MORE THAN HALF OF EUROPE’S SMALL BUSINESSES EXPECT TO FAIL. One in ten of Europe’s small and medium-size businesses expect to file bankruptcy by next spring; and 55 percent believe they will fail before next fall if revenues remain at current levels, according to a survey of 2,200 businesses in France, Germany, Italy, Spain and the U.K. taken by consulting firm McKinsey & Co.
The survey of businesses with 250 or fewer workers was taken in August, before a new wave of restrictions and shutdowns engulfed the continent.
Small and medium-size businesses employ 90 million people across Europe and most lack the financial resources to survive months, or even weeks, with severely reduced revenue.
In Spain, for example, 83 percent of the 85,000 businesses that have failed since February employed no more than five people.
So far, individual countries have cobbled together wage subsidy programs, cheap loans, and grants to businesses and households to keep their economies afloat. But many of those bailout programs are approaching their end, leading the Bank of England and Germany’s Bundesbank to forecast a growing number of personal and business bankruptcies.
“Policymakers need to do whatever it takes to contain the pandemic and its economic damage, and not withdraw support prematurely to avoid repeating the mistake of the global financial crisis,” the International Monetary Fund wrote in its blog last week.
“For companies, policies now need to go beyond liquidity support and ensure that insolvent but viable firms can remain in business,” it said, by fostering programs to restructure debt or make equity investments in viable firms.
CENTRAL BANKS PRESSURING GOVERNMENTS TO BOOST ECONOMIES. After eight months of cutting interest rates, buying bonds from governments and corporations, and making cheap loans, central banks have run out of options to stimulate their nations’ economies and increasingly are pushing governments to step into the breach, Bloomberg reports.
“There simply isn’t enough demand in the global economy and monetary policy” – the purview of central banks – “can’t generate demand,” Torsten Slok, Apollo Global Management’s Chief Economist, told Bloomberg.
U.S. Federal Reserve chair Jerome Powell and Christine Lagarde, President of the European Central Bank (ECB), have repeatedly called for governments to do more to stimulate their economies. Both also have worried that government supports will be curtailed too soon out of concerns over skyrocketing public debt.
“Massive fiscal support has preserved production capacity,” said ECB vice-president Luis De Guindos in a 12 November video conference. “It is important that this support is maintained and, in some areas, even scaled up in the coming months.”
TREND FORECAST: Central banks and governments around the world will continue to inject more cheap money into the economies to artificially pump them up.
And central banks will keep interest rates low and/or sink them into negative territory. The Reserve Bank of New Zealand (RBNZ) recently said they may move the official cash rate from its barely positive rate into the negative territory.
To date, Japan, Switzerland, and the European Union have negative rates that range from –0.1 percent to –0.8 percent. As noted by the website The Conversation, “It might sound crazy, but if the lending rate is negative and you borrow an amount on interest-only terms, the bank actually pays you interest every period. For example, Jyske Bank in Denmark is offering negative interest payments by effectively reducing the repayment period.”
Last week, Silvana Tenreyro, a Bank of England monetary policy committee board member, told the Yorkshire Post that “the positive evidence related to negative interest rate policy comes from Europe, where it has worked fairly well.”
Market Watch reported that negative interest rates have boosted lending. The ECB’s own research has stated negative interest rates have helped, while eurozone banks have complained those rates have pressured profit margins.
“We will be in the world of low interest rates for a long time. That’s why it’s important for the MPC to engage with the review of negative rates in the U.K.,” said Tenreyro.
Last week, the BOE kept interest rates at 0.1 percent and extended its quantitative easing program by £150 billion.
TREND FORECAST: Again, the lower interest falls and the more cheap money injected into economies, the lower their currencies will fall and the higher precious metals and Bitcoin will rise as investors seek safe-haven assets.
CENTRAL BANK AND GOVERNMENT BAILOUTS HIDING BAD LOANS. Europe’s governments and central banks flooded their economies with cheap money and easier credit requirements to keep businesses afloat; in some cases, loan payments were even suspended.
But now officials are beginning to worry about largesse that went to businesses that were not viable even before the economic shutdown took away their trade.
“We have a very strange crisis” that sees defaults not increasing at the rate that national economies are shrinking, Steven van Rijswijk, ING Groep’s CEO, told the Wall Street Journal.
“When these measures stop, what will the picture be?” he wondered. “We have limited visibility as of yet.”
The Eurozone’s portfolio of failed loans could reach €1.4 trillion if economies shrink more than expected, the European Central Bank said in a recent report. With new lockdowns being imposed across the region, that scenario is plausible, the bank warned.
That scale of default would dwarf that in the aftermath of the Great Recession, the Journal reported.
In Italy, 25 percent of business loans and 15 percent of loans to households were given payment holidays during the country’s shutdown; the loans under suspension totaled about $300 billion, according to Scope Ratings.
More than €52 billion of personal and household loans in Spain are still on hiatus, according to the country’s central bank.
Accounting rules allow banks to categorize loans as performing as long as payments are not missed or the debtors remain out of bankruptcy.
The special terms of government rescue plans, as well as banks’ unwillingness to report bad loans, are hiding loans that already would have soured in normal times, Andrea Enria, the European Central Bank’s chief of supervision, testified before E.U. lawmakers in October.
He warned about banks letting bad loans “rot on their balance sheets.”
TRENDPOST: Should the “Greatest Depression” rapidly worsen, banks will run out of capital if they suddenly are swamped by a wave of defaults. However, it remains impossible to predict how fast the loans would go bad or whether ongoing government support could cushion failed companies into the future.
During the Great Recession, U.S. banks worked with government agencies to shed bad loans quickly and recover. In Europe, however, the previous crisis grew into a government debt crisis that crippled economic growth and was worsened by low interest rates intended to spark new spending and investment.
“At the moment, the biggest bank is governments,” said Matt Long, Chief of European capital markets at Accenture, who was quoted by the Wall Street Journal. “When that stops, we get to see the real ability of borrowers to meet their borrowing commitments.”
VACCINE’S ECONOMIC IMPACT: TWO SIDES. Three of the world’s most important bankers have expressed optimism about a COVID vaccine’s impact on the global economy.
Jerome Powell, Chair of the U.S. Federal Reserve, called news of a vaccine “good and welcome for the medium term” but noted uncertainties about the time to production and distribution.
“It’s just too soon to assess with any confidence the implications of the news for the path of the economy,” he said last week at the European Central Bank’s annual forum on central banking.
Denmark’s decision to exterminate its entire mink population to stop the spread of a mutated COVID form from minks to humans indicated that a vaccine “might not work,” said Christine Lagarde, President of Europe’s Central Bank, at the forum.
However, she said she welcomed news that relieved some of the uncertainty surrounding the future, including Brexit’s progress and she cited Joe Biden’s election as U.S. president.
Andrew Bailey, the Bank of England’s governor, shared to cautious optimism but seconded concerns about the time needed to produce and distribute the vaccine widely.
It is “critically important” that fiscal and monetary policies that have kept national economies functioning through the pandemic and shutdown continue and “bridge over to the other side of the river and continue to support the economy so there is as little lasting damage as possible,” Lagarde said.
The global availability of a vaccine by mid- to late 2021 will boost the worldwide economy, but U.S. and European officials expect the return of jobs and GDPs to pre-pandemic levels still will take well into 2022, according to the Wall Street Journal.
The global economy is shrinking at a rate of $3.4 trillion a year, an analysis by RAND Europe concluded. If a vaccine becomes available across China, Europe, India, Russia, and the U.S., the loss would continue, although at a slower rate of $1.2 trillion, the study noted.
Globally, face-to-face industries such as hotels and restaurants – which account for about 2.5 million of the 10 million net U.S. jobs lost from February through October, according to the labor department – will only approach full recovery after hundreds of millions of people have been vaccinated, the Journal reported.
Approval of a vaccine would signal an eventual end to the “stop-start cycle” of shutdowns being imposed, then eased or lifted, only to be reimposed as the virus regathers strength, Andy Haldane, the Bank of England’s Chief Economist, said in a Journal interview.
“That is all the difference in the world between having a viable business and not… and making that investment and not,” he said.
TREND FORECAST: Absent in the business media reporting is the fact there will be a big anti-vax movement. And, although Big Pharma is selling the effectiveness of the COVID vaccine to be in the 90 percent range, the results of mass inoculation may prove otherwise.
In any event, as we have forecast, yes, there will be an economic boost when people feel safe going out after being vaccinated and governments ease lockdown rules. However, the deadly economic damage inflicted upon the globe, as we have detailed, will not be brought back to life with a vaccination.
SHUTDOWN MAY PERMANENTLY “SCAR” CANADIAN ECONOMY. The economic damage wrought by the pandemic and economic shutdown could leave a permanent scar on Canada’s economy, Carolyn Wilkins, outgoing Senior Deputy Governor of the Bank of Canada, said in a 12 November video speech to the Munk School of Global Affairs and Public Policy.
“Canada is likely to exit the pandemic with… a significantly diminished ability to generate… goods and services and incomes on a sustainable basis and any of those scars could become permanent,” she warned.
To avoid scarring, the country should adopt new attitudes and practices, she said, such as relying more on equity and less on long-term debt to fund new businesses and placing more emphasis on renewable energy.
Social and economic goals should not be seen as separate, she noted, citing Quebec’s day-care system that educates and cares for young children while enabling women to return to the workforce.
Canada has long struggled with lagging productivity and competitiveness; the current crisis affords an opportunity to tackle those problems in fresh ways, she added.
She likened the aftermath of the pandemic to the years following world wars, when economies and societies innovated and changed at speeds previously unimaginable.
“It’s not lost on me that I’m encouraging you and all of us to explore the far side of the moon when right now life still feels pretty difficult here on Earth,” she said.
BRITAIN’S RECOVERY LAGS OTHERS IN EUROPE. Britain’s third-quarter economic expansion lagged that of France, Italy, and Spain, slowed by the shutdown’s harsh impact as well as uncertainties about the country’s exit from the European Union.
Output was 9.7 percent lower than at the end of 2019, a decline twice as great as seen in France, Germany, and Italy and three times worse than reported by the U.S.
The new month-long shutdown of non-essential retailers and Britain’s protracted failure to negotiate a post-Brexit trade agreement with Europe also are hobbling the current quarter’s economic performance, analysts said.
VIRUS SPIKE MAY LEAVE EU BUDGET RULES SUSPENDED. The new COVID wave washing over Europe is sparking new shutdowns, risking a double-dip recession, and may force the European Union (EU) to leave its budget rules for member states suspended for another year or more, Paolo Gentiloni, the EU’s Economics Commissioner, said in a 12 November Financial Times interview.
EU rules oblige member states to keep national debt and deficits within targeted ranges. Those rules were suspended last spring as countries struggled to meet the soaring pandemic-related costs of health care and recover from their economic shutdowns.
EU officials will discuss “in the next few months” leaving the suspension in place into 2022, Gentiloni said.
“The recovery has been interrupted and we will enter next year at a very, very low level of activity,” he added, noting that “the idea of a V-shaped recovery is an illusion and I have never believed it.”
The Eurozone’s economy will contract 7.8 percent this year, then grow 4.2 percent in 2021 and 3 percent in 2022, Gentiloni’s office predicted in an early November forecast.
By 2022’s fourth quarter, Italy and Spain will be furthest below their pre-pandemic economic performance, followed by Belgium, Croatia, and the Netherlands, the analysis said.
ASIA-PACIFIC NATIONS SIGN MAJOR TRADE PACT. As noted in the “U.S MARKETS OVERVIEW” article in this Trends Journal, on 15 November, after eight years of negotiations, China and 14 other Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP), creating a trading bloc that encompasses a third of the world’s economic output and a third of the world’s population.
The new compact dwarfs the European Union and North American Free Trade Agreement in its economic power.
Other countries joining the pact include Australia, Canada, Indonesia, Japan, Malaysia, Mexico, New Zealand, Singapore, South Korea, Thailand, and Vietnam.
The 15 countries in the agreement already have significant trade relations among them; the pact is intended to streamline regulations and supply chains to make trade more open and efficient.
For example, the RCEP abolishes 91 percent of tariffs among members. Non-tariff items Japan sends to South Korea will rise from 19 percent to 92 percent and to China from 8 percent to 86 percent.
Tariffs also will vanish from $50 billion worth of vehicle parts Japan sends to China each year, or about 87 percent, the Japanese government calculates.
The partnering nations see their agreement as an “economic recovery tool” that will enable the partners to recover more quickly from the economic shutdown’s damage, Mohamed Azmin Ali, Malaysia’s international trade minister, told the Wall Street Journal.
The new compact challenges the U.S. to engage more fully as a trading partner with the RCEP bloc.
The U.S. participated in early negotiations that created the Trans-Pacific Partnership, the RCEP’s forerunner. However, the U.S. withdrew from the project when Donald Trump took office.
India withdrew from the group last year, fearing that a flood of imports would damage domestic producers.
PUBLISHER’S NOTE: As I have long said, the 20th century belonged to the U.S. and the 21st century will belong to China because the business of China is business while the business of the U.S. is war… and Europe is going out of business.
CHINA’S ECONOMY BOOMS IN THIRD QUARTER. China’s economy grew 4.9 percent in the third quarter, compared to a year earlier, speeding away from the first quarter’s 6.8-percent contraction and modest third quarter rebound of 3.2 percent, according to the country’s National Bureau of Statistics (NBS).
China’s industrial production grew 6.9 percent in October, building on September’s robust growth and beating markets’ expectations of a 6.5-percent bump.
Consumer spending, as gauged by retail sales, climbed 4.3 percent during the month compared to a year earlier, outpacing September’s 3.3 percent. The consumer sector of China’s economy remains slower than others to recover from the shutdown and fell short of the 4.6-percent jump expected among economists polled by the Wall Street Journal.
Retail sales were boosted by consumers’ liberal spending during October’s eight-day National Day holiday. This month’s sales were amped by China’s e-retailers extended the traditional 11 November Singles Day bargain-shopping spree over several days.
Investment in fixed assets, such as factory equipment, grew 1.8 percent during January through October, year over year, also better than expectations among the economists surveyed.
China’s economic vigor drew in $11.83 billion from foreign investors in October, up 18.4 percent from a year previous and extending the string of rising foreign investment to a seventh consecutive month, the Ministry of Commerce reported on 9 November.
The urban surveyed jobless rate, China’s key measure of unemployment, ticked down during October from 5.4 percent to 5.3, continuing its decline from a 6.2-percent high in February.
China created 10.09 million jobs by the end of October, surpassing its full-year goal of 10 million jobs two months ahead of schedule, the NBS reported.
The country’s economy should grow another 5 to 6 percent in the current quarter, many analysts have predicted.
If China meets that target, its economy will close the year with a 12-month growth rate of 2 percent.
Growth will continue but perhaps more slowly in the new year as ongoing shutdowns and fear of the COVID virus may dampen consumer spending and factory production, Li Wei, an economist at Standard Charter, warned in a comment to the Journal.
Industrial production will be limited in its growth until the rest of the world’s major economies are further along in their recoveries, he said.
Still, the expectation of a bright future has led several government officials to speak of scaling down stimulus programs still in place.
However, Beijing may leave some of those programs in place, at least for now, due to uncertainties besetting the global economic recovery and a growing risk of a wave of debt defaults in the corporate sector, Li said.
CHINESE BANK TO ISSUE BONDS IN BITCOIN. The government-owned China Construction Bank is issuing $3 billion worth of bonds to foreign investors that can be purchased with dollars or Bitcoin.
The bonds are digital tokens, priced as low as $100, and can be traded using dollars or Bitcoin on the Fusang Exchange, a trading house for cryptocurrencies in the tax haven of Labuan, Malaysia, where the Chinese bank has a branch.
The bonds carry an interest rate of 50 basis points above the London Inter-Bank Offered Rate (LIBOR), or about 0.75 percent, which is “considerably higher than market interest rates for typical fixed deposits,” said a bank statement quoted in the South China Post.
The bond issue is the first that any major bank has made using blockchain technology.
“We are taking bank deposits, which is our core business,” Steven Wong, COO of the bank’s Malaysia branch, told the Wall Street Journal.
The Bitcoin bond project is a pilot, he said, implying that China’s government is planning more such offerings.
The China Construction Bank is one of China’s “Big Four” banks. In 2015, it was ranked as the world’s second largest bank by deposits. Following China’s announcement of its Bitcoin bond project, the crypto currency spiked over $200.
LAGARDE EXPECTS EU TO ISSUE DIGITAL CURRENCY. The European Central Bank (ECB) is likely to issue a digital currency within five years, bank president Christine Lagarde said during a 12 November ECB panel discussion, as reported by the Financial Times.
The bank will need two to four years to work out issues related to privacy, security, and technology before issuing the digital version of the euro, she added.
“If it’s cheaper, faster, more secure for the users, we should explore it,” she said. “If it’s going to contribute to a better monetary sovereignty, a better autonomy for the euro area, then we should explore it.”
The ECB began a public consultation process about the issue that will close in mid-January. The bank then will decide around mid-2021 whether to launch a full-fledged project.
On the same panel, U.S. Federal Reserve Chair Jerome Powell said the Fed will “carefully and thoughtfully” mull the issue of a digital currency; Andrew Bailey, Governor of the Bank of England, added that “there’s a lot of hard work to think through the implications.”
Neither country has progressed beyond initial discussions, while China has conducted several tests of its digital renminbi and plans to issue it publicly in time for the 2022 Winter Olympics in Beijing.
“We’re not racing to be first,” Lagarde said. “We will be prudent.”
TREND FORECAST: Yes, Ms. Lagarde, the ECB will not be first. As we reported in the 20 October Trends Journal article, “World governments will go from DIRTY CASH TO DIGITAL TRASH and, of the major nations, China will lead the charge.” (See “GLOBAL ECONOMIC TRENDS, CHINA: DIGITAL CURRENCY WORLD LEADER.”)
And last month, 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.”
JAPAN’S ECONOMY GROWING AGAIN. Japan’s economy grew 5 percent during 2020’s third quarter, compared to an 8.2-percent contraction in the second quarter, the government has reported.
Third-quarter growth was Japan’s fastest ever recorded, representing an annual expansion rate of 21.4 percent.
In contrast, the second quarter’s performance was one of Japan’s worst, even more dismal than at any time during the Great Recession.
The recovery for the world’s third largest economy was driven, in part, by the so-called “Zoom boom,” the spurt in worldwide demand for Chromebooks, notebook computers, and accessories as students and office workers were exiled to their homes for months.
Japan, which chose not to impose severe social restrictions during the pandemic, enacted two stimulus programs totaling the equivalent of $2.2 trillion, including small business loans and cash grants to households.
TRENDPOST: Despite a strong third quarter, Japan’s economy will contract by about 5.6 percent overall during its current fiscal year, which ends 31 March 2021, the government has forecast.
Yet, as with other nations, its stock market rises higher as Main Street sinks lower.
INDIA UNVEILS NEW STIMULUS PACKAGE. India’s government has announced new money and programs are being added to its four earlier stimulus plans, which have so far failed to reverse the contraction in the country’s GDP.
India’s economy was the world’s fifth largest last year and grew more than any other in 2017.
So far this year, it has shrunk more than any other major economy, contracting 24 percent year-on-year in 2020’s second quarter. The economy likely shrank another 8.6 percent in the third quarter, the Bank of India recently said.
TREND FORECAST: We forecast the stimulus package will do little to rescue the failing Indian economy which was sinking for several straight quarters in 2019, prior to the outbreak of the COVID War. And, as economic conditions deteriorate, riots and protests that were simmering before the lockdown will escalate… as will border disputes with their neighbors China and Pakistan. As Gerald Celente notes, “When all else fails, they take you to war.”
AFRICAN NATIONS FACE 2023 DEBT RECKONING. To pay government debts due by 2023, African nations will need to find €410 billion, the equivalent of about $485 billion, the International Monetary Fund (IMF) has calculated.
Many of the countries borrowed heavily, especially from China, to finance infrastructure projects that they expected to pay for by exporting timber, oil, minerals, and other raw materials. However, the global economic collapse has shut large portions of those markets.
Therefore, paying the debts would leave many of the continent’s nations without money to fund basic services, such as schools or hospitals.
Mozambique is struggling with a debt crisis after government officials stole several billion dollars from the national treasury.
“If we had to pay our debts, the situation would be tough,” Adriano Nuvunga, with the FMO civil society network, told the Financial Times. “We need funds to support the poorest of the poor. Since coronavirus began, they have received no support at all.”
Zambia recently became the first African nation to default on its sovereign debt since the pandemic struck. It missed a $40-million loan payment on its $12 billion in debt last month.
Angola’s debt stands at 120 percent of its GDP, which derives largely from oil exports. Recently, foreign creditors agreed to wipe out $5.6 billion of that over the next several years. However, that still leaves the country with more than $40 billion needing to be repaid.
Gabon’s economy also is oil-dependent. The country’s finance ministry had expected the economy to grow by 5 percent this fiscal year, based on an oil price of $57 a barrel. Now it predicts growth of 0.5 percent at most, figuring oil at $26 a barrel.
“If you suddenly get half your salary, you can’t continue to pay your debts as if nothing is wrong,” said finance minister Jean-Marie Ogandaga in a May Times interview.
In 2021, $18 billion will come due from African countries. While governments and international agencies such as the IMF have shown willingness to erase some of the debt, private lenders have shown no such leniency.
That may force public lenders to rethink their generosity.
“As a taxpayer, I do not want to accept waivers so that Blackrock and Deutsche Bank can continue to cash in,” Jurgen Kaiser, coordinator of the Germany-based Jubilee Debt Network, said to the Times.
TREND FORECAST: Civil unrest and political turmoil will increase throughout the region as governments are forced to cut social and economic supports at home to satisfy the terms of foreign creditors.
