Global economy to suffer worst blow since the 1930s, warns IMF

Most countries’ economies set to be at least 5% smaller, even after recovery

Chris Giles in London


A closed café in Vienna, Austria. Businesses around the world have shut their doors © Leonhard Foeger/Reuters


The coronavirus crisis will leave lasting scars on the global economy and most countries should expect their economies to be 5 per cent smaller than planned even after a sharp recovery in 2021, the IMF said on Tuesday.

Forecasting that this year would be the worst global economic contraction since the Great Depression of the 1930s, Gita Gopinath, the fund’s chief economist, said the world outlook had “changed dramatically” since January with output losses that would “dwarf” the global financial crisis 12 years ago.

“A partial recovery is projected for 2021, with above-trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound,” she said.

The IMF expects advanced economies to contract by 6.1 per cent and emerging economies to shrink by 1 per cent this year, although positive growth is still expected in India and China. But even after the sharp rebound which the IMF forecasts for next year, output is still expected to be 5 per cent lower in 2021 than expected in the IMF’s forecasts from October last year for advanced economies.

“This is a deep recession. It is a recession that involves solvency issues and unemployment going up substantially and these leave scars,” Ms Gopinath said.




Emerging economies are forecast to perform better as a whole, but that is boosted significantly by China which is expected to have output in 2021 that is just 1.4 per cent lower than the IMF forecast six months ago.

If extensive lockdowns have to be extended beyond the second quarter of the year and Covid-19 returns in a milder outbreak in 2021, the overall economic hit would be twice as large, the IMF estimated.

Although the lockdowns are generating large economic contractions across the world, Ms Gopinath said they were necessary to get the pandemic under control. “There is not trade-off between saving lives and saving livelihoods,” she said.

The IMF’s economic forecasts for 2020 are not as pessimistic as many private sector forecasts.

They assume that the lockdowns will result in an 8 per cent loss of working days which will be concentrated in the second quarter for most countries but in the first quarter for China.

Even with these moderate assumptions, global economic performance will be hit hard, the IMF said. It forecast that world output would decline by 3 per cent in 2020, 6.3 percentage points down from the growth forecast of 3.3 per cent that the IMF expected as recently as late January.
 In 2009, the worst year of the financial crisis, global output dipped 0.1 per cent. The IMF considers any growth rate below 2.5 per cent to be a global recession because, 90 per cent of the time, global growth exceeds that rate.

Given the large fall in output, unemployment is expected to rise sharply even though many countries have adopted job retention programmes to keep employees attached to their places of work. As a result, incomes per person are expected to fall in nine in 10 of the IMF’s 189 member countries.

In the US, unemployment is expected to rise from 3.7 per cent in 2019 to 10.4 per cent this year and only dip to 9.1 per cent in 2021. There is likely to be a smaller rise in the eurozone from 7.6 per cent last year to 10.4 per cent this year and 8.9 per cent in 2021. 




Almost all other countries should plan for output next year to be about 5 per cent lower than thought likely in October 2019, the IMF said — a forecast that reflects significant bankruptcies and lay-offs. This growth performance will result in much weaker public finances as countries seek to limit the damage from Covid-19.

The IMF praised the efforts countries have taken individually to mitigate the pain and provide insurance for companies at the sharp end of the crisis. It said countries were right to lock down their populations to limit the spread of the virus and forecast that those such as Sweden that have followed alternative and looser policies would face just as deep recessions.

She added that the fiscal insurance provided by governments and extraordinary actions by central banks to keep financial markets functioning smoothly “will go a long way toward ensuring that the global economy regains its footing after the pandemic fades, workplaces and schools reopen, job creation picks up, and consumers return to public places”.

But she warned that many emerging economies did not have the resources either to provide adequate health services for their populations or to limit the economic damage. With many confronting simultaneous health, economic and financial crises, they “will need help from advanced economy bilateral creditors and international financial institutions” over the months ahead, she said.

Postponing an Oil Production Catastrophe

By: Antonia Colibasanu


Fresh off helping to broker a global agreement on oil production cuts on April 12, U.S. President Donald Trump has declared American cuts a priority for the country. Texas, however, said it needed more time.

The Railroad Commission of Texas spent April 14 debating whether the state’s oil output should be reduced. The commission regulates Texas’ energy sector, which means it oversees about 40 percent of the United States’ oil and gas production. Like other producers around the world, U.S. shale producers have seen prices crater since late February as the coronavirus crisis set in.

And like other producers, the U.S. was hurt by the price war launched in early March after a first attempt at an OPEC+ deal fell through. But pressure on the U.S. has been reduced by this week’s deal, which came about after the scale of the economic damage in Europe and the U.S. persuaded Russia to give way. American producers were also aided by Saudi Arabia’s decision on April 13 to shift more of its supply toward Asia to reduce pressure on the U.S.

Nevertheless, the size of these moves pales in comparison to the challenges ahead. If no adjustment had been made, the point at which production would have become unprofitable would have been weeks away.

But with the output cuts announced this week, if current conditions hold and economic activity doesn’t pick up in May, the unprofitable threshold will be crossed in a couple of months. The cuts are clearly not enough to restore the market equilibrium, but they are the best that countries can do right now.

An Incalculable Decline

Oil demand is relatively inelastic — the quantity purchased doesn’t change much when the price does. Yet small changes in demand create sudden (and sometimes dramatic) changes in price. According to the International Energy Agency, China’s lockdown caused a decrease in demand in February of 1.8 million bpd compared to February 2019.

Global demand as a whole fell by 2.5 million bpd year-over-year (about 35 percent) during the first quarter of 2020. It also anticipates that the coronavirus pandemic will generate a drop in demand that’s similar to (or worse) than 2009 crisis levels — and that prediction assumes, rather optimistically, that demand returns to normal levels during the second half of 2020.

This is impossible to know: Global supply chains have broken down as the coronavirus put countries in lockdown.

With emergency measures in place all over Europe and the U.S., the key consumers of oil such as airlines and factories have stopped consuming. Social distancing means that people are mostly indoors and businesses are at least partially shut down. If we knew how long this state of affairs was going to last, we could calculate its impact — but we don’t.




In times of less uncertainty, OPEC has often chosen to micromanage the oil market by subtracting small quantities of supply to balance market prices. Countries with the highest levels of production and flexibility, like Saudi Arabia, could use the cartel to manipulate pricing to their advantage.

But never before have changes occurred over a timeframe of several months, with no end in sight, and never before have fluctuations in demand been more than a couple of million barrels per day; analysts now discuss a drop in demand of between 15 million and 35 million bpd over the first quarter, with the bulk of it happening during the last three weeks of the quarter, when the U.S. implemented its emergency containment measures.




The OPEC+ deal on April 12 means to reduce oil output by 9.7 million bpd, just short of the 10 million bpd that OPEC members wanted and market analysts expected. This is obviously too little to bring supply in line with demand, considering the demand projections cited above.

But it helps delay the onset of the disaster and allows key political players to save face.

Russia’s Resistance

The idea of a supply agreement dates back to February, when a drop in demand of nearly 10 percent — led by China, the world’s largest importer of crude — began to affect market pricing. Saudi Arabia turned to OPEC, expecting OPEC members and affiliates to follow its lead and voluntarily cut production by 1.5 million bpd.

Everyone signed on to the idea except Russia. Russia’s budget is balanced at a lower oil price than it is for Saudi Arabia and other OPEC members, enabling Russia to ride out lower prices while maintaining a budget surplus.

And considering its sluggish economic growth since 2015, Russia also wanted to bring more oil to market to bring in extra revenue. Moreover, Moscow saw an opportunity to push U.S. competitors out of Europe by driving prices down to levels at which U.S. shale production would be unprofitable.




Finally, Russia’s climate and geological conditions make it costly for the country to reduce output.

Unlike its competitors, Russia gets most of its output from bitterly cold environments, where costs are higher due to technology needed to keep crude flowing into pipes and to keep gas from freezing.

In fact, oil extraction is currently unprofitable in about 33 percent of Russian fields. The quality of Russia’s reserves has been deteriorating for the past decade, and production is on the wane.

Therefore, the most Moscow was willing to do in early March to reduce output was what it had always done: to feign cooperation and scale up seasonal maintenance periods to slightly reduce output temporarily.

In response, Riyadh launched a price war. It started bringing its spare production online to see how much oil it could dump on the market and to force Moscow to capitulate. Saudi exports grew by over 1 million bpd in March. The effect of cratering oil prices at the same time that the coronavirus crisis’ economic consequences were becoming clear was enough to drive all oil producers back to the negotiating table — at the urging of Washington.

In late March, things changed rapidly for Russia, too. The coronavirus outbreak in the country was so widespread that it could not be denied. The government imposed emergency measures, including quarantine, in Moscow and other major cities.

More important, the virus was hitting Europe hard. Europe is Russia’s most important energy market, and as Europe went into lockdown in the first half of March, Moscow saw its price of oil slip into unprofitability for the first time.

Finally, as the scale of the economic downturn became clear, Russian concern about its financial reserves grew. Russia holds about $560 billion dollars’ worth of financial reserves, but most of it is not denominated in U.S. dollars.

This means the value of these reserves decreases as the U.S. dollar gets stronger relative to other currencies — which tends to happen during global crises as investors rush to the safety of the dollar.

All these factors combined to push Moscow to compromise. The last thing President Vladimir Putin wants is to be blamed for economic mismanagement — if reserves drop in value and Russians have to suffer, it needs to be someone else’s fault and not Moscow’s.

American Holdouts

American shale oil companies, like other producers, have been struggling with falling prices since March. U.S. President Donald Trump, facing a reelection campaign and a plunging economy this year, had to respond and therefore made an agreement on production cuts a priority. Apart from the OPEC+ deal, the U.S. got extra help from the Saudis.

On April 13, Riyadh announced that it had added $5 to the price per barrel of crude shipped to the United States, while cutting $5 from the price for Asian deliveries. This means the Saudis will stop dumping crude oil on the U.S. market, and therefore many U.S. producers — mostly shale producers — will stay in business a little longer.

Without Saudi oil on the U.S. market, American production doesn’t really need to be cut. The nature of U.S. shale is different from that of more conventional oil fields. Shale isn’t pumped; instead, natural pressure in the rock formation pushes the oil up and into pipes that carry it to loading facilities at ports.

Lifting costs are minor, and much of shale producers’ daily operating costs stem from pipeline rates. Under the present circumstances, when little to no other oil will compete for the American market, shutting in may incur higher costs for producers than simply letting things run normally.

Furthermore, even though the U.S. brokered the historic OPEC+ deal, it lacks the legal tools to force its own states to implement oil cuts. The federal government doesn’t have a state-owned company, and its regulations are not as centralized as those of Russia or Saudi Arabia. It is instead up to the states and the companies themselves whether to cut.

At the same time, U.S. producers are very responsive to price changes, which means shale producers will keep production going only as long as it is profitable for them to do so. And with prices continuing to slide despite the OPEC+ deal, that won’t be long.

On April 10, Trump asked the U.S. Department of Energy to purchase crude oil for the Strategic Petroleum Reserve, which will boost prices temporarily. But eventually companies will close down production because of low prices — something Washington can pass off as a “cut” to the OPEC+ countries.

Defining the Limits

The Saudi announcement on price differentiation between American and Asian markets means that, in spite of the OPEC+ agreement, Riyadh will effectively intensify its price war in Eurasia. Whatever Saudi output is not sent to the Gulf of Mexico will be sent to Asia, where Saudi Arabia competes with Russia (and others, to a lesser extent, including Iran, Nigeria and Iraq).

Though Saudi Arabia knows that Russia will break the agreement — as it has before — it also knows that Saudi oil has only limited time to gain profits.

The global storage capacity is estimated to be between 900 million and 1.8 billion barrels. This is equal to roughly 9-18 days of global supply based on output in 2018, when the world produced nearly 95 million bpd. Assuming that 10 million bpd is put into storage, facilities would be filled in between 90 and 180 days.

Since early April reports have been coming in that the United States’ Caribbean and Cushing storage hubs are nearing capacity. The math suggests this will soon be true for the rest of the world. Saudi Arabia, as well as Russia and other producers, is interested in selling as much oil as it can until storage capacity is reached.

At that point, the production price of oil will fall close to or even below zero if the coronavirus crisis hasn’t abated and the world is still effectively quarantined.

Even assuming that all producers stick to the OPEC+ plan, if we take the median of the estimate of global storage capacity — 1.35 billion barrels — then the world’s stocks of oil storage will be full by early June. If the deal collapses, and everyone maximizes output, then production prices will fall to single digits or even zero earlier, potentially by mid-May.

This reality can be avoided only if the coronavirus outbreak is quickly contained and the global workforce is able to get back to work.

Big Picture Thinkers Ponder Deficits, The Fed, The Dollar And Gold

by: Montana Skeptic

Even Before Coronavirus, Markets Were In Trouble

• Low interest rates also have encouraged corporations to take on ever more debt, often using some of the proceeds to buy back their own stock. This, too, has contributed to ever-rising equity prices, while making corporations more vulnerable in any downturn.

• Meanwhile, the U.S. government and other national governments have continued running large deficits and piling on ever more debt. State and local governments, attracted by low municipal bond rates, have added to their debt as well. The governments have been enabled to do so, thanks to the interest rate suppression engendered by monetary policy.

• All the while, despite the longest-running bull market in history, unfunded public and private pension obligations have been increasing. Compounding the problem has been the paucity of investment grade debt at yields adequate to meet the pension funds' needs, which has forced the funds into ever-riskier investments.
  While the coronavirus shock is unprecedented in its nature and scale, both Pomboy and Williams view it as accelerating and deepening problems that were already bound to emerge.

"the idea that we are going to bounce out of this and go right back to where we were before just seems absolutely ludicrous to me."

Government Will Become (Even) More Profligate

These pensions have had to take an enormous amount of risk. They were the marginal buyers of all of the most toxic paper out there. You know, "Levered loans with no covenants? Sure, we'll take some of those! Investments in unicorn stocks through private equity that have no business and managed to lose a billion dollars a month? Sign us up for that!"

What just happened, earlier this month, to cause those lines to cross? For the first time, the Fed's holdings eclipsed the foreign holdings in the Fed's custody account as the Fed kept adding to its purchases while foreign central banks unloaded some $131 billion of their own Treasuries.
 

Serious people are going to start to discuss: "How are we going to work our way out of this and how are all the developed world economies going to grapple with the massive amount of debt that they're facing?" 

I again come back to the idea that the only way that aging, demographically-challenged, highly-indebted developed world economies can get out of this is to print money like crazy, because deflation is not an option for them. They have to inflate away the burden of this debt. 

But if we all do it at the same time, and we have this race to the bottom, at some point the creditors, which are really China and other EM (emerging market) nations, are going to say, "Look, we're not schmucks. We see what you're doing over there. We're not having it."

[I]t's going to have to come back to a hard asset tether, going back to a gold standard or something along those lines.

Should the de facto embrace of overt monetary finance (aka unlimited money printing) around the globe call into question the whole fiat money system, and we go back to a hard-money tether via a gold standard, the fact that the US has the largest gold reserve of any country gives us great advantage.

But even if it doesn't come to that (which it probably won't since the $1t we owe China is a drop in our rapidly expanding bucket of borrowing) the US still has a trump card it can play in the new world order. And this one is also one of the President's legendary affections. No. I'm not talking about exotic models. I'm talking about gold. 

Should the de facto embrace of overt monetary finance (aka unlimited money printing) around the globe call into question the whole fiat money system, and we go back to a hard-money tether via a gold standard, the fact that the US has the largest gold reserve of any country gives us great advantage.

 

Will it be an Inflationary or Deflationary Depression?

by Doug Casey

 


At some point, the economy is no longer controlled by individual citizens in the marketplace but by government "planners," who find they have only one of two alternatives: stop "stimulating" and permit a full-scale credit collapse, or continue stimulating until the dollar loses all value and society breaks down.

Depending on which they choose, we will have a depression characterized by deflation or by hyperinflation.

Deflationary Depression
 
This is the 1929-style depression, where huge amounts of inflationary credit are wiped out through bank failures, bond defaults, and stock and real-estate crashes.
 
Before 1913 (the inception of both the Federal Reserve and the income tax), having the dollar pegged to gold (at $20 an ounce) inhibited the scale of monetization.
 
When depressions of this type occurred, depositors acted quickly to collect their money; they had no illusion that the government would bolster their banks; once the banks ran out of gold, their bank accounts were worthless.
 
Their quick response and the fact that the federal government could not monetize its deficit spending as freely as it now can forced the market to correct distortions rapidly.
 
Until the 1930s, depressions were sharp but brief.
 
They were short because unemployed workers and distressed business owners were forced to lower their prices and change their business methods to avoid starvation.
 
The 1929 Depression was deeper and more widespread than any before it since the Federal Reserve (by becoming the lender of last resort) allowed banks to maintain far smaller reserves than ever before.
 
By backing the dollar with Reserve Bank IOUs instead of gold, the money supply could be increased enormously, and large distortions could be built into the economy before a depression liquidated them.
 
It was far longer than those before it, because government attempted to hold wages and prices at levels few could afford to pay, while its make-work and income-redistribution schemes retarded the rebuilding of capital and the productive employment of labor.
 
Meanwhile, the government discovered the freedom with which it could have its deficit spending monetized and proceeded to spend at an unprecedented rate to finance the New Deal’s spending programs and World War II.
 
Since the end of the last depression, there have been numerous small recessions. Since at least the ‘70s, anyone of them could have snowballed into another 1929-style deflation.
 
Government has been able to forestall a deflation each time, since it has far more power than it did during the ‘30s. But the government’s success so far has linked all the cyclical recessions since the end of World War II into a much larger "supercycle."

Just as each of the past recessions had its moment of truth, so will the current one. And it could well be the turning point for the bigger supercycle as well.
 
Hyperinflationary Depression

This is the Weimar-style depression, like the one Germany experienced in the early ‘20s. Here, rather than let a collapse of inflationary credit wipe out banks, securities, and real-estate values, the government creates yet more currency and credit to prop things up.

It pumps massive amounts of new purchasing power into the economy to create "demand" (even, or rather, especially among corporate and individual welfare recipients, who produce nothing in return).

The government extends past misallocations of capital, when the economy instead needs to readjust to sustainable patterns of production and consumption.

Hyperinflation could result from overstimulation when the authorities try to boost the economy out of a trough. If they expand the money supply too quickly, it might encourage the trillions of US dollars owned by foreigners to flood back here at once, in a bid for real wealth in competition with domestically held dollars. That would reverse, overnight, the muted inflation figures of the last 40 years, and prices could jump at a 20 percent to 30 percent clip.

It is hard to anticipate all the implications of that happening but, presumably, everyone would panic out of dollars and into real goods.

There would be a wave of bank failures. Possible government reactions would be price controls, withdrawal restrictions, foreign-exchange controls, and many other forms of "people controls."

This country is arguably unique in having a gigantic long-term debt market; bonds and mortgages are worth several times what the stock market is. If the dollars that debt is denominated in were to evaporate, it would be a world-class disaster.

Previous runaway inflations in other countries have been characterized by the printing of literally tons of paper money. But the US economy is based largely on credit.

Would credit cards be accepted if the dollar were to start losing value at a very high rate?

Quite possibly not. In other hyperinflations, there was usually some alternate currency to facilitate trade.

Weimar Germans had substantial amounts of gold coins salted away.

In South American inflations, people simply used US dollars.

In the ex-USSR, dollars (and deutsche marks) practically became the new national currency for a few years.

But what would Americans use?

All this would be an academic discussion, or perhaps an interesting topic for a science-fiction treatment, if the US government were a manageable size, and instead of a "legal tender" currency, "dollar" were just a name for a certain quantity of gold.

But that is not the case, and we have to deal with things as they are.

Which Will it Be?

The current administration, Congress, and the Federal Reserve are confronting a far, far more serious problem than ever in past business cycles.

At the bottom of each past cycle, interest rates were high (bond prices were low), inflation was high, and the stock market was very low.

This set up ideal conditions for recovery, as each of these situations went into reverse.

But now, stocks and bonds are already very high, and inflation is already at (what have come to be accepted as normal) very low levels.

At the same time, the government has far less flexibility than in the past, despite being more powerful than ever.

Most of its revenues are already spent before they come in, and it has a gigantic debt load to service.

If some unexpected shock hits, it will be like watching a tightrope walker over the Grand Canyon during a windstorm.

In their efforts to quell inflation, the authorities could make the supply of credit either too small or too costly.

With as much debt as there is today, the wave of bond and mortgage defaults would cascade through the economy. Loan defaults would wipe out banks, and foreclosure sales would depress prices and wipe out the net worth of individuals.

A corporate bankruptcy can take down its suppliers, its workers, its community, and its lenders as well. Perhaps a scramble to pay debt would result in the wholesale liquidation of assets at distress-sale prices, further reducing everyone’s net worth, even while the dollars they owe gain value.

In their efforts to head off a deflation, the authorities would undoubtedly attempt to supply liquidity by creating more currency and credit. But that would just bring back the inflation scenario.

And world credit and currency markets are far larger than they were during the early ‘80s, when things very nearly collapsed.

The financial problems the government has created have taken on a life of their own, and there is a good chance we’ll have a nasty surprise when the next recovery is slated to occur.

Betting on inflation has been the winning strategy since the bottom of the last depression, but a financial accident could change all that overnight.

The inflationists will almost certainly be right in the long run, but they may get wiped out in the short run.

In any event, the moment of truth is approaching, and there likely will be a titanic struggle between the forces of inflation and the forces of deflation. Each will probably win, but in different areas of the economy.

As a result, we’re likely to see all kinds of prices going up and down, like an elevator with a lunatic at the controls. It will not be a mellow experience.