OECD - a troubled outlook

OECD - a troubled outlook

by Pininvest Analysis

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The OECD Nov. 19, '20 growth projections for the third quarter - Q3-20 - bring some respite, after the dismal previous release for Q2-20

We observed at the time that 

the damage inflicted by the COVID-19 economic standstill was so extreme that statistics struggle to convey the cloud of economic disarray looming in plain sight

and that

In the midst of smooth-talking commentators, the social and political consequences of the crisis have not yet found their voice

Benefitting from the July-August business upswing as lock-downs were eased across the world, the growth estimates for Q3 (July-September) seemed to provide a measure of reassurance  with a real GDP drop over the corresponding quarter Q3-19 of  'only' 4.1% for the 37 OECD countries - following a collapse of 11.7% for the second quarter

However, this ray of sunshine will turn out to be short-lived as a second wave of virus infections roils the Americas (North and South) and Europe since September

The scramble for additional COVID-stimulus funding, complementing the economic support to business and to households, betrays the magnitude of the challenge to get the world's largest economies on the road to recovery

Baring the structural weaknesses of some of the European Union largest economies', Italy and Spain, but also France, compounded by new waves of virus infection laying down entire industries (hospitality, tourism), the European Union and its common currency, the Euro, will face substantial challenges before long

One does not need to look any further to explain the magnitude of the support measures implemented by the Union

  • €750 billion 'recovery fund' borrowed on the financial markets, €390 billlion of which in the form of grants benefitting in priority the hardest hit economies (such as Italy)
  • €1.074 trillion 5-year EU budget (2021-2027)
  • €1.35 trillion purchases of government bonds by the European Central Bank

One more reason to follow closely the monthly monetary policy meetings of the ECB Governing Council - scheduled today Dec. 10

A whiff of optimism

As was the case in our August report, the table refers to Quarterly Real GDP growth, in % change on the same quarter of the previous year, Q1-20 / Q1-19, Q2-20 / Q2-19 and Q3-20/Q3-19, a measure which makes more sense than the more widely publicized % change of the one quarter over the next (such as Q3/20 over Q2/20)

GDP % change Q1 Q2 Q2 (update) Q3 2020 proj.
           
OECD-Total -0,9 -10,9 -11,7 -4,1  
European Union -2,5 -14,2 -13,9 -4,3  
Major Seven -1,3 -12,1 -11,9 -4,2  
           
Canada -0,9 -13,5 -13 -4,6 -5,4
Germany -2,2 -11,7 -11,2 -4,2 -5,5
Japan -2 -10 -10,3 -5,9 -5,3
United States 0,3 -9,5 -9 -2,9 -3,7
           
France -5,7 -19 -18,9 -4,3 -9,1
Italy -5,5 -17,3 -17,9 -4,7 -9,1
United Kingdom -1,7 -21,7 -21,5 -9,6 -11,2
  source - OECD News Release Nov.19

The update on second quarter estimates highlights worsening growth trends in 'second league' OECD countries, while the 'Major Seven' and the European Union fell slightly less than previously estimated

Presumably, Mexico and some of the East-European countries, all OECD members, have been experiencing a sharper downturn than previously expected

For the economies ranked as 'Major Seven', the July-September quarter - Q3-20/Q2-19 - pointed to a balanced, albeit slow, recovery across the world with the noteworthy exception of the United Kingdom, which suffered a new set-back, with a 9.6% fall in the quarter, at twice the drop suffered by its main trading partners

Projections for the full year 2020 again draw a stark line in Europe between Germany and the badly crippled economies of France, Italy and the UK, which entered the pandemic with weak fundamentals 

 

No end in sight

The summary for these major economies in terms of public debt,  broad commitments to stimulate the economy and projected full year 2020 growth, is indicative of the structural weaknesses constraining budgetary response, which might hold back the collective rebound of the group

Apart from Japan's debt, which has been building up over decades, the German Covid-based stimulus - representing an estimated 33% of GDP - is by far the most remarkable commitment of major economies...

...except, possibly, for Switzerland - with a projected GDP drop of only 4.1% projected in 2020 and the smallest stimulus commitment (CHF60 billion) included for reference

  '20 (1) Debt/GDP Gov.Debt(2) Ccy Ref.Date Stimulus/GDP
             
Canada -5,4% 88% 0,685 CND 2020 11,8%
Germany -5,5% 67.5% 2,108 EUR June 20 33%
Japan -5,3% 223% 12,142 USD Sept.20 21%
United States -3,7% 128.4% 27,446 USD Sept. 20 12,1%
             
France -9,1% 114.1% 2,638 EUR June 20 14,6%
Italy -9,1% 149.5% 2,582 EUR June 20 14,5%
United Kingdom -11,2% 96.6% 2,076 GBP June 20 12,1%
             
Switzerland 37% 0,192 CHF July 20 8.5%
      (1) 2020 GDP Projection - OECD Dec.20
      (2) Debt in trillion of ref. currency at ref. date

 

Government debt ratios - sourced from CEIC - and debt volume - sourced from Trading Economics - should be viewed with care because they refer to distinct institutional frameworks - as is the case for Canada where federal debt rises to 49% of GDP but the more inclusive public debt (incl. at state level) reaches 88%

While this factor causes debt figures to vary from a data source to another, the trend - and the rankings - are unmistakable...

...on the rise everywhere with profound consequences for the countries starting with high indebtness, such as Italy, France and - to a lesser extent - the United Kingdom (apart from Japan's very unique case)

 

Tearing Europe's delicate financial balance apart

The comparison of the stimulus packages summarized in our table (last column), reported by Grant Williams in a newsletter quoted by Mauldin Economics Dec.20, shows how countries with less financial flexibility committed to 12-to-14% stimulus plans , hardly enough fire power to meet Germany's commitment weighing 33% of GDP on an equal footing

A new wave of infections, compelling governments to revisit lock-downs measures, which may be tiered and more flexible in supporting business activity, will still set the return to a growth path back by another quarter, and deepen the rift between sound economies such as Switzerland or Germany (or the Netherlands) and everyone else...

In September, Germany was among the first to confirm additional borrowing of €96.2 billion ($114 billion) as part of the €413.4 billion stimulus program in 2021, still 23% less than the €509 billion set aside for the current year after implementing two emergency budgets

By mid-November, further measures were announced to support the all-important German auto manufacturing industry, with an additional of €3 billion ($3.56 billion) — bringing Berlin's total financial support to €5 billion, following similar moves by the French government last May, with an €8 billion plan to bolster its local automotive industry

In Washington, the magnitude of the economic havoc is finally leading to a bipartisan compromise on new budgetary measures of $908 billion, increasing allocated funding by 4.2% of GDP (our estimate)

 

It remains difficult to project recovery planning beyond a few quarters in 2021, but there can be no doubt that the path back to the 2019 growth track is receding into the future, with the unhinging of the Euro zone balance a real probability