BRITISH ECONOMY PLUMMENTS 20 PERCENT IN SECOND QUARTER. Britain’s economic output dropped 20.4 percent in the year’s second quarter compared to the first, marking both the country’s largest quarterly drop and its worst recession on record since 1955.
The British economy has shrunk to the size it was in 2003. Annualized, the rate of contraction would be 59.8 percent.
Construction spending dove 35 percent. Industrial production was off 17 percent and services, the largest sector of Britain’s economy, contracted 20 percent.
Business investment pulled back 31.4 percent; government spending shrank 14 percent; and consumers spent 23.1 percent less. The hospitality industry was down by at least 75 percent.
The economic plunge came in April and May, with June’s performance bouncing back 8.7 percent as retail, manufacturing, and the housing market all perked up. Construction led the rebound; services rose 7.7 percent.
The magnitude of the economic decline was greater in Britain that in France, Germany, and other European countries which eased their lockdowns earlier.
During the period, the French economy shrank 14 percent, Germany’s 10 percent, Italy’s 12 percent, and Spain’s 19 percent. U.S. GDP was down about 10 percent.
Britain suffered a steeper drop because about 12 percent of its economy depends on personal contact services, compared to about 10 percent for the European economy in general. It also is more dependent on consumer spending than many other countries in the region.
U.K. employers shaved 1.6 percent from workers’ pay, the first decline since 2015 and the worst since 2008’s Great Recession.
An estimated 730,000 Britons have lost their jobs since March, with the country recording its greatest quarterly job loss since 2009.
The figure would be much worse without a government program that pays part or all of workers’ wages, even if they do not work, so they will not be reported among the jobless.
The program, which currently supports as many as 9.6 million workers, ends in October.
“Hundreds of thousands of people have already lost their jobs and, sadly, in the coming months many more will,” said treasury secretary Rishi Sunak.
A third of British companies are planning more layoffs between now and October, a recent survey found.
To help young workers find a place in the economy, Britain’s government will pay six months’ wages for some new hires and will promote apprenticeship programs.
The government also will continue its program of tax cuts and stimulus spending, Sunak added, and noted the longer an economy recovery takes, the greater the risk of permanent damage to the nation’s financial and employment future.
As an added nudge to the economy, Boris Johnson’s government will spend the equivalent of $69 million to provide discounts for meals eaten in pubs and restaurants on Mondays, Tuesdays, and Wednesdays.
The Bank of England has said the U.K.’s economy will need through 2021 to recover to a pre-pandemic level.
The U.K. suffered more COVID-related deaths than any other European country because its population is older and more ethnically diverse, giving the virus more of its favored victims.
TREND FORECAST: While investor sentiment on the British pound has turned increasingly positive recently, long term it will be hit with downward pressure as The Bank of England continues to lower interest rates and the government pumps in more money to boost the failing economy.
SPAIN LOSES MORE THAN A MILLION JOBS. About 1.35 million jobs have disappeared from the Spanish economy since 1 February, according to the Spanish National Statistics Institute (INE). Just over a million of them were lost in the second quarter.
Spain’s unemployment rate of 15.6 percent is the highest in the European Union.
In the first three months of 2009, as the Great Recession took hold, Spain lost 770,899 jobs.
In April through May this year, Spain lost an average of 11,800 jobs every day. The loss is the greatest since 1976, when records began to be kept.
Another one million workers are still considered to be employed because the government is paying all or part of their wages. Many of the jobs exist only on paper, as companies remain without customers or capital to restart work.
The government payment scheme ends next month, when hundreds of thousands of these workers are likely to join the ranks of the officially unemployed.
Only 13.9 million people, or 35 percent of the workforce, were actually working during the second quarter, the INE reported. The rest were on the government payment scheme, off the job due to illness, or self-employed workers who had shut down their businesses, for example.
Spain’s economic shutdown lasted from 16 March to 22 June but localized lockdowns have since occurred as COVID case numbers flared again in spots.
Spanish workers were under strain even before the shutdown. In 2019, 5.5 million people wanted more work than they could find and 22.2 percent of the labor force were gig workers under short-term contracts.
From 2009 through 2016, in real terms, pay for a Spanish worker fell an average of €3,200 per year, according to the International Labor Organization.
TREND FORECAST: As we noted in the COVID section of this Trends Journal and others, the government’s locking and re-locking down of the Spanish economy will keep pushing the economy lower and the unemployment rate higher.
GIG WORKERS IGNORED IN INCOME SUPPORT PROGRAMS. European governments have showered money on businesses to subsidize wages and salaries for more than 60 million workers idled by the economic shutdown, but the wage-support programs offer no help to gig workers and other self-employed people who, instead, must rely on unemployment benefits, which are far less generous.
Unemployment benefits often replace only half or less of a self-employed or contract worker’s income and may end after a few months. After that, recipients must apply for welfare.
Since 2010, amid the economic crisis, European companies have increasingly turned to gig workers and short-term contractors to carry out more and more specialized tasks.
Of Europe’s 15 million jobless workers in June, about 40 percent were short-term contractors from tourism, food services, and other up-close-and-personal industries hit hardest by the shutdown, according to the Organization for Economic Cooperation and Development.
Many workers have sold cars, homes, and drained their meager savings to meet basic expenses.
Several government-paid furlough programs will end between now and November, casting previously spared workers into the jobless pool. Airbus, British Airways, Renault, and many other European corporations have warned they will lay off millions of workers across the continent if government employment subsidies disappear.
In France alone, a million more jobs may vanish, the government said.
TREND FORECAST: The real unemployment numbers, who is being affected, and what the implications will be (which we have outlined) are being under-reported by the governments and the media.
The “Greatest Depression” has begun. It won’t make the mainstream headlines until the equity markets crash.
CHINA’S BOND MARKET SURGES. Offering interest rates of 2.5 percent, China’s bonds denominated in renminbi had lured $360 billion from foreign investors by 1 July. Billions more have flowed into the country’s bank and government bonds since then.
Central banks in the U.S. and Europe poured trillions of dollars’ worth of stimulus into their economies, setting bond prices high, which keeps yields low – currently near or, in some cases below, zero.
In contrast, China used little stimulus, allowing it to offer higher yields as its economy recovers faster than those in the West.
The world was “absolutely starved” for bonds offering positive yields, said Hayden Briscoe at UBS Asset Management, adding the Chinese bonds are a “standout asset,” even considering the risk of currency fluctuations.
TREND FORECAST: With the yuan steadily rising against the dollar, there is no more political talk that China is devaluing its currency so they can increase exports.
As global trade continues to slow, the $40 trillion indebted Chinese nation will sink deeper in debt. The deeper it falls, so, too, will its currency, which will in turn push up demand for precious metals.
HONG KONG’S WEALTHY SEND GOLD ABROAD. Since China passed a new law restricting the rights of Hong Kong residents to govern themselves and express political dissent, the city’s wealthy have shipped about 10 percent of their physical gold to storage bunkers in Singapore, Switzerland, and other safe havens, according to Joshua Rotbart, a Hong Kong gold broker.
“Many [gold owners] now see Hong Kong as riskier than other jurisdictions,” he added.
The trend began in 2019, when protracted street protests roiled Hong Kong’s economy and cast doubt over its political independence.
PUBLISHER’S NOTE: The Chinese government forbids gold to be exported from the mainland. Gold owners in Hong Kong worry that stricture will be extended to Hong Kong and some fear that an increasingly authoritarian China could eventually move to confiscate private gold holdings.
CAR SALES SURGE IN CHINA. China’s car dealers sold 1.6 million vehicles in July, a 7.7-percent surge from a year earlier and the best monthly percentage gain in more than two years, the China Passenger Car Association reported.
Car factory shipments to dealers climbed 10.4 percent during the second quarter, but retail sales sank 3.4 percent during April, May, and June.
July sales were helped by government incentives – including a new program to boost sales of selected electric cars – and dealers’ rock-bottom markdowns to get the glut of cars off their lots.
Last month, electric car sales in China shot up 19.3 percent, year on year, to 98,000 vehicles; Tesla’s sales fell 26 percent from June as government incentives targeted Chinese-owned makers.
However, the oversupply remains: manufacturers boosted their shipments to dealers by 16.4 percent in July, compared to a year before.
“Dealers are facing increasing intense pressure to cut prices in the second half [of 2020] in order to meet their yearly targets,” the China Automobile Dealers Association said last week after surveying their members.
July’s figures indicate that sales in the second half are likely to rise 4 percent above those of last year, leaving China’s auto industry with a 10-percent dip in sales compared to all of 2019.
TREND FORECAST: U.S. and European car makers take hope from China’s July sales figures that the second half of this year will bring a stronger rebound to the global auto industry than previously had been expected.
They were in a downward slump, however, throughout 2019, and we forecast the upswing will be moderate as the global economy continues to weaken and unemployment rises.
CHINA’S RETAIL SALES SLOW IN JULY. China’s retail sales fell 1.1 percent from a year earlier, dashing economists’ expectations for a second consecutive month that sales would equal the previous year’s now that stores and restaurants are reopening.
The dip was an improvement on June’s 1.8 percent drop but still continued China’s decline in retail sales every month this year, signaling an underlying weakness in the nation’s economic recovery.
China’s GDP expanded a robust 3.2 percent in the second quarter, beating expectations and buoying hopes for a swift recovery.
But now, with GDP not sustaining its earlier momentum, China’s rebound may have spent its early energy in a spurt and now will make slower, less steady progress, analysts warned.
“When you don’t allow cinemas to open, and tell people you should avoid restaurants, you should expect that those parts are going to necessarily lag,” said Michael Spencer, head of Asia-Pacific research in Deutsche Bank’s Hong Kong office. “Demand couldn’t recover because people were told to be careful.”
China’s unemployment rate remained steady in July at 5.7 percent. The jobs outlook for young workers worsened, the government said, without offering specifics or data. In June, unemployment among college graduates climbed to 19.3 percent.
TREND FORECAST: July’s figures show that China’s economic recovery is relatively weak. We forecast, at best, moderate growth rate increases.
JAPAN’S ECONOMY SHRINKS AT RECORD PACE. Japan’s economy contracted at a record annual rate of 27.8 percent in 2020’s second quarter, new government data revealed.
The plunge was slightly worse than economists’ median forecast of 27.2 percent.
Consumer spending, which makes up more than half the nation’s GDP, dropped 8.2 percent below this year’s first quarter. Japan’s stay-home mandate sharply reduced spending on restaurants, travel, and general retail shopping, government officials said.
Exports of goods and services, including spending by foreign tourists, slid 18.5 percent.
SINGAPORE’S SECOND QUARTER WORSE THAN THOUGHT. Singapore’s economy crashed 43.9 percent in the second quarter of this year compared to the first, the government reported.
Originally, the contraction had been reported as 41.2 percent, but that was before June’s data was incorporated into the calculation.
The contraction was 13.2 percent greater than that a year before and slightly more than the 12.6 percent reported earlier.
Much of Singapore’s economy was shut down on 7 April and began to reopen in early June.
The shutdown paralyzed the construction industry, which saw second-quarter activity drop 59.3 percent, as reported by Singapore’s Ministry of Trade and Industry. Hotel and restaurant trade dove 41.4 percent, transportation and storage 39.2 percent.
The ministry has revised its forecast for 2020, now saying Singapore’s economy will contract by 5 to 7 percent this year, not the 4 to 7 percent predicted last spring.
TREND FORECAST: With much of the globe in the early stages of the “Greatest Depression”… and still locked down, the economic future is evidenced in the dire data that provides no “Hope and Change You Can Believe In.”
Yes, there will be economic upticks, but the long-term trend remains sharply down.
RUSSIA AND CHINA ALLYING AGAINST THE DOLLAR. In 2020’s first quarter, 46 percent of trade transactions between Russia and China were settled in dollars, the first time the proportion has fallen below 50 percent, according to data from Russia’s Central Bank and Federal Customs Service.
The euro was used to settle a record 30 percent of the transactions and the two countries used their own currencies in 24 percent of the deals.
In 2015, about 90 percent of the two countries’ transactions were settled in dollars. After the U.S.’s condemnation of Russia’s invasion of Crimea and the outbreak of the U.S.-China trade war, however, the proportion began to slip and Russia and China both looked for alternatives to the dollar to conduct cross-border trade.
In 2014, China and Russia formally agreed to give each other direct access to their currencies without having to buy rubles or renminbi on the world’s open market.
“Only recently did the Chinese state and major economic entities begin to feel that they might end up in a similar situation as our Russian counterparts: being the target of the sanctions and potentially even getting shut out” of the international banking communications network, said researcher Zhang Xin at the East China Normal University.
That, in part, prompted a 2019 deal between the two countries to dump the dollar and use their own currencies in trade. The agreement also called for the nations to create alternative payment mechanisms to the international banking communications system, which is seen as being dominated by the U.S.
“The collaboration between Russia and China in the financial sphere tells us that they are finally finding the parameters for a new alliance with each other,” said Alexey Maslov, Director of the Institute of Far Eastern Studies at the Russian Academy of Sciences. “Many expected this would be a military alliance or a trading alliance, but now the alliance is moving more in the banking and financial direction, and that is what can guarantee independence for both countries.”
The “de-dollarization” of China-Russia trade is reaching a “breakthrough moment” that could open the door to broad range of agreements and alliance between the two powers, Maslov said.
TREND FORECAST: Trends are born, they grow, reach old age and die. The war against the dollar has begun and more trade will be done with other currencies.
With the global economy on a sharp downturn, the dollar, while shrinking in demand, will still be the World’s #1 reserve currency since other nations will also be facing economic peril.
