· IMF slashes its forecasts for the global economy and warns of soaring debt levels
The International Monetary Fund slashed its economic forecasts once again on Wednesday and warned that public finances will deteriorate significantly as governments attempt to combat the fallout from the coronavirus crisis.
The IMF now estimates a contraction of 4.9% in global gross domestic product in 2020, lower than the 3% fall it predicted in April.
“The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” the IMF said Wednesday in its World Economic Outlook update.
The fund also downgraded its GDP forecast for 2021. It now expects a growth rate of 5.4% from the 5.8% forecast made in April (the positive reading reflects that economic activity will be coming from a lower base following 2020′s heavy contraction).
Ø‘Catastrophic’ hit to labor markets
“The steep decline in activity comes with a catastrophic hit to the global labor market,” the IMF said Wednesday, indicating that the global decline in work hours in the second quarter of the year is likely to be equivalent to a loss of more than 300 million full-time jobs.
ØU.S. economy to contract by 8%
Looking at country forecasts, the United States is expected to contract by 8% this year. The IMF had estimated a contraction of 5.9% in April.
Similarly, the fund also downgraded its forecasts for the euro zone, with the economy now seen shrinking by 10.2% in 2020.
Brazil, Mexico and South Africa are also expected to contract by 9.1%, 10.5% and 8%, respectively.
In order to mitigate some of the economic impact from the pandemic, governments across the world have announced massive fiscal packages and new borrowing. As a result, public finances are seen deteriorating significantly as a result.
“The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year,” the fund said.
Under the IMF’s base case, global public debt will reach an all-time high in 2020 and 2021 at 101.5% of GDP and 103.2% of GDP, respectively. In addition, the average overall fiscal deficit is set to soar to 13.9% of GDP this year, 10 percentage points higher than in 2019.
· Dollar gains on coronavirus, tariff concerns
The dollar gained on Wednesday as a rise in coronavirus cases in the United States weighed on optimism about a quick economic recovery, and as the U.S. weighed tariffs on European products.
Arizona, California, Mississippi and Nevada on Tuesday reported record numbers of new cases of COVID-19, the disease caused by the novel coronavirus, while Texas set a record on Monday.
The coronavirus pandemic is causing wider and deeper damage to economic activity than first thought, the International Monetary Fund said on Wednesday, prompting the institution to slash its 2020 global output forecasts further.
Concerns about an increase tariffs also weighed on risk sentiment, and boosted demand for the greenback.
The United States is weighing its tariffs on European products and is considering changing rates for various products as part of the trading partners’ aircraft dispute, according to a notice by the Office of the U.S. Trade Representative on Tuesday.
The dollar index gained 0.33% to 96.45. It has fallen from a three-year high of 102.99 in March.
The euro fell 0.32% to $1.1270. It had reached a one-week high of $1.1348 on Tuesday after data showed that a downturn in the euro zone economy eased again this month.
The greenback rose 0.19% to 106.71 Japanese yen. It fell as low as 106.06 yen on Tuesday, the weakest since May 7.
· Trump will not follow New Jersey coronavirus quarantine order, ‘he’s not a civilian,’ White House says
The White House said Wednesday that President Donald Trump will not change his plan to travel to New Jersey this weekend despite a new order by the governor requiring visitors who have been in states with high numbers of coronavirus cases to quarantine for 14 days.
“The president of the United States is not a civilian,” said White House spokesman Judd Deere, when asked about Trump’s compliance with the quarantine order given his travel Tuesday to Arizona, which has seen a rise in the rate of its Covid-19 cases.
· Oil drops nearly 6% on record U.S. crude inventories, pandemic resurgence fears
Oil prices fell nearly 6% on Wednesday after U.S. crude storage hit another record and coronavirus cases rebound in countries like Germany and surge in heavily populated areas of the United States.
Mounting coronavirus cases in the United States, which had its second-largest rise in new infections since the crisis began, China, Latin America and India have unnerved investors and pressured oil prices.
“These are all important oil demand centers. A second wave of infections and lockdowns will derail the global economic recovery and with it, oil demand and prices,” said Stephen Brennock of broker PVM.
Brent crude was down $2.29, or 5.5%, to $40.29 a barrel, a day after hitting its highest levels since early March, just before the pandemic and Saudi-Russia price war hit the markets. West Texas Intermediate crude settled $2.36, or 5.85%, lower at $38.01 per barrel.
U.S. crude oil inventories swelled last week by 1.4 million barrels, exceeding analysts’ expectations in a Reuters poll for a 299,000-barrel rise, the Energy Information Administration said, citing rising production.
That marked the third straight record for crude in U.S. storage.
· Border clash between India and China was a ‘turning point’ in their relationship, ambassador says
The border clash between India and China that killed 20 Indian soldiers is going to be a “turning point” in bilateral relations between the two Asian giants, a former Indian ambassador to China told CNBC.
A “violent face-off” in the Himalayas occurred Monday last week along the border in the Galwan Valley in Ladakh, where soldiers from India and China have been locked in a standoff since May.
While India said both sides suffered casualties, China did not disclose how many of its soldiers died during the clash. The encounter sparked concern and soured public sentiment even as the two nuclear powers moved to deescalate tensions.
ØTrade and investment ties
In recent weeks, anti-China sentiment in India has grown, with people calling for a boycott of Chinese products in the country. But experts say that it will be difficult for India to suddenly sever or reduce trade and economic ties with its neighbor.
India imported more than $62 billion worth of goods from China between April 2019 to February this year, and exported only around $15.5 billion worth of products, Indian government data showed.
Most of India’s imports from China are manufactured items such as electronics and electrical equipment, alongside organic chemicals, according to Rao from DBS. She explained that China also has notable portfolio investments in India’s technology sector, with top start-ups like Paytm, Ola, Swiggy and Zomato all backed by Chinese investors.
New Delhi had already introduced restrictive measures on Chinese foreign direct investments before last week’s border clash.
Ambassador Rao said that if India pursues closer ties with the U.S., it may cause concern as China “tends to be insecure about these things.”
“But India can only be expected to protect and safeguard its interests in what is emerging as a very sensitive situation in the bilateral relationship,” she said. “Even as we promote and pursue strategic autonomy, we will have to review and reconsider how our relations with the rest of the world are configured.”
Reference: CNBC, Reuters
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