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How is the Coronavirus putting countries at risk of recession?

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How is the Coronavirus putting countries at risk of recession?

The OECD has warned that global economic growth could be halved and slow to below 2.5%, which is widely considered to be recessionary. For countries like the UK and those in Europe, growth has been stagnant or tepid, so a “shock” like the coronavirus increases the risk of a recession. Since the coronavirus is a “supply shock” that affects, among others, supply chains and global value chains, it poses a challenge to monetary policy. It is hard for central banks because such shocks lead economists to consider a policy response that seems counter-intuitive. Fiscal policy thus has a greater role to play.

The best examples of supply shocks are the 1970s oil price shocks. That was the unenviable decade of “stagflation” when there was both high inflation and high unemployment along with weak growth. The dramatic rise in oil prices fed through into higher energy prices and input costs, which generated high rates of inflation. The usual response of raising interest rates to control inflation would worsen the economy.

The coronavirus is disrupting production and supply chains which could raise input costs and eventually prices. As firms will likely run down inventories first, a lot depends on the duration of the virus. Brexit could have raised input costs through trade disruptions. That was why the some at the Bank of England(BOE) referred to a potential supply shock during the fraught moments in the years since the 2006 EU referendum.

Should the current economic situation worsen, many would expect the BOE to cut rates. And the Bank would consider it, as it is at present, if it thought there was a negative shock to demand by consumers and firms. By cutting rates, it would support demand but also boost prices and potentially contribute to inflationary pressures at a time when the shocks to supply chains is already leading to expected shortages and potentially higher prices.

It is not straightforward to determine the nature of a shock. Supply and demand effects are likely both present and are intertwined. For instance, the coronavirus has had not only a negative impact on supply side of the economy, but it clearly also affects demand. Consumers in Asia and latterly parts of Europe have been affected as travel has been curtailed. In badly affected cities, there are restrictions to control the spread of the coronavirus. So, a supply shock also negatively affects demand.

The BOE has often “looked through” imported inflation. It wouldn’t be sensible to change interest rates to address fluctuations generated by volatile global conditions. But if the coronavirus ends up causing significant real supply chain disruptions as a supply shock, then we could be in for a period of inflation paired with anaemia growth. Such a supply shock would pose a challenge for monetary policy.

But, a central bank could ease credit conditions as well as lower the cost of borrowing. That would help firms with cashflow problems which could result from supply chain disruptions and also lower customer demand. That is unlikely to generate much inflation but could help millions of particularly small businesses weather such an unexpected shock.

But that might not be enough to prevent a stagnant economy from tipping into recession. It leads to the role that fiscal policy could play.

In a similar vein, supportive tax measures, such as on business rates or VAT, could help businesses get through a period of disruption on both the supply and demand sides. Such measures would help. But if the coronavirus lasts a significant period of time or is seasonal, then there could be severe or recurring business impact during the course of 2020.

Calibrating the amount of fiscal stimulus needed to avoid recession is always challenging, but more so under these uncertain conditions.

It is also well understood that fiscal policy requires more discretionary policy choices and can take some time to implement. That puts more pressure on the Chancellor to get it right next week. Discovering that not enough was done would mean another round of fiscal measures at a later point, which might be too late to head off a downturn.

The Chancellor does have a second Budget planned in the autumn so there is a checkpoint for more fiscal policy. Still, with the UK economy stagnant in the last three months of 2019 and a weakened global economy in the first quarter of 2020, Britain faces a challenging few upcoming months.

Getting fiscal and monetary policy calls right may well make the difference between a recession or not.

By Professor Linda Yueh, Visiting Professor at LSE IDEAS

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British grocery sales soar 15% on lockdown boost

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British grocery sales soar 15% on lockdown boost 1

LONDON (Reuters) – British grocery sales soared 15.1% year-on-year in the four weeks to Feb. 21, the fastest growth since June 2020, as the latest national lockdown curtailed spending in cafes, restaurants and bars, market researcher Kantar said on Tuesday.

England entered a third national lockdown on Jan. 4 to contain a surge in COVID-19 cases that threatened to overwhelm the health system. Rules in England mean schools are closed to most pupils, people should work from home if possible, and all hospitality and nonessential shops are closed. Scotland, Wales and Northern Ireland imposed similar measures.

Last week, Prime Minister Boris Johnson announced a road map out of lockdown in which outdoor-only service in restaurants and bars will not return until April 12 at the earliest.

The pandemic has been changing the way Britons shop for a full year. Overall, shoppers have spent 15.2 billion pounds ($21.2 billion) more on groceries during the crisis, said Kantar.

“We’ve eaten an extra 7 billion meals at home since spring 2020. Office tea rounds meanwhile were replaced by brews in our own kitchens and we drank an additional 2 billion cups of tea in the house this year,” said Fraser McKevitt, Kantar’s head of retail and consumer insight.

Online grocery sales reached a new record share in the four weeks to Feb. 21, accounting for 15.4% of sales, up from 8.7% last year. Kantar said Morrisons, Britain’s fourth-biggest grocer, was again the best performer of the major groups with sales up 13.9% year-on-year over the 12 weeks to Feb. 21.

Market leader Tesco’s sales rose 13.2% and it gained market share for the first time since 2016.

Sales at No. 2 Sainsbury and No. 3 Asda rose 12.1% and 10.3%, respectively. Kantar said grocery inflation was 1.2% over the 12 weeks. It said prices are rising fastest in markets such as colas and chilled fruit juices, while falling in vegetables, bacon and beef.

(Reporting by James Davey in London; Editing by Matthew Lewis)

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German retail sales tumble in January as lockdown bites

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German retail sales tumble in January as lockdown bites 2

BERLIN (Reuters) – German retail sales tumbled more than expected in January as the COVID-19 lockdown and the withdrawal of a temporary cut in sales tax hit consumer spending in Europe’s largest economy, data showed on Tuesday.

The Federal Statistics Office said retail sales fell 4.5% on the month in real terms after an upwardly revised decline of 9.1% in December. The January reading undershot a Reuters forecast for a decline of 0.3%.

“This decline can be explained by the ongoing coronavirus lockdown, which meant a closure of many retail stores since Dec. 16, 2020,” the statistics office said.

The end of a temporary sales tax cut may also have contributed as many consumers made big ticket purchases before the end of 2020 to save money.

Fashion retail sales plunged 76.6% year-on-year, while sales of groceries were up 4.3% year-on-year as supermarkets and convenience stores remained open.

Online retailers continued to benefit from shifting consumer habits with sales up 31.7%.

Chancellor Angela Merkel and state premiers closed most shops and services in mid-December after a partial lockdown for bars, restaurants and entertainment venues failed to push down infections.

Merkel and state premiers are due to meet again on Wednesday to discuss a gradual easing of lockdown measures that are currently in place until at least March 7.

(Reporting by Caroline Copley; Editing by Riham Alkousaa and Andrew Heavens)

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The cost of Brexit to an eCommerce business: How can the effects be minimised?

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The cost of Brexit to an eCommerce business: How can the effects be minimised? 3

After four years of uncertainty for businesses, the UK has finally left the EU, bringing many changes to rules and legislations into force. Almost every individualomponent of ecommerce businesses will be affected, with everything from shipping costs to trading fees subject to changes.

Despite a long warning period, Government data[1] has revealed that almost two thirds (61%) of businesses had made no preparations to leave the EU by June 2020, and whilst the Covid-19 pandemic had certainly added further economic stress onto businesses during this time, the delaying of preparations has made the process even more difficult. Here, warehousing and logistics platform Trident Worldwide discuss the effects of Brexit on ecommerce businesses and how they can be minimised.

Consider your ecommerce business’ shipping and sourcing locations

For online businesses that are trading outside of the UK, Brexit will now change every element within the business and will determine the complexity of each step of trading, from sourcing materials to postage.

It is vital to consider the location of where materials are being sourced, manufactured, stored, and even where customer bases are situated to keep additional costs at a minimum. For new customs regulations, all ecommerce businesses with need to apply for a UK and EU EORI number to be able to sell into the UK. Only a few weeks into the new legislations and the effects of this change are already showing, and with the UK currently positioned as the world’s third largest online retail market and the top market in Europe[2], this issue is only going to be magnified further.

The cost of Brexit to an eCommerce business: How can the effects be minimised? 4

Leila Aaboud from international law firm Berkeley Rowe explains how ecommerce businesses can overcome changes due to Brexit: “After years of positive growth, it is unfortunate that European e-commerce businesses are facing numerous challenges at the start of 2021 such as delivery speed and technical issues due to Brexit. Businesses actively involved in the international supply chain should now consider applying for an Authorised Economic Operator (AEO) certification to counter the trade delays inflicted by Brexit. Entering the AEO scheme is highly beneficial to businesses in that it will enable them to trade efficiently through simplified customs procedures and fast-tracked shipments. “Additionally, businesses with an AEO certification will gain a ‘trusted trader’ status which is an increasing demand amongst international clients.

“In line with government guidelines and to avoid increased costs and delays when trading across international borders, businesses need to apply for an Economic Operators Registration and Identification (EORI) number. Previously, EORI numbers were only required when exporting goods to non-EU countries however, since January 1st, businesses exporting goods from Great Britain to the EU will need an EORI number starting with ‘GB’. This number is used to uniquely identify the exporter in customs procedures and documentation.

“To avoid any potential losses, e-commerce businesses should prioritise being cost-effective throughout Brexit and should continue lining up their costs during the introduction of new Brexit tariffs.”

Understand new tax regulations and their effects

For goods shipped into the U.K., several changes have taken place that affect VAT, liability, and tax obligations to name just a few key components. To stay profitable, it is key for online retailers to pick the countries that they choose to work with carefully and consider each additional cost throughout the logistics process.

Arjun Thaker, CEO at Trident Worldwide says, “The Brexit deal agreed on Christmas Eve explains that under the new terms, anyone sending parcels from the EU to the UK needs to fill in forms including proof of origin and the reason for sending the package. Retailers selling to the UK are also now required to pay customs duties and fill out declaration forms, as well as register for VAT in the UK.”

Review your supply chain

The three main issues for ecommerce businesses caused by Brexit are delivery times, new tariffs on goods and the drop in value of the pound sterling, all of which affect the supply chain cost and efficiency.

Review your business logistics and supply chain and consider more efficient ways of sourcing and shipping goods that may minimise delays and import duties on goods coming from the EU. If possible, consider bulk-sourcing goods locally; this may cost more initially, but you may save money on importation tax in the long run, making the logistics of your business more seamless.

The cost of Brexit to an eCommerce business: How can the effects be minimised? 5

Arjun Thaker, CEO at Trident Worldwide, said: “Considering the logistics of your business throughout Brexit can be confusing for many businesses as new rules and regulations come into play. It is key for ecommerce retailers to plan, manage and market with effective end-to-end logistics handled professionally to help make the transition easier.”

Be cost-effective

A July 2020 survey conducted by delivery management company Whistl[3] outlined that consumers in Europe feel strongly that Brexit will lead to less choice of UK goods to purchase online. However, UK respondents were more evenly split, with 23% believing that there will be more choice post-Brexit, with an equal 23% believing there would be less. This clearly highlights the uncertainty surrounding ecommerce retail across Europe in a post-Brexit world, yet some retailers are already altering prices to align with this newly acquired outlook.

Amazon UK[4] has taken the decision to add a 20% price increase to items sold by non-UK sellers, with overseas sellers now finding themselves in an increasingly difficult position in which they are unable to compete with domestic sellers. Sellers on Amazon UK are also seeing increased importing fee deposits, with a huge 60-day waiting period for refunds, effecting the trust between ecommerce businesses, and selling platforms.

Arjun at Trident Worldwide explains: According to government calculations published last summer, it was suggested the UK businesses would have to submit 215 more customs forms a year after Brexit, from EORI numbers for every order, to Rules of Origin and Customs Declaration, as the requirements for information are huge.

The present drama’s and delays are thought to be caused by extra paperwork and additional customs and border checks. We can already see the parcel carriers and logistics providers struggling and the retailers adding additional pricing for international deliveries, so far, several companies have been hit by the disruption almost three weeks into the new arrangements.

So, who is going to pay these additional costs? Ultimately, it is us the consumer who will have to pay the additional costs added to the price of delivery and the price of goods.”

The ecommerce industry has undoubtedly been changed, with many businesses having to adapt quickly to the new regulations brought into place. By remaining reactive and critical of each aspect of the business, online retailers are more likely to thrive and grow.

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