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What's Happening in the World Economy: The fight over oil is a new economic risk – Bloomberg

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Hello. Today we look at the OPEC impasse, how some Americans may lose benefits as trade assistance legislation ends and how millions of graduates hitting China’s labor market will keep a lid on inflation. 

Testing Times

The breakdown of talks to boost crude oil production among OPEC members and their allies has introduced a new wrinkle into what’s already a challenging environment for economic forecasters.

Without the prospect of a near-term pickup in supply, crude oil prices aren’t expected to retreat meaningfully from their recent seven-year highs. U.S. shale producers aren’t likely to help either, given their scars from over-investment that caused more than $300 billion of losses in the last decade.

“They’ve got their hands tied behind their back a bit – either by their bankers or by their investors, who are not interested in hell-for-leather growth. They’re interested in dividends and very considered levels of production growth,’’ says Fiona Boal, head of commodities at S&P Dow Jones Indices LLC.

For the U.S. economy, that means no investment bump but all the more pressure on consumer prices as the cost of gasoline and other crude derivatives reflect the supply concerns. 

Maeva Cousin and Ziad Daoud of Bloomberg Economics conclude that, for the U.S. and Europe, the hit to GDP “is small in the context of the very strong growth expected as they emerge from the Covid crisis.”

“The effect on inflation would be a lot more pronounced,” sending inflation higher in coming months before an eventual uptick in production in 2022 depresses price gains next year, the duo wrote Tuesday.

The Rise and Fall of Oil Price Pressures

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The biggest danger is if this latest bump up in costs — alongside escalating housing and food prices, along with those for homes — prompts households to conclude that we’re now in a new inflationary era, making it harder for central banks to hold off on withdrawing stimulus.

Recent economic history suggests little such risk. The U.S.-China trade war, during which American tariffs on Chinese imports soared to an average of over 19% from little more than 3%, had no noticeable lasting impact on U.S. inflation.

Monthly consumer price index readings averaged 1.8% during 2019, less than the 2.1% recorded in 2017, before the tariff hikes.

Goldman Sachs Group Inc. economists discounted inflationary fears in a July 5 note:

“The prices of food and gas are particularly salient for many households and do have an outsized impact on short-run inflation expectations. But crucially, unlike in the 1970s, in recent decades even extreme fluctuations in commodity prices have had only small effects on longer-term inflation expectations, and we expect this to remain the case through the current commodity boom.”

Chris Anstey

The Economic Scene

President Joe Biden’s pledge to refrain from pursuing new trade deals is leaving a key training and assistance program for workers without a clear path for renewal

Biden on July 1 officially lost Trade Promotion Authority — the fast-track deal-making ability Congress delegates to a president — after he didn’t ask for its renewal. TPA expiration coincided with the end of enhanced Trade Adjustment Assistance — a program renewed along with the fast-track authority six years ago.

TAA provides aid for Americans who lose their jobs or whose hours and wages are cut due to competition from imports. An estimated 48,000 workers, primarily in service industries, will lose eligibility for benefits over the next year, according to the Department of Labor.

Today’s Must Reads

  • Coming up | The record of the Federal Reserve’s last meeting, which surprised investors with a hawkish pivot, will be scrutinized today for any hints on when the central bank will pare back its stimulus. 
  • Europe upbeat | Officials markedly raised their outlook for the euro-area economy and said there’s a higher risk of inflation taking hold as loosening virus restrictions allow demand to snap back.
  • More help | Japanese Prime Minister Yoshihide Suga is likely to unveil another economic stimulus package worth at least $180 billion within the next few months, according to a Bloomberg survey. 
  • Desperate times | Vietnam is going to extraordinary lengths to protect its reputation as a vital cog in the tech supply chain, with workers sleeping on factory floors to curb virus disruptions.
  • Tax tussle | The U.S. is pressing Europe to reconsider plans for a new digital tax across the bloc in a dispute that threatens to undermine progress made toward a global corporate-tax agreement.
  • Peter Coy | It’s conventional wisdom that labor’s share of the U.S. national income has plummeted. But by carefully accounting for stock-based compensation, three economists have found that the decline is smaller than is commonly assumed.

Need-to-Know Research

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China’s long-term inflation outlook is getting some help from the surging number of graduates in the economy, according to HSBC Holdings. The country will have more than 50 million new university graduates over the next five years, boosting the size of its workforce with tertiary education by 23%, economists led by Qu Hongbin said in a report.

The estimates are based on official forecasts that top 9 million university graduates this year and 10 million in 2022. Since growth in salaries for new graduates has lagged productivity, the massive supply of skilled labor will keep wage inflation in check, the economists said. 

On #EconTwitter

What explains European bond yields…

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The fourth annual Bloomberg New Economy Forum will convene the world’s most influential leaders in Singapore on Nov. 16-19 to mobilize behind the effort to build a sustainable and inclusive global economy. Learn more here.

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    Economy

    Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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    OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

    Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

    Business, building and support services saw the largest gain in employment.

    Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

    Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

    Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

    Friday’s report also shed some light on the financial health of households.

    According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

    That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

    People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

    That compares with just under a quarter of those living in an owned home by a household member.

    Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

    That compares with about three in 10 more established immigrants and one in four of people born in Canada.

    This report by The Canadian Press was first published Nov. 8, 2024.

    The Canadian Press. All rights reserved.

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    Economy

    Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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    The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

    The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

    CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

    This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

    While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

    Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

    The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

    This report by The Canadian Press was first published Nov. 7, 2024.

    Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

    The Canadian Press. All rights reserved.

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    Economy

    Trump’s victory sparks concerns over ripple effect on Canadian economy

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    As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

    Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

    A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

    More than 77 per cent of Canadian exports go to the U.S.

    Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

    “It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

    “It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

    American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

    It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

    “A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

    “It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

    A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

    Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

    “Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

    Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

    With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

    “With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

    “By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

    This report by The Canadian Press was first published Nov. 6, 2024.

    The Canadian Press. All rights reserved.

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