World Economy Review - August 2020
After a drawn-out fight against the COVID-19 pandemic over the past half year, countries going through lockdowns to varying degrees have recently published the growth rate of their gross domestic product (GDP) in the second quarter, and "slump" has become the buzzword.
Nonetheless, be it "quarter-on-quarter" growth or "year-over-year" economic performance, China has grossed impressive positive growth from April through to June. And this is inseparable from the bolstering of anti-epidemic efforts.
The world`s second-largest economy grew by 3.2 percent in April-June from a year earlier, reversing a 6.8-percent decline in the first quarter the first contraction since at least 1992 when official quarterly GDP records started, according to China`s National Bureau of Statistics.
The reading beats the median 1.1-percent forecast by economists surveyed by Nikkei and coincides with an AFP poll, which projected the economy would claw its way back into growth territory in the second quarter of this year. The poll also forecast that China will be the only major economy to experience positive growth this year.
"China`s GDP growth rebounded rapidly in the second quarter, thanks to the successful epidemic control, orderly resumption of work and production, and supportive government policies," said Bai Ming, deputy director of the international market research institute of Chinese Academy of International Trade and Economic Cooperation.
The Wall Street Journal has said China`s strategy of early lockdowns as well as the modest stimulus are paying economic dividends. "China is experiencing something far closer to a V-shaped recovery than any other major economy. Growth is likely to slow in the second half but still be faster than in most other places," wrote the newspaper.
The U.S. suffered its biggest economic decline since the government began recording the index after World War II in the second quarter of 2020 as the novel coronavirus continues to ravage the economy, leaving business shut and tens of millions unemployed.
Its GDP plunged 32.9 percent on an annualized basis, following a five-percent decline in the first quarter. The historic crash is far worse than the 8.4-percent quarterly drop during the 2007-2009 Great Recession. Before the COVID-19 pandemic, the largest drop in GDP on record was 10 percent in 1958.
On the last day of August, data released by India`s National Statistics Office showed that the country`s GDP in the April-June quarter this year dropped by 23.9 percent year on year. The Indian media pointed out that this was the biggest decline since the country began to release quarterly economic data in 1996, and it was worse than the pessimistic expectations of most economists.
On September 2, the Australian Bureau of Statistics again disclosed that the country`s GDP had shrunk by seven percent from the previous quarter in Q2, marking the largest decline since 1959 on record.
The country joins the United States, Japan, UK and Germany in technical recession, defined as two straight quarters of decline, in Australia`s first such downturn since 1991.
The UK economy contracted by 21.7 percent year on year in the second quarter, France by 18.9 percent, Spain 22.1 percent, Italy 17.7 percent and Germany 11.3 percent. The whole euro zone witnessed a 15-percent slide and Japan contracted by 9.9 percent in the April-June period.
In addition to the world`s major economies, South Africa`s central bank expects economy to shrink a stunning 40.1 percent in Q2, letting alone Argentina immersed in negative growth since 2018.
Aside from these, a finance ministry report published in July showed Saudi Arabia had notched up a deficit of 109.2 billion riyals (29.12 billion U.S. dollars) in the second quarter this year in that low oil prices hurt revenues. The world`s largest oil exporter`s Q2 oil revenues fell by 45 percent year on year to 25.5 billion U.S. dollars, with total revenues dropping 49 percent to settle at nearly 36 billion U.S. dollars.
Among the G20 member countries hit by the COVID-19 pandemic, China is the only country that resumed its growth trajectory in the April-June period, with the rest fizzling into nothing or on cusp of recession.
When the total tally of confirmed cases in the United States was over six million and the number of cases in India was approaching four million, foreign netizens and media outlets were still quarreling over which of these two countries` economic performance was worse.
For instance, a chart by Business Today shows that the U.S. economy has fallen by 32.9 percent and India by 23.9 percent. Some Indian social media influencers used this data comparison to emphasize that India is not the only one going through a recession.
But it is worth noting that the epic 32.9 percent is a quarter-on-quarter decline was calculated on an annualized basis. The adjusted data by the U.S. government on August 27 showed that the U.S. GDP contracted by 9.1 percent year over year from April to June, lower than India`s 23.9 percent.
Gita Gopinath, chief economist of the International Monetary Fund, posted a tweet concerning G20 members` quarter-on-quarter GDP growth in the second quarter, which indicated India had the worst quarterly slump.
The expert noted the graph "puts G20 growth numbers on a comparable scale, quarter-on-quarter non-annualized. Should expect rebounds in Q3 but 2020 overall will see major contractions. China recovers strongly in Q2 after collapse in Q1."
In practical terms, heated disputes over who is the "tail ender" at this time bears no significance and will not help the economy recover at a faster clip. Such a war of words has also spread to the discussion about China`s GDP data, manifested in a mixture of envy, jealousy and positive comments.
And now what can really drive economic growth and hand people normal lives should be the anti-pandemic measures that put lives first and the opportune control over the contagious disease.
Economy of the United States
A second reading of the U.S. economy in the second quarter reflected the biggest quarterly plunge in activity on record, though the Covid-induced plummet wasn`t as bad as initially estimated. Gross domestic product from April to June tanked 31.7% on an annualized basis, according to the Commerce Department`s second reading. That was revised down from the 32.9% initial estimate of the damage the pandemic-fueled lockdowns had on the economy in the second quarter.
Economists surveyed by Refinitiv had expected a decline of 32.5%. Even with the revision, it was still the worst contraction in the economy ever recorded. The drop in GDP was more than triple the previous all-time decline. The economy contracted at a 5% pace in the first quarter. The economy fell into recession in February.
American industry continued to regain ground lost in the coronavirus recession, but production remains well below where it was before the pandemic struck. The Federal Reserve reported that industrial production - including output at factories, mines and utilities - climbed 3% in July after surging 5.7% in June. Still, production remains 8.4% below its level in February before the outbreak began to spread rapidly in the United States.
Factory output rose 3.4% last month, pulled higher by a 28.3% gain in production of cars, trucks and auto parts. Mining production ticked up 0.8%, snapping five straight months of decreases. Utility output climbed 3.3% as hot weather forced many Americans to turn on the air conditioner. Industry was running at 70.6% of capacity, up from its April low of 64.2% but well below its long-term (1972-2019) average 79.8%.
The gap between what the United States buys from the rest of the world and what it sells widened to its highest level since 2008, as imports jumped by a record amount in July. Data from the U.S. Department of Commerce showed that the trade deficit in July spiked 18.9 percent to $63.6 billion. That`s the highest figure since the same month 12 years ago, during the depths of the financial crisis.
The U.S. economy imported $231.7 billion worth of goods from the rest of the world during the month, the highest amount ever and a 10.9 per cent increase from June`s level. American exports also rose 8.1 per cent to $168.1 billion. The deficit, which represents the difference between how much the U.S. bought from abroad and how much it sold abroad, was concentrated in goods, where the deficit rose $9.3 billion to $80.9 billion in July. The overall deficit was tempered by a surplus in services, which decreased $0.8 billion to $17.4 billion.
The cost of U.S. goods and services rose sharply in August for the third month in a row, but the increase mostly stemmed from a rebound in prices after a steep decline early in the coronavirus pandemic. Overall inflation is still quite low.The consumer price index, a measure of the cost of living, rose 0.4% last month, the government said. The biggest spike in the cost of used cars and trucks in more than a half-century accounted for more than 40% of the increase in the index.
Economists polled by MarketWatch had forecast a 0.3% advance in the CPI. The increase in August followed back-to-back 0.6% advances in July and June. Yet the cost of most goods and services had declined in the first three months of the pandemic aside from certain items such as toilet paper or meat that were in either high demand or short supply.
Even after three straight monthly increases in the CPI, inflation remains low. The increase in consumer prices over the past 12 months moved up to 1.3% from 1%. By contrast, the yearly pace of inflation was much higher at 2.5% at the start of 2020. Another closely watched measure of inflation that strips out food and energy also rose 0.4% last month. The yearly increase in the so-called core rate edged up to 1.7% from 1.6%.
The official unemployment rate fell to 8.4% in August as businesses continued emerging from broad shutdowns imposed early in the coronavirus pandemic, the Bureau of Labor Statistics reported. That`s the lowest rate since unemployment exploded in April, to levels unseen since the Great Depression. It would also mean the official rate dipped below the peak seen during the country`s last downturn, known as the Great Recession.
But the true rate in August is likely much higher than the official figure - perhaps even exceeding 11%, according to labor economists. The unemployment rate is a measure of joblessness in the country and is a rough barometer of financial hardship. A rate above 11% would mean the country remains in the throes of the worst period of joblessness in post-World War II history. It would mean roughly 1 in 9 people who want a job and are able to work can`t find employment. Before the coronavirus pandemic, the highest post-war unemployment rate in the U.S. was 10.8%, set in 1982.
Economy of the European Union
In the second quarter of 2020, still marked by COVID-19 containment measures in most Member States, seasonally adjusted GDP decreased by 12.1% in the euro area and by 11.7% in the EU compared with the previous quarter, according to a flash estimate published by Eurostat, the statistical office of the European Union. These were by far the sharpest declines observed since time series started in 1995. In the first quarter of 2020, GDP had decreased by 3.6% in the euro area and by 3.2% in the EU.
Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 15.0% in the euro area and by 14.1% in the EU in the second quarter of 2020, after -3.1% and -2.5% respectively in the previous quarter. These were also by far the sharpest declines since time series started in 1995.
In June 2020, a month marked by some relaxation of COVID-19 containment measures in many Member States, the seasonally adjusted industrial production rose by 9.1% in both euro area and EU, compared with May 2020, according to estimates from Eurostat. In May 2020, industrial production rose by 12.3% in the euro area and by 11.6% in the EU. In June 2020 compared with June 2019, industrial production decreased by 12.3% in the euro area and by 11.6% in the EU.
In the euro area in June 2020, compared with May 2020, production of durable consumer goods rose by 20.2%, capital goods by 14.2%, intermediate goods by 6.7%, non-durable consumer goods by 4.8% and energy by 2.6%. In the EU, production of durable consumer goods rose by 20.2%, capital goods by 14.2%, intermediate goods by 6.5%, non-durable consumer goods by 5.6% and energy by 1.7%. The highest increases were registered in Slovakia (+21.7%), Hungary (+17.1%) and Romania (+16.3%). Decreases were observed in Belgium (-1.4%) and Finland (-0.8%).
In the euro area in June 2020, compared with June 2019, production of capital goods fell by 15.9%, intermediate goods by 13.1%, durable consumer goods by 8.9%, energy by 7.6% and non-durable consumer goods by 7.5%. In the EU, production of capital goods fell by 16.4%, intermediate goods by 11.9%, energy by 9.1%, durable consumer goods by 7.5% and non-durable consumer goods by 6.0%. The largest decreases were registered in Portugal (-14.8%), Germany and Spain (both -14.1%) and Italy (-13.7%). An increase was observed in Ireland (+4.5%).
In June 2020, the COVID-19 containment measures widely introduced by the Member States continued to have a noticeable impact on international trade in goods, although there are signs of improvement compared to the previous month. The first estimate for euro area exports of goods to the rest of the world in June 2020 was 170.3 billion, a decrease of 10.0% compared with June 2019 (189.3 bn). Imports from the rest of the world stood at 149.1 bn, a fall of 12.2% compared with June 2019 (169.9 bn). As a result, the euro area recorded a 21.2 bn surplus in trade in goods with the rest of the world in June 2020, compared with +19.4 bn in June 2019. Intra euro area trade fell to 150.6 bn in June 2020, down by 7.3% compared with June 2019.
The first estimate for extra-EU exports of goods in June 2020 was 154.4 billion, down by 9.6% compared with June 2019 (170.8 bn). Imports from the rest of the world stood at 133.7 bn, down by 12.8% compared with June 2019 (153.3 bn). As a result, the EU recorded a 20.7 bn surplus in trade in goods with the rest of the world in June 2020, compared with +17.5 bn in June 2019. Intra-EU trade fell to 235.4 bn in June 2020, -6.4% compared with June 2019.
In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual inflation is expected to be -0.2%, down from 0.4% in July 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 August (1.7%, compared with 2.0% in July), followed by services (0.7%, compared with 0.9% in July), non-energy industrial goods (-0.1%, compared with 1.6% in July) and energy (-7.8%, compared with -8.4% in July).
In July 2020, a month marked by some relaxation of COVID-19 containment measures in many Member States, the euro area seasonally-adjusted unemployment rate was 7.9%, up from 7.7% in June 2020. The EU unemployment rate was 7.2% in July 2020, up from 7.1% in June 2020. These figures are published by Eurostat. Eurostat estimates that 15.184 million men and women in the EU, of whom 12.793 million in the euro area, were unemployed in July 2020. Compared with June 2020, the number of persons unemployed increased by 336 000 in the EU and by 344 000 in the euro area.
Economy of Japan
The Japanese economy in July grew by 0.2% on the month in real terms, according to estimates by the Japan Center for Economic Research, indicating a second consecutive month of expansion. External demand was responsible for lifting the gross domestic product as a whole. Japanese exports to the U.S. and China jumped by significant margins. However, the country`s internal demand went into negative territory in July. Capital expenditures shrank 2.7% while consumer spending receded by 1.4%, according to JCER.
Japan`s economy contracted by a revised 7.9 % in the April-June period compared with the preceding quarter, producing an annualized rate of decline of 28.1%, the Cabinet Office said. A preliminary estimate of a 7.8% contraction had suggested an annualized pace of decline of 27.8%. The revision factored in new data about business investment.
Companies across all industries reduced capital investment in the second quarter, as they were uncertain about when the economy would return to normal after the coronavirus pandemic. Economists expected a decline of 8.0%, or an annualized fall of 28.4%, according to a survey by Nikkei affiliate QUICK.
The country`s industrial output in July jumped a record 8.0 percent from the previous month, as production of autos and their parts continued rebounding from a plunge triggered by the coronavirus pandemic, government data showed. The seasonally adjusted index of production at factories and mines stood at 86.6 against the 2015 base of 100, the Economy, Trade and Industry Ministry said in a preliminary report.
The July output increase was the highest since January 2013 when the ministry started compiling data under the current method, and was the second straight rise following a downwardly revised 1.9 percent increase in June. Still, the result was not strong enough to prompt the ministry to revise up its assessment, as the index level remains low compared to the pre-coronavirus reading of 95.8 in March.
Japan saw its first goods trade surplus in four months in July, while exports remained sluggish with the continued impact of the novel coronavirus pandemic suppressing overseas demand, government data showed. The country logged an 11.6 billion yen ($109 million) goods trade surplus, helped by the first increase in exports to China in seven months. Exports to Japan`s largest goods trading partner rose 8.2 percent from a year earlier, according to a preliminary report by the Finance Ministry.
Overall exports in July dropped 19.2 percent from a year ago to 5.37 trillion yen to mark a double-digit fall for the fifth straight month, as the continued impact of the pandemic suppressed overseas demand. Exports sagged for the 20th consecutive month. Imports posted a sharper fall of 22.3 percent to 5.36 trillion yen, helping the world`s third-largest economy log a trade surplus in the month. It was the 15th straight month of decline mainly on falling prices of crude oil imported from countries such as the United Arab Emirates and large drops in imports of liquefied natural gas and coal from Australia.
Japan`s core consumer prices were stubbornly unchanged in July, dashing hopes for a modest rise as the coronavirus pandemic hit household demand and revived fears of a national plunge back into deflation. A slow economic recovery from last quarter`s record slump is expected to weigh on prices as consumer demand collapsed amid resurgent infections, which will in turn hit profits, jobs and business investment, analysts say.
The so-called core-core inflation index, which excludes food and energy prices, rose 0.4% in the year to July, maintaining the pace seen in the last two months. The BOJ projects consumer prices to fall 0.5% this fiscal year to next March and stay well below its 2% target through early 2023.
Japan`s low unemployment rate on paper suggests an economy weathering the coronavirus reasonably well, but official figures belie worsening prospects for the country`s army of temporary workers, who make up about 40 percent of the jobs market. Japan`s jobless rate stood at 2.8 percent in June, much lower than 10.2 percent in the United States and 7.8 percent in the 19-member eurozone.
But a close look at data shows a rising number of people dropping out of the jobs race. That prevents the official jobless rate - the ratio of job seekers who are yet to land work - from rising much. About 2.4 million furloughed workers are kept on payrolls backed by state subsidies, which the government is seeking to extend beyond its end-September expiration.
Economy of Russia
The decline in Russia`s GDP, according to the first estimate, totaled 8% year-on-year in the second quarter of 2020 and 3.4% year-on-year in the first half of the year , the Federal Statistics Service (Rosstat) reported. Rosstat preliminary estimated the decline in Russia`s GDP in the second quarter at 8.5%, in the first half of the year - at 3.6%. Under the current prices, the volume of GDP is estimated at 48.606 trillion rubles ($644 bln) in the first half of 2020.
In the second quarter, amid the spread of coronavirus infection, the biggest drop in added value was marked in services, in particular in such sectors as hotels and restaurants (-56.9%), culture and sports (-28.0%), in transport (-19.3%), trade (-12.7%). Also a significant drop was observed in the extractive industry (-12.8%) and manufacturing (-7.9%). According to the forecast the Economic Development Ministry presented in May, by the end of 2020, Russia`s GDP will fall by 4.8%.
Russia`s industrial production slumped 8.0 percent from a year earlier, easing from a 9.4 percent contraction in the previous month and matching market consensus. Output fell at a softer pace for manufacturing (-3.3 percent vs -6.4 percent in June), extraction of raw materials (-15.1 percent vs -14.2 percent) and production and distribution of electricity, gas (-2.6 percent vs -4.8 percent). At the same time, distribution of water, sewage plunged 7.1 percent in July, compared to a 6.5 percent drop in the previous period. Industrial Production in Russia increased 3.4 percent in July over the previous month.
Russia`s trade surplus narrowed to USD 4.25 billion in July of 2020 from USD 11.05 billion in the same month of the previous year, below market expectations of a USD 5.5 billion surplus. Exports slumped 29.2 percent from a year earlier to USD 23.68 billion, led by lower shipments to both non-CIS (-32.6 percent) and CIS countries (-7.8 percent). Meanwhile, imports fell at a softer 13.2 percent to USD 19.42 billion, dragged down by reduced purchases from both non-CIS countries (-13.2 percent) and CIS countries (-13.4 percent).
The annual inflation rate in Russia rose to 3.6 percent in August of 2020 from 3.4 percent in the previous month and above market expectations of 3.5 percent, though remaining below the central bank`s 4 percent target. It was the highest inflation rate since October 2019, pushed up by prices of food products (4.3 percent vs 4.2 percent in July), non-food products (3.4 percent vs 3.1 percent) and services (2.7 percent vs 2.5 percent). On a monthly basis, consumer prices showed no growth, after a 0.4 percent gain in July and in line with market consensus.
Russia`s unemployment rose to 6.3 percent in July 2020, the highest since March 2012 and above market expectations of 6.1 percent, as the coronavirus pandemic hit the labor market. The number of unemployed people increased by 125 thousand from a month earlier to 4.731 million and those officially registered as unemployed surged by 524 thousand to 3.311 million.