Graeme Wearden 

US jobless claims jump; UK factories suffer record slump – as it happened

The number of Americans filing fresh unemployment claims jumped last week to 1.4m, as states impose new lockdown measures
  
  

A line of cars on a car assembly line at the Vauxhall car factory in Ellesmere Port, Wirral.
A line of cars on a car assembly line at the Vauxhall car factory in Ellesmere Port, Wirral. Photograph: Colin Mcpherson/The Guardian

Closing summary

Time for a recap:

UK factories have suffered their worst slump in output on record. The CBI’s latest Industrial Trends report showed that orders fell at the fastest pace since 1980, forcing firms to keep cutting jobs.

But the worst may be over. Manufacturers reported that they expect output to rise in the next quarter.

Bank of England policymaker Professor Jonathan Haskel has warned that the UK recovery could be held back by rising unemployment, or by consumer anxiety about the virus.

When the economy re-opens, customers might still fear infection and therefore stay away from consumption that has a social element to it (pubs, restaurants etc.). It seems likely that such demand weakness will therefore drag on the economy and hold back the recovery.

America’s labor market has weakened. The number of new claims for unemployment benefit jumped last month, to 1.4m. That’s worse than expected, and the first week-on-week rise for four months.

Economists say the US economy is ailing, as states are forced to reverse their efforts to reopen their economies because the Covid-19 pandemic is worsening.

The US dollar responded...by slipping to its weakest level in nearly two years.

Consumer giant Unilever became the most valuable company listed in London, after posting strong results for the last quarter. The firm enjoyed solid demand for cleaning goods and food products as people were stuck at home for months, while grooming products fell out of favour.

CEO Alan Jupe warned, though, that “A deep global recession has already started” which is changing consumer habits “dramatically”

South Korea underlined this point. by slumped into recession, after suffering the worst drop in exports in decades.

Technology firm Dyson announced plans to cut 900 jobs worldwide, with two-thirds being lost in the UK.

Staff are unhappy, with one source telling our Rob Davies:

“There’s a lot of resentment that we are owned by the richest man in the UK but a temporary blip in sales has resulted in 900 job losses worldwide.”

The media industry is also suffering from the pandemic, with Daily Mail & General Trust reporting a sharp plunge in revenues.

Social media firm Twitter also posted a drop in advertising revenue, but also attracted more users than ever before....as it continues to investigate this month’s hack:

The ONS reported that the UK economy is slowly reopening, with more businesses operating and more people travelling to work.

And there was a glimmer of optimism in Germany - where consumer confidence has risen.

Goodnight. GW

Updated

There’s some late drama in the currency markets: the US dollar has just dropped to its lowest level against other major currencies in nearly two years.

The dollar index has extended its recent weakness, hitting levels last seen in September 2018.

This has lifted the pound back to $1.276, while the euro has trading at a fresh 21-month high of $1.162.

Today’s disappointing US jobs report didn’t provide much support for the dollar, as it suggests further policy easing will be needed.

European markets close

European stock markets have ended the day roughly where they started it.

The UK’s FTSE 100 and the German DAX both rose just 0.07%, while France’s CAC slipped slightly. Spain (-0.4%) and Italy (-0.7%) both lost ground, as optimism over the EU’s recovery fund faded.

But it was a strong day for Unilever, which ended 7.8% higher tonight after beating City sales forecast today. That pushes the consumer goods firm’s market capitalisation up to over £121bn, by my maths, over AstraZeneca to become the most valuable company on the FTSE 100.

Russ Mould of stockbrokers AJ Bell says investors appreciate Unilever’s resilience:

“Business resilience is a much sought-after attribute in the current economic climate and Unilever has certainly got the right ingredients. While it failed to deliver any sales growth on a group basis during its first-half period, its performance was considerably better than expected.

“Analysts had forecast a 7.4% drop in second quarter sales, yet Unilever delivered a mere 0.3% decline. High demand for hygiene products helped make up for a decline in food and drink sales. While people are home were busy ordering ice cream and tea bags, Unilever suffered from a reduction in demand from cafes, bars, restaurants and ice cream vans.

My colleague Rob Davies points out that Dyson’s UK workforce really are bearing the brunt of today’s job cuts:

Just in: A Guardian investigation has found that Sports Direct may be paying staff less than the minimum wage, nearly five years after problems were first uncovered at its Shirebrook warehouse in Derbyshire.

My colleague Simon Goodley explains:

In the latest investigation, the Guardian placed an undercover reporter inside the same Shirebrook, Derbyshire, warehouse during two weeks in late June and early July, where an estimated 3,000-4,000 workers distribute goods for Frasers Group, the holding company that also includes retailers such as Flannels, Jack Wills and USC.

The reporter recorded how warehouse staff at the group were unable to leave the warehouse during their 30-minute unpaid breaks – a practice some employment law experts say should count as paid working time and, if correct, would push Shirebrook’s effective hourly wage rates below the legal minimum of £8.72 to about £8.20.

The investigation also found that many of the issues raised five years ago have been addressed, but other problems appear to remain or have re-emerged.

Here’s the full story:

Technology firm Dyson is joining the ranks of companies cutting jobs since the Covid-19 crisis began.

Dyson is cutting 600 jobs in the UK and a further 300 worldwide, as part of an ongoing restructuring, the BBC reports. Most of the cuts are among customer service and retail staff.

A Dyson spokesman said:

“The Covid-19 crisis has accelerated changes in consumer behaviour and therefore requires changes in how we engage with our customers and how we sell our products.”

American Airlines has tumbled into the red for the last quarter, after the pandemic forced it to slash flights.

It made a net loss of just over $2bn, down from a profit of $662m a year ago, with revenues tumbling by 86%.

CEO Doug Parker summed up the situation:

“This was one of the most challenging quarters in American’s history.

COVID-19 and the resulting shutdown of the U.S. economy have caused severe disruptions to global demand for air travel.”

Wall Street has opened in subdued mood, following the rise in unemployment claims.

The Dow Jones industrial average has dipped by 48 points, or 0.2%, to 26,957 points, while the S&P 500 and the Nasdaq are flat.

But there are some movers. Twitter has jumped 7% after reporting that record jump in user numbers earlier today.

Tesla shares also rose at the open after it reported its fourth quarterly profit in a row. That could qualify it to join the S&P 500 index (which would force index trackers to buy the stock).

Unilever has now overtaken AstraZeneca to become the most valuable FTSE 100 company.

Shares are now up 9%, after the company beat City expectations this morning (see here) and outlined plans to break up its tea business.

That values Unilever at around £122bn.

CEO Alan Jope didn’t sound too cheerful today, though, warning that the economy is struggling:

“We believe that talk about a quick recovery is too optimistic. A deep global recession has already started and we are seeing consumer habits changing dramatically. Unemployment is rising across many markets and even for those with jobs, people are saving a bit harder.”

The jump in US jobless claims underlines the need for a new stimulus package to protect the unemployed, says Charles Hepworth, investment director at GAM Investments:

“US jobless claims for the week ending 18 July came in at 1.416m – a higher amount compared to the previous week and importantly the first increase the US has seen since March. The impressive falls in unemployment through April and May now appears to have stalled and this should be no major surprise as the Covid-19 pandemic continues to ravage across the US. With states halting reopening plans it feels that these numbers will continue to contrast President Trump’s more bullish view on the economy.

The jobless benefits CARES Act of $600 per week payments is due to end next week and an extension of sorts is expected to help keep the economy from cratering.”

Full story: US weekly unemployment claims on the rise...

The jump in US unemployment claims last week was particularly sharp in states which are also suffering a surge in Covid-19 cases.

Those states have recently been forced to order bars and restaurants to close again; employers have responded by laying staff off.

Our US business editor, Dominic Rushe, has the details:

Claims for unemployment have dropped sharply since the shutdown orders in March which triggered more than 6m claims in just one week. But they remain stubbornly high and in recent weeks have hovered around 1.3m a week, twice as high as the pre-pandemic record of 695,000 set in 1982.

There are signs that claims could rise higher as more states report increases in infections and reconsider their reopening plans. In the week ending 11 July the largest increases were in California, Florida and Georgia, all states struggling with rising infection rates, the labor department announced.

About 273,000 Arizona residents filed first-time unemployment claims last week, a new record as the state’s coronavirus case numbers passed 150,000. In North Carolina, where cases are also continuing to climb, unemployment claims are now approaching 2m.

Here’s Dom’s full story:

Richard Flynn, UK managing director at Charles Schwab, says the spike in jobless claims shows that the US economy is struggling:

“Today’s rise in initial jobless will disappoint the market, especially following over two straight months of positive data. With coronavirus hotspots flaring up around the country and some businesses pausing or rolling back their grand re-opening, key parts of the U.S. economy are still ailing.

While stocks have held on to their gains, the market’s internal conditions suggest there is some valid scepticism around how long this strong performance can last.

US jobless claims jump: What the experts say

Economist and investors are alarmed and disappointed that the number of Americans filing for unemployment benefits last week jumped last week to 1.4 million.

Financier Steve Rattner, the former head of Barack Obama’s Auto Task Force, fears initial jobless claims will keep rising unless the Covid-19 pandemic is brought under control.

Naeem Aslam of Think Markets says the report shows that the US economy is in desperate need of help.

Today’s number has fueled fears that the economic data is rolling over and the optimism about the US economy is fading.

The US initial jobless claims data has a bit of mixed news for the US stock market. On one hand you have the data that is showing more Americans are out of jobs but on the other side we have hope that policy makers will deliver the second stimulus check now.

Randy Frederick of Schwab points out that weekly jobless claims have been extremely high for months:

Scott Horsley of NPR points out that nearly a million gig economy workers applied for unemployment help (which aren’t counted in the initial claims figure).

US unemployment claims jump as lockdowns resume

Newsflash: the number of Americans filing new claims for unemployment benefit has jumped for the first time since the end of March.

The rise comes after some States imposed new lockdown measures in an attempt to control the surge in Covid-19 cases.

The initial jobless claims total rose last week to 1.416m last week, up from 1.3m in the previous seven days.

That’s a larger increase than expected, and the first increase in the weekly jobless total in four months (back in March, it soared to a record high over 6 million people but had been dropping since).

It suggests that the labour market is weakening again, as efforts to reopen the US economy start to unwind.....

More to follow...

Twitter posts record jump in users

Social media firm Twitter has posted a surge in usage during the pandemic, and a drop in advertising revenues too.

Average daily user numbers surged by 34% in April to June compared to a year earlier, to 186m - beating forecasts of 176m.

That suggests the lockdown has left people with more time to engage with social media, and more to talk about --including Covid-19, and the Black Lives Matter protests in America for example.

But advertising sales - the core of Twitter’s revenue - fell 23% during the last quarter. Ad revenues had gradually recovered after slumping in March, but then tumbled in late May to mid June when “many brands slowed or paused spend in reaction to US civil unrest”.

Jack Dorsey, Twitter’s CEO, has hailed the jump in monetizable daily active users (mDAUs).

Our product work is paying off, with tremendous growth in audience and engagement.

We grew mDAU to 186 million, a 34% year over year increase in Q2, the highest quarterly year-over-year growth rate we’ve delivered since we began reporting mDAU growth.”

Shares have jumped 6% in pre-market trading....

Back in the markets, the pound is sliding as the UK’s trade talks with the EU continue to struggle.

Following the latest round of talks in London, the UK’s chief negotiator David Frost warned that there are still hurdles, so the UK must “face the possibility” that it can’t agree its future relationship with the EU by the end of the year.

Frost warned:

“We have always been clear that our principles in these areas are not simple negotiating positions but expressions of the reality that we will be a fully independent country at the end of the transition period.”

The EU’s chief negotiator, Michel Barnier, also warned that the two sides are still divided on two key issues - the ‘level playing field’ and access to fisheries.

He also blamed the British side for budging, saying:

By its current refusal to commit to conditions of open and fair competition and to a balanced agreement on fisheries, the UK makes a trade agreement - at this point - unlikely.

In response, the pound had dropped by half a cent against the US dollar to $1.268. It’s also down 0.4% against the euro, to €1.096.

Professor Haskel also warns:

I am concerned about the economy “getting stuck” and recovering only slowly and undershooting the inflation target.

The whole speech is online here.

Bank of England: Unemployment and Covid-19 fears threaten the recovery

Bank of England policymaker Professor Jonathan Haskel is warning that the UK’s recovery could be weak because consumers are too scared of Covid-19 to return to normal behaviour.

In a speech just published, Haskel argues that demand, not supply, will be the key factor on whether the UK economy rebounds from the slump, or struggles.

Haskel identifies unemployment, or the fear of losing one’s job, as a key factor, along with anxiety about the virus itself.

He also highlights the importance of health measures -- both Covid-19 tests, and measures within shops, bars and restaurants to keep people safe.

Evidence is emerging that the dominant driver of activity will in fact be on the demand side. When the economy re-opens, customers might still fear infection and therefore stay away from consumption that has a social element to it (pubs, restaurants etc.). It seems likely that such demand weakness will therefore drag on the economy and hold back the recovery.

The path of recovery crucially depends therefore on the fear of infection, which in turn depends on the mix of public (e.g. track and trace) and private (e.g. screens in shops) health measures undertaken. It also depends on the fear, or realisation, of unemployment, as weak activity and capacity constraints on the operation of surviving businesses, and insolvencies, translate into a fall in the demand for labour

He cites evidence from America that people are still nervous about dining out:

Disappointingly, the CBI also found that UK manufacturers expect employment to continue falling next quarter.

Although the pace of job cuts may slow, it shows that the government’s stimulus efforts aren’t preventing a rise in unemployment.

The pandemic also forced UK factories to run down their inventories in the last quarter, the CBI reports:

Firms ran down inventories at a hefty pace in the quarter to July, likely due to COVID-related supply disruption.

Stocks of raw materials and work in progress fell at their fastest pace since April 1981 and January 1981, respectively. Stocks of finished goods declined at their quickest rate since October 2009.

Tom Crotty, Group Director at chemicals giant INEOS, agrees that manufacturing may have passed the low point, given output is now expected to rise.

But he also warns that many are still in distress, despite the overall improvement in today’s report:

“The latest survey showcases the significant challenges that manufacturers have faced over the last three months due to the COVID-19 crisis. However, these results may prove to be a low point in the crisis, with manufacturers expecting output to grow for the first time since the pandemic hit.”

“Government policy measures have proved vital in supporting manufacturers during the crisis, but it’s clear that many firms are still in distress. As the UK economy begins to recover, it will remain vital that the government continues to work with firms to both shore up near-term cash flow and build a stronger, more sustainable manufacturing sector.”

Charts: Manufacturing output in record plunge

The CBI has tweeted the key charts from today’s Industrial Trends report.

It shows how factory output fell at a record speed in May-July, following the lockdown:

Updated

CBI: UK manufacturers more upbeat about the outlook

Just in: UK manufacturers are more upbeat about their future prospects, after being hammered by the pandemic.

The CBI’s gauge of business sentiment has stabilised in the last three months, according to its latest healthcheck on the sector.

That follows a record plunge in the February-April quarter, and suggests the slump in UK manufacturing may have bottomed out.

Factory bosses told the CBI that they expect output to begin to recover in the coming months, for the first time since Covid-19 hit the economy. Indeed, expectations for output over the next quarter were the strongest since early 2018.

Today’s survey also shows that the last three months have been very grim for UK manufacturing. Output volumes declined at a record pace, while total new orders fell at their fastest rate since October 1980.

That has driven unemployment up, with headcounts dropped at their quickest pace since April 2009.

And worryingly, the percentage of firms reporting weak export order books hit its lowest level on record.

So while the CBI sees “some early signs” that the worst may be over, it also warns that the COVID-19 crisis is weighing heavily on firms’ investment plans.

Rain Newton-Smith, CBI chief economist, explains:

“Manufacturers continue to face extreme hardship due to the COVID-19 crisis. Output volumes continued to decline at a record pace, while total orders have fallen at their fastest rate since October 1980.

“There are tentative signs of gradual recovery on the horizon, with firms expecting output and orders to begin to pick up in the next three months. But demand still remains deeply depressed.

Updated

The US dollar remains under pressure today, trading at its lowest levels in four months.

Traders continue to see value in the euro, now that European leaders are backing a €750bn recovery programme.

This pushed the euro up to $1.16 overnight, a 21-month high, while the dollar index is at its lowest since March.

Marios Hadjikyriacos at XM explains that investors are expecting America’s central bank to expand its stimulus programmes again soon.

The currency market continues to be dominated by the resurgent euro, which has been liberated from its fiscal shackles after EU leaders took a step closer towards risk sharing this week.

Since FX is a zero-sum game in the sense that for every winner there must be a loser, the euro’s fortunes have come mostly at the expense of the dollar, which may also be bleeding because investors are anticipating more action from the Fed next week.

That’s what the bond market is saying at least, judging by the inability of longer-term US yields to get off the floor even though stock markets keep floating higher.

Updated

DMGT hit by pandemic

The owner of the Daily Mail, MailOnline, the i and Metro saw print advertising revenue plunge by 69% and digital income fall by almost a fifth in the three months to the end of June as the coronavirus lockdown hammered publishers.

Daily Mail & General Trust said that the 17% reduction in total digital revenues came despite an impressive boost of well over a third in traffic to its main digital property, MailOnline, as readers sought out news about the health emergency in record numbers.

The company said.

“Since March, the impact of Covid-19 has resulted in a pronounced reduction in advertising revenues across both print and digital formats,”

“Growth in online traffic has helped mitigate the impact on digital but not enough to compensate for the overall reduction in advertising spend”.

Overall DMGT’s consumer media division saw total advertising fall 45% and newspaper sales drop 12% across the quarter, as brands put marketing budgets on hold and high streets shut as the nation went into lockdown.

The company also split out the performance of the Daily Mail and Mail on Sunday, which saw overall advertising decrease by a third across the period, with print ads down 55%.

In May, the Daily Mail overtook The Sun to become Britain’s biggest selling newspaper. Rupert Murdoch’s tabloid had been the nation’s most popular newspaper since 1978.

UK national newspapers are expected to lose as much as £182m in circulation revenue and £330m in advertising, despite many seeing record levels of digital traffic as the public seeks out news relating to the health emergency.

Small investors have been spending lockdown taking punts on volatile stock markets, boosting trading at online investment firms IG Group and AJ Bell.

IG Group said pre-tax profits surged 52% to £296m over the year to May, after average daily trade volumes reached 1m at the peak of the Covid-19 market sell-off in March. That is three times higher than average trade volumes of 336,000 recorded a year earlier.

The firm said it attracted 96,900 new customers over the financial year, while the number of active customer traders rose 34% to 239,600. It helped the trading platform, which makes most of its income from transaction fees, record a 36% rise in net trading revenue to £649m.

While some customers will have lost money on their market bets, IG stressed that it “does not benefit from client trading losses, nor is it exposed to client trading profits.”

Investment firm AJ Bell said it brought in another 20,370 platform customers in the three months to 30 June, pushing its total customer pool up 8% for the quarter to 282,619.

More UK businesses have reopened this month as the economy slowly emerged from the Covid-19 lockdown.

That’s according to the latest healthcheck on the UK economy from the Office for National Statistics.

It found that more people have been travelling to the office, while the number of online job adverts also crept up from its recent lows and more people returned to the high street.

However, the economy is still well below its ‘pre-crisis levels’, as these findings show:

  • Of responding businesses, 92% said they were trading between 29 June and 12 July 2020, compared with 86% of responding businesses between 1 and 14 June 2020 before non-essential retail was allowed to reopen in England, according to the Business Impact of Coronavirus (COVID-19) Survey (BICS).
  • The proportion of adults wearing a face covering when leaving the home increased from 61% to 71% according to the latest Opinions and Lifestyle Survey (OPN).
  • On 17 July, overall footfall rose to two-thirds of its level the same day a year ago, the highest since lockdown began.
  • Between 10 and 17 July, the total volume of job adverts increased to just over 50% of their 2019 average.
  • Overall, prices of items in the high-demand product (HDP) basket decreased by 0.7% between the week ending 12 July and the week ending 19 July, the largest decrease since the series started on 16 March.

Insurer: Covid-19 is on a par with natural catastophe

UK insurer Beazley has been dragged into the red by the costs of the Covid-19 pandemic.

Beazley, which specialises in marine, property, data breach and life insurance, made a loss of $13.8m for the first half of 2020, down from a profit of $166.4m.

Its political, accident and contingency division bore the brunt of the pandemic, due to the “mass cancellation” of events.

It warned that the industry-wide costs will be huge:

In responding to this crisis, the insurance industry faces record losses on a par with major natural catastrophes. Having a well-diversified portfolio means our COVID-19-related claims are neither excessive nor restricted in any particular line of business.

We have estimated that Beazley’s pandemic-related losses will amount to $170m net of reinsurance split between political, accident & contingency ($70m) and marine, property and reinsurance ($100m). There is still uncertainty around how COVID-19 will impact liability lines of business.

More here.

Many UK firms have found that their insurers refused to pay out when they were forced to close - an issue which will be tested in court....

Updated

European stock markets have opened higher this morning, with the UK’s FTSE 100 jumping 1% (partly thanks to Unilever).

Pierre Veyret, technical analyst at ActivTrades, cautions that market sentiment remains mixed and directionless.

Even if most bullish trends remain valid on European benchmarks so far, especially on the DAX-30 Index, lingering concerns over the uncertainty on the timing of the next US stimulus package combined with simmering US-Sino tensions is making stocks a less attractive asset class.

While investors welcomed recent progress made by healthcare companies in the struggle against the pandemic (Pfizer Inc. +8%), most of them are becoming increasingly worried that the relationship between Washington and Beijing will worsen prior to the US election in November and put further pressure on riskier assets.

German carmarker Daimler has reassured investors that it’s turning the corner from the pandemic, after seeing sales slump this year.

Ola Källenius, Daimler’s chairman, says:

We are now seeing the first signs of a sales recovery – especially at Mercedes-Benz passenger cars, where we are experiencing strong demand for our top end models and our electrified vehicles.

Total sales at the carmaker fell by 34% in the second quarter of 2020, but the future now looke brighted:

Assuming that the economic recovery continues in the second half of the year and that there is no new major wave of COVID-19 infections in our key sales markets, Daimler expects both Group EBIT and the free cash flow of the industrial business to be positive in 2020, but lower than in the previous year

Shares in Unilever have surged by 8% this morning, after benefiting from the boost in eating at home during the pandemic.

The consumer goods giant reported that its underlying sales declined by 0.1% in the first half of 2020. Although volumes fell 0.3%, prices grew by 0.2%.

The maker of Domestos bleach, Persil washing powder, Dove deodorant, Ben & Jerry’s ice-cream, PG Tips tea bags and delicious toast topping Marmite said it had shown “resilience” through the Covid-19 crisis.

Unilever told shareholders:

As people spent more time in their homes, we saw growth in home consumption of foods, ice cream and tea. It also meant that consumers had fewer personal care occasions from going to work or socialising, and we saw a decline in our personal care business, except for hygiene products.

However, underlying sales declined 1.8% in Europe due to the region’s lockdown, with sales volumes down 1% and prices down 0.8%.

Negative volumes in Europe were a result of significant declines in out of home ice cream and food service, as well as reduced demand for personal care products.

The most severely impacted countries were Italy and Spain, where increased demand for in home eating and hygiene products only partially offset these negative impacts.

There’s a glimmer of good news in Germany this morning.

Consumer confidence in Europe’s largest economy has jumped, thanks to tax cuts as Berlin tries to stimulate growth.

The consumer sentiment index, published by the GfK institute, beat expectations by rising to -0.3 , up from -9.4, and better than the -5.0 which economists expected.

GfK researcher Rolf Buerkl reckons a temporary cut to VAT has raised spirits:

There is no doubt that the reduction in value-added tax has contributed to the extremely positive progress. It is clear that consumers are looking to make major purchases earlier than planned, which will help boost spending this year.

France’s finance minister has warned that the French economy won’t return to pre-crisis levels until 2022.

Bruno Le Maire told the National Assembly that GDP is still expected to tumble by 11% this year, and only rise by 8% next year, as recent economic data was “satisfying but too fragile”.

He also cautioned that there is much uncertainty about the economic prospects for 2021.

The price of copper fell in China today as traders brace for a new wave of tit-for-tat retaliations between Washington and Beijing.

Reuters has the details:

The most-traded September copper contract on the Shanghai Futures Exchange ended down 0.9% at 51,970 yuan ($7,429.59) a tonne, while three-month copper on the London Metal Exchange rose 0.1% to $6,493 a tonne by 0703 GMT, having fallen as much as 0.8% earlier in the session.

The United States’ move to shut the Chinese consulate in Houston, Texas on Wednesday prompted Beijing to consider closing the U.S. consulate in the central city of Wuhan, a person with direct knowledge of the matter said.

“Copper is trading lower as sentiment is dampened across markets after the decision by the U.S. to close the Chinese consulate in Houston, heightening tension between the two countries,” said commodities broker Anna Stablum of Marex Spectron.

How Covid-19 drove South Korea into recession

A dire slump in exports helped to drive South Korea into its worst slump in over 20 years

My colleague Alison Rourke explains:

Asia’s fourth-largest economy contracted 2.9% year-on-year in the April-June period, the Bank of Korea said, after a fall of 1.3% in the first quarter, putting the country into recession for the first time in around two decades. It’s the fastest decline since the aftermath of the 1998 Asian financial crisis, when it fell 3.8%.

South Korea was one of the worst hit countries outside China in the early part of the pandemic, recording around 900 new cases a day in February. But by April, an intensive tracking and tracing campaign had reduced the daily figures to single digits. The country is now battling new outbreaks, including one centred on bars in Seoul.

South Korea’s economy is highly trade-dependent, and exports plunged 13.6% year-on-year in the second quarter – the sharpest decline since 1974, in the wake of the OPEC oil crisis. It was largely driven by falls in car, coal and petroleum products, according to the Bank of Korea.

Introduction: Rising US-China tensions

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Investors have plenty to worry about today.

Tensions between the US and China are rising again, as American politicians struggle to agree a new stimulus package and the economic cost of Covid-19 mounts.

China’s yuan weakened overnight, dropping below 7 against the US dollar, after the US ordered China to shut its consulate in Houston amid accusations of spying.

President Trump has hinted that he could order more consulates to close, telling reporters that a fire was spotted on the Houston consulate’s grounds after the US Department of State ordered the closure.

“I guess they were burning documents and burning papers.”

Beijing slammed the move as an “unprecedented escalation,” and there’s talk it could retaliate in kind.

China’s CSI 300 stock index tumbled 2% at the start of trading, before slowly recovering its losses as traders digest the situation:

A renewed US-China trade war is just what the markets don’t want to see right now. It would disrupt the world economy, just as countries around the world try to return to growth.

Mark Haefele, chief investment officer at UBS Global Wealth Management, fears we could face months, or even years, of such jitters:

“US-China tensions could persist into the US election in November. A change of leadership might not mark the end of pressure on China from the US.

Investors around the world need to consider the implications of trade policy and other major election policy issues for their portfolios.”

Covid-19 continues to wound the global economy too, with South Korea falling into its first recession in 17 years:

The Covid-19 pandemic continues to rage, with California recorded its highest number of new cases in a single day and the global total of cases exceeding 15m.

With the reopening of America’s economy stalling, Senators on Capitol Hill are struggling to agree a new stimulus package before the current deal expires.

Democrats are pushing to extend benefits for the unemployed, while the White House favours a payroll tax cut to put more money into the pockets of those who are working.

Jim Reid of Deutsche Bank says hopes of a quick breakthrough are fading:

The still high caseload across the US means that the need for additional stimulus is still fairly acute, however optimism surrounding a bill being enacted in the next 2-3 weeks is fading.

Congressional Democrats and Republicans remain nearly $2tr apart in funding. Senate Minority Leader Schumer said late yesterday that it would not make sense for Democrats to start talking to their Senate counterparts until Republican leadership had a bill to work off.

The agenda

  • 9.30am BST: Latest ‘fast indicators’ of Covid-19’s impact on UK economy released
  • 11am BST: CBI index of UK business confidence
  • 12pm: Bank of England’s Jonathan Haskel webinar: “From Lockdown to recovery – the economic effects of COVID-19”
  • 1.30pm BST: UK weekly jobless figures
 

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