Yet another country imploding under a wall of debt.
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rssGermany forecasts worst recession since at least 1950
The German government expects the fallout from the virus outbreak to send the economy into its worst recession since the aftermath of WWII
- Forecasts GDP to fall by 6.3% in 2020
- Forecasts GDP to grow by 5.2% in 2021
The above is the latest projections by the economy ministry, and that shouldn’t come as much of a surprise given the economic hit across the globe – not just in Germany.
This hinges on some kind of U-shaped or V-shaped recovery but the issue is we’re not even going to be sure how the next quarter is going to look like.
The focus right now is on easing restrictions but what happens if there is a secondary outbreak or the infection rate starts rising again? The latest report from Germany is that the virus’ reproduction rate is back up to 0.96 from 0.70 as of Monday.
If that goes back above 1.00, will the government impose another round of restrictions? What happens if this continues all the way into Q3 or even Q4?
It is very much play by ear at this point and the same applies to every country in the world.
US advanced GDP for 1Q -4.8% versus -4.0% estimate
US GDP for 1Q 2020
The US advanced GDP data for the 1Q came in at +4.8% initially but the headlines were then corrected to read -4.8% vs -4.0% estimate.
- Personal consumption fell -7.6% vs -3.6% estimate
- Core PCE rose 1.8% vs 1.7% estimate
- GDP price index rose 1.3% vs 1.0% estimate
The data signals the start of the recession. The worst is yet to come as GDP is expected to plunge in the 2Q
Japan PM Abe: The economy is in a situation I have not experienced before
I think that is almost certainly the case for everyone in the world right now
- The psychological situation is worse than the Great Depression
- It is not true that cost of Olympics delay has been agreed
- Important for IOC, organizers to cooperate on the extra costs
Even before the coronavirus pandemic, the Japanese economy had been struggling big time and all of the latest developments will just exacerbate those problems.
The BOJ is also starting to run out of creative juice to try and bolster economic confidence and there is a real fear of strong deflation risks the longer this keeps up.
BIS: In 2019, euro-denominated credit overtook US dollar-denominated credit as the largest stock of foreign currency credit to emerging Europe
The balance of the main central banks.
Some bleak outlooks for the global recession ahead
Some of the commentary in the piece from Reuters is very downbeat indeed.
JPM:
- “The global economy is collapsing at a pace not seen since World War Two”
- “Staggered re-openings of economies until a vaccine is widely available imply more of a U- rather than a V-shaped recovery for the global economy.”
HSBC:
- “We are likely to see a deeper contraction in 2020 than during the global financial crisis. But so much depends on what comes next: how long the suppression measures last, what medical science can deliver, what further policy support is available”
- “What is already clear is that this is not just a short-term issue: the medium to long-term implications for global growth, debt levels, public policy and globalization are going to be vast.”
Rabobank:
- “We are seeing credible claims in the UK and U.S. that millions/tens of millions are going to be unemployed – again taking us back to black-and-white memories of long queues of the jobless holding signs saying ‘Will Work For Food'”
Reuters poll shows global economy expected to have its steepest contraction on record this year
Reuters polls of economists surveyed over the past few weeks
- global economy will suffer its steepest contraction on record this year
- a longer, U-shaped recovery more likely
- More than 55% or 87 of 155 economists said the global economic recovery would be U-shaped
- Thirty-one analysts said it would be V-shaped
- 24 said it be more like a check mark
- A few respondents expected a W- or L- shape
Global economy was forecast to shrink 2.0% this year
- compared to a 1.2% contraction predicted just three weeks ago and growth of 1.6% forecast before that in the March 20 poll
Eurozone April flash services PMI 11.7 vs 22.8 expected
Latest data released by Markit – 23 April 2020
- Prior 26.4
- Manufacturing PMI 33.6 vs 38.0 expected
- Prior 44.5
- Composite PMI 13.5 vs 25.0 expected
- Prior 29.7
The poor readings here have been forewarned by the dismal French and German releases earlier, as we see an unprecedented collapse in the Eurozone economy.
The services and composite prints are at series lows while the manufacturing print sits at a 134-month low, though manufacturing output crumbled to its lowest on record.
Again, this is all largely due to the virus outbreak situation and lockdown measures causing businesses to close – resulting in a collapse in demand and supply.
Markit notes that:
“The extent to which the PMI survey has shown business to have collapsed across the eurozone greatly exceeds anything ever seen before in over 20 years of data collection. The ferocity of the slump has also surpassed that thought imaginable by most economists, the headline index falling far below consensus estimates.
“Our model which compares the PMI with GDP suggests that the April survey is indicative of the eurozone economy contracting at a quarterly rate of approximately 7.5%.
“With large swathes of the economy likely to remain locked down to contain the spread of COVID-19 in coming weeks, the second quarter looks set to record the fiercest downturn the region has seen in News Release Confidential ‘ Copyright © 2020 IHS Markit Ltd Page 3 of 4 recent history.
“Hopes are pinned on containment measures being slowly lifted to help ease the paralysis that businesses have reported in April. However, progress looks set to be painfully slow to prevent a second wave of infections. In the face of such a prolonged slump in demand, job losses could intensify from the current record pace and new fears will be raised as to the economic cost of containing the virus.”
The danger of debt becoming more expensive as GDP drops for emerging markets
South Africa’s debt financing is becoming more expensive
It is an obvious problem. When income is high enough we can finance debt. However, when times are hard not only does income drop, but debt also becomes more expensive. Repayments go up because you are now a riskier borrower. It is the double edged sword of debt that can get you in big trouble. Adam recommended a book recently which really outlines this problem.
And the money kept rolling in (and out). Having read the book it really outlines so clearly the problem that emerging markets have in trying to break free of this debt/bust cycle. If you want to see how the World Bank, IMF and Wall Street work together to ‘support’ emerging markets then read this book. It will also really underscore how bonds can work to really create an uphill struggle for emerging markets when bond yields rise and make borrowing more riskier as well as attracting predatory investors keen to capitalise on a country’s weakness.
South Africa is potentially facing a similar problem to Argentina. The yield curve is steepening as South Africa embarks on a $26billion plan to support the economy.
The funding for that plan is due to come from reallocations within the budget , loan guarantees to banks, the World Bank, the IMF as well as other domestic and international lenders. All well and good to take the loans when times are good. However, the forecast is for a -6.1% contraction this year which will leave a large tax revenue shortfall. This will mean that Government debt could climb to 80% of GDP from around 62%. The problem comes that a vicious spiral can quickly emerge: Falling income, leads to greater borrowing, leads to higher bond yields, leads to steeper repayments. Eventually the bubble bursts and the cards come falling down. Sadly, a number of emerging markets are going to be experiencing this problem going forward. This is one area to watch for SA and hopefully the selective default that Argentina implemented won’t be repeated.