Week in Review
What We're Reading:
February 22, 2021
Anti-coup protests spread in Myanmar amid UN warning of violent crackdown. Tens of thousands of demonstrators flooded the streets of Myanmar’s biggest city on Feb. 17, in one of largest protests yet of a coup, despite warnings from a human rights expert that recent troop movements could indicate the military was planning a violent crackdown. (Business Mirror)
More ‘Brexit’ companies shift to the Netherlands as uncertainty persists. The flow of businesses moving to the Netherlands because of Brexit remained strong in 2020, even though foreign investment fell by a quarter as the coronavirus pandemic hit, the Netherlands Foreign Investment Agency said on Feb. 18. (HSN)
Iran reacts coolly to US talk offer, demands lifting of sanctions. Iran will “immediately reverse” actions in its nuclear programme once U.S. sanctions are lifted, its foreign minister said on Feb. 19, reacting coolly to Washington’s initial offer to revive talks with Tehran aimed at restoring the 2015 nuclear deal. (Reuters)
Back in Paris pact, US vows no more sidelining of climate. The United States officially returned to the Paris global climate accord on Feb. 19, and President Joe Biden and other U.S. leaders declared the nation could not afford to sideline the growing climate crisis again. (AP News)
How China is bending the rules in the South China Sea. Beijing’s misapplication of international law in the disputed waters is more complex than it seems on the surface. (Interpreter)
Toppy stock markets spark more ‘bubble’ chatter. A strong start for world equities in 2021 after the fastest bear-to-bull market switch last year has prompted market mavens to flag worries about pricey assets, with BofA calling it the “mother-of-all asset bubbles.” (Reuters)
Managing risk in the food manufacturing business. The food industry is one that the world cannot do without. It often experiences various evolutionary stages that make it difficult for food manufacturers, suppliers, and retailers. There are several risks involved, and managers need to be prepared to combat them when they arise. (Global Trade Magazine)
Deep freeze upends US agriculture markets from grains to beef. The deep freeze that has left almost five million Americans without power is snarling shipments of goods from corn to soybeans, shutting meat plants and curbing ethanol production. (AJOT)
What happened to Australia’s “soft power”? A review of soft power was trumpeted as a chance to increase Australia’s persuasive force. So why was it abandoned? (Interpreter)
Draghi fever may drive Italian risk premium to post-crisis low. Italy’s new Prime Minister Mario Draghi may boost the appeal of his government’s bonds for foreign investors, and could even push their risk premium over German debt to the lowest level since the euro zone debt crisis. (Reuters)
Power outages linger for millions in US as another icy storm looms. Millions of Americans endured another frigid day without electricity or heat in the aftermath of a deadly winter storm as utility crews raced to restore power before another blast of snow and ice sowed more chaos in places least equipped to deal with it. (Business Mirror)
New WTO chief’s pile of problems. The coronavirus pandemic, log-jammed trade talks and a long-delayed meeting of member states are just a few of the crises awaiting Ngozi Okonjo-Iweala as she takes the helm of the World Trade Organisation next month. (EurActiv)
China may ban rare earth technology exports on security concerns. China may ban the export of rare-earths refining technology to countries or companies it deems as a threat on state security concerns, according to a person familiar with the matter. (AJOT)
Bitcoin consumes 'more electricity than Argentina'. Bitcoin uses more electricity annually than the whole of Argentina, analysis by Cambridge University suggests. (BBC)
Biden to order review of semiconductor supply chain, report says. The White House is ordering a full review of foreign supply chains, including semiconductors and rare earth metals, says CNBC. (CNet)
Can Draghi Pull This Off?
Chris Kuehl, Ph.D., NACM economist
It was not expected or anticipated by anyone in Italy. Yet another attempt to form a government that works has failed; there was little indication that Mario Draghi would be tasked with trying to dig Italy out of a dual crisis that has resulted in the lowest life expectancy for the population since WWII.
The economy is teetering on recession, and Italy still has among the worst levels of the virus infection. The populist parties—Five Star Movement and the League—have proved adept at getting voters angry and frustrated, but they have been miserable at actually leading. Their respective heads have done nothing but argue with one another. No coherent policies exist to deal with either the economy or the pandemic.
Suddenly, Draghi was persuaded to enter the fray, despite the fact he has never really affiliated with a specific party and has not held political office previously. He is an MIT-trained economist who has been the head of the Italian central bank as well as the head of the European Central Bank.
Draghi has experience in terms of being a last-ditch choice. His elevation to the head of the ECB was not expected because that post was slated to go to the head of the German Bundesbank when Jean Claude Trichet served out his term. The unofficial deal was that Germany and France would alternate when it came to heading up the bank. The choice was to have been Axel Weber; but at the last minute, he backed off and that set off a scramble.
The Germans were not thrilled with the elevation of Draghi, but he was thought to be the best of the available alternatives. It was feared that he would be less engaged on issues of inflation. However, this proved not to be the case. He stepped down from the ECB and was replaced by Christine Lagarde, who had been the head of the IMF. The point is that Draghi has a history of taking hold during an emergency. At the moment, he is supported by almost every party in Italy. The center right, center left, populists and even some of the extreme parties are supporting him, but few are placing long-term bets.
In his first speeches as the new prime minister, he has emphasized the dual threats to Italy and has outlined his intent. The pandemic is the No. 1 concern; and like every other leader in Europe and the world for that matter, he has put distribution of the vaccine and the lifting of the lockdown at the very top of the list.
The Italians have struggled to get compliance from the population from the very start. There has been deep resentment over the restrictions and the shutdowns. Italy has been very quick to lift many of them. This has resulted in many viral spikes and has not really done the economy any favors.
The second major plank is the reason that Draghi has been tasked with this latest government. Italy simply can’t begin to recover without substantial help from the EU—assistance beyond what has been offered thus far. There is considerable compassion fatigue in Europe. Draghi is expected to use his contacts to break down these barriers. To put it bluntly, the Italians need the Germans to back them, and the Germans are quite tired of playing that role. They want to see the money that has been allocated to Italy and the other nations used to actually bolster the economy rather than get siphoned off by pet projects and through outright corruption.
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Structural Factors and Central Bank Credibility Limit Inflation Risks
Gita Gopinath, IMF
After ending last year with unexpectedly strong vaccine success and hope that the pandemic and economic distress it caused would recede, we woke up to the reality of new virus variants and the unpredictable, winding road that it can lead the world down.
Something similar has happened with the discourse on inflation. At the end of last year, after a historic collapse of the global economy estimated at -3.5%, inflation was below target in 84% of countries. This was expected to allow for continued low interest rates and government spending to support growth, especially in advanced economies. The U.S. plan for an additional $1.9 trillion of fiscal spending has challenged this view, with even traditionally dovish economists raising concerns about an overheated economy that could push inflation well above the comfort zone of central bankers.
The evidence from the last four decades makes it unlikely, even with the proposed fiscal package, that the United States will experience a surge in price pressures that persistently pushes inflation well above the Fed’s 2% target. Despite the large swings in the U.S. unemployment rate from 10% in 2009 to 3.5% in 2019, inflation remained remarkably stable, even as wages rose. As of now, U.S. 2008 employment gaps are large and understated by the headline unemployment rate. Our preliminary estimate is that the proposed U.S. package, equivalent to 9% of GDP, would increase U.S. GDP by a cumulative 5 to 6% over three years. Inflation, as measured by the Fed’s preferred index, would reach around 2.25% in 2022, which is nothing to be concerned about and, indeed, would help underpin the achievement of the goals outlined in the Fed’s policy framework.
Several structural factors underlie this diminished relation between inflation and economic activity in many countries. One such factor is globalization that has limited inflation in traded goods and even some services. In this crisis, despite some early disruptions, global supply chains have shown resilience and agility, and merchandise trade has recovered in lockstep with the recovery in manufacturing, surpassing pre-pandemic levels. Considerable slack remains in the global economy, with over 150 countries projected to have lower per capita incomes in 2021 relative to 2019.
A second factor is automation which, along with relative declines in the price of capital goods, has largely kept higher wages from being passed through to prices. This crisis is likely to accelerate that trend. Another structural trend over recent decades is the dominance of market share by firms with high profit margins. This has allowed these firms to absorb higher costs without raising prices, as was seen after the increase in U.S. tariffs. This crisis could likely increase the market share of such firms, as smaller firms have been harder hit than large businesses by the pandemic-related downturn.
Another important factor is that expectations of inflation have remained broadly stable around the targets set by central banks, thanks to central banks’ independence and the credibility of their policies. This credibility has also meant that even with high government debts there is no expectation that monetary policy will prioritize keeping government borrowing costs low at the expense of high inflation. As an example, Japan’s government debt has averaged over 200% of GDP since 2009, yet the challenge has been to raise inflation expectations. Indeed, inflation in Japan has averaged just 0.3% over the past decade.
None of this detracts, however, from the need to follow sound principles in the conduct of policy. First, even though there is limited risk of a steep rise in inflation, well targeted public spending would deliver the same improvement in employment and output but with a much smaller accumulation of debt, leaving more space for future spending that carries a high social return. High quality public investment would raise potential output, increase demand, and should be central to a comprehensive climate mitigation strategy to mitigate the catastrophic risks from climate change.
Second, because these are uncertain times with almost no parallel in history, extrapolating from the past is risky. Because of exceptional policy measures in 2020, including fiscal spending by G7 countries of 14% of GDP—well above the cumulative 4% of GDP spent during the financial crisis years of 2008–10—household savings rates in advanced economies are at multi-year highs and bankruptcies are 25% lower than before this pandemic. As vaccine protection becomes widespread, pent-up demand could trigger strong recoveries and defy inflation projections based on evidence from recent decades. On the other hand, bankruptcies may have only been delayed, and their eventual increase could dampen confidence, and weaken inflation and lead to further job losses.
Lastly, there is the danger of market turbulence that could be triggered by the discovery of new virus variants, transitory swings in inflation, or the possibility that major central banks raise interest rates sooner than expected. Such market reaction could tighten global financing conditions in unexpected ways. While central banks can’t do anything to change the course of the pandemic, they can and should pre-empt the possibility of sharp swings in borrowing costs. They can do this with early and clear communications of their intentions.
Gita Gopinath is the economic counsellor and director of the research department at the International Monetary Fund (IMF). She is on leave of public service from Harvard University’s Economics department where she is the John Zwaanstra Professor of International Studies and of Economics.
Reprinted with permission by IMFblog.
Repercussions of Coronavirus Hit India’s Already Weakening Economy
Bert Burger, principal economist, Atradius
India is facing an uphill battle in 2021. Its already weakened economy faces significant challenges from the long-term economic impact of extended COVID-19 lockdowns and supply chain disruptions.
According to Atradius economists, the Indian economy last year went through its worst economic crisis since World War II with a GDP contraction of 7.4%. As a result of social distancing measures and travel bans, unemployment has sharply increased, and household consumption is expected to have contracted by about 9% last year.
That said, there is hope for a strong recovery in 2021 if a robust vaccine rollout and supply chain stabilization occur.
2020 Industry Performance Deteriorated
The outlook for every major Indian industry except food is poor to fair going into 2021. Like many other sectors, food has been impacted by the consequences of the lockdown (e.g., transport and supply chain issues) in the first half of 2020. Consumer demand, however, is expected to show robust growth this year, which is reason for the good economic outlook. Value added is forecast to increase by more than 15% in 2021.
Across many industries, payment delays sharply increased in second-quarter 2020. For many key sectors, including construction, electronics, services and steel/metals, the business performance and credit risk situation assessments remain poor for the time being.
Government Strong, Social Tensions Rising
On the political front, the situation is largely stable with a majority Bharatiya Janata Party (BJP) government at the center. A strong majority for the BJP bodes well for the passing of economic reforms. The nationwide lockdown, however, caused several delays in ongoing government projects, resulting in funds being blocked with relevant authorities. While the state of the economy remains quite concerning, the government is taking measures to revive the economic growth.
The Indian government is also dealing with lingering social unrest. In early 2020, it faced public discontent over the country’s weak economic performance, while the adoption of a controversial citizenship law in December 2019 increased tensions between Muslims and Hindus, leading to severe violent sectarian clashes in early 2020.
Recently, protests of famers flared up after parliament passed a comprehensive farm reform bill in September. A longer-lasting coronavirus pandemic and enduring economic downturn, resulting in many people falling into poverty, could lead to an additional increase in social tensions. The millions of daily wage earners and migrant workers employed in the large informal sector have been hit particularly hard by the lockdown measures and the recession.
A Strong Economic Rebound Expected in 2021
After the sharp recession in 2020, 2021 will likely be a year of recovery. Economic growth is expected to be high, supported by an anticipated strong rebound in private sector output, positive news on vaccines, and our expectation of a slow policy normalization. A GDP growth rate of 8.5% to 9% is likely, but this can mostly be attributed to the low base of last year. The contribution of net foreign trade to the business cycle will turn negative because rising domestic demand will lead to a strong increase in imports.
India needs to reform land acquisition laws and the labor market to see long-term economic stabilization. The government should broaden its tax base and the banking sector needs to strengthen its balance sheets. The level of non-performing loans (NPLs) will rise sharply in 2021 again because of the strains caused by the COVID-19 crisis, rendering some small banks insolvent.
A robust vaccine rollout is also on the horizon for India. On Jan. 16, India launched the mass vaccination program. India has been relatively proactive in securing vaccines. The availability of effective vaccines is bringing hope that the economy can return to normal sometime later this year, but likely only in the second half of 2021. The main risk to this positive outlook is that the virus could mutate, making vaccines less effective.
India, while not the highest risk country, still offers a challenging business environment. Besides structural issues with property rights, government integrity, and judicial effectiveness, the COVID-19 pandemic and the trade war have a severe impact on sentiment and create uncertainty. Credit insurance can support liquidity and protect businesses. In addition to insuring a business’s accounts receivable, trade credit insurance companies regularly provide updates on markets. Commercial credit insurance is an effective tool to help protect businesses from customer defaults, supporting their commercial results and stability to thrive in India.
Bert Burger is principal economist at Atradius Credit Insurance working in Amsterdam, The Netherlands.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations