Week in Review
What We're Reading:
January 11, 2021
US GSP special tariff status expired at end of 2020. U.S. Customs and Border Protection (“CBP”) issued a notice announcing the lapse of the Generalized System of Preferences (“GSP”) special tariff program, effective December 31, 2020, unless renewed by an act of Congress. The GSP is the oldest U.S. trade preference program and was established by the Trade Act of 1974. (Global Trade Magazine)
World Bank sees subdued recovery in 2021 and plenty of risk. The global economy will experience a subdued recovery this year from the devastating pandemic, the World Bank predicted on Jan. 5, but it warned that the near-term outlook is highly uncertain and growth could be imperiled if coronavirus infections and delays in the rollout of vaccines continue. (AP News)
US suspends French tariffs over digital services tax. The United States on Jan. 7 said it would hold off slapping tariffs on French cosmetics, handbags and other imports in retaliation for a digital services tax Washington says will harm U.S. tech firms, while it investigates similar taxes elsewhere. (Reuters)
US labor market recovery stalling; trade deficit widens sharply. The number of Americans filing first-time claims for jobless benefits unexpectedly dipped last week while staying extremely high, with the labor market recovery appearing to stall as a raging COVID-19 pandemic threatens to overwhelm the country. (HSN)
Portugal aims to seal EU-Mercosur trade agreement, progress on other deals. Portugal will try to conclude a free-trade agreement between the EU and the South American trade bloc Mercosur during its six-month EU presidency, and attempt to expand Europe’s ties with other potential trade partners, the country’s foreign minister said on Jan. 7. (EurActiv)
Qatar emerges from Gulf spat resolute and largely unscathed. Qataris awoke to a surprise blockade and boycott by Gulf Arab neighbors 3 1/2 years ago, and this week were jolted again by the sudden announcement that it was all over. (AP News)
Exporting to India: What you need to know. Looking to break into the world’s fastest-growing economy? Then look toward India. That’s right—within the next decade, India will outrank China as the most populous country in the world. So, what does the growth of this nation mean for its economy and for exporters who may want to enter it? (Shipping Solutions)
Trump signs order banning transactions with eight Chinese apps including Alipay. The move is likely to face similar court challenges as the Commerce Department did when it sought to block transactions with WeChat and TikTok. (NBC)
Chinese cities reportedly go dark as country faces shortage of coal, a major Australian export. Several major Chinese cities have reportedly gone dark as authorities limit power usage, citing a shortage of coal. (CNBC)
Cash in circulation is soaring, and that usually means good things for the economy. The amount of currency in circulation soared last year at a rate unseen since World War II, providing what historically has been a good sign for the economy. (HSN)
The bleak reality of sectarian Lebanon. As the Lebanese people are left to pick up the pieces of the Aug. 4 blast, few have faith in the state to help. (Interpreter)
US Exim tweaks domestic content rules as part of efforts to take on Chinese ECAs. The Export-Import Bank of the United States (U.S. Exim) has announced an “historic” change to its domestic content rules, as it bids to finetune its fledgling programme on China and boost support to key battleground sectors such as 5G and quantum computing. (Global Trade Review)
The top import for each country: Asia. By 2040, Asia is projected to make up 40% of worldwide consumption. What types of goods and products are in high demand by the world’s (soon-to-be) largest consumer? One way to tackle this question is by looking at the top imports across Asia. (Visual Capitalist)
Is Europe Headed Back into Recession?
Chris Kuehl, Ph.D., NACM economist
It would seem likely that the EU will slide back into recession in the next quarter’s reading. By most accounts, Q4 numbers will be in negative territory, and that decline is very likely to extend into Q1 of this year.
Some nations will manage to escape the retreat, but for the eurozone as a whole, the prospects look bleak. The primary reason for this fall is the spread of the virus, but it is not the only problem. The pandemic issue has been vexing in the extreme because Europe has done about as much as any region to deal with the spread.
The policies in the EU are at least as strict as those in many Asian states where there has been palpable progress. The U.S. still has a much higher rate of infection, hospitalization and fatality than most in Europe. However, the U.S. has been lax about its control efforts. The most comparable reading as far as the pandemic is concerned is the number of deaths per million. The U.S. is looking at 1,102 per million; Germany, 444 per million; France, 1,014; Spain, 1,100; and Italy, 1,263. In contrast, Japan is at 44 per million; South Korea, 20; and Taiwan, .03.
There will be intense assessment regarding the reasons Europe is struggling with the pandemic. This is not the only issue as far as the economy is concerned. A significant factor has been the Brexit process. The split between the U.K. and the EU has done much more damage to Britain than Europe. There has been an impact for the European nations as well. The countries with the closest trade ties to the U.K. include France and Germany. Both have seen a decline in economic growth attributable to the loss of that market.
The third factor that has affected the eurozone economy has been trade conflict with other key partners. The EU has long depended on trade for growth. Exports make up at least 55% of the German GDP, 30% of the French GDP and roughly 45% of the total EU GDP. In contrast, the U.S. is less than 12% dependent.
Much of that export activity is intra-Europe. Outside the EU, the major trading partners are the U.S. and China. Both of these have been under stress over the last four years. The relationship with the U.S. deteriorated badly under President Donald Trump who was hostile to the EU in general. China has been pursuing EU trade, but the power of the Chinese has worried the Europeans, making them cautious. The expectation is that conditions will markedly improve between the EU and the U.S. and that will go a long way towards improving the economies of both the U.S. and Europe.
As with the U.S., the EU economic rebound will depend heavily on the progress of the vaccine and the end of the pandemic lockdowns. However, Europe is experiencing the same delays and slowdowns as the U.S. The pace of distribution has been affected by training gaps and jurisdiction fights, but there are also cultural inhibitors. There are plenty of differences between the Asian states and those in Europe as well as the U.S. One has been standing out during the pandemic. Cooperation among the citizenry is crucial for these protocols to work. Cooperation continues to be very spotty in Europe and especially in the U.S.
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World Bank: Vaccine Deployment and Investment
Key to Sustaining Recovery
After a 4.3% contraction in 2020, the World Bank identifies near-term policy priorities to support growth in 2021. To support global recovery gains and a foundation for robust growth, policymakers must address challenges to public health, debt management, budget policies, and central banking and structural reforms, according to its January 2021 Global Economic Prospects report.
To support economic recovery, authorities must ensure a rapid and widespread COVID-19 vaccine deployment and facilitate a re-investment cycle aimed at sustainable growth that is less dependent on government debt, states the World Bank.
The World Bank estimates the collapse in global economic activity in 2020 as slightly less severe than it previously projected, mainly due to shallower contractions in advanced economies and a more robust recovery in China. In contrast, disruptions to activity in the majority of other emerging market and developing economies were more acute than it expected.
The near-term outlook remains highly uncertain, and different growth outcomes are still possible, the report details. A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit global expansion to 1.6% in 2021. Meanwhile, an upside scenario with successful pandemic control and a faster vaccination process accelerates global growth to nearly 5%.
In advanced economies, a nascent rebound stalled in the third quarter following a resurgence of infections, pointing to a slow and challenging recovery. The World Bank forecast puts U.S. GDP growth at 3.5% in 2021, after an estimated 3.6% contraction in 2020. In the euro area, it anticipates output to grow 3.6% this year, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.
According to the report, aggregate GDP in emerging market and developing economies, including China, is expected to grow 5% in 2021, after a contraction of 2.6% in 2020. China’s economy is expected to expand by 7.9% this year following 2% growth last year. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, after a contraction of 0.9% in 2020.
Analytical sections of the latest Global Economic Prospects report examine how the pandemic has amplified risks around debt accumulation; how it could hold back growth over the long term absent concerted reform efforts; and what risks are associated with the use of asset purchase programs as a monetary policy tool in emerging market and developing economies.
As severe crises did in the past, the pandemic is expected to leave long lasting adverse effects on global activity, the report finds. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and labor force declines in many advanced economies. If history is any guide, the global economy is heading for a decade of growth disappointments unless policy makers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable economic growth.
Policymakers must sustain the recovery, gradually shifting from income support to growth-enhancing policies, the report proposes. In the longer run, in emerging market and developing economies, policies to improve health and education services, digital infrastructure, climate resilience, and business and governance practices will help mitigate the economic damage caused by the pandemic, reduce poverty and advance shared prosperity. In the context of weak fiscal positions and elevated debt, institutional reforms to spur organic growth are particularly important. In the past, the growth dividends from reform efforts were recognized by investors in upgrades to their long-term growth expectations and increased investment flows.
Central banks in some emerging market and developing economies have employed asset purchase programs in response to pandemic-induced financial market pressures, in many cases for the first time. When targeted to market failures, these programs appear to have helped stabilize financial markets during the initial stages of the crisis. However, in economies where asset purchases continue to expand and are perceived to finance fiscal deficits, these programs may erode central bank operational independence, risk currency weakness that de-anchors inflation expectations, and increase worries about debt sustainability, the report finds.
Global Insolvencies Expected to Rise
The blockade of courts and governmental support measures have kept insolvencies at bay, according to trade credit insurer, Euler Hermes. The firm’s Global Insolvency Index fell 12% year-on-year in the third quarter of 2020, after a 13% drop year-on-year the prior quarter—even with a modest trend reversal in some economies.
The broad extension of temporary support programs until 2021 is likely to keep insolvencies, artificially lower, for longer, Euler Hermes said. Massive support measures implemented and extended by governments to provide liquidity, time and flexibility to companies have delayed the time before companies file for bankruptcy.
The progressive elimination of these measures should produce an increase by the second half of 2021, Euler Hermes predicts. The increase will consist mainly of pre-Covid-19 zombies, companies that were no longer viable before the crisis. These companies survived due to emergency aid. Post-Covid-19 zombies, companies weakened by the excess of debt resulting from the crisis, are also expected to contribute to the increase.
Euler expects its Global Insolvency Index to grow significantly in 2021 (25% year-on-year) because of the base effect created by the sharp drop in 2020 (10%). It anticipates all regions will contribute to this increase, with North America registering the highest volume (57% at the end of 2022 compared to 2019) compared to Western Europe (23%) and Asia (18%).
However, even in 2021, one in two countries in Euler Hermes’ sample will register a low number of insolvencies compared to the Great Financial Crisis and even the long-term average, notably among advanced economies.
The phasing out of support measures remains critical and uncertain, the trade credit insurer said. Any new extension in terms of time or magnitude would lead to a changed perspective, with less insolvencies in the short term, but more insolvencies in the long term, mainly in the sectors most affected by the crisis. In this sense, the likelihood of further extension of support measures is greater in countries with greater scope for fiscal and financing maneuver.
Economies that have seen a modest trend reversal include Spain, Ireland, South Africa, South Korea, Hong Kong and Denmark.
FCIB has nearly a dozen country-specific insolvency webinars available to members free in the FCIB Academy of Global Credit. Find out what you need to know before you need it.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations