2%). Compared with April, annual inflation fell in twenty Member States, remained stable in two and rose in five.
In May, the highest contribution to the annual euro area inflation rate came from food, alcohol & tobacco (+0.64 percentage points, pp), followed by services (+0.59 pp), non-energy industrial goods (+0.06 pp) and energy (-1.20 pp).
In April 2020, the second month after COVID-19 containment measures were implemented by most Member States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020. These figures are published by Eurostat.
Eurostat estimates that 14.079 million men and women in the EU, of whom 11.919 million in the euro area, were unemployed in April 2020. Compared with March 2020, the number of persons unemployed increased by 397 000 in the EU and by 211 000 in the euro area.
Economy of Japan
Japan`s economy shrank less than initially estimated in the first quarter but the broad impact from the coronavirus crisis is still expected to send the country deeper into recession. A series of recent April data including exports, factory output and jobs figures suggested Japan is facing its worst postwar slump in the current quarter as the outbreak forced people to stay at home and businesses to close globally.
The world`s third-largest economy shrank an annualized 2.2 percent in January to March, revised data showed, less than the 3.4 percent contraction indicated in a preliminary reading and compared with a median market forecast of a 2.1 percent drop. The GDP in Japan contracted 1.7 percent in the first quarter of 2020 over the same quarter of the previous year. On quarter-on-quarter basis, the economy contracted 0.6 percent in the first quarter compared with an initial reading of a 0.9 percent decline.
Japan`s industrial production fell 8.4 per cent in May due to the fallout from the COVID-19 pandemic, while its unemployment rate rose for the third month in a row. The May result in industrial production marked the fourth straight month of decline. It was steeper than the median forecast of a 5.8 per cent fall by analysts surveyed by the Nikkei Business Daily, and followed a 9.8 per cent decrease in April.
Japan`s trade deficit narrowed to JPY 833.4 billion in May 2020 from JPY 965.4 billion in the same month a year earlier, compared to market expectations of a JPY 970.8 billion gap. Year-on-year, exports tumbled 28.3 percent to JPY 4.18 trillion, mainly due to lower sales of transport equipment, machinery, manufactured goods, and mineral fuels. Imports shrank 26.2 percent to JPY 5.02 trillion, dragged by lower purchases of vehicles and mineral fuels.
Japan`s core consumer prices recorded a second straight monthly fall in May, down 0.2 percent from a year earlier, as the effects of the coronavirus pandemic lowered the cost of energy and accommodation, government data showed. The slide in the nationwide core consumer price index, excluding volatile fresh food items, followed April`s 0.2 percent decline -- which had marked the first fall in 40 months -- and adds to the Bank of Japan`s woes in trying to hit its 2 percent inflation goal. May`s figure was almost in line with forecasts by analysts.
So-called core-core consumer prices, which exclude fresh food and energy, rose 0.4 percent from a year earlier, compared with an increase of 0.2 percent in April. Excluding the impact of the consumption tax hike to 10 percent from 8 percent and a free preschool education and nursery program, both introduced Oct. 1 last year, consumer prices fell 0.6 percent in May, staying flat from the previous month.
Japan`s unemployment rate rose to 2.9% in May, official data showed, the third consecutive monthly rise as the coronavirus pandemic takes its toll on the world`s number-three economy. The 0.3-percentage-point rise from April suggests Japan`s first recession since 2015 is beginning to have an impact on the labor market.
Another closely watched indicator showed there were 120 jobs available for every 100 jobseekers, compared to 132 jobs in April the steepest drop since the 1974 oil shock. Set against the millions of newly unemployed seen in major economies like the United States, Japan appears to have weathered the economic chaos of the pandemic.
Economy of Russia
Russia`s economic growth slowed to 1.6 percent year-on-year in the first quarter of 2020 from 2.1 percent in the previous three-month period in line with preliminary estimates. Growth was mainly supported by financial and insurance activities (9.8 percent); wholesale and retail trade; repair of motor vehicles and motorcycles (4.9 percent) and manufacturing (3.6 percent); agriculture (2.3 percent). Russian GDP (gross domestic product) plunged 28% in April.
Russia`s industrial production declined 9.6 percent year-on-year in May of 2020, following a 6.6 percent fall in the previous month and compared to market expectations of an 8 percent drop. It was the steepest contraction in industrial production since August of 2009, as output fell for extraction of raw materials (-13.5 percent vs -3.2 percent), electricity and gas (-4.1 percent vs -1.9 percent), manufacturing (-7.2 percent vs -10 percent) and distribution of water, sewage (-10.9 percent vs -11.4 percent). On a monthly basis, industrial output slumped 5.5 percent, after a 9.2 percent plunge in April.
Russia`s trade surplus narrowed to USD 6.24 billion in April 2020 from USD 14.61 billion in the same period last year, the smallest trade surplus since July 2017. Exports tumbled 36 percent led by lower sales to both non-CIS (-35.5 percent) and CIS countries (-39.3 percent). Meanwhile, imports declined at a softer 21.9 percent, as purchases from non-CIS countries fell 21.1 percent and those from CIS dropped 28 percent.
The annual inflation rate in Russia decreased to 3 percent in May of 2020 from 3.1 percent in the previous month and in line with market expectations. Prices slowed for food (3.3 percent vs 3.5 percent in April) and non-food inflation was steady (at 2.8 percent). On the other hand, cost of services advanced faster (3 percent vs 2.9 percent). On a monthly basis, consumer prices went up 0.3 percent, following a 0.8 percent gain in April.
Russia`s jobless rate rose to 6.1 percent in May of 2020 from 5.8 percent in the previous month, slightly below market expectations of a 6.2 percent. It was the highest jobless rate since March of 2013, as most Russian cities imposed lockdowns measures to curb the spread of the coronavirus. The number of unemployed persons rose by 227 thousand from a month earlier to 4.513 million.