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SEPTEMBER 2020

U.S. And Russian Economies Shrink, As China Invests Heavily In Infrastructure

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U.S. And Russian Economies Shrink, As China Invests Heavily In Infrastructure

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The U.S. economy shrunk 4.8% in the first quarter of 2020, this is the biggest slide since 2008 and the first time it has contracted at all since 2014.

This is a direct result of the need to close businesses to fight the spread of COVID-19, as well as the oil market crash.

Consumer spending, which had already begun to cool in the second half of 2019, fell at a 7.6% rate in the first quarter of 2020.

The second quarter is expected to be even worse, with analysts expecting a shrinking of the economy not seen since the 1940s. Bloomberg Economics has projected a 37% annualized contraction, but UniCredit is the most bearish with a 65% estimate.

“It’s kind of incredible when you think about the fact that the economy was running pretty much on a normal footing for over 80% of the first quarter,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said.

Early hopes for a rapid rebound have faded with most analysts assuming a jump in activity once the virus passes will be followed by a slower resumption of growth.

While two quarters of contraction is considered by most to constitute a recession, the official call in the U.S. is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research.

Russia, too, is struggling, with analysts estimating a reduction in the income of Russian oil companies by $18–20 billion, or about 40%, due to a drop in oil prices and a decrease in production.

In April 2020, oil exports are moving towards: taking into account taxes, transportation costs and operating expenses, losses will amount to $6–8 per barrel. However, this will be a consequence of high duties on oil exports. In May oil exports will become barely profitable.

As of May 1st, analysts the export duty on oil after the spring collapse will drop by $45.2 and amount to $ 6.8 per ton. In April, it amounted to $52 per ton. At the same time, the duty on highly viscous oil will decrease to $1 from $5.2, for light oil products and oils – to $2, for dark – to $6.8.

International oil companies were initially trying to avoid reducing their production, by circumventing it through producing in countries such as Nigeria, but this also is beginning to prove impossible.

BP, Royal Dutch Shell, Total and Eni showed steady production growth with an additional bonus in the form of attracting investors through generous dividends. Now everything is different. Most likely, the major oil companies expect the largest drop in production in decades. BP will have to share the burden of cuts in Azerbaijan, and Kazakhstan is in difficult negotiations with Chevron, Exxon, Shell and Eni. The cuts will exacerbate the damage inflicted by NK on low oil prices and weak fuel sales.

It is not yet possible to determine the exact volumes of production reductions, as the largest oil companies and many countries continue to conduct difficult negotiations. They can reach a record hundreds of thousands of b/d per company, or 5-10% of their level of oil production.

In contrast, China appears to be handling the situation rather well. In 2020, it is expected that Chinese economy will grow, less than 2%, but it will not shrink.

The median estimate for 2020 full-year gross domestic product growth from 56 economists surveyed this month fell to 1.8% from 3.7% in March.

To help mitigate the coronavirus shocks, China will likely raise the annual quota for local government special bonds. The majority of analysts expect the government to sell between 3 trillion yuan ($424 billion) and 4 trillion-yuan worth of debt, higher than last year’s total of 2.15 trillion yuan.

Some economists expect a 4 trillion-yuan ($565 billion) issuance of special bonds, to be spent on infrastructure in an attempt to kick-start the economy.

Key infrastructure projects for 2020 include the build-out of the Sichuan-Tibet railway, a high-speed rail corridor along the Yangtze river and intercity connections in major city clusters. Elsewhere, special bonds are being used to fund toll-road projects from Gansu province in the north west to the rust-belt of Heilongjiang.

“It’s common practice that local governments artificially inflate anticipated revenues of infrastructure projects in order to get approval to issue special bonds,” said Tang Fengchi, a consultant on public-private partnerships to China’s Ministry of Finance. “Special bonds can solve the funding problems, but it is no solution to local governments’ inability to make scientific decisions.”

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