PUBLIC DEBT TOPS 12 PERCENT OF WORLD GDP. The world’s governments have added about $11.7 trillion to their debt this year, equivalent to 12 percent of the global economic output, according to the International Monetary Fund (IMF) in its semiannual Fiscal Monitor report.
The new debt will claim an additional 9 percent, on average, of national GDP and will push the cumulative amounts owed close to 100 percent of the world’s economic production.
The U.S. now owes 130 percent of its 2020 GDP, the agency estimates.
Stimulus spending, tax cuts, loans, guarantees, and support payments by the world’s governments are “truly unprecedented and decisive and extremely important in avoiding a financial and economic collapse,” said Vitor Gaspar, director of the IMF’s fiscal affairs department.
Central banks have chipped in an additional $7.5 trillion through purchases of government securities and other measures. The banks also have made borrowing and deficit spending easier by forcing interest rates to historically low levels.
However, the new debt will weigh on public spending for generations to come.
The world’s economy will contract 4.4 percent this year, the IMF thinks, less than the 5.2 percent it had forecast in June. The agency also scaled back its growth estimate for next year, from 5.4 percent to 5.2 percent.
“The near-term priority is to avoid premature withdrawal of fiscal support,” Gaspar said. “Support should persist at least into 2021 to sustain the recovery and limit long-term scarring.”
The pandemic and global economic shutdown will cast from 100 million to 110 million people worldwide into poverty, erasing more than 20 years of progress, the IMF has said.
TREND FORECAST: As we have noted in this and previous issues of the Trends Journal, the more people fall into poverty, the higher crime rates will rise, corruption will increase, and social unrest will accelerate.
Again, as evidenced by the mainstream reporting of the dire poverty forecasts, absent in their coverage are the many dire consequences that will sweep the globe as the “Greatest Depression” worsens.
SHUTDOWN MAY HAVE DONE PERMANENT DAMAGE, IMF SAYS. The global economic recovery is uneven and “marked by significant uncertainty” as the virus still rampages across the globe, said the policy committee of the International Monetary Fund (IMF) on 15 October.
Without continued stimulus spending and other forms of government aid, the world’s economy, and those of individual nations, might never recover to pre-pandemic levels, the group warned.
Those “long-lasting scars” could include slower productivity growth, higher rates of poverty and economic disparity, and economies more vulnerable to disruption.
The IMF panel also endorsed a six-month extension of the moratorium on debt payments by poor nations that the G20 economic group enacted on 14 October.
The IMF has predicted a 4.4-percent economic contraction this year, the worst since the Great Depression. The shock could cast 114 million people into extreme poverty, the World Bank said, which means subsisting on $1.90 a day or less.
“Wealthy countries are making decisions for the entire world about the crisis,” said Eric LeCompte, Executive Director of aid group USA Jubilee Network. “Nearly 90 percent of all global stimulus was spent in wealthy countries and less than three percent in developing countries.”
Aid groups have faulted China in particular for not contributing enough to aid poor nations.
Economic pain will not be limited to developing countries, the IMF warned in its twice-yearly World Economic Outlook, published 13 October.
Living standards across the globe may fall and taxes rise on corporations, capital gains, and the wealthy to begin to repay the unprecedented level of public debt incurred to rescue the world’s economy, the report noted.
Entire economic sectors may no longer be viable, it said. Economic ecosystems relying on urban commuters will suffer; nations that rely on tourism and exporting raw materials will be “in a particularly difficult spot,” the study warned.
By 2022, advanced economies will be 4.7 percent smaller than the IMF’s pre-pandemic forecasts, with emerging nations suffering an 8.1-percent reduction in potential growth.
“The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic,” said IMF chief economist Gita Gopinath. “Not only will the incidence of extreme poverty rise for the first time in over two decades, but [economic] inequality is set to increase.”
Despite the dire fiscal outlook, countries still able to borrow should do so as much as possible to prevent even worse short-term economic contraction, Gopinath urged.
Doubling Down
In another, “better late than never” forecast, the Brookings-Financial Times Tracking Index for the Global Economic Recovery reported last week that the implication of the global economic shutdown is far from complete in developed economies, with emerging nations faring much worse.
Repeating what we had noted since governments began pumping in trillions to boost failing economies and equity markets, they note that financial markets have remained stable because of central banks’ intervention. They also report that household spending has been strong, due in part to government payments to individuals, the index found; manufacturing also has revived, boosting global trade.
PUBLISHER’S NOTE: The Trends Journal was first to warn of the degree of damage the “Greatest Depression” would wreak on the global economy. Note, however, that the dire socioeconomic and geopolitical implications of the COVID War are not being analyzed of forecasted by the institutions, governments, or the mainstream media.
WORLD BANK, IMF FAULTED OVER STIMULUS SPENDING. The World Bank and the IMF were faulted for their approaches to aiding poor countries during the current financial crisis as the two institutions held their annual meetings last week.
The World Bank, which declares its mission to be relieving poverty around the world, has pledged to spend $160 billion to help poor countries recover from the pandemic and economic shutdown. The amount is the “maximum possible on the current capitalization” of the bank’s program, said bank president David Malpass.
The bank is on track to spend only $79 billion, according to an analysis by the Center for Global Development, a private thinktank. The World Bank disputes the finding.
Oxfam International rebuked the IMF’s call for austerity measures once the pandemic and economic crisis have passed.
Eighty-four percent of IMF loans across 67 countries called for “fiscal consolidation measures,” another term for financial austerity, Oxfam pointed out.
“Our message has been clear,” said Gerry Rice, an IMF spokesperson. “Spend what you need to save lives and livelihoods.” When the twin crises end, however, many countries will have lower revenues and higher debts, he said.
The situation is likely to force many of those countries to ask to restructure their loans or to have some portion of the loans forgiven outright.
The IMF supports social spending for those in need, taxing the wealthy to help reduce public debt, and closing tax loopholes that allow corporations and the rich to avoid paying a proportionate share of public costs, Rice said.
Don’t Pay the Bills
On 14 October, the G20 nations voted to continue for six months the moratorium on poor nations’ debt payments.
That is not long enough, said Carmen Reinhart, the World Bank’s Chief Economist.
The suspension should be extended for a full year, she said, noting that about half of poor countries are close to “debt distress.”
Almost 60 percent of those debt payments due this year are owed to China, which has participated in debt relief “less than fully,” Reinhart noted, highlighting forecasts that China will be the only major economy to grow this year. “Full participation is something we should strive for but have not so far seen,” she said.
RENEWED SHUTDOWNS HALT EUROPE’S ECONOMIC RECOVERY. As we have reported, the climb in COVID cases has led politicians to renew shutdowns across parts of Europe, virtually halting the region’s economic recovery.
In France, where among the many new restrictions is the closing down of bars and restaurants in and around Paris for two months, the government lowered its 2020 economic forecast from 1-percent growth to zero.
And with parts of Spain again under government-imposed lockdowns and restrictions, their GDP may plummet as much as 12.6 percent this year, the country’s central bank warned.
After showing vigor earlier this summer, Britain’s economy grew just 2.1 percent in August, less than analysts were forecasting.
The U.K.’s program covering 60 percent of wages for workers that employers could fire, but retain instead, will expire this month, potentially exposing hundreds of thousands of workers to layoffs.
The program has cost the British treasury an estimated £39 billion, the equivalent of about $50 billion.
The artificial boost of the Eurozone after the European Central Bank (sters) forged a landmark €750-billion recovery plan and factories reopened.
But a continued recovery depended on people buying the factories products. With movement restricted, retailers closed or cut back, and people again worried about losing their incomes, the recovery has lost its fuel.
Spain has concocted a €72-billion economic rescue plan, with 80 percent of the funds coming from the European Union, but the EU’s distribution of the funds is still being worked out and probably will not be made until sometime in the first quarter of 2021.
Italy is waiting for a €209-billion rescue from the European Central Bank, equivalent to about $246 billion, but also has pledged to shrink its debt, which began the pandemic at 134 percent of GDP. Honoring that pledge will eventually impose austerity measures that will hobble growth even more.
Debt will hang over the recovery for the foreseeable future. EU rules limit the amount of debt that member nations can carry. Those limits have been suspended during the crisis but will be re-imposed at some point, limiting economic growth as countries divert public funds to pay off loans from the EU.
TREND FORECAST: There will be more monetary methadone injected in to the chronically ill European economy in 2021. Thus, the more cheap money pumped into the economy, the lower the value of the euro.
CITY CENTERS BECOME GHOST TOWNS. In London’s financial district, visits to restaurants are less than a third the number before the shutdown, with businesses remaining open suffering an even greater loss of trade as a new round of virus infections sweeps the city.
British Land, a major owner of office buildings, reported that only about 18 percent of the city’s office workers are regularly on-site.
Elsewhere in Britain, restaurant traffic is almost 70 percent of its pre-pandemic volume.
In NYC and SF, eateries and bars are seeing less than half the number of customers that came during the pre-pandemic days, compared to only a 15-percent drop in the national average.
Visits to the center of Paris were down 40 percent during the week ending 9 October, compared to January levels; downtown Stockholm saw a 20-percent reduction.
The rates of decline in urban visits were derived by the Financial Times, which analyzed Google’s mobility data.
Google’s data also shows that passenger volumes on public transport have fallen 40 and 47 percent in London and New York City, respectively.
The pandemic and shutdowns are likely to have a permanent effect, speeding the shift of jobs and families out of cities to suburban and exurban areas, some experts say.
BRITISH PUBS FACE LAST CALL. More than a quarter of Britain’s almost 40,000 pubs may not survive the current shutdown, risking as many as 290,000 jobs, according to the British Beer and Pub Association.
Forty-three percent of pub workers are under age 25, the association said.
The U.K. government has focused on pubs as vectors for virus transmission.
The Marston’s pub chain, with most of its shops in the north of England where restrictions are the most stringent, said last week it will let go of 2,150 workers.
The Green King chain will close 79 inns and say farewell to 800 employees.
The City Pub, Fuller’s, Wetherspoon’s, and Young’s chains each have said they will terminate several hundred workers.
TRENDPOST: As we had forecast, across the business spectrum, the Bigs will get bigger and the crunch will be hardest on independent operators who lack the financial resources chains have.
MAERSK TRIPLES SECOND-QUARTER PROFITS, WILL CUT JOBS. A.P. Moeller-Maersk, the world’s biggest ocean shipping line, tripled its second-quarter profits to $427 million from $141 million a year earlier, the company announced.
Maersk has raised its earnings forecast for the year, from the previous $6 to $7 billion to $7.5 to $8 billion now.
Shipping was down about 3 percent in the third quarter, year-on-year, but stronger than the 5- to 7-percent decline the company had predicted.
“The outlook for the fourth quarter is solid,” said Soren Skou, Maersk’s CEO, because “volumes have rebounded faster than expected, our costs are well under control [and] freight rates have increased due to strong demand.”
The company continues a restructuring that began in 2015 and will take a $100 million charge in the third quarter to fund the effort. About 2,000 jobs will be cut as part of the plan, which ultimately could impact as many as 27,000 of Maersk’s 80,000-person workforce.
CHINESE IMPORTS SET RECORD; EXPORTS AND RENMINBI ALSO GAIN. The value of China’s September imports rose to a record $203 billion, up 13.2 percent year on year and the most of any month in 2020. The previous record was set in September 2018, before the U.S.-China trade war intensified.
The country upped its purchases of agricultural products and semiconductors. Imports of iron ore increased as a result of government investment in industrial recovery that has expanded China’s share of the global steel market.
Imports had been forecast to rise only 0.4 percent.
The dramatic gain offers yet more evidence of China’s robust economic recovery from the pandemic-inspired economic shutdown.
“The sharp rebound was driven by the continued domestic recovery and increased domestic demand due to currency appreciation,” noted HSBC economist Erin Xin.
Exports rose 9.9 percent during the month on foreign sales of electrical equipment and medical devices. The gain marked the fourth straight month of growing exports.
The exports satisfied the continuing global demand for personal protective equipment and for computers and home entertainment gear as people shelter in place and work from home.
The gains in exports brought added strength to the renminbi, China’s internal currency. China hopes the robust currency will improve its prospects as an international trade currency and convince central banks to add to their renminbi holdings, especially amid economic uncertainty and political turmoil in the U.S.
The strong renminbi, coupled with China’s bond yields of around 3 percent, have kept foreign investment flowing into the country and helped persuade stock and bond indexes to add China to their list of benchmark countries.
TREND FORECAST: As we have said before, the 20th century was the American century, the 21st century will be the Chinese century. It should be noted that U.S presidents, especially Barack Obama, used to brag about “American exceptionalism.” As the nation declines financially, socially, physically, and mentally, that phrase is no longer repeated by its top politicians.
CHINA’S THIRD-QUARTER GROWTH BOOSTS STOCKS. China’s economy grew 4.9 percent in the third quarter, compared to the same period in 2019, according to the country’s National Bureau of Statistics. The expansion followed a 3.2-percent gain in the second quarter.
The rise was aided by a 3.3-percent increase in spending by China’s consumers.
Although the expansion fell short of the 5.2 percent expected by economists surveyed by Wind Information, Chinese stock markets edged up on 19 October from 0.51 to 0.67 percent on the news.
During the same quarter, Japan’s exports declined 4.9 percent, the country’s finance ministry said.
GDP Grows
China’s share of global economic growth will expand from 26.8 percent this year to 27.7 percent in 2025, according to Bloomberg’s analysis of figures from the IMF.
India’s share of economic growth will be 13 percent over the next five years and the U.S.’s 10.4 percent. Indonesia will claim 3.5 percent, Russia will claim 2 percent, and all other countries less than 2 percent.
However, by 2025 the pandemic and shutdown will have robbed the world’s economy of $28 trillion that it would have gained without the twin crises, the IMF said.
China will lead economic growth in 2021, expanding by 8.2 percent as the world’s economy as whole grows 5.2 percent, the IMF predicts. The U.S.’s GDP will expand by 3.1 percent next year, according to the agency.
China’s economy will exceed 2019’s output this year, the IMF says, while all other economies’ outputs will remain below 2019 levels through 2021.
TREND FORECAST: China’s institution of dual circulation economy – relying less on exports as the global economy slides deeper into the “Greatest Depression” and more building a self-sustaining domestic economy – will accelerate its GDP higher than other major nations.
XI CALLS FOR CHINESE TECHNOLOGICAL SELF-SUFFICIENCY. Having built its blooming economy on technologies developed abroad, China now “must take the road toward a higher level of self-sufficiency,” Chinese president Xi Jinping said on 14 October.
“The world economy is at a low ebb and international trade and investment have drastically shrunk,” therefore, “we’re experiencing a transition the likes of which hasn’t happened for a century” Xi said.
Xi made his comments as part of a 40th anniversary celebration of the city of Shenzhen being designated a “special economic zone.”
The city, adjacent to Hong Kong, became a laboratory for free-market experimentation and economic development rooted in technology and is home to Chinese tech giant Huawei, among other firms.
Warning that “the world has entered a period of turbulence and transformation,” Xi said that China must “gain the initiative in the global technological revolution.”
Among other things, Xi hopes to develop a national industry in computer chips, for which China still depends on suppliers in South Korea, Taiwan, and the U.S., despite having invested billions to be competitive in that industry.
Shenzhen will continue to be a center of economically-focused technological innovation, he said, pledging to increase spending on research and development.
By focusing his comments on Shenzhen, Xi signaled that Hong Kong will play less of a role in China’s economic future, some analysts said.
Xi also promised to allow free markets a greater role in the economy.
His vow was greeted with pessimism in China’s business community. Since taking power in 2012, Xi has emphasized government control of key industries. Last month, the Chinese Communist Party revealed plans to take an even greater role in the private sector.
TREND FORECAST: As other nations pump money into the pockets of the public and the financial markets, China’s self-sufficiency model (while also injecting yuan into select companies) is doing what Americans did during the Great Depression with the Works Progress Administration (WPA): they are building their infrastructure, and, in doing so, they’re creating more jobs.
In contrast, while China keeps building its top-of-the-line 21st century rail, as we have reported… across America, its a third world commute, as its early 20th century consumer rail system continues to decay.
CHINA: DIGITAL CURRENCY WORLD LEADER. China has taken another step toward releasing its digital currency.
Fifty thousand Chinese consumers lining in the city of Shenzhen were chosen at random through a drawing and each was given 200 yuan – about $30 worth – of the government’s new digital money to spend at more than 3,000 area retailers.
Users had to download an app to their smartphones and create a dedicated account for the digital money with one of China’s four government-owned banks. Each contactless transaction creates a unique code that merchants scan to register the transaction against the buyer’s bank account.
That gives the banks and, therefore, the government the power to see who is paying what price to buy what.
It was the country’s largest experiment yet in distributing and processing the digital currency, dubbed Digital Currency Electronic Payment (DCEP), the strength and stability of which is backed by the Chinese government.
China’s economy is rapidly going digital and shoppers already are largely comfortable with cashless or digital transactions.
The digital yuan is being introduced not only to defend China’s economy against outside forms of currency and digital payments, such as Bitcoin, PayPal, or the dollar, but also to eventually replace physical cash entirely. The DCEP could also create a shield against financial sanctions on China by the U.S. or other powers that want to punish its behavior.
The government is partnering with tech companies to expand the DCEP’s use for things such as ride-hailing and food delivery, broadening its usefulness and, thereby, its wider acceptance.
“We must build an independent and high-quality financial infrastructure, quicken the pace of research and development of the central bank’s digital currency, and ensure that pilot tests show [the DCEP] is controllable and safeguards the security of payments,” said Chen Yulu, deputy governor of the People’s Bank of China.
The Chinese government plans to have its DCEP in general public use by February 2022 when Beijing hosts the winter Olympics.
“In the future, everyone will be using DCEP,” said Chandler Guo, a Chinese bitcoin pioneer.
China now leads in experience and technology around digital money, which could bolster the yuan’s claim to being a global currency.
At present, 60 percent of international transactions are made in dollars and 20 percent in euros. A digital yuan could vie for a larger share of those transactions.
During the pandemic and shutdown, the world has “gone into a different pace of digital,” said Charlotte Hogg, Visa’s CEO of European Operations. “People who never used digital payments before are using them. It’s going to be ever more important for our recovery for all of our business communities to be able to use digital forms of payment.”
On 2 October, the European Central Bank announced that it is planning to introduce a digital euro.
TREND FORECAST: As we had forecast, world governments will go from DIRTY CASH TO DIGITAL TRASH and, of the major nations, China will lead the charge.
Indeed, yesterday, U.S. Federal Reserve Chairman Jerome Powell told a panel discussing digital payments hosted by the International Monetary Fund, “We do think it’s more important to get it right than to be first and getting it right means that we not only look at the potential benefits of a CBDC, but also the potential risks, and also recognize the important trade-offs that have to be thought through carefully.”
CHINESE STOCK MARKETS REACH RECORD HIGHS. Powered by the country’s rapid recovery from its economic shutdown, China’s stock markets have set a new record value of $10.08 trillion.
The previous record of $10.05 trillion was set in 2015 during a stock market bubble, which deflated by half when the government cracked down on leveraged trading.
The Shanghai and Shenzhen stock markets have taken in about $26.5 billion in new investments this year, much from foreign investors placing their money by way of a “stock connect” program through Hong Kong.
Partly as a result, China’s CSI 300 stock index has gained 17 percent this year, compared to the U.S. S&P, which has climbed 9 percent.
While CSI 300 stocks traded at more than 40 times earnings during the 2015 craze, shares currently are priced at less than 19 times earnings, indicating that the market is hewing closer to fundamentals than speculation.
“Investors are looking for growth and finding it very scarce elsewhere,” said Craig Coben, Bank of America’s co-chair of Asia Pacific global capital markets.
