Global trade to shrink 18.5% in Q2, defying worst fears – WTO

Global trade is expected to drop around 18.5% year-on-year in the second quarter of 2020 in a huge coronavirus-driven plunge which nonetheless could have been much worse, the WTO said today. 

“Initial estimates for the second quarter, when the virus and associated lockdown measures affected a large share of the global population, indicate a year-on-year drop of around 18.5%,” the World Trade Organization said in a statement. 

The global trade body said that in the first quarter, the volume of merchandise trade shrank by 3% year on year. 

Giving its initial estimates for the second three months of the year,the expected drop of 18.5% was better than the WTO’s worst predictions. 

“The fall in trade we are now seeing is historically large – in fact, it would be the steepest on record. But there is an important silver lining here – it could have been much worse,” said outgoing WTO director-general Roberto Azevedo. 

“This is genuinely positive news but we cannot afford to be complacent,” he stated.

In its annual trade forecast issued on April 20, the WTO forecast volumes would contract by between 13% at best and 32% at worst in 2020.

“As things currently stand, trade would only need to grow by 2.5% per quarter for the remainder of the year to meet the optimistic projection,” the WTO said. 

“However, looking ahead to 2021, adverse developments, including a second wave of Covid-19 outbreaks, weaker than expected economic growth, or widespread recourse to trade restrictions, could see trade expansion fall short of earlier projections.” 

Roberto Azevedo said policy decisions had softened the ongoing blow and would help determine the pace of economic recovery from the crisis. 

“For output and trade to rebound strongly in 2021, fiscal, monetary, and trade policies will all need to keep pulling in the same direction,” said the Brazilian, who is leaving his post a year early at the end of August.

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Consumers spent €600 million using contactless payments in May

The impact of Covid-19 on how consumers are spending is recorded in the latest figures from the banking sector.

In May, consumers spent €600 million using contactless payments, the highest monthly figure on record.

The figures were compiled by Banking and Payments Federation Ireland.

Every day in May, more than €19 million was spent using contactless payments.

Consumers may be tapping slightly less because of the lockdown, but they are spending more.

In April, the amount people could spend using contactless payments increased from €30 to €50, so as a result the average spend per transaction is also up, more than €3.

Given the pandemic, it appears customers want to handle cash less.

More than 90% of consumers now use contactless with a quarter prefering using contactless when buying groceries.

Cashless society has been much talked about and it appears we are inching ever closer, but it remains some way off.

“The volume of contactless payments were down in May when compared to February before COVID-19 hit, however this must be seen in the context of the restrictions which only started to ease during the second half of May”,  Brian Hayes, CEO of the BPFI, said.

“With the recent acceleration of the reopening roadmap and the resulting uplift which has been seen in retail and hospitality spending in particular, we would expect that contactless volumes should show a recovery in the months ahead as more restrictions are lifted,” he concluded.

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Ibec calling for ‘dramatic intervention’ to save businesses

A Government fund aimed at helping small and medium-sized enterprises to reopen and rebuild – as the Covid-19 pandemic restrictions are eased – needs to be at least quadrupled in size, according to employers’ group Ibec.

Ibec also said that loans with 100% State-backed credit guarantees and an interest rate holiday of 12 months are required if small firms are to get back on their feet.

The policy recommendations are contained in a new plan called Sustaining SMEs.

Ibec wants this plan to be considered by Fine Gael, Fianna Fáil and the Greens as part of the ‘July Stimulus’ contained in the proposed new programme for government.

However, the organisation also points to the ongoing instability around government formation as another issue that needs to be resolved.

“A stable political executive and legislature is crucial to enable implementation of urgent policy measures,” Ibec’s chief economist Gerard Brady said. 

The business group said the SME sector has been the worst impacted by the lockdown measures here, and action is required to save firms.

Ibec said over 100,000 SMEs were among those worst impacted by the shutdown and they employ over half a million people.

“Unless there is a dramatic intervention, significant numbers of businesses will fail in 2020,” Mr Brady said.

“Our research indicates that for over seven in 10 companies, the minimum period in which they expect ‘normal’ demand to return is greater than their existing cash reserves. This ‘liquidity gap’ will need to be bridged by external funding in order for many of these companies to survive.”

Mr Brady said it is recognised that not all SMEs will manage to survive, but it is crucially important that as much of the ecosystem as possible is protected through the implementation of a range of unprecedented measures.

These include the introduction by the Government of a fund to write down debts under the Revenue Commissioners tax warehousing scheme when such debts threaten business viability.

The group also wants the commercial rates waiver to be extended for a further three months, to a total of six months, with an additional deferral of six months.

In order to deal with the rents issue, Ibec is seeking a binding mandatory arbitration system for commercial lease disputes, including a form of state burden-sharing based on the Swedish model.

It also wants the €250m Restart Grant fund supercharged to over €1bn. This would include a flat payment of €15,000 for every company, rather than the current €2,000 to €10,000, with the link to the rates system removed.

Credit guarantees on loans with 100% guarantees (the existing scheme guarantees 80%), no portfolio limit and an interest rate holiday of 12 months is also required, followed by interest rates below the euro zone average, according to Ibec.

The group said its cashflow modelling work shows that if normality begins to return by the end of this month and demand reaches a break-even point by November, the average SME in consumer facing sectors will have fixed cost debts amounting to €45,000. 

This increased leverage, it said, is equivalent to almost 80 weeks’ post-tax profits. 

Over 40% of this debt is owed to the Revenue Commissioners and local authorities, with another 27% owed to the firm’s commercial landlord. 

The remainder is split roughly three ways between utilities, insurance and loan repayment, and suppliers.

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Crucial six months ahead for SME sector

Decisions taken in the next six months will impact the small and medium enterprise sector for the next five years, according to a treasury specialist who works closely with the sector.

John Finn, Managing Director of Treasury Solutions – which helps businesses deal with a range of issues including cash flow, lending and currency management – said there were a number of risks ahead for the sector at a crucial time for the survival of many firms as they deal with the fallout from Covid-19.

“The first is the formation of a new government. You need it to pass legislation for a loan guarantee scheme,” John Finn said.

“The second is a hard Brexit (if trade talks collapse) and the third is a second wave of the virus, which we will get,” he said.

“The timing of that prior to the conclusion of Brexit talks is an added complication. What we see is a need for a coordinated macro move by government with the SME sector to weather the next six months,” he added.

John Finn warned businesses that they would have to ‘dust down their hard-Brexit plans’ once again as the UK insists that it will not be seeking an extension to the end-year deadline for concluding trade talks.

“It’s the last thing they want to hear now as they’re dealing with Covid, but it remains a risk. This is where the state is going to have to come in with a concerted effort in the coming months.”

The reluctance of the UK to seek an extension to the negotiating deadline on a trade deal has seen sterling move back over 90 pence to the euro in recent days.

That renewed weakness puts further pressure on exporting companies as their goods become more expensive to sell into the UK market.

John Finn said it was likely there would be a degree of volatility out to the end of the year now with the pound-euro moving in the range of 88 to 92 pence with bouts of strength reflecting progress and bouts of weakness reflecting bad news.

“The markets have taken the view that they’re not going to seek an extension. In reality, there will be no trade deal. What you’ll probably get is a heads of terms agreed by the end of the year. They won’t call it an extension, but in reality it will be. They’ll probably get six months extra on some things and 12 months on others,” he said.

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50% of restaurants face closure without emergency grant aid package

A new report warns that up to 50% of restaurants in Ireland face closure unless an emergency grant aid package is issued by the Government. 

The latest Restaurants Association of Ireland report also warns that recently promoted staycations or weekends away will not be an option if the tourism and hospitality industry is not supported.

Prepared by Jim Power Economics, the report stated that the accommodation and food services sector has been seriously damaged by the Covid-19 crisis. 

Jim Power said that once the restaurant sector reopens, the trading environment will be extremely challenging.

This will be as a result of social-distancing requirements, various health protocols, the absence of overseas visitors and consumer nervousness. 

The economist said the restaurants sector is a major employer all over Ireland, adding that it is an essential element of economic and social life and is arguably the most important component of Ireland’s tourism offering. 

“It seems clear that many restaurants will struggle to survive in the challenging environment ahead, but it is equally clear that in order to rebuild the economically vital tourism sector over the next couple of years, it is essential that we have an abundance of high quality restaurants in the country,” Jim Power said. 

“It is essential that the restaurant sector gets the maximum possible support from Government, to get the sector through the difficult times ahead,” Jim Power stressed. 

“The cost of such support would be far outweighed by the cost of doing nothing, in terms of job losses all over Ireland, closed businesses on the streets of towns, villages and cities all over the country, and the damage to Ireland’s tourism offering,” he added.

Today’s report suggests eight recovery measures for the sector.

These include labour cost support, the dropping of Local Authority Charges, a reduced temporary VAT rate of 0%, reduced commercial rents, debt repayment restructuring, liquidity measures, a cut in excise duties on alcohol and an innovation fund for restaurant diversification.

The report also warns that if 100,000 workers were to remain unemployed for a full year, it would cost the Exchequer around €2 billion in increased social protection expenditure as well as €500m in lost payroll taxes.

The Exchequer would also be hit by around €240m in lost VAT receipts, while local authorities would be down about €52m in lost commercial rates.

Adrian Cummins, the CEO of Restaurants Association of Ireland, said today’s report is “damning evidence” that the sector needs support measures put in place immediately by the Government. 

“Our members are stating that a 50% staff layoff is inevitable unless they receive supports, and in the long run, we estimate that almost 50% of restaurant businesses will struggle and shut their doors if the Government do not intervene,” Mr Cummins said.

Noting that the Government have been promoting staycations and weekends away for the months ahead, Adrian Cummins warned that there will be no staycations if the country’s restaurants and hospitality businesses close. 

“Indigenous businesses will be lost forever,” he stressed.

“The plan put forward in this report is very comprehensive in both how it will be executed and how much it would cost. But more importantly, it highlights how much it will cost us in the long run to do nothing,” he added. 

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Numbers on Pandemic Unemployment Payment fall again

465,900 people are now receiving the Covid-19 Pandemic Unemployment Payment – a drop of 32,800 over the last week.

This is according to the latest figures from the Department of Employment Affairs and Social Protection today. 

At the peak of the Covid-19 crisis, 598,000 people who had lost their jobs were claiming the Pandemic Unemployment Payment.
Since last week, 30,000 people have closed their PUP claim and 17,900 will be receiving their final payment tomorrow. 

A further 225,600 unemployed people are claiming on the Live Register as of the end of May. 

The downward trend in PUP claims reflects the return to work by many claimants as the economy gradually re-opens.

However some of those will be returning to jobs that are now being subsidised by the state through the Temporary Wage Subsidy Scheme (TWSS).  

An estimated 410,000 employees are currently having their wages supported through the scheme, while over 551,800 have received at least one TWSS subsidy payment at some point since it was launched on March 26. 

61,800 employers have registered for the scheme.

The Minister for Employment Affairs and Social Protection welcomed the downward trend in PUP claims, saying the statistics constituted clear evidence that many businesses were returning “slowly but surely” – particularly in the construction, manufacturing and wholesale and retail sectors. 

But Regina Doherty stressed that her Department continues to support those workers who have not yet gone back to work and particularly those whose jobs are no longer there, with a view to helping them back into new employment safely. 

Since the peak in PUP claims on May 5, the number of PUP recipients from the construction sector has dropped by 50%, manufacturing by 35% and wholesale and retail trade by 30%.  

According to the statistics, this week sees the numbers in the wholesale sector dropping faster than construction for the first time. 

The numbers in the accommodation and food service activities returning to work have also surpassed those returning to work in manufacturing. 

The Department’s statistics also reveal that to date 51,600 people aged up to 66 have been medically certified to receive the Covid-19 Enhanced Illness Benefit Payment of €350 per week. 

Of those, just over 7% (3,706) had actually contracted the virus, while the remaining 93% (47,894) were required to self-isolate on a precautionary basis. 

Since the beginning of June, 600 workers have been eligible for the Enhanced Illness Benefit, but of those, only 67 were actually diagnosed with coronavirus. 

The highest proportion of employees qualifying for the Enhanced Illness Benefit were working in the human health and social work sector (11,900) followed by the wholesale and retail trade (10,900) and manufacturing (6,800) sectors. 

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5 Irish banks have granted borrowers mortgage breaks

Low repayments on mortgages across the property industry have shown the adverse effect of the pandemic on businesses. The fall in economic activity has translated into a fall in consumer disposable income and financial incapacity to honor financial obligations. To cushion mortgagors against this loss of income, Irish banks have granted 45,000 loan repayment breaks to struggling individuals.
45, 000 individuals to benefit from mortgage breaks
According to the Banking Payments Federation Ireland (BFI), the 45,000 individuals who’ll benefit from the financial scheme represents 5% of the mortgage market. Also, all five banks are now involved in the plan and its implementation.
14,000 SMEs applied for loan repayments breaks and capital requirements
Apart from the breaks given to individuals, the banks also received a huge volume of applications from SMEs requesting loan repayment breaks and working capital. As a result, the banks have offered close to 14,000 breaks to SMEs. They are also busy processing working capital applications, which represents 35% of financial support.
All five Irish banks are involved in the financial plan
The loan repayments break granted to both individuals and SMEs has been necessitated by the unfavorable impact of the pandemic. All five Irish banks have initiated and implemented the mortgage breaks to borrowers so that they can cope with repayments. Those banks have also processed working capital requests from small businesses. Click here to find out more.

EU ready to go it alone on taxation of digital firms

France said a US decision to quit global talks on how to tax big digital firms such as Google, Amazon and Facebook was a “provocation”.

This comes as the European Union said it could impose taxes even if no deal was reached by the end of the year. 

The latest trade row was ignited after the Washington said it was withdrawing from negotiations with European countries over new international tax rules on digital firms, saying talks had made no progress. 

Nearly 140 countries are involved in the talks organised by the Organisation for Economic Cooperation and Development on the first major rewrite of global tax rules in a generation to bring them up to date for the digital era. 

The talks aim to reach a deal by the end of 2020, but that deadline is now slipping out of reach with Washington’s latest move and the US presidential election in November. 

Meanwhile, OECD Secretary-General Angel Gurria said that addressing the tax challenges arising from the digitalisation of the economy is long overdue.

He said that all members of the Inclusive Framework should remain engaged in the negotiation towards the goal of reaching a global solution by year end. 

“Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back,” he stated. 

He said this, in turn, would trigger tax disputes and, inevitably, heightened trade tensions.

“A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further,” he warned. 

Finance Minister Bruno Le Maire said France, Britain, Italy and Spain had jointly responded today to a letter from US Treasury Secretary Steven Mnuchin announcing the pullout. 

“This letter is a provocation. It’s a provocation towards all the partners at the OECD when we were centimetres away from a deal on the taxation of digital giants,” Le Maire said. 

A Spanish government spokeswoman said Madrid and other European countries would not accept “any type of threat from another country” over the digital tax dispute. 

European countries says tech firms pay too little tax in countries where they do business because they can shift profits around the globe with little physical infrastructure.

Washington has resisted any new unilateral taxes on Silicon Valley companies in the absence of an OECD deal. 

“The European Commission wants a global solution to bring corporate taxation into the 21st century,” European Economic Commissioner Paolo Gentiloni said. 

“But if that proves impossible this year, we have been clear that we will come forward with a new proposal at EU level,” he said, saying taxes could be introduced even without a global deal. 

France, one of several European countries which has enacted new taxes to collect more revenue from digital companies, had agreed to suspend collection of its levy while talks were under way on a global approach.

Le Maire said France would impose its digital services tax this year, whether or not Washington returned to negotiations. 

“No one can accept that the digital giants can make profits from their 450 million European clients and not pay taxes where they are,” he said. 

The French tax applies a 3% levy on revenue from digital services earned in France by companies with revenues of more than €25m in France and €750m worldwide. 

Washington has threatened to impose trade tariffs on French Champagne, handbags and other goods in response. 

The US opened trade investigations this month into digital taxes in Britain, Italy, Spain and other countries over concerns that they unfairly target US companies. 

President Donald Trump threatened this month to impose tariffs on EU cars if the bloc did not drop its tariff on American lobsters. 

Efforts to reach even a limited US-EU trade deal have foundered and sources on both sides see little chance of progress with a US presidential election barely four months away. 

A spokeperson for the Department of Finance here said it was too early to speculate as to what impact this recent development may have on the progress of global tax reform efforts at the OECD. 

“Ireland remains convinced that globally agreed action is preferable to unilateral measures when it comes to international tax matters,” the spokeperson added.

Sorley McCaughey, Christian Aid Ireland’s Head of Policy and Advocacy, said the developments were further evidence of the cracks in a fundamentally flawed process.

“From the outset the OECD BEPS process has suffered from a democratic deficit,” he said.

“The ability of one powerful country- the US to derail the process puts a lie to the idea that this was ever an inclusive process where countries engaged on an equal footing.”

“Developing countries have long complained that they have been shoe horned into a process that did not take into account their concerns. To see the process now derailed over the concerns of one country will appear rather rum to developing countries who have long been told that countries engaged in the process as equals.” 

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Air freight rates head back to earth as virus-driven boom cools

An air cargo boom driven by demand for protective gear against the coronavirus has peaked.

Rates, while still 50% above normal levels, are falling in a worrying trend for airlines relying on freight revenue in the absence of passengers. 

Declining prices may deal a blow to carriers that are scrambling to move cargo to offset weak passenger revenues as they rebuild networks by flying reopened routes with half-empty cabins. 

“The early-mover advantage has disappeared and I can see why some of the rates are coming down,” said Phil Seymour, president of aviation consulting firm IBA. 

“The market is becoming flooded with belly freight capacity,” he added. 

About half of the air cargo carried worldwide normally flies in the belly of passenger jets rather than in dedicated freighters. 

But flight cuts due to weak travel demand squeezed freight capacity at a time when demand for masks, gloves and other protective gear was surging, leading many airlines to fly empty passenger jets as freighters. 

Global air cargo capacity was down 27% in the week starting May 31 compared with a year ago, according to Accenture data, but capacity is rising as passenger flights return. 

Air freight rates from China to the US surged to more than $7 a kilogram in April and May and China-Europe rates were at more than $6 a kilo, Frederic Horst of Cargo Facts Consulting said. 

Rates have since softened, although they remain 40%-50% above normal levels closer to $3 a kilo, he added. 

The International Air Transport Association estimates cargo will contribute 26% of airline industry revenue in 2020, up from 12% in 2019.

This is due mostly to a sharp fall in passenger revenue that will lead to forecast losses of more than $84 billion.

Air freight demand had been depressed before the pandemic due to subdued global economic growth and a US-China trade war and recessionary conditions will make for a slow recovery, said Oliver Plogmann, Singapore-based aviation lead at Accenture. 

“We estimate around 100 passenger freighters are flying globally and we think the number is going to reduce over the next weeks and months when more capacity comes back into the market because it is simply not viable,” he said. 

Hong Kong’s Cathay Pacific Airways, one of the world’s biggest freight carriers, said last week that demand for medical supplies had softened in the latter half of May.

It flew nearly 900 cargo flights with passenger planes in May but that could be reduced as demand falls. 

Taiwan’s China Airlines said it was concerned about the outlook for cargo given there was no obvious global economic recovery trend. 

Analysts noted that PPE (personal protective equipment) via air freight has drastically slowed down in the last couple of couple weeks, and it is probably because the second round can afford to go ocean freight. 

Logistics group CH Robinson said it helped the state of Minnesota save $500,000 in shipping costs for surgical gowns by selecting fast boat services over air freight.

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Ireland to push for more of EU Covid-19 recovery funding

Ireland will push to receive more of the EU’s coronavirus €750bn recovery fund at a virtual summit of EU leaders, which gets under way this morning.

The Government has joined a number of other member states, including Belgium, in pushing for a revision of the mechanism being used to work out how much individual countries will receive by way of loans and grants.

Under the current proposals, Ireland is due to receive €3bn of the fund, partly due to the fact that Ireland has become one of the wealthier member states, and partly due to the mechanism being deployed by the European Commission to calculate disbursements.

Taoiseach Leo Varadkar is expected to argue that the mechanism, or allocation key, does not accurately reflect the impact of the virus on the Irish economy.

The Government is also pushing for the impact of Brexit to be recognised as an asymmetric shock, one which also merits a larger share of the EU’s recovery fund.

The Taoiseach is also expected to resist proposals to introduce a digital tax, and a special tax for large corporations, as a means for the EU to help pay back the €750bn fund over a 30-year period.

Member states are currently getting to grips with how the fund, known as the Recovery and Resilience Fund, will be shared out and on what terms.

According to the European Commission’s initial proposal, which will have to be approved by leaders, the fund will be made up of €500bn in grants and €250bn in loans and will be administered through the seven- year EU budget, with much of it front-loaded.

The fund is the result of weeks of sometimes bad-tempered debate over how the EU had responded to the pandemic, with northern member states, who have resisted any mutualisation of debt, pitted against southern member states, who were hardest hit.

Ireland was one of nine countries led by France, Spain and Italy who initially called for the EU as a whole to underwrite the debts of those member states who were suffering the most.

Member states have since accepted a European Commission proposal to borrow up to €750bn on the markets using the commission’s triple A rating, with member states ultimately underwriting the debts.

Once member states agreed in principle, the commission began work on the technical details, including the allocation key, which works out which country gets what.

The Government is arguing that the methodology is backward looking, and that it captures a snapshot of the Irish economy at a moment when it was booming, and in a way which does not fully take account of the impact of the pandemic on the Irish economy.

The methodology is designed to work out which countries were poorest when the pandemic struck, and which had the fewest fiscal resources to respond.

In particular, officials say the commission’s methodology uses youth unemployment as a yardstick. The period the allocation key relates to, say Irish officials, was one with relatively high youth employment.

The OECD last week said Ireland’s economy would contract by 8.7% if a second outbreak occurred.

The Government is also keen that the new seven-year EU budget, known as the Multiannual Financial Framework (MFF) maintains spending under the Common Agriculture Policy (CAP).  The Taoiseach is expected to argue that maintaining CAP funds is vital, given the threat of Covid-19 to food security.

Ireland is also expected to be fighting a rearguard action on proposals for paying the fund back.

National capitals had already been mulling a number of ways for the EU to generate income, beyond the annual contribution by member states and money raised through VAT and external tariffs.

Member states have been considering the raising of funds through a new plastics tax and through the Emissions Trading System (ETS).

While Ireland is open to such ideas, Dublin is alarmed at further suggestions from the commission. These include a special tax for large digital corporations, and another one-off tax for other large multinationals that benefit from access to the single market.

These ideas remain embryonic and formal negotiations have not yet opened, but Ireland is expected to strongly argue against the latter two proposals. Dublin believes that taxation must remain a national competence.

However, the Government supports ongoing work at OECD level on how to tax large, cross-border hi-tech giants.

European Commission President Ursual von der Leyen and President of the European Council Charles Michel will brief leaders on their video conference with British Prime Minister Boris Johnson on Monday.

Mr Varadkar will also brief leaders on the implementation of the Northern Ireland Protocol, which foresees checks and controls on goods crossing the Irish Sea into Northern Ireland.

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