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US economy shrinks at 4.8% pace, signaling start of recession – BNNBloomberg.ca

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The record-long U.S. economic expansion is over after almost 11 years, with the deepest recession in at least eight decades now under way.

The world’s largest economy shrank at a 4.8 per cent annualized pace in the first quarter, the biggest slide since 2008 and the first contraction since 2014, as the need to fight the coronavirus forced businesses to close and consumers to stay home.

The downturn, reported Wednesday by the Commerce Department, was led by the steepest drop in consumer spending since 1980 and the fastest decline in business investment in almost 11 years.

The worse-than-expected report reveals the wide-scale hit to U.S. output from Covid-19 and the subsequent freezing of economic activity.

The current quarter is likely to be far worse, with analysts expecting the economy to tumble by a record amount in data going back to the 1940s. Bloomberg Economics has projected a 37 per cent annualized contraction, but UniCredit is the most bearish with a 65 per cent estimate.

Crisis, Recovery

That will end an expansion that began in mid-2009 when the economy began to recover from the financial crisis. Since then, gross domestic product swelled by US$7 trillion and unemployment had fallen to a five-decade low of 3.5 per cent, although some have questioned how widely the benefits have been spread with an increasing concentration of wealth at the top and wages rising at a relatively tepid pace for most of the expansion.

The pain is being felt worldwide with China already reporting a sharp decline in output and the euro-area set to deliver grim figures Thursday.

As the U.S. government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery.

Early hopes for a rapid rebound have faded with most analysts assuming a jump in activity once the virus passes will be followed by a slower resumption of growth. So far, many data points signal a deepening contraction, while others have shown slight improvement, according to a Bloomberg Economics tracker.

Consumers Wary

Despite massive government aid packages and near-zero interest rates, businesses big and small risk going bankrupt, while consumers may remain wary of hitting shops and restaurants amid health concerns, higher debt burdens and job insecurity.

Another big question is how the recession affects the re-election chances of President Donald Trump, who lately has been pushing for removal of the constraints after losing the ability to run on a strong economy.

At the Federal Reserve, which slashed rates and rolled out a slew of emergency and unprecedented lending programs, Chairman Jerome Powell and colleagues are trying to limit the virus’s damage to jobs and business while setting the conditions for recovery.

They conclude a two-day meeting later Wednesday, with a statement expected at 2 p.m. in Washington and a press conference by Powell at 2:30 p.m.

While two quarters of contraction is considered by most to constitute a recession, the official call in the U.S. is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research. They look at a wide range of indicators including consumer spending, employment and GDP.

The analysis can take a while. In the last recession, which became the longest since World War II, the committee didn’t make the determination for nearly a year after the downturn started.

In any case, the GDP figures underscore what’s already clear from government data showing 26 million Americans filing for unemployment, along with plunges in retail sales and factory production.

The contraction in first-quarter GDP — the first decline since a 1.1 per cent drop in 2014 — compared with the median projection for a 4 per cent drop in a Bloomberg survey of economists. In January, analysts were forecasting growth of 1.6 per cent.

Spending Habits

Consumer spending, which had already begun to cool in the second half of 2019, fell at a 7.6 per cent rate. Changing consumption habits were evident in the report, as the biggest increase since 2003 in spending on nondurable goods such as food was more than offset by the largest slump in purchases of durable goods in more than 11 years.

Consumption is forecast to be much weaker in the second quarter because broader government measures including closures of restaurants and stores didn’t start in earnest until mid-to-late March, and they continue today in much of the U.S.

Business investment, already down for three straight quarters as the U.S.-China trade war kept companies guessing, also took a big hit. Companies slowed spending on structures and equipment. Investment in software rose, however, potentially reflecting efforts to help employees work from home.

Exports of services fell by the most since 1975, reflecting a decline in international travelers coming to the U.S.

The first-quarter GDP figures will be revised several times, and some economists broadly expect the reading to become weaker as more data and adjustments are made.

–With assistance from Kristy Scheuble and Sophie Caronello.

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'No-deal' Brexit threat looms over pandemic-ravaged UK economy – BNNBloomberg.ca

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The threat of a no-deal Brexit is back — and with it the risk that the U.K. economy’s shaky recovery from the coronavirus pandemic will be hobbled.

As British and European Union negotiators head into the last round of talks scheduled before a key summit this month, chances are growing that the U.K. will end the post-Brexit transition period on Dec. 31 without a free trade agreement in place — spelling turmoil for businesses.

Instead of postponing its final parting with the bloc because of the coronavirus, the U.K. government has so far ruled out any delay. That may be, critics say, because Brexiters calculate the cost of leaving without a deal will be obscured by the far more extensive damage wreaked by the virus.

To Sanjay Raja, an economist at Deutsche Bank AG, a no-deal Brexit would halve the pace of growth next year to 1.5 per cent. The U.K. in a Changing Europe, a research group, estimates gross domestic product could be crimped by eight per cent over 10 years as trade barriers and a reduction in productivity hit output.

“It may be less politically costly for the U.K. to do no deal in the midst of a pandemic, but economically I’m not sure about that at all,” said Jonathan Springford, deputy director of the Centre for European Reform. “It might be that they’re able to get away with it — but I don’t think it changes the view that no deal would impose quite sizable economic costs.”

Citigroup Inc. says the size of the shock could even force the Bank of England to take the controversial move of cutting interest rates below zero because fiscal policy and other tools may not be enough.

Companies now have to think of how to prepare for Brexit while dealing with the fallout from coronavirus. Many are shuttered, indebted and struggling to pull through the lockdown.

The additional debt firms are carrying will make adjusting to Brexit more difficult, according to Alan Winters, director of the U.K. Trade Policy Observatory at the University of Sussex.

The re-introduction of trade barriers with the EU and changes to trading relationships with other countries will require a major re-orientation of exports, he wrote late in May. Heavily indebted firms are less likely to invest in developing new export markets.

“It’s a tense conversation at the moment,” said Allie Renison, head of Europe and trade policy at the Institute of Directors. “Companies are struggling with their survival, and there’s not a narrative yet from government saying to prepare, but they are saying the transition is ending.”

While both the U.K. and the EU insist a deal is still their preferred outcome, the deadlocked talks and the limited time left available mean risk no agreement will be reached is rising: analysts at Eurasia Group now put the odds of that outcome at 55%. EU Trade Commissioner Phil Hogan told RTE last month that the U.K. “can effectively blame Covid for everything.”

If the sides can’t strike a deal by the year-end, the U.K. will default to trading with the bloc on terms set by the World Trade Organization. That means British manufacturers of goods such as cars, pharmaceuticals, plastics, and precision tools could face new costs and significant disruptions to their just-in-time supply chains in Europe.

For Patrick Minford, chair of the pro-Brexit group Economists for Free Trade, leaving on anything but WTO terms would mean Britain would “lose the gains of free trade with the rest of the world.” It’s also better that the U.K. stays out of the EU’s expensive coronavirus recovery plan, he said. “When you add them both up, it’s pretty serious, really, and we’re much better off leaving.”

The fracturing of supply chains due to the coronavirus is one wake-up call to the upheaval that could be on the way. More than 80% of small and medium-sized manufacturers say the pandemic has affected their supply chains, and while some say contingency plans for Brexit have proved useful in preparing for the situation, others are facing shortages.

The pandemic has also led to discussion of bringing supply chains closer to home, particularly as the U.K. struggled to fly in emergency supplies while factories were closed and most workers stayed away.

U.K. Cabinet Office minister Michael Gove last week touted the “phenomenon of re-shoring” and said “we’re seeing how countries can increase resilience.”

But moves to shorten supply chains further could likely lead to goods becoming more expensive, according to Springford of Centre for European Reform. What is more, the U.K.’s geographical proximity to the EU means it’s likely to stay an important trade partner.

Philip Hammond, a former U.K. finance minister who campaigned to stay in the bloc, said last week that the government should at least seek a temporary trade deal to protect jobs.

Since the U.K. is such an open economy, “we will be more exposed than most developed economies to any headwinds in international trade during the recovery,” he said. “We really can’t afford to layer on top of that, during a very difficult recovery period, a sort of self-inflicted shock.”

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Global shares gain on hopes for regional economies reopening – CTV News

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TOKYO —
Global shares are higher Tuesday on optimism about moves to reopen economies from shutdowns to contain the coronavirus pandemic.

France’s CAC 40 jumped 1.9% in early trading to 4,851.37, while Germany’s DAX surged 3.2% to 11,961.53. Britain’s FTSE 100 added 0.9% to 6,219.95. U.S. shares were set to climb with Dow futures gaining 0.4% to 25,576.00. The S&P 500 future contract added 0.4% to 3,064.88.

Investors have been balancing cautious optimism about the reopening of businesses against worries that widespread protests in the U.S. over police brutality could disrupt the economic recovery and widen the virus outbreak.

Japan’s benchmark Nikkei 225 rose 1.2% to finish at 22,325.61, and Hong Kong’s Hang Seng gained 0.8% to 23,912.07. South Korea’s Kospi added 1.1% to 2,087.42. Australia’s S&P/ASX 200 rose nearly 0.3% to 5,835.10, while the Shanghai Composite edged up 0.1% to 2,918.94.

In Southeast Asia, where shutdowns are beginning to ease, Indonesia’s benchmark jumped nearly 2.0% and Singapore’s surged 2.3%.

Despite the bright mood across the region, fears persist about a possible resurgence in coronavirus outbreaks.

There were 34 new confirmed cases in Tokyo on Tuesday, seeming to reaffirm growing risks as people begin to mingle more in crowded commuter trains with the reopenings of more offices, schools, restaurants and stores. The daily numbers had dropped below 20 recently.

Critics had said Japan’s relaxation of its pandemic precautions was premature, and Japanese media reported that Tokyo Gov. Yuriko Koike plans to announce a “Tokyo Alert” requesting residents of the capital to try harder at social distancing.

Despite such concerns and the widespread unrest erupting in many U.S. cities, hopes for a quick recovery from the worst global downturn since the 1930s have spurred recent rallies.

The protests that have rocked American cities for days have so far not had much impact on financial markets. But the violence and damage to property may hinder the re-opening of the economy. Crowds gathering to protest injustice and racism also could touch off more outbreaks.

But Robert Carnell, regional head of research for the Asia-Pacific region at ING, warned against too much optimism.

“How long can markets remain buoyant?” he asked. “The honest answer, and one that may save you five minutes is, `I don’t know.’ “

This week will provide market watchers more insight on the impact that the coronavirus is having on U.S. workers and employers. Payroll processor ADP issues its May survey of hiring by private U.S. companies on Wednesday. The next day, the government releases its weekly tally of applications for unemployment aid.

On Friday, the government reports its May labour market data. Analysts surveyed by FactSet expect the report will show the economy lost 9 million jobs last month.

In other trading, benchmark U.S. crude oil added 42 cents to US$35.86 a barrel in electronic trading on the New York Mercantile Exchange. It fell 5 cents to $35.44 a barrel on Monday. Brent crude oil, the international standard, gained 59 cents to $38.91 a barrel.

The U.S. dollar rose to 107.72 Japanese yen from 107.58 yen. The euro climbed to $1.1158 from $1.1136.

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Australia central bank sees glimmer of hope as economy restarts after pandemic shutdown – The Guardian

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By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually re-opens during what is likely to be the worst quarter since the Great Depression.

The Reserve Bank of Australia (RBA) left rates at 0.25% at its monthly policy meeting in a widely expected decision, and said the “accommodative approach will be maintained as long as it is required.”

In a short post-meeting statement Governor Philip Lowe said the RBA was prepared to scale up government bond purchases if needed to ensure three-year yields held around 25 basis points.

Australia’s A$2 trillion ($1.4 trillion) economy is experiencing its biggest contraction since the 1930s in the current quarter but “it is possible that the depth of the downturn will be less than earlier expected,” Lowe added.

A significant decline in new infections, earlier-than-expected easing of restrictions and signs that hours worked stabilised in early May auger well for a recovery.

“There has also been a pick-up in some forms of consumer spending,” Lowe added.

States and territories across Australia have been easing social distancing regulations at differing paces in recent weeks, slowly ending a partial lockdown ordered in March, having largely contained the COVID-19 pandemic.

Australia, which has about 7,200 coronavirus cases, has not reported a death from the disease for more than a week.

The country’s success in containing the virus has sent the Aussie dollar soaring to five-month highs. Yet, that is leaning against monetary stimulus and won’t be welcome by the RBA.

The central bank made no mention of the exchange rate in the statement.

Highlighting the depth of the pandemic-driven global economic downturn and the fallout on Australia, many economists expect interest rates to remain at record lows for at least two more years.

Some are even predicting negative interest rates, though Lowe has ruled it out.

“While we have also become more optimistic about the outlook for the economy in recent weeks, we still expect the unemployment rate to jump to nearly 9% by Q3,” said Capital Economics analyst Marcel Thieliant.

He expects the central bank to announce an expansion of its government bond buying programme at its August policy meeting.

“And we only expect the unemployment rate to fall below 7% by 2022. That would leave it far above the RBA’s estimate of the natural rate of 4.5%, underlining that the RBA will miss its full employment mandate for years to come.”

Q1 GDP MAY DODGE CONTRACTION

Official data out earlier showed Australia boasted a record current account surplus last quarter as firm export prices and a fall in imports provided a timely boost to growth.

Other data out on Tuesday showed government spending also added to growth in the March quarter, while companies reported better sales and profits than many expected.

The figures led analysts to upgrade their forecast for first-quarter gross domestic product due Wednesday with some saying the economy might not have shrunk in the quarter as previously feared.

GDP had been forecast to show output contracted 0.3%, the first fall since early 2011.

“A small positive print cannot be ruled out,” said Su-Lin Ong, chief economist at RBC Capital Markets.

“But the likely collapse in activity in the current quarter and accompanying impact on the labour market…is a sharp and deep shock through the whole economy with likely lasting ramifications.”

(Reporting by Swati Pandey; Editing by Shri Navaratnam)

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