By Jonathan Cable
LONDON (Reuters) – Britain will expand at its quickest pace in decades this quarter after shrinking at its fastest pace in centuries last quarter, a Reuters poll found, as vast swathes of the economy have reopened following a nationwide shutdown to control the coronavirus.
Despite near-term optimism, almost 85% of respondents, 32 of 38, thought the outlook for the British economy had stayed the same or worsened over the past month, with only six saying it had improved.
The virus has infected almost 15 million people across the world and Britain has the highest death toll in Europe – despite the government forcing businesses to close and citizens to stay home.
(Reuters Poll: UK economic and monetary policy outlook – https://fingfx.thomsonreuters.com/gfx/polling/qzjvqwkqavx/UK%20economic%20outlook.PNG)
But many restrictions have now been eased and people are emerging from their homes, returning to work and spending money again, so the economy was expected to expand 12.2% this quarter, the July 13-21 Reuters poll showed, better than the 10.5% recovery predicted last month.
That bounceback comes after an historic 18.9% contraction pencilled in for last quarter and nearly all economists who responded to an extra question said the biggest threat to the recovery would be a second wave of virus infections.
“The economy will almost certainly have imploded over Q2 as a whole. The good news is that in terms of the monthly trajectory, there is clear evidence that the economy has remained on an upward path since May,” said Philip Shaw at Investec.
“But the challenge of course is keeping the economy from running out of steam.”
This year, the economy was expected to contract 9.1%, the median in the poll of over 70 economists showed, and then recover to expand 6.0% in 2021. In a worst case scenario it will shrink 13.0% this year.
Official GDP figures said the economy grew a slower than expected 1.8% in May.
To tackle the hit from COVID-19 to the economy the British government has massively ramped up spending, borrowing 128 billion pounds ($163 billion) last quarter, five times the amount during the same period last year.
But only a slim majority said the Treasury’s response had been enough – 14 of 25 respondents to an additional question said.
“The authorities have done broadly what they needed to do,” said Peter Dixon at Commerzbank.
(Reuters Poll: UK economic recovery outlook – https://fingfx.thomsonreuters.com/gfx/polling/yxmvjrogevr/Britain%20economy.PNG)
Forming the centrepiece of the government’s support was a scheme to pay 80% of wage bills if staff were put on leave rather than let go. But that is due to close in October and unemployment was seen peaking at 8.0% in the fourth quarter.
The Bank of England chopped borrowing costs to a record low of 0.10% and restarted asset purchases. But no change in policy was expected at its next meeting on Aug. 6.
The bank rate will not rise until 2022, but an additional 70 billion pounds ($89 billion) will be added to the BoE’s existing 745 billion pounds quantitative easing programme toward the end of this year, the poll showed.
Another risk is the expiry of Britain’s transition period with the European Union at the end of the year, after leaving more than 40 years of membership in March.
The two sides resumed talks on Tuesday but while there has been little movement what divides them. Still, the aim of reaching agreement on future ties by October is ambitious but achievable, German Foreign Minister Heiko Maas said on Tuesday.
As has been consistent in Reuters polls since the June 2016 vote to leave the EU, economists almost unanimously expect the eventual relationship will be a free trade deal.
“Failure to sign a trade agreement with the EU in 2020 will go down as a major policy error. It is inconceivable to me that the British government would be prepared to take such a risk with the economy, particularly in the current climate,” Commerzbank’s Dixon said.
“But then Brexit and a rational approach to economic policy have never been natural bedfellows.”
(Reporting by Jonathan Cable; Polling by Mumal Rathore and Hari Kishan; Editing by Alison Williams)
Sweden's economy less hard-hit by coronavirus – BBC News
Sweden, which avoided a lockdown during the height of the Covid-19 pandemic, saw its economy shrink 8.6% in the April-to-June period from the previous three months.
The flash estimate from the Swedish statistics office indicated that the country fared better than other EU nations which took stricter measures.
However, it was still the largest quarterly fall for at least 40 years.
The European Union saw a contraction of 11.9% for the same period.
Individual nations did even worse, with Spain seeing an 18.5% contraction, while the French and Italian economies shrank by 13.8% and 12.4% respectively.
“The downturn in GDP is the largest for a single quarter for the period of 1980 and forward,” Statistics Sweden said.
“It is, as expected, a dramatic downturn. But compared to other countries, it is considerably better, for instance if you compare to southern Europe,” said Nordea bank chief analyst Torbjorn Isaksson.
Sweden has largely relied on voluntary social distancing guidelines since the start of the pandemic, including working from home where possible and avoiding public transport.
Although businesses have largely continued to operate in Sweden, the country’s economy is highly dependent on exports, which were hit by lack of demand from abroad during the pandemic.
Despite the contraction, Sweden is not yet in recession, since the first quarter saw growth of 0.1%.
An economy is generally deemed to be in recession if it contracts for two consecutive quarters.
Various forecasts predict the Swedish economy will still shrink by about 5% this year.
That is less than other countries hit hard by Covid-19, such as Italy, Spain and the UK, but still similar to the rest of Scandinavia.
Sweden’s unemployment rate of 9% remains the highest in the Nordics, up from 7.1% in March.
'$500 for everyone': Belarus leader's Soviet-style economy wears thin for some voters – TheChronicleHerald.ca
By Andrei Makhovsky
MINSK (Reuters) – Under President Alexander Lukashenko, the average monthly wage in Belarus has risen in dollar terms to $500 from $50 in 1999. For voters, there’s just one problem: it hit $500 in 2010, and has been stuck there ever since.
As Lukashenko, a 65-year-old former collective farm manager with a fondness for a Soviet-style command economy, seeks re-election on Sunday after 26 years in power, his economic record is being found wanting by some voters.
“My daughter tells me all the time: I love my country, I want to live in my country,” said Dmitry, a 53-year-old Minsk resident protesting against Lukashenko last week.
“But with what is happening here, there are no prospects for young people. No future,” he said, saying his daughter lived in the Czech Republic and had no plans to return.
He declined to give his surname for fear of reprisals in a country where little dissent is allowed.
Once cast by Washington as “Europe’s last dictator”, Lukashenko controls the levers of power in the strategically important country between East and West through which Russia sends its oil. He is expected to be re-elected.
But he faces protests by opposition supporters rallying around his main opponent, a former English teacher whose husband was jailed and cannot run himself.
Lukashenko is also facing criticism over his human rights record and dismissal of COVID-19 as “a psychosis”.
His once popular promise of “$500 for everyone” was a reflection of rising prosperity in the 2000s, but has become the butt of internet memes.
“People are really sick of it, people want change, people want some kind of development,” said Vadim Iossub, a senior analyst at financial company Alpari Eurasia.
Fraying ties between Belarus and Russia have prompted Moscow to scale back subsidised energy supplies that previously propped up Lukashenko’s rule, creating a $700-million budget hole as the coronavirus pandemic tipped the economy into recession.
Hundreds of thousands of Belarusians have moved abroad in recent years. Lukashenko said on Tuesday the population had fallen by 8%.
Around 70% of the economy and two-thirds of the workforce have remained in state hands in the former Soviet republic.
While the government has cut red tape for private entrepreneurs, whom Lukashenko once derided as “leeches”, the economy is dominated by public companies receiving government loans and subsidies.
The model has been underpinned by cheap Russian gas and crude oil, processed in Belarusian refineries and exported.
Addressing the nation on Tuesday, Lukashenko promised to double wages within five years and resisted calls for rapid change, casting Belarus as an island of stability at a time of global turmoil.
Lukashenko said he expected the economy to grow by 3-4% in coming years. He said his statist model should deliver that if production and exports are ramped up and Belarus starts to manufacture $4 billion of goods it currently imports annually.
“For the entire term of my presidency, I have not found an answer to the question: why are state-owned enterprises such an eyesore to everyone?” he said.
Belarus grew by an average of less than 1% annually between 2010-2020. In 2012, the purchasing power of Belarusian wages was 73 percent of that in neighbouring Poland. By 2020, it had dropped to 60 percent, according to official data.
Valery Tsepkalo, an election opponent who fled abroad fearing arrest, told Reuters Lukashenko had broken an “unwritten agreement” with voters to deliver prosperity in exchange for political obedience.
“He deprived Belarus people of political freedoms and he also deprives Belarus people of economic growth. This is one of the reasons society started to protest,” he said.
(Additional reporting by Gabrielle Tétrault-Farber in Moscow; writing by Matthias Williams, Editing by Andrew Osborn and Timothy Heritage)
Now for the hard part: Argentina must fix economy after debt deal – TheChronicleHerald.ca
By Cassandra Garrison and Eliana Raszewski
BUENOS AIRES (Reuters) – It took months of tough talks for Argentina to reach agreement on restructuring $65 billion in debt. Now, economists and policymakers say, the real work begins: reviving Latin America’s No. 3 economy from its currency and fiscal crises.
Though both government and creditors celebrated Tuesday’s deal that should help Argentina avert a messy default, it still faces a 10%-plus contraction this year, an over-valued peso, spiking poverty and a deep fiscal hole.
“This was the easy step,” Stephen Liston, senior director at the Council of the Americas, said of the debt deal.
How the once-wealthy grains producer does from now is the acid test for Peronist President Alberto Fernandez and his star Economy Minister Martin Guzman, fresh from taming Wall Street.
“This is an important step,” Guzman said of the agreement. “But this does not solve all the problems of the Argentine economy.”
Argentina’s peso has been propped up by tight capital controls, which has seen the value of the currency in black market trades veer dangerously away from the official rate, with the gap currently around 76%.
The government says it plans to ease controls, but only when the economy has been righted, leaving an artificially strong peso that businesses say hinders trade.
“It’s a very precarious situation there where you’ve got an over-valued currency, but weakening it will only worsen the debt situation,” said Nikhil Sanghani of Capital Economics in London.
Inflation, the thorn in the side of Argentine policymakers for years, shows little sign of abating. Consumer prices have slowed during the pandemic, but remain at an annualized level above 40% and will likely revive as the economy recovers.
The central bank, looking to mop up liquidity, is facing a “snowball” of short-term debt, temporarily reining in prices but increasingly straining the institution, said economist Eduardo Levy Yeyati of Buenos Aires’ Universidad Torcuato Di Tella.
Getting out from under this would likely mean the bank has to raise interest rates to encourage savings in pesos, he added, otherwise it would risk unleashing a new wave of inflation.
Under the weight of public spending to combat the impact of the pandemic, the primary fiscal deficit soared to $3.53 billion in June and the government is expected to end the year with a large fiscal hole.
Guzman has pledged to return to fiscal balance and keep the deficit under control, but faces a politically tricky balancing act between that and growth-boosting policies.
“The fiscal deficit has blown out again and we think that the primary deficit will be something like 8% of GDP this year,” said Sanghani, adding it could force the government to adopt politically unpalatable measures even as millions face increased poverty.
“If they have to impose some sort of austerity going forward, it will only keep the economy quite weak and that will hinder its ability to pay off even these restructured debts.”
The government plans to turn attention to negotiating a new program with its biggest creditor, the International Monetary Fund (IMF), which floated a $57 billion line in 2018.
Argentina may seek to extend its payment schedule in return for lowering inflation, fixing the exchange rate and reeling in public spending, said Claudio Loser, a former director at the IMF’s Western Hemisphere department.
“That would help Argentina a lot in the next decade, if it can be done,” Loser said.
But despite a softer approach from the IMF, any deal would likely come with some tough fiscal demands.
“It’s feasible that the Fernandez government is hesitant on some of these terms,” Sanghani said. “There are still some hurdles to getting a renewed IMF deal, so it’s not a forgone conclusion by any stretch of the imagination.”
(Reporting by Cassandra Garrison and Eliana Raszewski; Editing by Andrew Cawthorne)
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