The PMI indices published this week give an early insight into the scale of the economic shock from Covid-19. The composite indices for Japan (35.8), Germany (37.2), France (30.2), the UK (37.1) and the US (40.5) all slumped in March. The euro zone composite PMI was the lowest ever recorded at 31.4. The deterioration was particularly marked for the sub-indices relating to employment and orders for goods and services. Figures for April, whilst remaining at historically low levels, are expected to show increasing divergence between the regions. In East Asia, internal demand should start to pick up, as activity starts to normalise in China. Conversely, the epidemic is spreading more rapidly in the US, India and Africa; meanwhile, many European countries remain in lock-down.
The most recent PMIs announced the shock earlier this month: industrial production fell strongly in January-February 2020, declining by 13.5% year-on-year. China also registered a very severe contraction in total exports (-18% y/y), fixed-asset investment (-24.5%) and volumes of retail sales (-23.7%). Such a collapse in economic activity is an unprecedented situation in China, which is expected to record a contraction in real GDP in Q1 2020. Activity has been recovering gradually in recent days, and a rebound in real GDP growth is expected in Q2 2020, notably supported by the authorities’ stimulus policy measures
In the end, the US Federal Reserve (Fed) did not wait for the next corporation tax payment deadline in April before intervening in the money market. In an attempt to stave off the risk of pressures on the market as a result of the coronavirus outbreak, it increased the scale of its repo transactions on Monday 9 March. At the end of last week, demand for cash from primary dealers far outstripped what the Fed was offering. Although the Fed has injected nearly USD 480 billion in additional central bank money since mid-September, the liquidity position (immediately available cash) at major US banks has not improved. On the one hand, bank reserves with the Fed have increased by only USD 280 billion, due to the growth in the Treasury’s general account
The weight of the tertiary sector in the Spanish economy has grown steadily over the years, and this growth has accelerated in the last five years. Value added for the services sector (volume terms) has increased by 16.2% since Q3 2008, the previous peak achieved before the financial crisis. Conversely, the industrial sector remains 6.9% below its 2008 level. This structural transformation could reflect the growing role of new technologies and the digital economy as engines of growth for both consumption and investment choices. This trend is reflected not only in Spanish domestic demand, but also in the country’s international trade. Indeed, Spanish exports of services have risen 46 % (volume terms) since the autumn of 2008.
A large number of economic sectors have been struggling with the impact of the Covid-19 epidemic on Chinese consumer demand, transport, tourist flows and industrial production chains. Over the past month, the People’s Bank of China (PBOC) has loosened monetary and credit conditions in order to support local corporates, help them cover their cash requirements et encourage a rapid recovery in activity. PBOC has injected a large amount of liquidity into the financial system, reduced interest rates – monetary rates, medium-term lending facility rate and benchmark lending rate – and announced special loans to firms directly affected by the virus outbreak. As a result, the weighted average lending rate, which has declined since Q2 2018 (from 5.94% to 5
Tiering partially exempts excess reserves of the euro area banks from the negative deposit facility rate (-0.5%). It applies within the limit of an amount equal to six times their minimum reserves. Banks whose excess reserves do not exceed this multiple may, in addition, convert all or part of their deposit facility into excess reserves. The amount of the deposit facility of the 19 banking systems in the euro zone decreased by 59% between September and December 2019, falling back to its spring 2016 level. We estimate that tiering reduces the cost of negative interests by EUR 4.0 bn in the euro area and EUR 825 m in France[1]. The annual cost of negative interest amounts to EUR 4.7 bn for the euro area banks, including EUR 3.5 bn attributable only to excess reserves and EUR 1
Population ageing creates major challenges for PAYG retirement systems in the OECD countries. Reforms are needed to their sustainability. These reforms have taken two directions: lower benefits or the extension of the retirement age. Based on current regulations, in most countries, benefits will be less generous for future cohorts. In Poland, replacement rates - the percentage of an individual's latest employment income that is replaced by a pension benefit upon retirement - could be more than halved compared to those retiring now. Another possibility is the lengthening of the normal pension age. Countries that have linked the pension age to life expectancy will be able to maintain benefits at a relatively high level
According to the first estimates, economic activity contracted for the third quarter in a row in Q4 (-0.3% y/y). Manufacturing industry was the most affected and contracted by 2%. In 2019, real GDP contracted by 0.1%, after recording a 2% growth in 2018. Real GDP growth should pick up in 2020 (+0.6%), but remains under its potential (estimated at 2.5% by the IMF). Indeed, one year after Andres Manuel Lopez Obrador came to power, his economic policy is still hard to read and weighs on investment. The future of the energy sector also raises doubts, affecting investor sentiment, both domestic and foreign
In a period of declining interest rates, the interest margin on transactions with customers has widened due to greater inertia on the downside of yields on bank assets compared to that of the cost of resources. Portuguese banks, however, hold a large share of variable rate loans which tends to accelerate the downward adjustment of the yield on the loan portfolio. In a context of durably low interest rates and close to zero cost of resources from customers, the sustainability of the interest margin will depend essentially on the ability of Portuguese banks to maintain the current rates applied on new loans[1]. A further decrease in interest rates on new loans would drive the margin on new transactions well below the margin on outstanding amounts
As the unemployment rate stabilises owing to the economic slowdown (14.1% in November 2019), the active population is finally rebounding. This is mainly due to the stabilisation of the number of young workers under the age of 30, after several years of decline. The chart shows that this decline had been strong since 2009. Such a decrease has been observed in the 30-40 years-old age group as from 2011-2012. For the latter group, the decline continues today. Conversely, the labour force over 40 and over 55 years old has never stopped growing, even during the years of crisis. These trends are mainly the results of changes in the participation of various age groups to the labour market
Mozambique urgently needs to resume a medium-term agreement with the IMF, the latter having suspended its cooperation in 2016, after discovering a hidden debt of around 1.2 billion dollars. Already, a first default of a Eurobond issued on 2013 for an amount of 850 billion dollars, in order to finance patrol vessels, had led to a first restructuring. Following a second default in January 2017, a new restructuring agreement for about 900 billion dollars has been reached last September. Nonetheless, the Mozambican state creditworthiness remains very fragile. A part of the hidden debt (around 8% of GDP) remains in default and a judicial battle is underway against Mozambican’s state. The latter is asking for the deletion of one of the two state guarantees issued
Our home affordability index measures the ratio of the borrowing capacity of households (based on average household income, average fixed mortgage rates and average mortgage duration1) to the average existing home price per square meter (m2). Over the past ten years2, home affordability has increased by 30.4% in the provinces, but declined by 12.2% in Paris. Changes in average credit conditions (the average duration was extended to 18.8 years from 17.8 years, and mortgage rates declined to 1.30% from 4.30%) and disposable household income (+7.1%, notwithstanding differences in level) were relatively homogeneous at the national level, which means the differential can be attributed almost exclusively to the spread in existing home prices changes since 2009: home prices have increased by 64
Although not as significant as during the 2004-2007 boom period (+4.8 % per year on average), the dynamism of French business investment has nonetheless been noteworthy since 2014 (+3.4%). In 2018, its contribution to GDP growth (0.5 percentage points) was slightly above the one of household consumption (this latter lacking itself in dynamism) and in 2019, according to our forecasts, it would be barely below. The outcome of business investment being the main engine of French growth is very unusual. Its breakdown by products and its evolution over the time are also noteworthy: the current dynamism is based up to 40% on investment in information and communication services, far above all other products and twice as much as its share during the 2004-2007 period
When looking at Colombia’s creditors by residence and type of institution over the past 10 years, we observe three main dynamics at play: first, non-residents have increased their exposure to the sovereign in both relative terms but also in absolute terms as the general government’s debt burden has increased by 20 percentage points of GDP in the intervening time. Second, most of that increase has been driven by larger holdings from foreign non-banks (i.e. investment management industry) which in fact have captured the shortfall in sovereign financing left behind by domestic banks. Finally, non-residents have altered the currency composition of their holdings as evidenced by their comparatively much larger exposure to local currency public debt instruments over the period.
The 2014 reform of US money market funds led to a massive reallocation of cash from funds invested in private debt (prime funds) to funds invested in public debt (government funds)*. Foreign banks, traditional borrowers of prime funds, were deprived access to US dollars, while the US Treasury, federal agencies and American banks attracted fund inflows**. With the improvement in average returns over the past two years, the savings collected by government funds and prime funds have both increased sharply, up USD 450 bn and USD 430 bn, respectively
Certain gases in the atmosphere, such as carbon dioxide (CO2), are largely opaque to the Earth’s infrared radiation and keep heat at the Earth’s surface trapped, like a lid. This is the greenhouse effect, identified in 1824 by French mathematician Joseph Fourier. Its intensity has always varied, but human activity has caused it to disrupt. Since the pre-industrial era – generally accepted as the period from 1850 to 1900 – human activity has caused 2,000 billion tonnes of CO2 to be released into the atmosphere, increasing the Earth’s temperature by 1°C. That increase is now accelerating. It will reach 3-5°C by 2100 if carbon emissions continue at their current trend. Few species can adapt to that rate of change, which is a hundred times faster than during interglacial periods of warming
Economic growth has averaged only 1% per year since 2015, and weakened further in H1 2019. Exports have suffered from slower world demand growth while structural constraints have weighed heavily on investment, which has declined continuously since early 2018. Major power outages have disrupted activity in 2019: they result from the severe troubles of state-owned company Eskom, and illustrate well the country’s lack of infrastructure. Only steady progress in the structural reform process will allow investment to recover in the medium term. Meanwhile, real GDP growth is expected to remain low (projected at 0.4% in 2019 and 0.8% in 2020) and policymakers’ room for manoeuvre to boost domestic demand is very narrow
In September 2019, outstanding sight deposits collected by credit institutions remained particularly dynamic (+ 11.9% year-on-year) and amounted to more than EUR 1,106 bn. This change concerns all customers and especially non-financial corporations (NFCs). First contributors to the growth of total sight deposits each year since 2011, their share within the latter has increased significantly. Several explanations can be given. The low or negative interest rate environment weighs on the attractiveness of other investments compared to sight deposits. Moreover, it contributes to the expansion of NFCs’ bank credit flows, which have been relatively well correlated with their flow of sight deposits since the beginning of the decade
Revenue of older people mainly consists of state and occupational pensions and income from savings and work. In countries that have, relatively speaking, more generous pension benefits, labour participation of the elderly is relatively low. In France, only 3% of people older than 65 still work, compared to almost 20% in the US and 25% in Japan. Moreover, the French old age poverty rate, the percentage of seniors (66+) whose income is lower than 50% of the median household income, is among the lowest in the OECD. The chart shows that, in general, there is a positive relationship between the percentage of revenue of older people coming from work and their at-risk-of-poverty rate. It thus seems that, when seniors feel financially constrained, they decide to work longer
At its 25 October monetary policy meeting, Russia’s Central Bank cut its key policy rate by 50 basis points to 6.5%, the lowest level since 2014. This had been the fourth key rate cut since June. Monetary easing occurs at a time when inflationary pressures are declining (4% year-on-year in September) while economic activity remains sluggish. The Central Bank is now forecasting a growth of between only 0.8% and 1.3%, which is close to the growth forecasts of the IMF and World Bank (1.1% and 1%, respectively, vs. 2.3% in 2018). This slowdown can be attributed to the deceleration in both domestic and external demand
Concerned about reducing pressure in the money markets, the Federal Reserve (Fed) will proceed with outright securities purchases in addition to its repurchase agreement operations (repo). At the end of the year, between USD 365 bn and 400 bn* in central bank money could thus be injected into the current accounts of banks. Given the current amount of the outstanding liquidity lent, the upward trend in currency in circulation and the foreseeable rebuilding of the Treasury account with the Fed, the banks’ reserves with the central bank are unlikely to increase by more than USD 130 bn by the end of the year (to a total of nearly USD 1600 bn, the April 2019 level)
The usefulness of carbon pricing lies in the abatement incentives that it creates. An implicit carbon price can be derived by dividing the revenues from carbon pricing systems and excise taxes on fuels by the total greenhouse gas emissions. According to this method, prices range from close to 0 in most developing countries but also the US and Canada, to close to 100 euro for 1 tonne carbon emitted in Sweden and Switzerland. The chart confirms that the countries that have relatively high implicit carbon prices also rank high in terms of carbon productivity defined as the amount of GDP produced per unit of carbon emissions. This suggests that in order to increase carbon productivity, i.e
Between the end of March 2018 and the end of August 2019, the yuan lost nearly 13% against the dollar. With each new increase in US tariffs (announced or effective), the Chinese authorities have responded by letting the yuan depreciate to offset partially the impact on export corporates. In September, despite the introduction of new tariffs, the yuan levelled off against the dollar, because Beijing and Washington had agreed to restart trade talks. In the short term, exchange rate policy is likely to be used moderately to stimulate economic growth, especially due to the risk of a vicious circle as the anticipation of currency depreciation fuels new capital outflows triggered by the yuan’s decline. Yet this risk is limited, however, by ongoing controls on resident capital outflows
Alongside the quasi-uninterrupted decline in Japanese interest rates since the early 1990s, the household savings rate has declined by more than 10 percentage points, from a net rate of 12.9%(1) in 1994(2) to 2.5% in 2017(2). The savings rate consists of a net financial savings rate (gross financial savings flow minus borrowings flow) and a net housing investment rate (gross housing investment flow minus (in Japan) fixed capital consumption). The decrease in the financial savings rate resulted from the decline in the gross financial savings flow rather than from a rise in the borrowings flow. Thus, the flow of gross financial savings not only contracted, but was also reshaped in favour of monetary deposits, owing to the decline in opportunity costs
In the eurozone, current public debt ratios are much higher than before the Great Recession. A proper assessment of the risk that this entails should also take into account other changes in the economic environment, and in particular, the decline in long-term sovereign rates. This trend has accentuated recently, with long term interest rates in several eurozone countries dropping below zero. But the decline has been at work for a long time and has already produced major effects. On the chart, each point represents a member state. The x axis shows the country’s debt ratio and the y axis the interest charge paid each year on its public debt
Weekly charts highlighting points of interest in the world economy