Hotel California 06 August 2020
As noted in a blog last month, (‘Riders On The Storm’ – 16 July), property prices and rents in some of Dubai’s popular communities remained fairly stable in H1, despite a slowdown induced by the Covid-19 pandemic, according to a recent report by listings portals Bayut and Dubizzle. It also noted that there had been 15.9k transactions, valued at US$ 8.9 billion, and prices had dipped 4% in the first six months of 2020.
Valustrat has estimated that 14k residential units were completed in H1 and reckoned that a further 45.1k (including 10.8k villas and 34.9k apartments) will come on line before the end of the year; that being the case, over 59k will be added to the 664k figure, per the Dubai Statistics Center figures for 2019 – an annual increase of 8.8%. For the previous two years, the increases have been 6.5% and 7.4% and it is highly likely that this year’s figure will hover around 45k (6.8%) – and not 59k. According to official data, the number of Dubai apartments has increased by 145k in the four years from 2015’s total of 398k to last year’s figure of 543k; villa numbers were 36k higher to 145k over the same period. In 2016, the number of new units was up 17k (13k apartments and 4k villas), to 500k (411k and 89k), in 2017 by 28k (21k and 7k) to 528k, in 2018 by 69k to 597k (486k and 111k) and last year by 67k (57k and 10k) to 664k. Valustrat also sees that the 90k unit imbalance of supply to demand is slowly eroding and that, by next year, the figure may have fallen to 70k and this could easily fall dramatically the sooner the economy recovers and Expo 2020 proves to be as big a success that some analysts are forecasting.
In 2018, Dubai’s population rose by 7.2% and then a further 5.1% last year to 3.356 million; the average size of each household is 5.1 (based on 664k units). This year, Covid-19 has wrought havoc on the global (including Dubai) employment market but nobody yet knows the number, but it must be remembered that the population movement will be in both directions. It is interesting to note that the majority of the job losses have been at the lower end of the pay scale, mainly in construction, retail and hospitality, even though retrenchments have occurred throughout the different pay levels of the economy. Over the first half of 2020, the population has nudged 0.1% higher to 3.394 million and will see a small increase by the end of the year. However, the end result will see a change in the socio-economic make up, as more tech savvy professionals and entrepreneurs will enter the Dubai employment market who are more likely to be interested in buying real estate.
Azizi is planning to invest US$ 954 million, over the next three years, to construct 11k new homes across Dubai, including in locations such as MBR City, Dubai Healthcare City and Al Furjan. The Dubai-based developer is already involved in fifty-four projects, valued at US$ 1.4 billion, and expects to deliver 3k units to the market this year. To fund its expansion plans, Azizi is planning a US$ 300 million bond issue. With H1 real estate prices declining by less than 4%, the developer is confident of a recovery early next year on the back of the recent US$ 70 billion government economic stimulus package, the delayed Expo 2020, starting in October 2021, and hopefully the potential discovery of a vaccine to treat Covid-19 disease.
In an attempt to attract the smaller investor to the hotel apartment segment, it is reported that the Dubai Land Department will introduce a ‘fractional title deed’ concept. Such a scheme would allow a division of the same unit to be divided into fractional shares, each having its own title deed that, like any other property, may be sold or mortgaged. With the emirate’s position, as one of the leading global destinations, it affords the opportunity to a sector of the population that would normally not have the funds to invest in real estate; at the same time, such investment will revive this segment of the market, coming out from Covid-19.
The Indian Premier League 2020 cricket tournament has been moved to Dubai and is set to commence on 19 September, once Indian government approval has been granted. This is a major coup for Dubai, as its hospitality sector, needs such a fillip after being battered by the impact of Covid-19. The 53-day tournament, involving eight teams, will showcase not only world class cricket but also the emirate, as matches will be televised live from Dubai, as well as Abu Dhabi and Sharjah, to a worldwide TV audience. The BCCI has also added a Women’s T20 Challenge, comprising three teams. Chinese mobile company VIVO will remain the title sponsor for the event, having a signed in 2017 five-season agreement, ending 2022, in a deal valued at US$ 310 million.
Dubai is hoping that one sector of the hospitality recovers quickly – medical tourism. As travel restrictions are gradually easing, and overseas visitor numbers moving upwards, the emirate is hoping to cash in on the fact that there are still many countries, who are in direct competition, still closed to this sector of the market. No figures are available for last year, but in 2018, there were 337k medical tourists. Last year, the Dubai Health Authority was confident that the market would top 500k by 2021 and, although Covid-19 has taken its toll, there is every chance that this target will be met.
Last Friday, history was made when the UAE started up Unit 1 at the Barakah Nuclear Power Plant and became the first Arab nation to use nuclear power. After more than a decade of planning, Unit 1 reached “first criticality,” which is when the nuclear chain reaction, within the reactor, became self-sustaining. Currently, Unit 2 is complete, whilst units 3 and 4 are 92% and 85% ready – and when all four reactors are up and running, the facility will provide 25% of the country’s electricity requirements.
From July’s IHS Markit UAE Purchasing Managers’ Index, UAE business is expanding at its fastest pace in ten months up 0.4 to 50.8, driven by the starting of new projects and an increase in marketing. It was noted that consumer spending improved, with most restrictions being lifted, and the economy further reopened. Whether the uptick continues is dependent on how quickly demand recovers and if and when it can ever return to pre-Covid levels of activity.
Some positive news coming out of the Dubai Gold and Commodities Exchange is that it has maintained its H1 momentum into July, with its G6 currencies portfolio recording year-on-year volume growth of 357%. The DGCX also launched the region’s first FX Rolling Futures Contracts (Eur, GBP and AUD) and expanded the range of Indian Rupee/USD contracts, with the launch of a weekly INR-US Dollar Futures Contract.
Dubai Aerospace Enterprise posted a 38.3% fall in H1 profit to US$ 122 million, driven by twenty-three fewer owned aircraft in its portfolio and lower asset sales; revenue dipped 8.5% to US$ 673 million. The ME’s biggest plane lessor also noted that figures were down because of fewer asset sales, resulting in lower gains on sale of assets, reduced finance income, and higher provisions for trade receivables, offset by lower interest expense. DAE, wholly owned by Investment Corporation of Dubai, had a total fleet of 351 aircraft, of which 297 aircraft were owned and the balance managed.
According to the Dubai Investment Development Agency of Dubai Economy, the emirate attracted foreign direct investment of US$ 3.3 billion in H1, across 190 projects, including technology, e-commerce and pharmaceuticals. Of the total projects, nearly 50% were greenfield projects and 36% were new forms of investment. The top five sources of incoming investment were the US, France, Belgium, UK and China contributing 25%, 18%, 9%, 8% and 8% of the total. The Financial Times’ fDi Markets ranked Dubai third in the number of greenfield FDI projects and fourth in FDI capital flows, whilst start-ups in the emirate attracted US$ 201 million.
Having sold US$ 900 million in bonds last year, it is reported that GEMS Education has raised $150 million in incremental financing, to support its working capital, and is in discussions with several banks relating to a possible share or debt issuance. The company operates more than fifty schools in the UAE, Qatar and Egypt.
Dubai Investments had posted a 40.0% increase in Q1 profit to US$ 58 million on the back of gains on valuation of investments, at US$ 14 million, and lower impairments, declining 56.0% to US$ 57 million. The company, formed in 1995 and in which the SVW, Investment Corporation of Dubai, holds an 11.54% stake, saw a 26.5% reduction in the cost of sales to US$ 837 million, as well as a 56.0% fall in net impairment losses on financial and contract assets to US$ 567 million. However, H1 revenue slid 21.0% lower to US$ 308 million, with profit sinking 41.9% to US$ 56 million, as rental income, including Dubai Investments Park, dipped 6.8% to US$ 118 million. DI, with interests in various sectors of the economy including real estate, industrial, financial, healthcare and education, saw H1 net impairment losses of US$ 2.3 million, (2019 – US$ 189k), on financial and contract assets. The value of total assets, (including, venture capital company Masharie, Al Mal Capital and the district cooling company Emicool). at 30 June, was up 2.0% in H1 to US$ 5.8 billion.
Dubai Investment Bank posted a 41.9% decline in H1 profit to US$ 56 million but noted that last year’s results included profit from a one-off transaction, which if ignored indicated that this year’s result showed “resilience”. Revenue for the period came in at US$ 308 million.
The bourse opened on Monday 03 August and, 62 points (3.1%) lower the previous five weeks regained most of those losses to move 57 points higher on the week, closing on 2,108 by 06 August. Emaar Properties, US$ 0.05 lower the previous three weeks, closed up US$ 0.03 on US$ 0.73, whilst Arabtec, up US$ 0.09 the previous four weeks, gained a further US$ 0.05 to US$ 0.30. Thursday 06 August saw the market trading at 348 million shares, worth US$ 79 million, (compared to 297 million shares, at a value of US$ 80 million, on 30 July).
By Thursday, 06 August, Brent, US$ 4.13 (10.4%) higher the previous three weeks closed up US$ 1.34 (3.1%) at US$ 43.75. Gold, having climbed US$ 160 (8.9%) the previous fortnight, had another positive week, climbing US$ 109 (5.6%) to US$2,069, by Thursday 30 July, to US$ 1,960. Brent, starting the month of July on US$ 41.15, and the year on US$ 66.67, closed on 31 July on US$ 43.32 – up for the month by 5.3% and 35.0% lower YTD. The yellow metal was much higher for both periods – by 9.8% for July and 30.3% YTD – closing on US$ 1,976 from its month’s starting price of US$ 1,800 after opening the year on US$ 1,517.
It was an accident waiting to happen and now the aftermath will not be pretty. The US shale revolution had seen an almost trebling of the country’s oil production, which was topping 13 million bpd at the beginning of the year. As Covid-19 resulted in a major decline in demand and prices crashed, it was inevitable that the high-cost shale industry would be the first in the queue to cut costs. When the market was on the up, banks and oilfield services companies could not get enough of the action and well and truly cashed in. Now they are feeling the pinch, as illustrated by the fact that the big three service companies – Baker Hughes, Halliburton and Schlumberger – with a combined capital base of US$ 55 billion, have already taken write-downs of over US$ 45 billion over the past twelve months. As shale drilling dries up, there will be more bad news for the banks who have pumped in billions of dollars in this sector and. will not get all their money back.
Bitcoin is at it again, proving that it continues to be a volatile product to be treated with caution. On Thurday, it was priced at US$ 11,761, after trading at just US$ 4,857 on 12 March – at the start of Covid-19 – but that was 53.1% lower than the price of US$ 10,351 recorded on 12 February. The cryptocurrency reached its peak in December 2017 at US$ 19,650 to slump 79.7% to US$ 3,980 a year later. There are veteran crypto watchers, some of whom have made a fortune out of trading whilst others have not. Anyone who thinks that this is a good time to invest, in a “store of fear”, should exercise caution in their business affairs and, if they do, look forward to a bumpy and eventful ride.
The fallout, from Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, concluded in February 2019, continues with what could be one of the biggest court actions. Claims have been filed against AMP, CommBank and Westpac Group’s BT, contesting that they established systems to sell “unsuspecting customers” overpriced in-house life insurance and income protection policies, using their own financial advisers. This was despite the fact that they knew there were equivalent or better policies, with lower premiums, and were basically promoting their own products and interests ahead of those of hundreds of thousands of their customers who were charged “excessive insurance premiums”.
Banking giant NatWest Group – formerly known as RBS – posted a US$ 1.0 billion H1 loss, (compared to a US$ 3.5 billion profit in H1 2019), as it provided a further US$ 2.7 billion in impairment provisions, (bringing the total to US$ 3.8 billion), as potential Covid-19 loan default risks increase. Last month, it seems that chief executive, Alison Rose, was right to warn of “tough times ahead” and she may be right again saying, “we don’t know how quickly the economy will recover and we don’t know yet what the underlying scarring is to the economy.” Last week, Lloyds and Barclays announced that their H1 impairment provisions had risen to US$ 4.9 billion and US$ 4.8 billion respectively. Santander posted a US$ 12.3 billion Q2 loss, after it wrote off US$ 6.8 billion of goodwill left over from the purchases that created Santander UK in the 2000s; the UK business has lost 90% in its value over the past twelve months. The bank has also set aside US$ 7.7 billion for impairments.
Markets were surprised at the fact that HSBC’s H1 profits fell more than expected, plunging 65.3% to US$ 4.3 billion, as it battles the coronavirus downturn. UK’s biggest bank is also battling with problems, other than Covid-19, including a major Group restructuring programme, with a 15.0% cut in staff numbers to 200k, and opposition to its support of China’s national security law in Hong Kong. The bank, with over 50% of its profit emanating from its Asian financial hub, is also considering winding down or divesting up to 30% of its US operations, comprising 224 branches. Along with Standard Chartered, also headquartered in London, HSBC is likely to continue with its commitment to the former UK colony, probably because China is its main source of revenue.
After posting a Q2 loss of US$ 6.7 billion, (compared to a US$ 2.8 billion profit in H1 2019), driven by a write down in the value of its assets, BP has decided to halve its shareholder dividend to US$ 0.0525 a share. The company is bearish about the short-term future of oil prices and demand which it expects to be nine million bpd lower when compared to 2019; the petro giant was also fearful that the pandemic could weigh on the global economy for a “sustained period”. Even before this announcement, BP had indicated 10k job cuts, including 2k in the UK.
This week saw a litany of bad news from the UK’s High Street. Hays Travel, which took on 2k Thomas Cook employees, when it bought the travel company last October, is now having to retrench 19.7% of its 4.5k employees, due to new coronavirus travel restrictions. Most of the retrenchments will be those in the foreign exchange division and others training to be travel consultants. The move is a result of the Spanish travel restrictions and changes in the UK furlough system which is being tapered by the government as from this month.
Foreign exchange firm, Travelex has not only been hit by the impact of Covid-19 but had also been reeling from a damaging cyber-attack at the beginning of the year; now it has announced 1.3k job losses in a deal to stay afloat. Weatherspoon has announced that up to 130 (a third of their staff) at their Watford headquarters are in danger of losing their jobs. LGH, which manages 55 UK properties, including some Crowne Plaza, Holiday Inn and Hallmark hotels, is set to lose 1.5k staff because of the coronavirus crisis.
WH Smith is considering retrenching 11% of its 14k workforce on the back of plummeting sales during the lockdown that could see the firm losing US$ 100 million when August year-end results are released; last year, it made a profit of US$ 225 million. The company has 575 High Street outlets and a major concern is the fact that July sales in its High Street division were still 25% shy, compared to pre-Covid levels. It has reopened all its High Street stores and 246 of its larger travel division sites, mainly located in airports, railway stations and hospitals.
Meanwhile, Willian Hill will not reopen 119 of its 1.5k betting shops after the shutdown, indicating that it did not expect business to return to former levels. Strangely, the betting shop posted an H1 profit of US$ 34 million, (compared to a US$ 85 million loss last year). DW Sports warned that 1.7k jobs were at risk, whilst Pizza Express’s latest restructuring programme could see the demise of 1.1k positions, with 15% of outlets closed. M&Co, formerly known as Mackays, has gone into administration which will see the closure of 17.9% of its 262 nationwide shops, with the loss of 400 jobs out of a 3k workforce. The family, that built up the Renfrewshire business over the past fifty years, immediately bought back its assets under a new company umbrella.
In 2019, there was an 18.0% surge in global sukuk issuances to US$ 145.7 billion, of which US$ 38.5 billion (26.4%) were international and the balance of US$ 107.2 billion domestic. This was the highest value of annual sukuk issuance ever since its 2001 launch. International issues were 16.6% higher, with an 18.9% hike for domestic, driven by three countries accounting for 84.1% of the total – Malaysia (US$ 54.0 billion), Saudi Arabia (US$ 18.9 billion) and Indonesia (US$ 17.3 billion). US$ 76.4 billion, or 81.3% of domestic issues, were long-term sukuk.
Anthony Levandowski has been sentenced to eighteen months in prison for trade secret theft. He was a lead engineer for Google’s self-driving car unit before he left, with more than 14k Google files, in January 2016 to join rival Uber, where he led its robocar project before being dismissed in 2017 over this case. The judge said it was the “biggest trade secret crime I have ever seen”, with the accused filing for bankruptcy because he owes US$ 179 million to Google’s parent company, Alphabet, for his actions.
Last year, Google’s parent company Alphabet agreed in a US$ 2.1 billion deal to acquire Fitbit. Now it seems that deal could be in jeopardy as, after a review, the EC has decided to carry out a full-scale probe, even though, in July, Google offered not to use Fitbit’s health data for ad targeting. The commission is concerned that Google’s acquisition could further entrench its market position in the online advertising world. Although a pioneer in the fitness trader market when it first launched its first device in 2009 – and now has thirty million active users and one hundred million gadgets – Fitbit lags behind Apple, Xiaomi, Samsung and Huawei in terms of global shipments.
It seems that the US President made a call last weekend to Microsoft indicating that he thought the US government should get a “substantial portion” of the purchase price from the sale of TikTok’s US company, if the tech giant were going to buy it. He had earlier warned that he would ban the app, owned by Bytedance and used by eighty million US users, if no deal had been reached by 15 September. Just as with Huawei, the Trump administration is concerned that TikTok is a security risk and supplies the Chinese government with users’ data – probably just what the US companies do.
IAG, owner of BA, Aer Lingus and Iberia, has posted a US$ 4.9 billion H1 loss, as the Covid-19 impact hits home, with BA’s boss, Willie Walsh, predicting that it would take three years for passenger levels to recover. The severity of the problem can be seen from the fact that BA’s Q2 passenger traffic fell 98% and that its US$ 925 million quarterly loss was 30% more than the combined amount of losses incurred from the 2008 GFC (US$ 423 million) and the aftermath of the 2001 9/11 attacks (US$ 243 million). IAG is planning to raise US$ 3.6 billion, via a share issue, and has support from its 25.1% stakeholder, Qatar Airways.
Meanwhile BA has signed an agreement with the pilots’ union, Balpa, that will see 270 jobs eliminated and a temporary 20% pay cut, to be reduced to 8% over two years and to zero in the long term. The deal, accepted by 87% of the pilots, prevented a “fire-and-rehire” scheme where pilots would have been handed new contracts “on worse conditions”. The airline had earlier proposed to make 12k staff redundant, including 1.3k pilots, with, unsurprisingly, Balpa being “bitterly disappointed” that “they were unable to persuade BA to avoid all compulsory redundancies”.
In April, Virgin Australia went into administration only to be later rescued by its new owner Bain Capital (which now plans to cut payroll numbers by a third, equivalent to 3k). On Tuesday, and less than month after it had agreed a US$ 1.6 billion rescue deal, Virgin Atlantic filed for bankruptcy, under chapter 15, which allows a foreign debtor to shield assets in the US, having negotiated a deal with stakeholders “for a consensual recapitalization” that will get debt off its balance sheet and “immediately position it for sustainable long-term growth”. In May, Virgin Atlantic, which is 51% owned by Virgin Group and 49% by US airline Delta, announced that it would close it Gatwick operation and lay off 3k in the UK.
In July, Australian home prices dipped an average 0.6%, (and 0.8% in capital cities), with the biggest declines seen in Sydney (0.9%) and Melbourne (1.2%). The Victorian capital is set to see an even bigger fall this month, since a six-week night-time curfew, with a new round of lockdowns and restrictions, was introduced on Saturday as virus increases there rose; over the past three months, Melbourne prices have fallen 3.2% – but are still 8.7% higher over the previous twelve months. Market declines may have been higher if not for mortgage repayment holidays and, depending on the state of the economy, after banking returns to some form of normalcy, the market may well witness a more marked fall in prices. For the first time since records were introduced in 1972, rents have fallen nationally, with house rents easing 0.1% in the quarter and 2.1% for units. Rental listings in some locations have more than doubled, with the lack of business caused by a dearth of students, tourists and business as borders remain closed. Hobart, for example, has seen unit rents down 4.4% since the onset of Covid-19.
Following the emergence of lurid details of his private life and allegations of corruption and money laundering, Spain was shocked to hear that its former king, Juan Carlos, had left the country, but would be available if prosecutors needed to speak to him. The 82-year old former monarch abdicated in 2014, to be replaced by his son Felipe, and since then the previously pliant Spanish press have been investigating rumours not only about his scandalous personal dealings and extravagant lifestyle but also his financial activities. In 2018, Swiss prosecutors launched an investigation into a US$ 100 million 2008 gift from the Saudi Arabian king to see if it were related to a US$ 7.5 billion contract for a Spanish consortium to build a high-speed railway from Medina to Mecca. They did find the existence of two offshore funds, (Lucum Foundation based in Panama and Foundation Zagatka, registered in Liechtenstein) connected to Swiss bank accounts. Spain’s Supreme Court has said it aims to establish Juan Carlos’s connection with the Saudi Arabia contract after his abdication. Under the Spanish constitution, Juan Carlos can only be prosecuted on wrongdoings after his 2014 abdication.
Indonesia’s economy contracted for the first time since Q1 1999, as its Q2 GDP declined 5.32%, year on year, and 4.19% compared to the previous quarter; the local economy was impacted, with the retail sector badly hit, by movement restrictions imposed on SE Asia’s largest economy, whilst manufacturing continued its downward spiral. The size of any recovery, during the rest of the year, is uncertain and is reliant on global developments and whether the virus outbreak, the worst in the region, starts to dissipate,; however, exports, dominated by commodities such as coal and palm oil, have shown some recent improvement. There is a possibility that the government will have to expand its stimulus package which to date only amounts to 20% of the US$ 48 billion Covid budget already allocated.
Because the Duterte government introduced tougher restrictions, (shutting most businesses and suspending public transport from March to May), than most of its neighbouring countries, the Philippine economy has entered into a deeper recession, with two successive quarters of negative returns. The latest quarter saw a record 16.5% contraction on the year and 15.2%, quarter on quarter. Analysts expect that by the end of the year, the GDP will be 5.5% lower, with a healthy rebound expected in 2021. The country’s problems continue with a six-fold increase In Covid-19 cases, since restrictions were eased in June, along with high unemployment, and reduced remittances from Filipinos working overseas. Since private consumption accounts for 65% of the economy, the lack of consumer spending is the main driver behind these disappointing results, followed by a double-digit fall in exports, as the lockdown restricted production and snarled supply chains.
According to the CBI, only 6% of UK companies are still closed with the balance completely operational, although many of them are in a state of dire financial trouble on the back of the impact of Covid-19. The national agency expects that manufacturing will grow by around 15%, over the next quarter, whilst retail sales surged last month after non-essential stores reopened. Although there are hints that business is slowly improving, “it’s clear that many businesses remain in acute financial distress,” but that “more immediate direct support for firms, from grants to further business rates relief, is still urgently needed.”
The Bank of England has pared back its recent forecast of a 14% contraction in the economy this year to 9.5% but warned that the recovery would take longer than first anticipated and unemployment was likely to rise “materially”, (from 3.9% to 7.5%); there will be declines in average earnings for the first time since the 2008 GFC. Inflation will be around zero, by the end of the year, nudging towards its 2.0% target level in 2021. The Bank confirmed that consumer spending has improved, with the spend on clothing and household furnishings back to pre-Covid levels, as more is being spent on food and energy bills than before the lockdown. Their longer-term forecast sees growth of 9.0% and 3.5% in 2021 and 2022. The bank’s money-printing programme will continue, with a further US$ 130 billion QE boost over the next five months, and it has no alternative but to keep rates at the historically low 0.1% level.
US-UK relations could be further strained, with reports that London may become the headquarters for TikTok, after Donald Trump has threatened to ban the Chinese software company from the US on security concerns. Now its parent company, ByteDance, which denies any links to the Chinese government, may move to London in a shift that will no doubt help heal diplomatic relations with China over the Huawei move and Hong Kong. Meanwhile, TikTok has announced a US$ 500 million data centre in Ireland, which had previously been stored in the US, with a back-up copy held in Singapore.
Over the past few months, Tencent has been in merger discussions with two other Chinese game-streaming platforms Huya and DouYu International, of which it already holds 37% and 38% stakes respectively. If the merger eventually goes through, it would result in a new entity, valued at US$ 10 billion, with Tencent the principal partner, dominating the US$ 3.4 billion domain. The merger would help TenCent, which has been facing increasing advertising competition from ByteDance, and its rapidly growing stable of apps, and removing unnecessary competition between the three entities, as well as synergising its cost structure. It is estimated the game-streaming market will generate US$ 3.4 billion in revenue this year, which has recently dipped for Huya and DouYu, even though they are still considered the two leading platforms.
Meanwhile, the world’s second largest economy continues to recover from the impact of Covid-19, with Chinese factories expanding at the fastest pace since Janay 2011, driven by higher domestic demand. The July Caixin/Markit Manufacturing PMI rose 1.6 to 52.8 – the sector’s third consecutive month of growth; the 50-mark level is the threshold between expansion and contraction. With greater consumer demand, output expanded for the fifth month in a row, and at the fastest rate for nine-and-a-half years., although new export levels and hiring remained weak, with both indices still in negative territory for the seventh straight month. The government has introduced a series of measures to stimulate growth, such as reducing key lending rates and allowing local governments to sell far more bonds to fund infrastructure projects. The IMF expects China’s growth to decelerate to 1.0% (down 0.2%) and that the global economy will slip into its deepest recession, with a 4.9% contraction, since the Great Depression, followed by a sluggish 2021 recovery. This outlook will obviously change if the world were to face a pronounced second wave.
The Chinese recovery has also been boosted by the eurozone’s return to growth – its first manufacturing expansion in eighteen months, as the PMI rose from 47.4 to 51.8 – which has resulted in more orders for Chinese factories. Only two countries remained under the 50 level – the Netherlands and Greece – whilst Spain, Austria, France, Italy and Germany posted July returns of 53.5, 52.8, 52.4, 51.9 and 51.0 respectively. There is every confidence that growth in new orders and output will continue this month and that business confidence is slowly returning to the bloc. However, there is one major problem that will not go away – job losses remain greater than at any time since 2009 due to widespread cost-cutting at many companies hit hard by Covid-19. There is no doubt that increased unemployment and job insecurity will hold back any sustained recovery.
Whilst last week was full of doom and gloom about the US and UK economies, the beginning of this week sees that the eurozone economies faring even worse, with a contraction of 12.1% (and 11.9% in the EU). More worryingly, three of the five largest economies reported even worse figures. Spain has sunk into its deepest recession, with a Q2 contraction of 18.5% on the back of a 5.2% decline the previous quarter; it is estimated that a group of service industries, including transport, restaurants and accommodation suffered an H1 decline of more than 50%. The Spanish figures point to the fact that the Covid-19 contraction has wiped out the previous six years of growth. France and Italy performed slightly better, but have still dire results, with Q2 contractions of 13.8% and 12.4% respectively. Even powerhouse Germany has not escaped unscathed, reporting its worst ever quarterly decline, as total production of goods and services fell by 10.1%. The country has seen its exports fall, driven by severe disruption to global trade and some estimate that the plunge in output has “wiped out nearly ten years of growth”.
Although still maintaining the country’s AAA rating, Fitch revised its outlook to negative because of “the ongoing deterioration in the US public finances and the absence of a credible fiscal consolidation plan”. The US public debt topped a massive US$ 26.0 trillion in June, at a time when the Q2 economy contracted 32.9%, on an annual basis, and personal spending, which accounts for 66% of GDP, came in with a 34.5% annualised contraction – the worst on record. The ratings agency estimates the government debt to equate to 130% of the country’s GDP by the end of next year, as the US is expected to pump in at least US$ 6.0 trillion to combat the economic and health impacts of Covid-19; health and social security costs are expected to rise over the next eighteen months. To add to its problems, the US has 4.5 million of its population infected, equating to 25% of the total global figure, and has seen 153k related deaths.
There was an interesting take, on last week’s EU’s Covid-19 package, penned by Finland’s former Foreign Minister, Timo Soini, in a letter to the Financial Times. It seems that Germany and France decided that, after almost five months of living alongside Covid-19, with member countries dealing with it in their own ways, the EU should borrow US$ 850 million from the markets and deliver it across the union. More than half of the money was distributed as donations, without any apparent conditions, and the richer northern countries, less the departing UK, have been left to pick up the tab. The only real winners are Germany, happy that delivering EU money to member states will result in them buying German cars and other products and France that “gets the deeper integration and common financial responsibility it has long sought”.
Under the guise of economic revitalisation, the EU has got away with doing something that is against their own regulations – the introduction of common debt – resulting in boosting EU integration to unprecedented levels. The strategy seems to have been to stop any other country leaving the EU as they will be tied together by common debt that makes leaving the bloc practically impossible. The Merkel-Macron plot, in the guise of a Covid-19 aid package, leaves the EU looking like its members are now permanently staying at the Hotel California.