Articles in Category: Macroeconomics

India came in for considerable criticism over its reaction to the spread of the coronavirus pandemic in the first wave.

Locking down the economy almost overnight and trapping millions of migrant workers from returning home, only to then release them a week or two later to flood out into rural areas and spread the virus, was roundly condemned (both inside the country and out).

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Coronavirus pandemic in India

Since then, infections have been on a relentless rise. Infections reached a peak in mid-September of some 93,000 per day. That brought the total to some 9 million cases and deaths to nearly 130,000 (one of the highest totals in the world).

Rolling local containments and much more effective work at the city and community levels have gradually reduced infections. Infections are about half of what they were in late September, as this graph illustrates:

chart of coronavirus cases in India

Lacking the financial firepower of mature economies, the government has been unable to support the economy in the way many Western governments have done.

As a result, India’s GDP contraction has been brutal.

According to the Financial Times, gross domestic product contracted almost 24% year over year in the second quarter of 2020. In the third quarter, GDP fell by an additional 9%.

The decline puts the country into a technical recession for the first time in its history.

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E.U. and U.S. flags

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As poll workers continue to count the final votes in the U.S. presidential election, it looks like we have a Biden victory — not by the landslide he and many of his supporters had hoped for, but a victory nevertheless.

There will be ongoing legal arguments, demands for recounts, and claims of fraud. However, the U.S. voting system is one of the most robust in the world: fraud is, in reality, not an issue.

Furthermore, the legal challenges are not intended to change the outcome. They are more about setting the scene for the post-Trump landscape, for what the then-ex-president does next. Even a Trump-stuffed Supreme Court knows it answers to the constitution first and the president second.

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Market implications of the presidential election

So, now we have a better idea of the political outcome, does that change our election day review of the implications for markets?

Yes and no.

Most of us in business would take comfort from the fact a more constrained government is one that is less able to do anything radical. Markets generally don’t like radical, at least from politicians.

The prospect of a Democrat presidency and a Republican-controlled senate could be a positive for equities. Such an arrangement reduces the possibility that regulation and corporation tax can be increased.

Market sentiment turned a little cautious overnight. For example, new environmental laws are likely to be more limited, helping those sectors that had been sold down in the run-up to the election.

But others have declined that might have benefited from the proposed stimulus program. A split executive and house likely reduces the size and scope of any future fiscal stimulus package in the U.S.

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markets

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Markets are sharing wider society’s caution today, as early results show the U.S. presidential election result is in the balance.

Against some predictions, the incumbent has held on to Florida and thereby kept himself firmly in the running. Other swing states may not see results for 24 or even 48 hours. Postal votes received before closing are gradually being counted.

What would a win, either way, mean for commodity markets?

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

The dollar’s reaction and metals

Firstly, metals are likely to react more to a weakening or strengthening of the dollar than the eventual winner of the White House.

The incumbent’s previous promise to rebuild the U.S. economy came to relatively little over the last four years. So, with a pandemic to contend with, the outcome is unlikely to make any dent on consumption in a second term.

Meanwhile, the challenger does not look like he will secure the sweep of both houses of Congress for which he had hoped. As such, the prospects of him fully implementing his $2 trillion “green energy infrastructure” initiative are looking challenging.

Implementation of such a plan could have boosted demand for metals if implemented in full. If not, then China remains the dominant demand driver for industrial metals. A narrow win either way is unlikely to significantly alter that reality.

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Europe

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Global stock markets took a battering last week.

Investors finally woke up to the resurgence of COVID infections in Europe and the series of national lockdowns. British Prime Minister Boris Johnson announced a one-month lockdown over the weekend. The U.K.’s lockdown adds to those already in place in the other parts of the U.K. and to those of Belgium, France, Spain, and elsewhere across the E.U.

Source: The Financial Times

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Europe lockdowns return

Governments seem surprised by the speed with which this second wave has spread through the populations. This comes despite medical experts predicting as far back as the spring that this is exactly what would happen as the colder weather drove people indoors in the fall.

According to the Financial Times, COVID-19 cases have risen across Europe but prevalence is still much higher in some countries than others.

Belgium is the worst-affected of the 31 nations comprising the European Economic Area and the U.K. Its 14-day cumulative number of 1,600 COVID-19 cases per 100,000 people is more than 30 times that of Finland. France had 706 cases. Meanwhile, the U.K. had 438 and Germany had 182.

Waning public support

Public support is more limited than in the spring.

Objections to a perceived denial of individual rights has in part fueled demonstrations in Barcelona, Paris and Berlin. However, the demonstrations also stem from worries about the economic impact.

A separate Financial Times article reports economist predictions of a 2.3% contraction in the fourth quarter across the E.U. That would mark a sharp reversal from the 12.7% growth in the third quarter – albeit that was from a severely depressed first half, when Eurozone output fell by 15%.

The new lockdown measures are not as severe as in the first half. We have all learned a lot about the transmission of infections and it is believed, with adequate precautions, schools, universities and manufacturing can remain open.

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currency

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For buyers purchasing goods and materials from China, an unwelcome trend over the summer has been gradual gains in the Renminbi’s (RMB) strength.

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RMB gains against the dollar

The Chinese RMB has strengthened against the dollar in the region of 2.5% in the last four weeks, as the below graph from XE currency exchange firm shows. The RMB moved from 6.951 to 6.770 per dollar — equating to a stronger RMB, or weaker dollar.

RMB vs. U.S. dollar chart

Source: XE currency exchange

The RMB is forecast to strengthen further, according to JPMorgan (as reported by the Financial Times).

Ken Cheung, a strategist at Mizuho Bank, is quoted as saying the onshore RMB could rise further, supported by stronger consumer spending and a tightening labor market.

To what extent, though, is this RMB surge a result of a markedly improving economy? How much is down to just a weakening dollar — a phenomenon we have explored previously on MetalMiner — as a major driver of commodity price recovery over the summer?

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India faces a dilemma — the country has the second-highest coronavirus caseload in the world at 4.2 million people and its economy is struggling.

India overtook Brazil this week, as it reported a record 90,000+ new cases on Saturday and nearly 92,000 on Sunday.

Yet, despite surging infections, India desperately needs to get its economy working again. It will need to do so in order to avoid the brutal impact of unemployment and rising poverty.

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Debt approaches highest level in four decades as India’s economy struggles

According to The New York Times, the government’s tax revenues have plummeted. Some states are unable to pay health care workers and government debt is approaching its highest level in 40 years.

As the below graph from Trading Economics shows, unemployment soured in the spring following the government’s ill-fated lockdown March 24:

The recovery has been swift but far from complete. Tens of millions of migrant workers, for example, are reluctant to return from the countryside to the cities.

As the New York Times explains, the lockdown was announced with just four hours notice. Offices, factories, trains, roads and even the borders between states were closed.

Instantly, tens of millions of Indians lost their jobs. Facing potential starvation, many began streaming back to their homes in the countryside, often by foot, in an epic migration of biblical proportions.

In the process, they spread the virus to every corner of the country and within touching distance of all 1.3 billion people.

Back to work?

As the unemployment figures show, some businesses are getting back to work despite the rising infection rates. The authorities are trying to contain local outbreaks while limiting a nationwide surge, but it is a juggling act they appear to be losing.

Workers remain reluctant to go back to work. Construction and factory workers are in many cases staying in their countryside villages.

In addition, consumption is way down. That is due to consumers’ fear of catching the virus in shopping malls and because of uncertainty over what the future holds. As such, saving for tomorrow is more of a priority than spending today.

Cities like New Delhi that had seen a gradual return to life are now seeing local containment zones being applied again as infection rates rise.

The New York Times cited a recent Google Mobility Report — which tracks cell-phone data — that noted trips to retail and recreation areas have dropped by 39% compared with before the pandemic. In Brazil and the United States, the drops were less than half as severe.

Economy struggles even before pandemic

The economy was suffering before the pandemic.

Quarter by quarter, India’s economic growth rate has been dropping, The New York Times states, from 8% p.a. in 2016 to 4% right before the pandemic.

A growth rate of 4% would be great for the U.S. or Europe. In India, that level is nowhere near enough. Millions of young people are streaming into the workforce each year, hungry for their first job.

Thankfully, the death toll is low compared to the level of infections. However, even at the official figure of 71,680 to date, it is sufficiently high for the population to be extremely wary of returning to life as normal. Many suspect – both inside the country and outside observers – that the true figure is much higher.

The resulting caution is a major hindrance to the economy returning to any level of growth before next year and even beyond.

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India

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The COVID-19 pandemic has had a significant impact on the Indian economy, as detailed by the Financial Times in an article covering the country’s response to the challenges posed by the pandemic.

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Q2 contractions for India, other large economies

India’s economy contracted by an annualized 23.9% in the second quarter ending June 2020, the Financial Times reported, as if that was an exceptional decline.

In fact, the U.K. and several European economies contracted the same amount.

Like India, they have begun to recover since.

With that said, nowhere is back to pre-pandemic levels.

Unemployment levels surge in India

Economically, more worrying for India is the level of unemployment.

Lockdown related to the pandemic caused an estimated 140 million job losses, the article notes. The pandemic hit after four years of gradually falling GDP growth – itself a cause of considerable worry when the rest of the world economy had been doing quite well.

India was falling below the level needed to create meaningful employment for its growing younger generation of job seekers.

Virus cases rise despite lockdown measures

More worrying for health officials is the lockdown has failed to stop the spread of the virus among the population. The country is detecting more new coronavirus cases than any other — with about 79,500 infections confirmed in the past 24 hours, the Financial Times reports.

At the current pace, India is expected to soon surpass Brazil in terms of cumulative COVID-19 cases, second only to the U.S.

The official death toll in India stands at 65,000. That compares with more than 183,000 lives in the U.S. and more than 120,000 in Brazil. Some put India’s number down to a relatively young population and hardy resistance to disease. However, the number may equally be due to underreporting of deaths due to the virus as opposed to deaths due to other complications.

Recovery slowdown

Since the end of the lockdown, the economy has been recovering.

The Financial Times cited investment bank Nomura, which said the pace of normalization was faltering.

The investment bank estimated aggregate demand in July reached just 67% of pre-pandemic levels. In August, the imposition of localized state-level lockdowns disrupted economic activity. New Delhi has now prohibited those lockdowns in the interests of encouraging economic recovery.

Like many countries, India is walking a fine line between controlling the spread of the virus and minimizing economic damage.

Unlike better-funded, mature economies, India does not enjoy the financial reserves or have the latitude to take on massive borrowing to support the economy. Priyanka Kishore, head of India and South East Asia Economics at Oxford Economics, is not alone in saying the central government needs to spend more to support incomes and, hence, consumption if it wants to see a sustainable economic recovery.

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True to form, if not to scale, Beijing resorted to infrastructure spending this quarter to support the economy as it sought to pull the country out of government-imposed lockdowns in the first quarter.

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The International Monetary Fund’s (IMF) most recently updated global growth forecast is gloomier than the last.

The IMF forecast global growth of -4.9% for 2020, down from the -3.0% forecast previously released in April.

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While positive coronavirus cases are on the rise in several parts of the country, industrial production bounced back in May after posting the largest monthly drop in the history of the Federal Reserve’s industrial production index in April.

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