{"id":173942,"date":"2020-07-21T05:41:27","date_gmt":"2020-07-21T09:41:27","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=173942"},"modified":"2020-07-20T21:43:41","modified_gmt":"2020-07-21T01:43:41","slug":"protracted-g7-contraction-or-multiyear-global-depression","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2020\/07\/protracted-g7-contraction-or-multiyear-global-depression\/","title":{"rendered":"Protracted G7 contraction \u2013 or multiyear global depression"},"content":{"rendered":"
July 21, 2020<\/div>
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By Dan Steinbock
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\u00a0– Global growth prospects are deteriorating. Instead of a V-shaped recovery in the 2<\/b><\/strong>nd<\/b><\/sup><\/strong>\u00a0quarter, advanced economies will face historical carnage and a prolonged contraction. But there\u2019s still worse ahead.<\/b><\/strong><\/p>\n

Current estimates for major advanced economies remain too optimistic, due to the mismanagement of the COVID-19, belated responses and premature exits, which have now caused far-earlier-than-expected secondary virus waves. As a result, the hoped-for V-shaped recovery will not happen in the 2nd<\/sup>\u00a0quarter.<\/p>\n

The Trump administration\u2019s catastrophic COVID-19 failures, along with premature exits to reopen the economy and leave the WHO will virtually ensure still new virus waves and longer contraction. In turn, US tariff wars are undermining the promise of the Asian Century.<\/p>\n

2<\/b><\/strong>nd<\/b><\/sup><\/strong>\u00a0quarter carnage: projections and realities<\/b><\/strong><\/p>\n

In early February, as new coronavirus cases began to decelerate in China but accelerate outside China, I predicted that China would rebound in the 2nd<\/sup>\u00a0quarter but major advanced economies could rebound in the 3rd<\/sup>\u00a0quarter only if they\u2019d manage to contain the pandemic.<\/p>

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At the time, this view was seen as too optimistic for China and too pessimistic for advanced economies.<\/p>\n

When the deceleration of new cases in China continued in March, but dramatically accelerated in major advanced economies, I projected that China\u2019s rebound in the 2nd<\/sup>\u00a0quarter would be stronger than expected. And that major advanced economies, particularly the US, would face a contraction that would be at par with or worse than the Great Depression.<\/p>\n

At the time, this view was seen as too optimistic for China and too pessimistic for advanced economies.<\/p>\n

In late January, President Trump congratulated President Xi Jinping for China\u2019s success in the virus containment. In March I predicted that Trump would reverse his words. Due to plunging ratings and re-election challenges, I projected that Trump and his administration would blame China for COVID-19, particularly in early summer ahead of the 2nd <\/sup>quarter results in the US.<\/p>\n

Today, we know that Chinese economy became the first to rebound in the 2nd<\/sup>\u00a0quarter, by growth of 3.2%. In contrast, major advanced economies are heading toward a historical plunge in the 2nd<\/sup>\u00a0quarter. And as projected, Trump\u2019s attacks against China intensified in June and have accelerated into a kind of hybrid war.<\/p>\n

And there\u2019s worse ahead.<\/p>\n

Economic erosion in G7, rebound in China<\/b><\/strong><\/p>\n

Until recently, many international observers expected US to benefit from a strong rebound that would start in late spring and strengthen in the 3rd<\/sup>\u00a0quarter. New virus waves were seen as a possible threat but later in the fall. The Trump administration\u2019s pandemic mismanagement and premature exits have undermined those hopes and resulted in a huge virus resurgence in the US; months earlier than anticipated.<\/p>\n

While consensus models expected US coronavirus cases to be around 3 million by now, they will exceed 4 million soon. So, the 2rd<\/sup>\u00a0quarter contraction, which was expected to amount to -33%, is likely to soar to -53%, according to the Atlanta Fed. Annualized growth will take a deeper hit, accordingly.<\/p>\n

In the UK, Boris Johnson\u2019s government followed in the US footprints until realities proved overwhelming. While the government has taken a different stance since late spring, it has been too little too late. Coronavirus cases are about to exceed 300,000. In the 2nd<\/sup>\u00a0quarter, British economy could plunge by -20% to -25%.<\/p>\n

Although Italy was the first major economy in the Euro area to suffer from the pandemic, its stringent quarantine measures reduced the damage in the spring. Nonetheless, the virus cases amount to almost 245,000 and the 2rd<\/sup>\u00a0quarter is expected to translate to a plunge of -9% to -10%.<\/p>\n

As the Euro area\u2019s strongest economy, Germany is no longer immune to contraction either. As German cases are about to exceed 200,000, the country could experience a plunge of -8% to -10% in the 2nd<\/sup>\u00a0quarter.<\/p>\n

France is following in Germany\u2019s footprints. Officially, the cases are about to exceed 175,000. Yet, the 2nd<\/sup>\u00a0quarter will prove dire with a plunge of -17%.<\/p>\n

While COVID-19 has recently surged in Japan, official cases average at about 25,000, while annualized growth is likely to plunge to -5%. But official virus data cannot be taken at face value because minimal testing. Until recently, the country\u2019s testing capacity, as adjusted to population, has been significantly behind that of Uganda, half of that in the Philippines and less than 2.5% relative to the UK.<\/p>\n

Chinese cases have stayed below 85,000, as I predicted three months ago. As long as China can deter imported infections, the rebound will prevail. The challenge will be the Trump administration\u2019s hybrid war, which seeks to derail China\u2019s return to pre-crisis economic growth, while risking global economic prospects for years to come.<\/p>\n

Protracted contraction or global depression <\/b><\/strong><\/p>\n

A review of official coronavirus cases and discrepancies between expected and likely quarterly results suggests trends that will cause increasing distress in major advanced economies. Not just in the next few months but in the medium-term, due to COVID-19 mismanagement, belated responses and premature exits.<\/p>\n

Here\u2019s why:<\/p>\n