(Bloomberg) — Price pressures continue to build in developed countries and emerging markets that include those in Latin America, where there are limits to what central bank rate hikes can achieve.
In the U.S., economists are adjusting their inflation forecasts higher and trimming consumer spending and growth projections. A similar trend is playing out in the U.K. as supply chain disruptions hinder factory output.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Natural gas prices are undergoing a historic surge, and it’s bad news for everyone from ceramic makers in China to customers of patisseries in Paris.
Port congestion is worsening during one of the calendar year’s two peak seasons for global shipping demand.
The rapid spread of the Covid-19 delta variant, higher inflation and persistent supply challenges are prompting economists to downgrade U.S. growth prospects for the remainder of the year. At the same time, economists raised estimates for the closely followed consumer price index for each quarter through the middle of 2022.
Job openings rose to a fresh record high in July, illustrating the lingering staffing shortages that are making it challenging for businesses to meet demand. After shedding millions of workers from payrolls last year, the rapid snapback in economic activity has left many businesses severely short-staffed.
The U.K. economy barely grew in July, suggesting the recovery from the coronavirus recession is rapidly leveling off as consumer spending weakens and supply disruptions hamper production.
The European Central Bank’s new staff forecasts showed a stronger near-term outlook for prices and growth in the euro area, though still insufficient to fulfill its mandate. Inflation will average only 1.5% in 2023, below its 2% target.
Europe is heading for a bruising battle over austerity as governments set out their positions on how to address huge debt loads and help their economies work past the deep Covid-19 recession.
Despite the disruption of the pandemic and political protests of recent years, Hong Kong’s economic growth is expected to catch up with rival financial hub Singapore’s this year for the first time since 2008.
When it comes to raising interest rates to cool off pandemic inflation, Latin America’s central banks have been near the front of the global pack. They’re also among the worst-equipped for that task.
Russia’s international reserves jumped to a record $618 billion, boosted by a $17.5 billion inflow from the International Monetary Fund’s global issue of its reserve currency. Amid Western sanctions, President Vladimir Putin has made boosting savings a major priority, controlling spending and salting away revenue from oil exports.
©2021 Bloomberg L.P.
Teetering property developer Evergrande sparks contagion fears for China's economy – CBC.ca
Property developer China Evergrande Group is teetering on the brink of collapse, weighed down by a giant debt load and billions of dollars of real estate it can’t sell as quickly or as profitably as anticipated.
While trouble has been brewing for a year, it’s coming to a head now, as the conglomerate missed one loan payment in June and more are expected. The company’s offices were the site of angry protests this week, and things could get even uglier on Monday when the company is likely to miss another key interest payment to its increasingly concerned financiers.
Evergrande’s possible collapse is sparking fears that it could take other parts of China’s housing market down with it — and impact business interests outside China, too.
Here’s a brief explainer of what you need to know about the story.
What is Evergrande?
Founded in 1996 in the Chinese city of Shenzhen, across the border from Hong Kong, Evergrande is mostly a property developer, whose core business is buying up land and turning it into residential real estate. Company founder Hui Ka Yan is a former steel worker who rode China’s 21st century real estate boom to a fortune that was at one point last year worth $30 billion US, good enough for the title of third-richest man in China.
The company has built more than 1,300 housing developments in 280 cities in China, with plans for another 3,000 projects underway in various cities across the country.
But like any good conglomerate, it has expanded into all sort of other businesses, including bottled water and food, electric vehicles, theme parks, a Netflix-like streaming service with almost 40 million customers — and even a professional soccer team.
Why are they in trouble?
Debt — and lots of it. The company has almost two trillion yuan of debt on its books, the equivalent of more than $300 billion US. The company aggressively borrowed money to buy more land to develop, and sold apartments quickly at low margins to raise enough cash to start the cycle up again. Which works fine as a business model — until it doesn’t.
In late 2020, new rules brought more scrutiny to the company’s finances, which revealed higher-than-expected debt loads. That, coupled with mounting construction delays spooked buyers, setting up a vicious cycle. The company began its descent to pariah status as lenders and buyers lost their nerve in lockstep with each other.
Every attempt by the company since then to distract from its problems only served to draw more attention to them. Lenders got more and more unsettled. Existing owners got upset. New sales slowed, which created a feedback loop that got lenders even more jittery.
WATCH | Investors angrily protest at Evergrande offices:
In June, the company admitted it missed payment on a loan. The next month, a Chinese court froze a $20 million bank deposit at the request of one its lenders. At least one creditor, a paint supplier, is reportedly being paid in apartments that won’t be ready until 2024.
According to data compiled by Bloomberg, on the 19th of July, presales at two projects in Hunan were halted. Three days later, Hong Kong banks stopped offering mortgages on any incomplete projects by the company in the city. On August 9, two more projects in Kunming stopped construction due to missed payments, followed by similar halts at projects in Nanjing and Chengdu. Things have snowballed ever since. The company’s stock price has cratered by 90 per cent in the past year, and most of their bonds are in junk status.
The company is behind on its obligations to more than 70,000 investors. More than one million buyers of unfinished projects are in limbo. And the pace of problems is picking up. “Sales could slump further as the developer may struggle to restore potential homebuyers’ confidence,” said Lisa Zhou, an analyst with Bloomberg Intelligence.
Monday figures to be an inflection point for the company as Evergrande is supposed to make an $80 million interest payment on one of its many loans, and there’s next to no chance it will pay that, which could start the clock ticking toward some undesirable outcomes.
So what could happen?
A number of bleak B words are on the table — bankruptcy, breakup, buyout, or bailout — and none of them are ideal.
The first option would be the most painful.
“If, as expected, Evergrande is defaulting on its debt and goes through a restructuring, I don’t see why it would be contained,” Michel Lowy of distressed debt investment firm SC Lowy, told Reuters.
But because of the Chinese government’s long-standing desire for stability, that’s also the least likely outcome. The company owes money to 128 different banks, and was behind almost one out of every 20 property sales in China in the past five years. Evergrande permanently employs almost 200,000 people, but hires almost four million people a year to work on various projects.
With a reach that wide, analysts who cover the sector are confident that Beijing won’t let the company simply collapse. “Evergrande’s escalating crisis may prompt government action to prevent social instability,” Zhou said.
More likely is some version of the next two options, a breakup or buyout, where the company sells assets to raise cash and help is brought in to run things. “State-owned enterprises or other developers may also take over Evergrande’s projects, after Chinese officials sent accounting and legal experts to examine the company’s finances,” Zhou said.
A full government bailout, however, is just as unlikely. China has been cracking down on its high-flying technology sector, trying to regulate and ban cryptocurrencies and reining in excesses in all sorts of sectors. Evergrande’s problems may be a test case in Beijing’s desire and ability to manage every facet of the growing economy.
Economist Art Woo with Bank of Montreal said in a note on Friday that he also doubts a bailout is coming. “As for who could bear the losses, that’s frankly tricky to predict, but we think it’s reasonable to believe that the authorities are unlikely to bail out equity holders or creditors in an effort to prevent moral hazard from increasing and improve financial discipline,” he said.
More likely is some sort of organized wind down, to keep damage to a minimum. “We do not believe the government has an incentive to bail out Evergrande (which is a private-owned enterprise),” Nomura analyst Iris Chen said in a note to clients.
“But they will also not actively push Evergrande down and will supervise a more orderly default, if any, in our view.”
WATCH | CBC reported on China’s ‘ghost cities’ of empty towers nearly a decade ago:
Is there an impact outside China?
Not much, directly, although the company does have assets in Europe and North America — including the ritzy Château Montebello resort in Quebec — but the company’s woes are nonetheless a cautionary tale for people everywhere.
China has been in a housing boom for more than two decades now, as more and more people put money into residential real estate — almost regardless of the price and demand for the underlying asset.
Video went viral on social media this month of a 15-tower condo development in Kunming being dynamited to the ground because it was a ghost city with no actual residents, eight years after being built.
While that wasn’t an Evergrande project, the worry is that there are many others out there like it.
Re-upping the stunning demolition videos showcasing housing oversupply in China: 15 skyscrapers in China that were part of the Liyang Star City Phase II Project were just demolished after sitting unfinished for eight years due to absent market demand. <a href=”https://t.co/UByqjk8QXX”>pic.twitter.com/UByqjk8QXX</a>
China’s Lehman Brothers moment?
The 2009 financial crisis was sparked by the failure of two investment banks, Bear Stearns and then Lehman Brothers, which exposed just how much bad debt there was in the system, and caused a chain reaction of worry down the line
That may be far fetched for the economy as a whole this time around, but it’s certainly on the table for China’s housing market at least.
“Lehman (was) very different as it went across the financial system, freezing activity,” said Patrick Perret-Green, an independent London-based analyst.
“Millions of contracts with multiple counterparties, everyone was trying to work out their exposure,” he said. “With Evergrande it depresses the entire real estate sector.”
“There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much,” Lowy said.
Simon MacAdam, an economist with Capital Economics, says the Lehman parables are unwarranted.
“The China’s Lehman moment narrative is wide of the mark,” he said. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.”
Regardless, the Evergrande saga is a cautionary tale about the down side of unrestrained real estate speculation anywhere.
As Woo put it: “A default or bankruptcy does not pose a Lehman-type threat … but it’s still bad news for the economy.”
A downturn in the global industrial economy is already underway, currency chart confirms – CNBC
One economic forecaster predicted a slowdown in global industrial activity earlier this summer.
Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, says the currency markets are now confirming his call.
“We made that earlier global Industrial downturn call, and that meant that you were going to see this slowdown in industrial materials price inflation, industrial commodity price inflation and the top line of the chart shows that,” Achuthan told CNBC’s “Trading Nation” on Thursday.
ECRI’s industrial materials price index shows the growth rate at its lowest level in around a year after a sharp runup from mid-2020 to early 2021.
“That weakness in industrial materials inflation, commodity price inflation, is also negative for commodity currencies like the Canadian dollar or the Australian dollar because those are commodity-exporting countries and they rely more on commodity exports,” said Achuthan.
The Canadian and Australian dollar, both commodity currencies, are closely tied to commodity price inflation, and the fact they have begun to roll over confirms the downturn in industrial price inflation, he said. The Canadian dollar is closely tied to oil prices, while the Aussie dollar has a high correlation with oil and gold.
That could portend trouble for the commodity trade as well as other areas of the market, Achuthan said.
“A lot of people are excited about the runup in commodities. We’re saying directionally you got to look the other way. It has knock-on effects to commodity currencies vis-a-vis the dollar. And that has knock-on effects I think for other asset classes — what’s going on with some of those currencies can obviously impact commodities themselves, bonds, even stocks,” he said.
The US economy is powering through Delta – CNN
London (CNN Business)“Delta? What Delta?”
Wall Street is unfazed by China’s potential ‘Lehman moment’
These were the week’s hottest IPOs
Watford wins first start as Ticats shut down Mitchell, Stamps – TSN
Here’s how Apple has eliminated the plastic wrap from the iPhone 13 box – Times of India
September's harvest moon shines this weekend – WAGM
Silver investment demand jumped 12% in 2019
Europe kicks off vaccination programs | All media content | DW | 27.12.2020 – Deutsche Welle
Iran anticipates renewed protests amid social media shutdown
Health20 hours ago
Prepping Your Home for the Canadian Winter
Health16 hours ago
'Absolutely gut-wrenching:' Waterloo Region child under the age of 10 dies after contracting COVID-19 – CP24 Toronto's Breaking News
Health17 hours ago
88 new COVID-19 cases in Manitoba Friday; more than half not vaccinated – CTV News Winnipeg
Art21 hours ago
Jidar, Rabat's street art festival draws international attention | | AW – The Arab Weekly
Economy17 hours ago
Charting the Global Economy: Retail Sales Stumble in UK, China – BNN
Health15 hours ago
COVID-19 booster debate in US heads to FDA vaccine advisory committee – National | Globalnews.ca – Global News
Economy14 hours ago
A downturn in the global industrial economy is already underway, currency chart confirms – CNBC
News12 hours ago
'Trudeau is bad for Canada,' Singh says as Liberal leader asks progressives to unite – CBC.ca