Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

TIPPING POINTS

EU BANKING CRISIS II

 
WILL THE EU BE THE FIRST CASUALTY OF A SPRUNG GLOBALIZATION TRAP?
 
No major region in the world is presently being economically hit harder than the Euro Area! The EU is not only one of the hardest-hit by the COVID-19 pandemic, but also the weakest, most problematic economy due to pre-crisis problems.
 
IMF’S 2020 GDP FORECASTS: “A CRISIS LIKE NO OTHER!”
 
EURO AREA:                -10.2%
LATIN AMERICA:           -9.4% 
CANADA:                       -8.4%
US:                                  -8.0% 
JAPAN:                           -5.8%
INDIA:                             -4.5%
 
In the Eurozone, exports in April, according to the World Trade Monitor, collapsed by 30.5% year-over-year, and imports by 26.7%, both to the lowest levels in the data going back to 2000. 
 
Many feel the real economic crisis will start In Europe and it will be triggered by the global recovery, as was the case with the Greek crisis a decade ago.. The pandemic is not the cause of the impending crisis, it just accelerated trends that were already in place. Inflationary pressures and a return of higher interest rates will overwhelm over-indebted countries and the magnitude of the problem will be too big to bail out. The entire Eurozone is set to fall into a debt trap.
  
   When the likes of George Soros declares that the EU may not survive this crisis, perhaps it is time to take it seriously. Though he is advocating the passing of the EU recovery fund, it is highly unlikely that the $826 billion bailout will make any difference because the EU’s economic problems predate the COVID-19 crisis. The main dysfunction of the EU, which is directly responsible for the bailout dilemma faced by its members stems from the deeply flawed monetary union which doesn’t serve the diverse mix of countries with different needs.
  
SITUATIONAL ANALYSIS
 
CRIPPLED PROTRACTED DEMAND IN A POST COVID-19 GLOBAL ECONOMY
 
In this month’s video we focused on the trend periods leading up to 2008 and from 2008 – 2018 so as not to be distracted from the Covid-19 plunges. In actuality,since 2018 the real accelerated downturn in the goods-based sectors started. US exports are now down 37% from that peak, imports down 25%.
 
  • SUPPLY/DEMAND: PLUNGING WORLD TRADE
    • World trade in goods plunged by 12% in April from March, after having already dropped 2.4% in March from February. This plunge of the Merchandise World Trade Monitor, released by CPB Netherlands Bureau for Economic Policy Analysis, was by far the largest month-to-month drop in the history of the data going back to 2000. Compared to April last year, the index was down 16.2%.
    • World trade had already taken a hit starting in late 2018, as tariffs, counter-tariffs, and threats of tariffs jiggled supply chains around. By December 2018, the index was down 1.2% from a year earlier. Year-over-year declines became a regular feature starting in June 2019. Then in March, the index dropped 5.4% year-over-year, and in April 16.2% year-over-year. This brought the index down 18% from the peak in October 2018, and back to where it first had been in January 2008.
  • DEMAND: PLUNGING IMPORT TRADE 
    • In the US, trade took an even bigger hit, with exports of goods collapsing 25% in April from March and 30% year-over-year, according to the Commerce Department earlier in June. Imports plunged 13.6% in April from March, and 20.2% year-over-year. For the first four months of 2020, US imports from China plunged 24% year-over-year .
    • On June 25, the Commerce Department released its advance estimates for May, which showed further deterioration in both exports and imports:
      • Exports in May dropped 5.7% from April and collapsed by 35% year-over-year, to just $90.1 billion, the lowest amount of exports since August 2009, and down 37% from the peak in 2018.
      • Imports in May dropped 1.8% from April and 23.6% year-over-year to $164.4 billion, the lowest since July 2010. This was 25% below the peak in 2018.
      • The slow-down in the US goods-based sectors started in late 2018 and worsened in 2019 before getting walloped in 2020. 
THE US WILL NOT SUSTAIN ITS RATE OF CONSUMPTION AND ROLE AS THE ‘GLOBAL CONSUMPTION ENGINE’ 
 
EU IS IN TROUBLE AS US DEMAND (NEW TRADE WAR) & TOURISM (COVID-19 ENTRY RESTRICTIONS FOR AMERICANS) WILL LIKELY SOON TAKE HOLD.
  • Bloomberg reported that:   “The European Union moved closer to recommending that travelers from the U.S. shouldn’t be allowed to enter the bloc even after July 1.” In this context, “European diplomats are braced for President Donald Trump to take unkindly to Americans being kept away, while the Chinese are allowed in.
  •  According to Bloomberg:   “Transatlantic relations could reach a new low next month as the European Union readies tariffs on billions of dollars of American exports aimed at politically important industries for President Donald Trump and his Republican allies in Congress. The EU has asked the World Trade Organization to give it the green light to place levies on $11.2 billion of U.S. products over a long-running aircraft subsidies dispute. A ruling is expected as soon as July and the EU is planning to target coal producers, farmers and fisheries, in addition to the makers of aircraft and parts.”
THE US CONSUMER IS ALREADY WELL “OVER THEIR SKIS!”

While stimulus checks and extra-benefits may provide a temporary boost to incomes, that income boost is only temporary. The reality is that 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank. With years of wage stagnation, the cost of living now exceeds what incomes and debt increases can sustain.  With consumers forced to consume more on credit, this will lead to a slower economic recovery as the ability to tap additional credit becomes problematic.
 

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