Weekly Update August 7 2020
Updated: Oct 25, 2020
European Union moves towards fiscal integration
The EU reached an agreement to borrow excessively to provide support to member nations after a prolonged period of disagreements and debates. An agreement on EUR750 billion stimulus meant to stimulate economic recovery in member states was reached. The unique aspect here is that EU itself, rather than individual members, will directly issue bonds to fund the stimulus.
Mixed performance of developed economies
The latest purchasing managers’ indices (PMIs) for July from IHS Markit indicate that the Eurozone and UK economies are roaring back, the US economy is just barely staying above water, and the Japanese economy continues to decline. Thus, the developed world remains a mixed bag in terms of recovery. The PMIs are forward-looking indicators meant to signal the direction of activity in the broad manufacturing and services sectors.
China’s economy rebounds strongly
China’s economy grew strongly in the second quarter—after having fallen at the fastest pace on record in the first quarter, real GDP grew at the fastest pace on record in the second quarter. Specifically, real GDP was up 11.5% from the first quarter, which translates to an annualized rate of 54.6%. It was up 3.2% from a year earlier. China is the only major economy to experience strong growth in the second quarter. It is the first economy to be hit by the virus and the first to begin to recover.
US failure to contain the virus has economic consequences
The number of infections, hospitalizations, and deaths continues to rise, especially in key hotspot states, such as Florida, Texas, and Arizona. Thus, it appears that consumer-related economic activity in a significant portion of the United States is starting to either stagnate or decline. The unemployment insurance payment, moratoria on evictions and forbearance on mortgages and student loans will soon expire. This could lead to large fiscal contraction in August. The US economy shrank at a 32.9% annual rate between April and June, its deepest decline since the government began keeping records in 1947 and three times more severe than the prior record of 10% set in 1958. The US unemployment rate dropped to 11.1 percent in June 2020, easing further from an all-time high of 14.7 percent reached in April and remaining below market expectations of 12.3 percent, as many people returned to the labour market following weeks of coronavirus-induced restrictions.
China-ASEAN trade increases
In the first six months of this year, Southeast Asia became the biggest trading partner with China, surpassing the EU.Specifically, Chinese trade with the EU fell 5% in the first half of 2020 versus a year earlier, and Chinese trade with the United States fell 10%. Chinese trade with Southeast Asia increased considerably after Chinese manufacturers shifted some production to Southeast Asia, in order to both reduce costs and avoid US tariffs. China and ASEAN signed a trade deal late last year that reduced trade barriers and intensified an existing free trade agreement. In addition, China is utilizing its Belt and Road Initiative to enhance the relationship.
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