After US President Donald Trump accused China of being responsible for the coronavirus pandemic on several occasions, and brought back the dispute over the influence of the Chinese network supplier Huawei, relations between the two largest economies have fallen back to a low point. On Friday, the US Department of Commerce announced that chip manufacturers are not allowed to supply semiconductors to the Chinese smartphone manufacturer if they are based on software and technology from the United States.
According to US Federal Reserve Chairman Jerome Powell, it may require a vaccine against the corona virus before the US economy can fully recover. However, this could take until the end of 2021. Powell had previously warned of a prolonged economic crisis.
According to estimates by Neel Kashkari, President of the Federal Reserve (Fed) in Minneapolis, the unemployment rate in the US could be higher than 14.7%, as officially stated, and amount to around 25%. Kashkari assumes that because of the lockdown, many Americans have not registered as unemployed with the authorities and therefore do not appear in the official statistics. Even the Department of Labor admitted that the actual number of unemployed could be about 7.5 million higher. Because of this assumption, the senior central banker also sees a V-shaped economic recovery as unrealistic. Last week, Fed Chairman Jerome Powell also expressed little optimism and warned of a prolonged period of low growth and stagnating incomes.
The world's third largest economy slipped into recession for the first time in four and a half years, due to the corona crisis. The gross domestic product shrank in Q1 compared to the previous year at an annualized rate of -3.4%. The main reasons were weak private consumption and lower investment. However, economists had expected an even stronger decline of -4.6%. In the final quarter of 2019, Japan's economy had already slumped by an annualized -7.3%.
As expected, the effects of the pandemic have resulted in a major setback for the European economy. The economic output of the euro states contracted by -3.8% in the first quarter (compared to the previous quarter) – this is the sharpest decline since data collection began in 1995. France recorded the sharpest slump (-5.8%), while the German economy fared somewhat better (-2.2%). However, the bottom has probably not yet been reached: Market strategists assume that the economic downturn will intensify in the second quarter. This is in-line with the assessment of the German government, which is forecasting the worst recession in post-war history for 2020.
Looking on the other side of the Atlantic, the outlook is gloomy too, as Americans have lost their spending desire. In April, they cut back on consumption once again and caused retail sales to slump by -16.4% compared with March. This is the biggest drop since the start of the survey. The restraint in consumption has partially been forced by the temporary closing of restaurants and retailers. But at the same time, millions of Americans have lost their jobs and thus face an uncertain future. The crucial question will therefore be whether and how quickly the propensity to spend will return once stores reopen. The US is heavily dependent on the population's willingness to spend, as private consumption accounts for around two thirds of economic output. At least the latest survey results from the University of Michigan in May have brightened things slightly up again. The consumer sentiment barometer climbed from 71.8 points in the previous month to 73.7 points. By contrast, analysts had anticipated a further dip to the 65 mark in view of the dramatic economic and labor market situation. The prospect of an imminent easing of pandemic measures and government aid packages may have led to a slightly more optimistic assessment of private households.
In April, the New York Fed's economic indicator, the so-called Empire State Index, plunged to a record low of minus 78.2 points against the backdrop of the corona crisis. In May, the mood among industrial companies in the New York metropolitan area appears to have brightened again slightly, with the barometer climbing to minus 48.5 points. Nevertheless, the indicator continues to signal a sharp decline in economic activity. On a national level, however, industrial production in the US slumped in April by -11.2% month-on-month – the biggest monthly decline in the 100-year data series!
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