Economy
7 potential lingering effects of COVID-19 on the economy: Don Pittis – CBC.ca
For those of us who have kept a close eye on forecasts for the impact of COVID-19 on the global and Canadian economy, it is instructive to watch how much the outlook keeps changing.
Just over a month ago, many economists were anticipating the brunt of the disease would fall on Chinese commerce and that the global effect would be passed on due to a slowdown in that economy to5.3 per cent for all of 2020, as one bank forecaster told me at the time.
Now that China’s problems have swept the world, sending stock markets into turmoil, many early forecasts seem laughably optimistic. But even now, with rare exceptions, predictions for the economy range frommoderately gloomy to what may be wishful thinking.
The often-bleak David Rosenberg, who now runs his own independent research company, concedes U.S. Federal Reserve’s massive cash injection may avert an economic depression. For Rosenberg, that’s positively cheery.
The current index of economic policy uncertainty is like nothing we have ever seen before and we have to say that in a strong sense: not like 2008, not like 9/11, not like 1997/8 or 87. <a href=”https://twitter.com/SoberLook?ref_src=twsrc%5Etfw”>@SoberLook</a> <a href=”https://t.co/jI162Fm0hn”>pic.twitter.com/jI162Fm0hn</a>
—@adam_tooze
But uncertainty remains extraordinarily high and with such a range of views each of us must either pick among the forecasts or make up our own. With that in mind, here are a few considerations to help you think about what the future may hold.
1. Debt accumulation
While a new round ofemergency rate cuts, income support andmortgage deferment plans should help heavily indebted Canadians from hitting rock bottom, it is inevitable that many will go further into the hole. There are reports that credit card companies arealready worried as consumers are using plastic to replace lost income.
All that raises questions about whether, once the illness is past, consumers can resume their role as debt-fuelled motors of the North American economy. Meanwhile, governments are accumulating massive new debts of their own. Highly leveraged businesses also face strain.
2. Business survival and recovery
Overall, recessions hurt people, but some economic theory says that capitalism actually needs periodic downturns to refresh itself throughcreative destruction. Weak “zombie” businesses and sunset industries are finally killed off, clearing the way for healthier, younger or more efficient firms, making the whole economy stronger in the aftermath. But the adjustment process is far from instant and can be painful for displaced workers.
3 Employment
One of the recent bright spots in the economy has been low unemployment, but asharp rise in U.S. jobless claims made headlines last week, and this week’s upcoming U.S. job numbers will tell us more. Canada’s come on the Thursday before Easter.
4. Immigration
Travel restrictions have already stopped immigration and despite objections from refugee advocates, theborder has also closed to asylum seekers. Restrictions of weeks or months will lead to a backlog of immigration cases and as the economy works through its recovery governments, may face pressure to limit the total flow of immigrants.
5. Housing
6. Energy
One reason for real estate fears in Alberta is that few parts of the Canadian economy have been as battered by the COVID-19 crisis as the oil and gas sector, where the cost of a barrel of oil sands crude has fallen below price for the Barrel of Monkeys childrens’ game. Despite low gasoline prices partly caused by a global price war led by Saudi Arabia, sales have plummeted as people stay home. Storage capacity has reached its limits meaning that even with federal and provincial help producers are shutting down. For incurable optimists, one positive effect could be the redirection of investment toward diversification.
7. The bounce back
It seems almost certain that as low prices slow exploration and drive some producers out of business, oil prices will bounce back. Of course, the question is when. Spending on COVID-19 testing may yield surprising results as they did in places like Singapore. It is also almost certain that as soon as they are released, commerce-starved shut-ins who do have money to shop will rush out to spend it on goods and services. That one-time burst of spending could act in a similar way toKeynesian stimulation, kick-starting the economy and sending businesses that have survived to new heights. In post-war kind of mood, perhaps we will experience post-war solidarity and goodwill based on shared experience to help solve our economic problems. And while some doubt it, another lingering effect may be a baby boom from couples who were just looking for a way to keep busy.
Follow Don on Twitter @don_pittis
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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