The EU’s Covid-19 Recovery Fund Did Not Work as Expected

Three years have passed since the activation of the European Union’s post-coronavirus pandemic recovery fund. The multi-year budget, worth $897 billion or 5.2% of the bloc’s GDP in 2022, is financed through EU debt.

Funds are still being disbursed, making it difficult to measure the economic effect. Experts also have not reached a consensus on the fund’s intended purpose. Only short-term goals are highlighted: to prevent a repeat of the 2010-12 euro crisis.

At the start of 2020, the European Central Bank (ECB) had to intervene decisively to prevent interest rates on Italy’s massive debt from spiraling out of control, as Italy was severely impacted by the pandemic. In addition to the ECB’s actions, the EU agreed to pool budgetary resources to assist poorer countries and those heavily affected by the pandemic. Aid varied from 10.8% of GDP for Italy to 0.6% for the Netherlands. Markets learned that the ECB would do “whatever it takes” to preserve the euro and that, in times of crisis, wealthier EU countries would assist poorer ones. In this respect, the fund was successful.

Another aim of the fund was to facilitate recovery from the deep recession caused by Covid-19, with budget stimulus focused on consumption rather than investments.

The EU co-funded some expenditures: Italy’s subsidies for eco-friendly home renovations were co-financed with 14 billion euros from EU funds. Investments such as childcare facilities require ongoing staff. Most of the money has yet to be spent, but the results so far are mixed. “For Italy, it was too much money and too little time to ensure it was spent correctly,” claims Tito Boeri of Bocconi University.

The funds were also intended to help countries undertake politically challenging reforms to stimulate economic growth. The Greek government plans to redistribute the responsibilities of various government levels, the healthcare system, and territorial planning. In Italy, the government has begun reforming its judicial system. The money acts as an incentive for carrying out agreed reforms, which is especially important in a country with frequent government changes. However, Italy struggles to increase competition in its economy.

European federalists hope that collective debt “will become a national blessing and a powerful cement of the union.” With the fund’s resources nearing depletion, having spent 832 billion euros across 27 member states, the EU will need to justify the need for a budget increase and expanded powers anew.

“A Long and Tiring Journey”: Companies Disappointed by China’s Prospects

Reuters reports that some of the world’s leading companies in the food, beverages, and food technology sectors have expressed pessimism regarding demand in China. This amplifies investor concerns about the damage inflicted on firms operating in the country.

Disheartening remarks were made by Starbucks, Pandora, Carlsberg ahead of the Chinese New Year—a typically intense period for consumer spending.

They highlight the scale of challenges faced by companies selling everything from phones to cars and necklaces, as Chinese consumers tighten their belts amidst uncertain job prospects, especially for the youth, a stock market slump, and declining real estate values.

These issues have undermined expectations of a strong post-pandemic recovery last year.

“I think it’s going to be a long and tiring journey,” Pandora’s CEO in China, Alexander Lacik, told Reuters after fourth-quarter sales fell short of expectations.

Carlsberg’s CEO, Cees ‘t Hart, said he is “cautiously optimistic” about the stabilization of adverse conditions throughout the year, which should also boost the economies of other Southeast Asian countries. However, he would not predict when a recovery in China might begin.

Starbucks CEO Laxman Narasimhan commented, “In China, we remain very confident in the long-term outlook. The market is going through a transition period as we see an increase in competitors in the mass market, which we believe will phase us out over time.”

Insiders agree that Chinese consumers prefer domestic brands over global ones, and it seems the government is indeed comfortable encouraging this trend.

The UN reports: The economies of two major countries, the USA and China, are expected to see a slowdown in growth

The outcomes of 2023 demonstrated that the economy, despite all negative factors, showed its resilience and avoided the worst-case scenario—a recession. However, amid decreasing investment levels, trade slowdown, and other risks, economic growth is expected to decelerate in the next two years.

From the UN report on the USA:
“A prolonged period of high interest rates will lead to a reduction in aggregate demand, an increase in defaults, and a sharp correction in asset prices, especially in developed countries, thereby further undermining growth dynamics. Higher interest rates in developed countries will hinder capital inflows to developing countries or even provoke capital outflow, complicating the situation with the balance of payments and creating risks for debt sustainability.

Besides raising interest rates, the Federal Reserve of the USA, the European Central Bank, and other central banks of developed countries have also begun to reduce the money supply and liquidity, initiating what is called “quantitative tightening,” by reducing assets on their balances, which surged during previous episodes of so-called “quantitative easing,” starting in 2008. Many developing countries have not yet recovered from the pandemic. Global trade and industrial production remain exceptionally sluggish.”

The forecast is for 1.4% economic growth in 2024 and 1.7% in 2025. There is a wide range of uncertainty factors, for example, elections.

From the UN report on China:
“In 2023, economic growth was 5.2%, which represents a significant leap after just 3% growth in 2022.

Since 2020, 66 construction companies in China have declared default, including five in the first half of 2023. A leading indicator of economic activity, the purchasing managers’ index in the manufacturing sector, has been in the contraction territory since April. While consumer spending remained stable, industrial production was volatile, facing instability in the real estate sector and weak external demand.

The housing market accounts for about 25 percent of China’s GDP, and Chinese developers have taken on unjustifiably large amounts of debt, resulting in regulatory measures against bad debt leading to the bankruptcy of many of them, affecting consumer and business sentiment.

Real estate investments in China fell by another 9.1% in the first three quarters of 2023. Ongoing trade tensions with the United States have also weakened demand for Chinese exports. China’s share in total goods exports to the United States dropped sharply after the United States began imposing tariffs and quotas on imports from China starting in 2018.”

The forecast is that China’s economic growth will slow down, approximately to 4.7%. However, weak inflationary pressure allowed for the easing of monetary policy, lowering the interest rate to stimulate domestic demand. The government is also trying to stabilize the real estate sector.

Extended comments by Grigor Agabekyan, a staff member of the UN Department of Economic and Social Affairs, can be read on the UN website.

For the first time in two decades, US buys more from Mexico than China

At the height of the pandemic, when global supply chains were disrupted and shipping costs soared almost twenty times, they saw this as an opportunity. In 2021, there was a request to establish links with companies that want to move production from China to Mexico. One of these turned out to be Hisun, a manufacturer of practical off—road vehicles and vehicles for outdoor activities.

Why Mexico? One of the main reasons is the growing trade tensions between the United States and China. Thus, for the first time in 20 years, Mexico surpassed China and became the main source of official imports of the United States.

The U.S. trade deficit with China narrowed significantly last year, with imports from the country falling by 20% to $427.2 billion, according to data, provided by U.S. Census Bureau and U.S. Bureau of Economic Analysis. American consumers and businesses have turned to Mexico, Europe, South Korea, India, Canada and Vietnam for auto parts, shoes, toys and raw materials.

Mexico’s exports to the United States were about the same as in 2022 and amounted to 475.6 billion US dollars.

We see how relations between Washington and Beijing are changing entire trade chains. Which companies will continue to participate in this process? We are all watching together!

Market Analysis:

Impact of Artificial Intelligence

The world definitely feels that this year is a leap year 

Andrey Syrchin, along with the entire Cresco Capital team, is closely monitoring the events in the finance sector. He has analyzed the events affecting the market and shared his insights!

The market began to grow on the “hype of artificial intelligence” (highlighted in the chart), accounting for 40% of the growth. To put it into perspective, with 50 trillion dollars, AI has generated 15-20 trillion, comparable to China’s GDP.

The situation resembles a “bubble,” which is typical for technological breakthroughs—initially inflated by admiration, then deflates when the same AI is applied in life, turning the extraordinary into the ordinary.

All this occurs during a formal liquidity crunch in the markets. The US is “taking money out of the market with one hand and giving it to its banks with the other,” effectively creating a new repo and QE instrument for banks to prevent the system from collapsing.

Andrey asserts: “The first sign of a bubble is when insiders (company owners and top managers) offload large shares of their own companies into the market during this movement. J. Bezos, the founder of Amazon, has already sold 8 billion dollars of his shares, and the same is happening with E. Musk, M. Zuckerberg, and others.”

The market loses logic, showing no fear, a consequence of trading automation. This will be the next significant “black swan” in the global financial system, as robots lack the sense of fear and predictability, operating on clear algorithms. However, how did “2008 happen”?

Something is off in the market: AI hasn’t created 20 trillion dollars of added value, and such efficiency doesn’t exist yet. This euphoria will end badly for most investors (for example, NVIDIA and others like Tesla which dropped from 410 to 110 after Musk sold a large package of his shares at 300+ levels).

Look for solid stocks or funds that will protect your investments!

Gloomy banking season

CNBC Daily Open has prepared an extended report on banking activities

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Four major Wall Street banks reported earnings.
— JPMorgan Chase started the season with lower fourth-quarter profits due to a $2.9 billion fee paid last year.
— Citigroup reported a quarterly loss of $1.8 billion and announced a 10% workforce reduction.
— Bank of America’s net profit in the fourth quarter fell by more than 50% compared to last year, while Wells Fargo reported higher quarterly revenues but warned of lower interest income this year.

The Labor Department’s producer price index fell by 0.1% in December, contrary to the 0.1% increase economists expected.

Goldman Sachs stated that there were no significant changes in the European utilities sector over the last three years, but a potential shift could occur.

The report also includes information on the elections in Taiwan, manufacturers in the USA, and inflation risks. The information in the report will be useful for investors worldwide.