GERMAN INDUSTRIAL PRODUCTION BEGINS TO STIR. Several sectors of Germany’s industrial economy are beginning to boost production, according to a survey by the ifo Institute.
The institute’s production indicator, based on the outlook of manufacturing executives, rose from a feeble collective 4.4 points in June to 14.7 in July.
Among the most optimistic sectors:
- Germany’s all-important auto industry’s production index nudged from 49 last month to 51 in July.
- The clothing industry’s marker shot from -33 to 12.
- The beverage industry’s index rose from 19 points in June to 31 last month.
- Pharmaceuticals’ number bounced from 12 to 23.
- Chemicals’ index grew from 9 to 19.
- Foods’ indicator went from 9 to 17.
- The mechanical engineering sector was only half as gloomy in July as it was in June, its score rising from -25 to -12. Metalworking businesses settled at -9 in July, up from -22 in June.
However, not all industries turned toward the positive.
The furniture index fell six points in July; for rubber and plastic makers, the number was down five and the shoe industry’s index lost 10 points.
The German government will release June’s industrial production figures this week.
Retail Rising?
On a somewhat bright note, Adidas, the German sports gear company, recorded a net loss of €295 million, or about $350 million, in this year’s second quarter, compared with a €531 million profit a year earlier.
Revenue was down 35 percent to €3.58 billion compared to €5.51 billion during the second three months of 2019.
Online sales zoomed up 95 percent, but still not enough to offset the loss incurred by the closure of 70% of its stores at the height of the shutdown.
Sales fared worst in Latin America and other emerging markets, dropping more than 60 percent. North American sales fell 38 percent, Europe’s 40 percent, but were flat for the quarter in China.
Adidas said revenues started to improve again toward the end of the second quarter, when about 83 percent of Adidas stores were open. Although traffic was lighter than before the shutdown, shoppers are spending more, the company said.
The company expects third-quarter operating profits to climb to €600 million and €700 million if the virus remains at bay and economies remain open.
Puma, another German sports equipment business, reported flat sales in July from June, a positive sign in contrast to April’s 55-percent plunge.
Eurozone Retail
On the 19-nation European retail front, retail sales volume increased month-on-month by 5.7 percent in June, according to seasonally adjusted figures from Eurostat, following a record 20.3 percent jump in May. However, much of this was pent up demand and a large portion came from online sales.
Considering the new lockdowns in parts of Spain and parts of other nations, plus the sharp decline in tourism, we forecast these increases to be temporary.
TURKISH CURRENCY TANKS. On 6 August, Turkey’s lira fell below a record low value set in May this year, dropping as far as 3.6 percent to trade under 7.31 to the dollar before ending the session at 7.23, barely above the previous low of 7.1988 on 6 May.
The lira has lost about 18 percent of its value so far this year.
For months, the country’s central bank had been steadily borrowing foreign currency from domestic banks, selling it, and using the proceeds to buy the lira.
The effort drained $65 billion in foreign exchange out of the country so far this year, more than the $40 billion it withdrew in all of 2019, according to Goldman Sachs.
The currency crash followed two days of heavy selling after investors grew skittish about Turkey’s dysfunctional money markets. Stock indexes fell 5 percent on the same day, the steepest slide since mid-March.
Domestic banks stood on the sidelines, unwilling to risk more of their resources to defend the lira when the central bank had already spent more than was wise.
The lira’s woes pushed up the interest rate on Turkey’s five-year, dollar-denominated bond to 7.01 percent from the 4.71 percent it carried when it was issued in February.
TRENDPOST: Turkey’s options for artificially maintaining its currency’s value will run out. As we have noted in the Geopolitical section of this issue, should they ramp up war with Libya and face off against Egypt, it will severely worsen the already damaged economy, which in turn will drive the lira lower.
Under demands from Turkish president Recep Erdoğan, beginning before the global lockdown, its central bank has lowered interest rates by 15.75 points.
While the government is offering cheap credit to businesses and individuals to revive the nation’s economy, the lowered rates have fueled inflation, which topped 11 percent in July.
CHINA’S EXPORTS RISE. In July, China’s export volume rose for a second consecutive month, gaining 7.2 percent from a year earlier and rising at the fastest rate this year, according to Chinese government data.
Much of the increase came from global demand for personal protective equipment and electronics needed by office workers relocated to their homes and by students learning remotely.
Shipments to southeast Asian nations, China’s primary trading bloc, and to the U.S. grew by double digits while exports to the European Union, China’s second-largest trading partner, fell.
In July, China’s spending on imports declined 1.4 percent in July. Global commodity prices fell sharply even as China’s purchases of foreign coal, oil, soybeans, and other items shot up.
As a result of growing export trade and lower import costs, China’s trade surplus grew from $46.42 billion in June to $62.33 billion in July. Analysts had forecast a $42.5-billion surplus.
During the first half of this year, China was able to achieve only 23 percent of the amount of goods it had promised to purchase from the U.S. under the January trade deal between the two countries.
China’s imports from the U.S. fell 3.5 percent during the first seven months of 2020, compared to the same period last year, but the rate of purchases has recently begun to increase.
TREND FORECAST: Following the economic devastation when much of the world was locked down for some five months, with more nations relaxing restrictions, the uptick in trade is expected, and it will moderately continue.
However, we forecast these up swings as temporary and will reverse as the world economy slides deep into the “Greatest Depression.”
CHINA “A MODEL OF RECOVERY?” Several companies battered by the global shutdown have taken heart, and revenue, from China’s reviving economy.
Quarterly sales for sneaker company Skechers USA fell 42 percent in this year’s second quarter but was saved from being worse by an 11.5-percent sales bump in China.
Nike’s China sales edged up 1 percent for the period even though global sales dropped 38 percent year-on-year.
LVMH Louis Vuitton Moët Hennessey saw total sales of its luxury brands fall 38 percent from April to June but logged a 65-percent gain in China as wealthy shoppers banned from foreign travel splurged at home.
Competitor Kering SA, which owns Gucci, reported sales in China rose 40 percent during the period, even as overall sales were off 43 percent year-on-year.
Sales in China were down 19 percent during the quarter for Starbucks and 11 percent for Yum China Holdings, which operates KFC restaurants in the country.
China’s retail economy fell just 3.9 percent, compared to a year previous and to the 19-percent plunge that tanked the sector in this year’s first quarter.
In contrast, U.S. retail sales slipped 8.3 percent in the second quarter, year-on-year, the U.S. census bureau reported.
TREND FORECAST: China’s jobless are finding work again, but most jobs being created are low-wage and temporary, flattening purchasing power and leaving a broader economic recovery precarious.
Again, there will be temporary increases in China’s GDP, industrial production, and retail sales. However, with much of the global economy weakened by the lockdowns and already in decline before the coronavirus struck, with near-term growth projected at best to modestly gain strength, China will be exporting and importing fewer goods and services.
CHINA EMBRACES COAL AS OTHERS SHUN IT. In the first half of 2020, the world retired more coal-fueled power capacity than it built.
Nations permanently shut down 21.2 gigawatts of coal power but commissioned only 18.3 in new coal-burning power plants. Vietnam and Bangladesh both abandoned plans for new coal-fired electricity generators.
The global economic shutdown curtailed power demand, making it easier and more economical to take coal-fired electric generating stations off-line and let renewable sources and cleaner-burning gas-powered plants take over.
China is fighting the trend; breaking ground on more new coal-fired plants than it has since 2016.
China is poor in oil and gas but has vast reserves of coal.
The economic shutdown saw fossil fuel emissions plummet. To maintain that level of clean air, economic recovery plans must invest in green energy and steer the future away from coal and other fossil fuels, scientists warn.
TRENDPOST: With COVID Hysteria grabbing the headlines, Climate Change, the media hot topic for the past two years, has been silenced. From burning coal to the increased use of plastics, the environment, and what’s destroying it, are out of the news.
LATIN AMERICA “HIT HARDEST OF ANY REGION IN THE WORLD”. Latin America’s collective economy will contract 9.4 percent this year, the region’s worst one-year crash on record, according to the IMF.
Argentina, Brazil, and Mexico – Latin America’s largest economies – will decline about 10 percent this year and Peru by 14 percent, the IMF has predicted.
In contrast, other developing economies around the world will shrink an average of 3 percent this year, with the Middle East slipping 4.7 percent and sub-Saharan Africa 3.2 percent.
In Mexico, which lost 12.5 million jobs in April alone, poverty could encompass 57 percent of the population, rising from 61 million in 2018 to 70 million because of the economic shutdown. Those in extreme poverty could rise from 21 million in 2018 to as many as 32 million in the months ahead, the IMF warned.
The crisis could wipe out more than a decade’s progress in raising people out of poverty.
The number of poor throughout Latin America could grow by 45 million to a total of 230 million, with those in extreme poverty rising from 72 million to 96 million, according to the IMF.
Because many countries have weak or no social safety nets, the region could face a widespread hunger crisis, the United Nations said.
About 20 percent of Latin America’s businesses, or roughly 2.7 million enterprises, will fail as a result of the global economic shutdown, destroying 8.5 million jobs, said Alicia Barcena, executive secretary of the United Nations’ Economic Commission on Latin America and the Caribbean.
Regional airlines in Chile, Colombia, and Mexico have gone bankrupt. Argentina, renowned for its beef, is seeing its steakhouses close. Lacking tourists, shops in Caribbean beach havens are going out of business.
Cencosud, one of the continent’s chief retail chains, is closing down its 11 Paris department stores in Peru. Techint, a major Argentinian engineering firm, laid off about 1,500 workers when building projects were suspended.
So far this year, six of the region’s large corporations have defaulted on loans, the same number for all of 2019. Another 40 businesses in construction, oil and gas, and telecommunications are nearing default on $36 billion in debt, Fitch Ratings reported.
In the current crisis, “Latin America will be hit as a region hardest of any place in the world,” said Luis Alberto Moreno, president of the Inter-American Development Bank.
TRENDPOST: Among the region’s nations, the average debt-to-GDP ratio is forecast to rise to at least 70 percent as countries lose both taxes and trade income. That loss is coupled with an estimated 30-percent decline in the money sent home from the region’s citizens working in other countries.
TREND FORECAST: Millions of people will head to North America as Latin American nation’s sink deeper into poverty and debt. Crime will rise and demonstrations, protests, and riots that had been going on before the lockdown will again heat up.
This in turn will intensify anti-immigration movements and propel growth of political parties calling for closed borders.
Beyond the Americas, the anti-immigration movements will intensify among developed nations as millions from poverty stricken countries flee civil unrest, crime, government corruption, and violence.
ARGENTINA DEAL RATTLES INVESTORS. Argentina has struck a deal with BlackRock, Fidelity Management, and other investors to restructure $65 billion of its $323 billion in sovereign debt.
A stalemate in the negotiations was broken when the government of president Alberto Fernández agreed to make some bond payments sooner than planned.
The talks have settled the value of the bonds in question at about 55 cents on the dollar, close to the 60 cents the creditors demanded and well above the 40 cents the government had first offered.
If the talks had failed and Argentina had defaulted, the country could have been disqualified from receiving international financial aid for years.
Argentina already defaulted on a bond payment in May, the ninth default in its history.
The deal eases fiscal pressures on the country, which has long struggled with a debt load that the IMF has called “unsustainable,” as well as a deep recession that was under way before the economic shutdown tanked the economy further.
Argentina will begin negotiations with the IMF soon over $44 billion in loans coming due in 2021 through 2023 that the nation owes the fund. The IMF could make concessions hinge on economic reforms that would risk public protests and political upheaval.
The latest restructuring plan unsettled investors with money in other Latin American countries, leading them to foresee demands to renegotiate terms, or outright defaults, among debtor nations.
On 2 August, Ecuador announced an agreement with creditors to restructure $17.4 billion in foreign debt.
TREND FORECAST: The dollar has weakened in recent weeks, making it less valuable and giving debtor nations a better chance to keep up payments on their dollar-denominated loans.
The dollar, however, has regained some strength lately, limiting the rise of commodity prices, a basic element of many Latin American economies.
In addition, the lingering effects of the economic shutdown and COVID fears have crippled tourism, another pillar of Latin American economies.
The implications of the COVID virus on Latin America will erase investors’ hopes for a swift rebound in the southern hemisphere.