From Europe To Japan To South Korea, Economic Gloom Is Pervasive

A raft of disconcerting data out Friday draws a line under the damage inflicted by the crisis in April, making the case for more accommodation from central banks and additional relief measures from governments.

In Europe, headline inflation slumped to just 0.1%, even as food prices rose.

The latest read is the lowest in four years, and likely cements the case for the ECB to add to purchases under the pandemic facility next week.

Updated ECB forecasts due at next week’s meeting will likely confirm the central bank believes the outlook for the euro-area is skewed towards downside scenarios.

Although this week saw the European Commission take a massive stride down the road to burden-sharing, agreement on the celebrated fiscal package is expected to take months.  Implementation isn’t seen before 2021. That leaves the ECB to shoulder the burden.

“The decline in energy prices was -12% YoY, which far outweighs the somewhat higher unprocessed food inflation of the lockdown”, ING said. “Core inflation has remained surprisingly stable at 0.9%, which might have been influenced by the difficulty in gathering data gathering during the lockdown period”, the bank went on to remark, adding that massive demand for loans “suggests that bank lending support through TLTROs is a key part of the emergency support delivered and the large support from PEPP and PSPP are boosting the money supply to keep conditions as loose as possible”.

Meanwhile, in Japan, data out Friday showed industrial production plunging a harrowing 9.1% in April, the third straight monthly drop. The print was nearly double the decline economists were looking for.

Japanese retail sales dove 9.6%, much worse than the expected drop.

Like the ECB, the BOJ has pledged to do whatever it can to support the economy, but it was Shinzo Abe’s fiscal pledge which grabbed headlines this week. The government will spend hundreds of trillions of yen to “save” the country (as Abe put it), and with emergency protocols lifted, the hope is that the world’s third-largest economy can get off the mat.

That said, a deep Q2 contraction is assured, and Japan was already in a recession headed into the teeth of the pandemic.

Also Friday, there was more foreboding data out of South Korea, where industrial production figures for April widely missed the mark. Output fell 4.5% on year, against expectations for a 0.5% drop. The MoM decline was -6%, the largest drop since December of 2008.

The bottom line: This was the worst factory activity data for the bellwether in 11 years, and suggests a “V-shape” recovery is unlikely, especially against mounting trade headwinds.

Bank of Korea cut rates to a record low this week and Governor Lee said the BoK may turn to unconventional policy measures, but was short on specifics.

The central bank said the South Korean economy will likely contract by 0.2% for the year. That is a truly large downgrade from the previous estimate (+2.1%).

It would mark the first contraction for the global bellwether since the Asian financial crisis.


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