E.U. ANNOUNCES RESTRUCTURING PLAN WORTH ALMOST €2 TRILLION. Another day, another list of government plans to rescue nations from falling in depression.
The latest is the European money pumping scheme to reinvigorate the EU economy as many of its nation’s GDP rapidly decline.
Highlights:
The European Commission (EC) will borrow €750 billion on the open market.
- €390 billion will be given to the hardest-hit countries as grants; the balance will be available to member countries as loans.
- The EC has created a €1.1-trillion budget for 2021 through 2027 designed to stimulate the continent’s economy.
- Recovery funds will aid businesses needing help to recover.
- The plan includes long-term economic reform for some member countries.
- The plan also creates mechanisms to reduce the risk of future economic disasters.
The plan makes Europe a major borrower in world money markets for the first time. The EC has promised to repay the loans by 2058.
A failure to reach agreement could have ignited a split economic recovery, with northern countries faring much better than nations of southern Europe, which lack a strong manufacturing infrastructure and rely instead on tourism and services.
Such a division would have risked the future of the euro as a currency and of the European Union itself, analysts said.
TREND FORECAST: As the “Greatest Depression” worsens, populism movements will escalate throughout much of Europe, with demands to break away from the European Union and calls to ditch the euro and a return to national currencies.
While the euro is gaining strength against the U.S. dollar, we forecast it will decline as nation’s debt levels soar, unemployment rises, and more monetary methadone is injected into falling economies.
This trend will also prove positive for pushing gold and silver prices higher as investors seek safe-haven assets in times of unprecedented economic turmoil.
FORECAST WORSENS FOR EUROPEAN RECESSION. Europe’s economy will contract by 8.3 percent this year, not the 7.4 percent forecast in May, the European Commission said on 21 July.
Next year, the region’s economy will grow by 5.8 percent, the commission predicted.
The economy of the Eurozone – the 19 countries sharing the Euro currency – will contract 8.7 percent this year, a full point worse than the 7.7-percent shrinkage predicted last spring.
The predictions assume lockdown measures will continue to ease at the current pace and the COVID virus will not return at strength, meaning the risk that the forecasts are too optimistic are “exceptionally high,” the commission admitted.
Recently, new lockdown measures were imposed around a German meat-packing plant and several areas of Lisbon, Portugal, after new virus cases flared.
Analysts have said economic activity around Europe, though still weak, is stronger than expected.
EUROPEAN BANKS FACE TIDAL WAVE OF LOAN DEFAULTS. Europe’s banks could see as much as €800 million in bad loans and take a €30-billion loss in revenue over the next three years, warned Oliver Wyman, a billion-dollar U.S. management consulting firm.
In the most probable case, which assumes a slow recovery and no additional shutdowns, loan defaults would reach €400 billion, about 2.5 times as many as in the previous three years.
A return of the virus and subsequent lockdowns would double the number of bad loans, bringing them to about 10 percent of banks’ total loan portfolios.
Banks in Italy, Greece, and some other countries in southern Europe are still struggling to emerge from bad loans made in the past 12 years. Banks throughout Europe have not yet recovered from the Great Recession and are only about half as profitable as their U.S. counterparts.
Banks’ revenues across the continent and the U.K. will shrink to €385 billion this year, Wyman predicts, a loss of €180 billion compared to last year. By 2022, revenues will still be €30 billion below 2019’s.
Banks’ net interest income in 2021 will fall by 8 percent, the company thinks.
TREND FORECAST: The worst is yet to come. From developed to developing nations, the giant debt bubble that has been inflated with cheap money since the Panic of ’08 is ready to burst.
As they have before, governments will rob from the poor and give to the rich in their new 2020 too-big-to-fail bank bailout schemes.
And, as the banking crisis worsens, more cash will be withdrawn as fearful investors seek safe haven assets such as gold and silver.
DEVELOPING NATIONS HEADED FOR DEBT CLIFF. As we keep noting, as economies continue to decline, the debt bubble keeps inflating, and the debt load keeps getting heavier.
Emerging and developing nations around the world have added new debt averaging 5.4 percent of their GDPs to fight the COVID virus and recover from government-imposed economic shutdowns, according to World Bank figures.
In India, Malaysia, Poland, Qatar, South Africa, and Thailand, deficit spending related to the crisis has passed 10 percent of GDP.
In several countries, total government debt now exceeds 50 percent of national economic output.
Countries must budget aggressively to pay down these debts or face a choice between ruining their credit or social unrest due to massive social spending cuts, the bank warned.
The world’s economy will lose $12.5 trillion in total economic production between this year and next, the bank predicted, warning that most of the loss will strike lesser-developed nations.
More than a third of the bonds these governments could face default by 2022, said Adam Wolfe at Absolute Strategy Research.
Egypt, Ghana, and Zambia are most at risk, he added, but Brazil, India, Indonesia, Mexico, Nigeria, Turkey, and South Africa also face heightened risk.
CHINA’S GOVERNMENT, NOT CONSUMERS, DRIVING RECOVERY. China’s economy expanded in this year’s second quarter due to the government’s continued investment in highways and other infrastructure projects.
The national government was eager to approve local jurisdictions’ bond issues to build subway tunnels and renovate train stations; it also was ready with loans to businesses on the condition they not lay off workers.
“It’s all investment,” said Hong Hao, Chief Strategist at the Bank of Communications International. Consumer spending “is the most sustainable part of growth” but it “is doing much less” in China, leaving the economy still weak.
Chinese consumers also are not returning to restaurants, traveling, and spending nights in hotels in large numbers.
Any consumer spending is being done by wealthier Chinese who can work at home and have savings. Consumer spending in villages, towns, and small cities still lags, figures show.
Also, unemployment has remained stubbornly high.
In response, the government is urging young people to enter graduate school and has redefined “employment” to include gray areas such as bloggers and videogamers.
The weakness is likely to soon become more apparent as Chinese factories continue to turn out consumer products faster than domestic consumers are buying them. With other countries struggling in recession and with millions of consumers out of work, foreign markets also are unable to take China’s surplus goods.
China’s veneer of apparent economic strength powered the Shanghai and Shen Zhen stock markets to a 14-percent gain early this month, but these underlying signs of economic weakness have led analysts warn of a speculative bubble forming, resembling one that burst in late 2015 and early 2016.
TREND FORECAST: As with all other governments, the Chinese will do what they can to artificially prop up its economy. Considering the global damage inflicted by politicians locking down entire nations, Beijing’s efforts to inflate growth as export revenues decline will be limited.
In addition, with its debt-to-GDP ratio an estimated 317 percent (U.S.: 106.9 percent in 2019) it will prove difficult for the Chinese government to inflate its economy without putting severe downward pressure on its currency, the yuan, which has gained strength over the past two months.
Also, both trade and military tensions between China and the U.S., and friction with India and neighboring nations… plus the conflict with Hong Kong will negatively impact economic growth.
RENTS STILL FALLING IN CHINESE CITIES. Residential rents in China’s large and mid-size cities fell 2 percent in June, marking the third consecutive month of declines, according to Beijing Zhuge House Hunter Information Technology Inc.
Rents in Beijing, a city of 21 million residents, dropped 1.4 percent in June, the Chinese Academy of Social Sciences reported.
In part, falling rents highlight lingering unemployment among young college graduates, still at 19.2 percent across the country.
The softness in rents, which have climbed 60 percent since 2012, also attest to the country’s continuing economic uncertainty, even though the government reported second-quarter GDP galloped 11.5 percent ahead of the year’s first three months.
TREND FORECAST: With rents declining as China’s housing prices continue to climb, these are early warning signs that its highly inflated housing bubble is ready to burst