The European economy shrank by a record 3.8% in the first quarter as business activity from hotels and restaurants to construction and manufacturing was frozen by shutdowns aimed at preventing the spread of the coronavirus.
The drop in the 19-country eurozone was the biggest since statistics began in 1995 and sharper than the plunge in the midst of the global financial crisis in the first quarter of 2009 after the bankruptcy of U.S. investment bank Lehman Brothers.
The drop compares to a 4.8% contraction in the U.S. during the first quarter as the shock from the outbreak hits economies around the world.
Unemployment rose only slightly, however, even amid the massive shutdowns that idled everything from florists to factories. The jobless figure rose to 7.4% in March from 7.3% in February, statistics agency Eurostat said Thursday. Millions of workers are being supported by temporary short-hours programs under which governments pay most of their salaries in return for companies agreeing not to lay people off.
U.S. unemployment rose to 4.4% in March from 3.5% in February, though the eventual picture is likely far worse. First-time claims for unemployment benefits have skyrocketed in the U.S. as 26 million people applied through the first three weeks of April.
Coronavirus outbreak: WHO says ‘pandemic is far from over’
The statistics in Europe likely understate the depth of the fall since shutdown measures were mostly put in place only in March, the last of the three months in the quarter.
Figures from France and Italy showed both countries fell into recession, defined as two quarters of economic contraction. The French economy shrank 5.8%, the most since the country’s statistics agency began keeping the figures in 1949. The drop was particularly pronounced in services that involve face to face interaction, such as hotels and restaurants, retail stores, transportation and construction.
The figures come ahead of a meeting of the European Central Bank, which analysts think may expand its bond purchase program that supports governments and borrowing markets. That decision may not come Thursday but markets are awaiting an assessment from bank head Christine Lagarde.
© 2020 The Canadian Press
Guardians of the world economy stagger from rescue to recovery – BNNBloomberg.ca
The world’s governments and central banks are shifting from rescue to recovery mode as the deepest slump since the Great Depression shows signs of bottoming out.
After rolling out trillions of dollars worth of measures to prevent their economies and markets from collapsing, they are now doubling down with even more spending to backstop a recovery as coronavirus lockdowns ease. In what counts for good news these days, Bloomberg Economics’ global GDP growth tracker showed economies contracted at an annualized rate of 2.3 per cent in May, less than the 4.8-per-cent slump in April.
“Policy-makers are moving from triage to recovery,” said Deutsche Bank Securities Chief Economist Torsten Slok. “They are realizing that more fiscal support will be needed to households and small businesses to prevent this liquidity crisis from turning into a solvency crisis.”
The new wave of stimulus has both governments and central banks moving in sync to continue flooding lenders, markets and companies with cheap credit at an unprecedented pace.
The European Central Bank last week expanded its asset purchases by 600 billion euros (US$677 billion) to 1.35 trillion euros, and extended them until at least the end of June 2021. And Germany’s government agreed another 130 billion-euro fiscal stimulus push and said it will back a proposed new 750 billion-euro European Union recovery fund.
“Action had to be taken,” ECB President Christine Lagarde said in a press conference.
It’s a similar story in Asia.
Japan is planning another US$1.1 trillion worth of spending in its biggest splurge yet and the central bank in May called an emergency meeting to roll out 30 trillion yen (US$274 billion) of loan support for small businesses.
China last week unveiled another 3.6 trillion yuan (US$508 billion) in spending and South Korea’s 76 trillion won (US$63 billion) ‘New Deal’ fiscal package is its largest to date.
In the U.S., lawmakers continue to debate extra fiscal stimulus and the Federal Reserve, which meets on June 10, has just launched a new Main Street Lending Program, the latest in trillions of support it has already poured into the economy and markets.
While the Fed is unlikely to signal any moves when its officials gather this week, many economists expect it to harden its commitment to easy monetary policy later in the year and perhaps even start pursing a Japan-style campaign to control long-term borrowing rates.
The latest U.S. jobs numbers give some hope that the stimulus unleashed so far is beginning to kick in. A record 2.5 million workers were added by employers during May while unemployment declined to 13.3 per cent, wrong footing economists who had forecast widespread job losses.
To be sure, there’s far from consensus that the latest wave of support will be enough to get growth back to where it was at the start of the year. Some of the steps being taken are merely to replace existing policies as they start to expire.
“It seems clear already approved packages are perceived to be not enough,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA.
There are other concerns that monetary policy can only do so much to revive growth before it loses its potency.
“How does the Fed actually get money to millions and millions of households and small businesses, that is difficult to do operationally,” former New York Federal Reserve Bank President William Dudley told Bloomberg Television.
“It’s much easier to intervene in the capital markets where the Fed can rely on counterparties, primary dealers and others,” Dudley said. “It is much more difficult to lend one by one to millions of different entities.”
Another risk is a return to austerity, even if it seems unlikely now. JPMorgan recently predicted a fiscal thrust of 3.3 per cent of GDP this year and 1.5 per cent drag next year.
U.S. senators have put the brakes on a US$3-trillion fiscal package that was approved by lower house lawmakers. China’s government has ruled out a return to the kind of large scale stimulus it rolled out after the global financial crisis, preferring to keep a lid on rising debt.
Still, because the crisis meant economies were forced into shutdown, much of the emergency response so far has been less about driving growth and more about avoiding total collapse. It’s that dynamic which is leaving governments with little option but to borrow harder.
“We shouldn’t look at the positive immediate growth impact of the opening up process as being the rate of growth that may last,” said David Mann, chief economist for Standard Chartered Plc.
Creating jobs will be mission critical to cementing any upswing. That will need support for firms to retrain employees, incentives to hire older workers and for governments to continue with wage subsidies. More than one in six people have stopped working since the onset of the crisis, according to the International Labour Organization, which in April estimated more than 1 billion workers were at high risk of a pay cut or losing their job.
“A faster job market recovery will speed up the economic healing and reduce the risk from widening income inequality and social stress,” said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte.
Ultimately, the rescue of economies will go well beyond quantitative solutions and into the realm of story telling too, as policy makers will need to inject confidence back into wary consumers and executives, said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London.
“Human psychology is the same and is now as important as the mechanics of delivering the fiscal stimuli themselves,” he said.
El-Erian: Here's a 'nightmare scenario' for the U.S. economy – Yahoo Canada Finance
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The big risk with the latest U.S. jobs report is if it turns out to be a “head fake” says Mohamed El-Erian, chief economic advisor at Allianz.” data-reactid=”16″>The big risk with the latest U.S. jobs report is if it turns out to be a “head fake” says Mohamed El-Erian, chief economic advisor at Allianz.
“That’s the nightmare scenario,” El-Erian told Yahoo Finance after the US unexpectedly added 2.5 million jobs in May as states started re-opening and easing COVID-19 shelter in place measures.
“The big risk … is that this is a head fake, a major head fake that we are picking up the impact of both data distortions, and policy distortions,” said El-Erian.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="May’s employment report has economists scratching their heads. They were expecting the US to lose 7.5 million jobs. Instead it gained jobs, and the unemployment rate, ticked lower to 13.3%.” data-reactid=”19″>May’s employment report has economists scratching their heads. They were expecting the US to lose 7.5 million jobs. Instead it gained jobs, and the unemployment rate, ticked lower to 13.3%.
“No one was looking for an uptake in jobs.” said El-Erian. “It may be that the economy has picked up in a major way. That’s the hope. And that’s certainly what the market has embraced.”
“Or it may be two other things: that government policies were very effective in reducing those who were officially unemployed. Or it may be that the data is very, very noisy,” he added.
“What is really striking is if you look at continuing claims, they went up, not down. So every other indicator you look at suggest that the labor market is not as healthy as these numbers,” said El-Erian.
If indeed the report is a “head fake,” El-Erian warns “the political process may have moved away from relief and repair.”
“We’ve got to understand these numbers better, and we’ve got to continue with the message to Congress that there is still a big hole we find ourselves in, even if you believe these numbers,” he added.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="President Trump on Friday signed legislation lengthening the PPP loan program, aimed at helping small businesses keep workers on their payroll.” data-reactid=”36″>President Trump on Friday signed legislation lengthening the PPP loan program, aimed at helping small businesses keep workers on their payroll.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The jobs report sent stocks soaring on Friday, with the Dow (^DJI) gaining more than 3%, and the Nasdaq (^IXIC) rallied to a record high.” data-reactid=”37″>The jobs report sent stocks soaring on Friday, with the Dow (^DJI) gaining more than 3%, and the Nasdaq (^IXIC) rallied to a record high.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Federal Reserve’s actions to combat the economic fallout of COVID-19, including backing corporate debt markets, have helped the markets rally reminiscent of the 2009 rebound.” data-reactid=”38″>The Federal Reserve’s actions to combat the economic fallout of COVID-19, including backing corporate debt markets, have helped the markets rally reminiscent of the 2009 rebound.
“In the equity market, there’s nothing more comforting than the notion that someone with a printing press in the basement and an unlimited ability and willingness to buy is your backstop,” said El-Erian.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="
"What we want is fundamentals to improve and validate asset prices. That’s how this is an orderly outcome. If that doesn’t happen at some point, fundamentals will assert themselves,” he added.” data-reactid=”40″>
“What we want is fundamentals to improve and validate asset prices. That’s how this is an orderly outcome. If that doesn’t happen at some point, fundamentals will assert themselves,” he added.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Read more:” data-reactid=”41″>Read more:
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Find live stock market quotes and the latest business and finance news” data-reactid=”48″>Find live stock market quotes and the latest business and finance news
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For tutorials and information on investing and trading stocks, check out Cashay” data-reactid=”49″>For tutorials and information on investing and trading stocks, check out Cashay
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.” data-reactid=”50″>Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.
Don’t Lose the Thread. The Economy Is Experiencing an Epic Collapse of Demand. – The New York Times
Despite it all — a nation on edge, with an untamed pandemic and convulsive protests over police brutality — for the first time in three months there is a scent of economic optimism in the air.
Employers added millions of jobs to their payrolls in May, and the jobless rate fell, a big surprise to forecasters who expected further losses. Businesses are reopening, and the rate of coronavirus deaths has edged down. The Trump administration has begun pointing to what are likely to be impressive growth numbers as the economy starts to pull out of its deep hole.
All of that is good news, and far better than the alternative of a continuing collapse in economic activity. But it also creates a risk: distraction and complacency.
You can already sense in the public debate over the economy that people are starting to lose the thread — viewing the slight rebound from epic collapse as a sign that a crisis has been averted. That certainly is the kind of optimism evident in the stock market, which is now down a mere 1.1 percent for the year.
But there are clear signs that the collapse of economic activity has set in motion problems that will play out over many months, or maybe many years. If not contained, they could cause human misery on a mass scale and create lasting scars for families.
The fabric of the economy has been ripped, with damage done to millions of interconnections — between workers and employers, companies and their suppliers, borrowers and lenders. Both the historical evidence from severe economic crises and the data available today point to enormous delayed effects.
“There’s a lot of denial here, as there was in the 1930s,” said Eric Rauchway, a historian at the University of California, Davis, who has written extensively about the Great Depression. “At the beginning of the Depression, nobody wanted to admit that it was a crisis. The actions the government took were not adequate to the scope of the problem, yet they were very quick to say there had been a turnaround.”
Though it may not attract the attention that reopening beaches and a soaring stock market might, the evidence is everywhere if you look closely.
Consider those seemingly great new employment numbers. It is clear that many workers who were temporarily laid off in March and April returned to work in May, such as employees at once-closed restaurants that opened up, or construction workers who returned to job sites.
But it still left the economy with 19.55 million fewer jobs than existed in February. And the rebound came in part thanks to more than $500 billion in federal aid to small businesses offered on the condition that workers be retained, under the Paycheck Protection Program.
Other data points to a severe but slower-moving crisis of collapsing demand that will affect many more corners of the economy than those that were forced to close because of the pandemic.
New orders for manufactured goods, for example, remained in starkly negative territory in May, according to the Institute for Supply Management; its index came in at 31.8, far below the level of 50 that is the line between expansion and contraction.
And despite the net gain in employment in May, there have been many announced layoffs at companies outside sectors directly affected by the pandemic. This suggests that the forced shutdown of travel, restaurant and related industries is rippling out into a broad-based shortage of demand in the economy.
Consider just a partial list of large well-known companies unaffected by the direct first-round effects of pandemic-induced shutdowns, but which have since announced layoffs: Chevron, I.B.M. and Office Depot.
Last week, the Congressional Budget Office tried to put a number on the aggregate economic activity that will be lost over the next decade compared with what was projected at the start of the year. That number is $15.7 trillion, reflecting both less economic activity and deflationary forces that reduce prices.
That is 5.3 percent less “nominal” output, meaning not adjusted for inflation, than had been forecast. For comparison, from 2008 to 2018, total nominal output came in 6 percent below the level the C.B.O. had forecast at the start of 2008.
We know how miserable that economic crisis and sluggish recovery were, with long-term costs to earnings and well-being. The C.B.O. is now forecasting that the next decade will be nearly as bad — but emphasizes that policy choices will shape how things actually evolve.
The economy is a gigantic machine in which one person’s consumption spending generates someone else’s income. The pandemic began by crushing the economy’s productive capacity — a shock to the supply side of the economy, as many types of business activity were shut down for public health concerns.
In normal times, when there is a negative supply shock (say, a year of drought that reduces agricultural crops, or new tariffs that make imports more expensive), the pain can be intense for people in sectors directly affected, yet the economy as a whole adjusts.
But this crisis is so large and so sudden that the usual adjustment mechanisms aren’t working very well.
The people losing their jobs because of shutdowns cannot easily find new ones, because so much of the economy is shuttered at the same time. The businesses in danger of closing have cut every possible expense: A hotel isn’t going to invest in new furniture or new reservation software right now. And consumer demand for some seemingly safe goods falls because those goods are complements to the sectors that are shut down.
“Hotels are locked down, so people buy fewer cars because they don’t need to travel as much,” said Veronica Guerrieri, an economist at the University of Chicago Booth School of Business. “Restaurants are locked down, so people don’t need fancy clothes because they don’t want to go out as much.”
The result is that what started as a disruption to the supply side of the economy has metastasized into a collapse of the demand side, she and co-authors say in a recent working paper. They call it a Keynesian supply shock: an inversion of the demand-driven crisis of the Great Depression described by the great economist of that era, John Maynard Keynes.
“Demand is interrelated with supply,” said Iván Werning, an M.I.T. economist and a co-author of the paper. “It’s not a separate concept.”
The demand shock, with lagged effects, is only beginning to hurt major segments of the economy, like sellers of capital goods that are experiencing plunging sales; state and local governments that are seeing tax revenues crater; and landlords who are seeing rent payments dry up.
The government can’t wave a wand and bring back industries that are semi-permanently shuttered. That original supply shock can be fixed only as public health conditions allow sports arenas and the like to reopen.
But the government can act — and has acted — to try to keep demand for goods and services at pre-crisis levels. That, in turn, can smooth the path for other sectors to grow so that there is not a prolonged depression of jobs, income and investment, with a resulting reduction in the economy’s long-term potential.
In the early phase of the crisis, Congress expanded unemployment benefits, funneled hundreds of billions of dollars toward small businesses to keep workers on their payrolls, and supported state governments, among other steps. But much of this help is scheduled to expire this summer, absent further action — and the positive jobs numbers Friday led many Republicans on Capitol Hill allied with the Trump administration to suggest that they were reluctant to do more.
It is against his backdrop that some of the most influential — and fiscally conservative — voices in economic policy are saying that further aggressive spending is needed to prevent this shock from causing long-lasting damage to the economy.
“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Jerome Powell, the Federal Reserve chair and a longtime fiscal hawk, said at a news conference in late April.
“Please, spend wisely, but spend as much as you can!” Kristalina Georgieva, the managing director of the International Monetary Fund, implored the world’s governments at an event in May. “And then, spend a bit more for your doctors, for your nurses, for the vulnerable people in your society.”
Both the Fed and the I.M.F. more typically act as brakes on fiscal profligacy. For Mr. Powell and Ms. Georgieva to effectively beg elected officials to stop a spiraling crisis reflects the unusual circumstances of this moment and the extraordinary risk they see if government action is inadequate to the job. Their comments are the equivalent of a normally debt-averse financial adviser urging a family to borrow more money to ride out a period of illness without suffering long-term financial damage.
When the crisis we now know as the Great Depression began in 1929, President Herbert Hoover started with denial, then tried blaming other countries, then argued that there was nothing the government could really do to contain the damage.
Eventually, the Hoover administration took more aggressive action, creating a large federal program of mass employment. “He gave a speech and said that 700,000 Americans were at work on federal public works, and it was bigger than anything that had done before,” Mr. Rauchway said. “And that was true, but it was at a time when more than seven million people were out of work.”
That crisis showed how when there are profound rips in the economic fabric, repairing them isn’t a simple job, it isn’t quick, and even what seems like a huge response often isn’t enough.
It’s great that the economy is ticking up from its shutdown of March and April. And the world right now is confusing and chaotic. But that makes it all the more important not to lose focus on fundamental forces that risk holding back the economy and that, if unchecked, could mean a second lost decade in this young century.
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