China's market economy
On 1/15/2020, the United States and China signed the first phase of the trade agreement. The impact of the original trade war has slowed down. The outbreak of COVID-19 began on 1/19 in 2020. Wuhan closed the city and the country adopted a lockdown policy. China became the first to suffer from COVID-19. 19 Countries were severely hit by the epidemic. Strict blockade, and quarantine measures have effectively controlled the spread of the epidemic, but have dealt a serious blow to economic activities. GDP in the first quarter of 2020 declined by 6.8%, and the annual growth rate of total retail sales of social consumer goods dropped sharply from January to February (20.5%). The added value of industries above designated size fell by 13.5%. After being unblocked in April, with strong policy support, consumption and industrial production recovered month by month. GDP in the second quarter rebounded by 3.2%, and GDP grew by 4.9% in the third quarter. The annual growth rate of retail sales of consumer goods turned positive in August (0.5%). The annual growth rate in October was 4.3%, catering revenue returned to growth of 0.8% (previous value -2.9%), and the annual growth rate of commodity retail was 4.8%. Among them, the cosmetics category had the largest annual growth rate, reaching 18.3%, and gold and silver jewelry grew by 16.7%. Driven by the promotion of consumer policies and the launch of new models, the demand for car swaps continues to be released. According to data from the China Association of Automobile Manufacturers, car production in October increased by 11% annually, and sales increased by 12.5% annually. Sales growth has been seen for six consecutive months. Each month has remained above 10%, and production and sales have shown growth for 7 consecutive months. This shows that as the government loosened epidemic control, consumers were willing to go out and consume high-priced goods, and the public’s willingness to consume has increased, and China’s domestic demand has shown a trend of recovery. The unemployment rate continued to drop to 5.3% in October, and the cumulative annual growth rate of per capita disposable income of residents in the third quarter increased from -1.3% to 0.6%. As employment and income continue to improve, it is expected that China's future consumption will continue to recover.
China's official manufacturing PMI and Caixin manufacturing PMI fell to a historical low in February 2020 and rebounded sharply above the 50-level mark in March. With the domestic epidemic under effective control, the government pushed for the resumption of work and production, and supply and demand continued to recover. Above designated size, the cumulative annual growth rate of industrial added value has continued to rise from -13.5% in January-February, and the cumulative annual growth rate from January to October 2020 has risen to 1.8%. The official manufacturing PMI, which is mainly surveyed by large companies and state-owned enterprises, has been in the range of 50 to 52 since March. The Caixin manufacturing PMI, which is mainly small and medium-sized and export-oriented companies, was initially recovered due to a decline in export orders. The recovery speed is not as fast as the official PMI. However, as the world's major economies gradually resume economic activities, manufacturing imports and exports have further improved. New export orders have been in the expansion range for three consecutive months. However, due to the repeated impact of overseas epidemics, the growth rate has slowed significantly. At present, external demand is still affected by the overseas epidemic and there is uncertainty, but the trend of China's industrial recovery in the general direction continues.
In the import and export sector, exports have been growing for 7 consecutive months since April, with a cumulative growth of 2.4% from January to October. The main supporting factor is that the anti-epidemic materials drove the growth of exports, and the growth of medical equipment and equipment from January to October was 46%, and Textiles, including masks, grew by 34.8%; second, housing economy products boosted exports, household appliances grew by 19.1%, lamps and lighting equipment grew by 11.7%, and furniture grew by 7.9%. China’s resumption of work and production after the epidemic promoted export orders. An increase of 14.3% for integrated circuits, and 10.5% for automatic data processing equipment and parts, were the main growth forces of exports.
Despite the gradual weakening of exports of epidemic prevention materials, China's exports in October were still strong, driven by the gradual recovery of labor-intensive products and mechanical and electrical products export industrial chain. However, as the overseas epidemic heats up, future exports may face external demand. Imports were affected by the COVID-19 epidemic, African swine fever, and floods. The cumulative annual growth rate from January to October was -0.5%. Among them, the aviation industry, which has been severely hit by the epidemic, has seen a sharp decline in aircraft imports by 71.5%, which was caused by African swine fever and floods. Meat, grain, soybeans, and edible vegetable oil were the main imported items, with growth rates of 78.8% for meat, 23.6% for grain, 17% for soybeans, and 17.8% for edible vegetable oil.
The China government has actively promoted new infrastructure, public works, and other policies. In addition, since the epidemic has been controlled, various regions have quickly resumed work. Demand for cement, steel, and copper has increased significantly. Steel grew by 22% and copper by 37.9%, driving imports to recover.
As part of China’s monetary policy, the first quarter of 2020 was affected by the impact of the epidemic. The People’s Bank of China guided the decline in market interest rates and reduced the cost of corporate loans through RRR cuts and MLF operations. In the second quarter, human behavior maintained reasonable liquidity and reverse repurchases. Operations and MLF contraction have been extended. However, in the process of the gradual recovery of medium and long-term liquidity, market interest rates have begun to rise to the level of the PBC's policy interest rate. Therefore, since August, the MLF has been overextended for three consecutive months. The cumulative increase in the scale of social financing in the first three quarters of 2020 was 29.62 trillion yuan, an increase of 9.01 trillion yuan over the same period in 2019. Among them, RMB loans to the real economy increased by 2.79 trillion yuan over the same period in 2019. The annual growth rate of M2 remained unchanged before the outbreak, 8-9%. The annual growth rate in March rose to 10.1%, and the growth rate in 2021 remained at an increase of 10.1% to 11.1%. Both the increase in social financing and M2 maintained substantial growth, the monetary policy remained loose, and the flow of funds was conducive to the recovery of the real economy.
Under the condition of good epidemic control, both the IMF and OECD believe that China will be the only large economy in the world to achieve positive GDP growth in 2021. The OECD estimates that China’s economic growth rate will reach 1.8% in 2020 and 8% in 2021. The IMF believes that China’s economy will grow by 1.9% in 2020 and 8.2% in 2021. The reason is that China has quickly controlled the epidemic, and the government has launched a series of economic stabilization, consumption promotion, investment stabilization, employment protection, tax reduction and fee reduction, and preferential interest rate loans for enterprises. Other policies were also implemented to increase domestic demand in order to maintain sustained economic growth. In addition, China will implement the 14th Five-Year Plan from 2021 to 2025. However, the 14th Five-Year Plan does not explicitly mention GDP growth targets. The full text of the painting focuses on economic growth, innovation, expansion of domestic demand, opening to the outside world, and outlines long-term goals for 2035, and takes technological self-reliance and self-reliance as strategic support for national development. Under the tension of Sino-US relations, China takes the construction of a "domestic cycle as the main body". The "Domestic and international dual cycle" strategy is to optimize the economic structure, expand domestic demand, and gradually reduce dependence on overseas markets and technology.
United States's market economy
In March 2020, when the COVID-19 epidemic broke out in the United States, the government and Congress quickly launched an emergency expenditure budget of US$8.3 billion (mainly used to develop vaccines, prepare medical supplies, and fund telemedicine programs), and a rescue budget of 104 billion US dollars (Used to subsidize unemployment insurance, 10 days of paid sick leave and free virus testing), among which taxpayers received cash checks of 1,000 dollars in both April and May. The CARES Act introduced at the end of March is even more effective for most American adults. Citizens are given US$1,200 in cash grants and US$500 for children under the age of 17. The epidemic broke out and the government implemented strict epidemic prevention measures. Retail sales fell to a low point in April. The annual growth rate of personal consumption expenditure fell sharply by 16.14%. Cash checks and an additional $600 weekly federal unemployment benefit provided support for people’s income. With the help of the rescue plan, total retail sales rebounded month by month after the closure in May. The performance in June was even better than before the outbreak. The savings rate continued to decline from the April high of 33.6% to 13.6% in October. The U.S. has strong consumer resilience, and the end of the year will usher in traditional consumer peaks such as Thanksgiving and Christmas. The total retail sales in October will still hit a new high.
The outbreak of the epidemic, the freezing housing market, and the US real estate-related economic data all fell to lows in April. In response to the economic shock, the Fed quickly cut interest rates to 0%~0.25% in mid-March and announced the launch of up to 750 billion US dollars in QE. Large-scale QE has led to a rapid decline in mortgage interest rates and accelerated the recovery of the housing market. Benefited from low mortgage interest rates, coupled with changes in home buyers’ preference for suburban and single-family housing, the US government provided several preferential measures to stabilize the economy during the epidemic. The demand for home purchases among high-income groups has grown substantially, and the US housing market is booming. The National Association of Home Builders (NAHB) predicts that housing construction and renovation work will continue to grow in the coming months.
However, in the fourth quarter of 2020, the number of people diagnosed with COVID-19 in the United States continued to surge, and various states have also implemented relevant restrictions. The relief plan related to the CARES Act, supported by the fiscal policy launched in March-April 2020, expired at the end of 2020. The U.S. economy has gradually dried up, and personal disposable income will continue to decline. JPMorgan estimates that after a growth of 2.8% in the fourth quarter of 2020, with the impact of the epidemic in the first quarter of 2021, growth will decline by 1%. The stimulus policy of about US$1 trillion, launched at the end of the first quarter of 2021, coupled with the mass production of vaccines, was expected to help the economy grow by 4.5% and 6.5% in the second and third quarters; Goldman Sachs believed that the economy would face a recession again in the first quarter of 2021, and begin to rebound in the second quarter, and in 2021 The GDP growth rate was 5.3%. Overall, Biden’s anti-epidemic policy was more positive than Trump’s after he took office. Biden promised to keep the U.S. economy open and adopt public health measures (such as the mandatory wearing of masks and maintaining social distancing) to control the epidemic, instead of implementing a nationwide policy. With the blockade, economic activities will continue without the United States being blocked again. In addition, the recent development of vaccines is expected to help the United States further improve its epidemic prevention. It is expected that the two parties in Congress will agree to launch a small-scale rescue plan in the future, and consumption momentum will be supported. In 2021, the US economy will emerge from the recession brought about by the COVID-19 epidemic.
Europe/Euro Area's market economy
The COVID-19 epidemic in Europe broke out in late February. Italy first began to implement a national blockade, which then spread to Spain, France, Germany, and almost all of Europe. The blockade measures halted European economic activities, and the Eurozone’s first-quarter GDP fell by 3.7%. All economic data dropped to lows in April 2020. The Eurozone's GDP fell sharply by 11.8% in the second quarter. Subsequently, governments launched comprehensive assistance and stimulus measures to support economic recovery in the summer. With the gradual control of the epidemic, many European countries have gradually unblocked since May, and retail sales have increased annually. After the sharp drop of 19.3% in April, the rate returned to growth in June, and the manufacturing PMI and service industry PMI also returned to the line of prosperity and decline in July. Benefited from the lifting of epidemic prevention measures by European governments, the GDP growth rate of the Eurozone in the third quarter was 12.6%. However, due to the rapid unblocking, the epidemic worsened rapidly. After the fall, the second wave of epidemics recurred. The PMI of major Eurozone countries was in the third quarter. At the end of the decline again.
In terms of monetary policy, the ECB launched a 750 billion euros emergency debt purchase program (PEPP) in March to assist EU member states in responding to the economic shocks faced by the epidemic. In June, the total size of the plan was increased to 1.35 trillion euros. Stimulus measures were to continue until June 2021 or the ECB believes that the epidemic crisis is over, and promises to reinvest the maturing bonds at least before the end of 2022. In April, a 100-billion-euro employment support plan was launched to effectively curb the rapid rise in the unemployment rate. In the same month, a 540-billion-euro stimulus plan was approved, which is mainly used to protect jobs, support enterprises, and provide member governments with financial assistance. In July, the European Union approved the European Recovery Fund with a scale of 750 billion euros, of which 390 billion euros are non-repayable bailouts and 360 billion euros are low-interest loans. The plan is matched with the 1.704 trillion euros EU budget for 2021-2027, to provide funding for Next Generation EU to assist member countries in the medium and long-term economic recovery.
The OECD predicted in September that the Eurozone’s GDP will fall by 7.9% this year, and will grow by 5.1% in 2021. The growth in 2021 will be revised down by 1.4 percentage points from the June estimate, reflecting that these European countries have again issued new restrictions to curb the second wave of epidemics, leading to a slowdown in the European economic recovery. Spain is one of the countries in the Eurozone that has been hit hardest by the epidemic. Due to its heavy dependence on tourism, it has not yet emerged from the haze of the implementation of the lockdown. According to ECB forecasts, Spain’s GDP will decline by 12.4% in 2020, making it is the country with the largest contraction in the eurozone. Spain has received 140 billion euros of assistance from the European Recovery Fund, of which 43 billion euros are free grants. The Spanish Prime Minister said in October 2020 that a three-year stimulus package of 72 billion euros will be introduced, which will help increase GDP by another 2.5%. France is now the country with the largest number of confirmed cases in Europe. ECB predicts that GDP will decline by 9.4% in 2020. The French government also launched a 100-billion-euro economic stimulus plan in September, which is about 4% of GDP. The plan covers public projects such as investment and corporate tax cuts, and wage subsidies are expected to return to pre-epidemic levels within two years.
In the fall and winter, in the face of the second wave of outbreaks, due to the ineffective implementation of some regional blockades, Germany and France implemented a one-month national blockade in November. Spain extended the national emergency and imposed a curfew. Ritz blocked some areas and imposed a national curfew. Although the epidemic has cooled slightly in some European countries, the number of confirmed cases has remained high, and there has not been any sign of slowing down. The 19 member states of the eurozone have uneven regional economic development, and the pace of epidemic control has been uneven. The implementation of blockade measures has brought companies together. Consumers' investment and consumption behaviors are becoming more cautious, which may weaken the recovery momentum of the European economy and cause the European economy to fall into recession again. ECB expanded its loose monetary policy in December and adopted fiscal policies and ECB monetary policies in various countries.
With the support of these ECB monetary policies, although Europe’s recovery speed is the slowest among the three economies, the economic growth in 2021 should remain unhindered.
