Economy

Putin's war has destabilized the world economy and inflation may be just the start – CBC.ca

Published

2 years ago

March 17, 2022

As images from the conflict in Ukraine attest, war can completely change the rules of economics.

Suddenly people who only a month ago were worried about keeping their jobs and paying their mortgages are on the move, some to the Polish border to escape shattered homes, some to risk their lives in battle.

By definition it is the unexpected that perturbs the world economy and the markets that are one of its real-time barometers.

As Canadian inflation hits new highs and the world’s most powerful central bank makes its first attempt to restrain an explosion of rising prices, even a continent away, Russia’s invasion of Ukraine has triggered an unpredictable alteration in what we thought were the conventions of global economics.

Tragic human toll

“The human toll is tragic, the financial and economic implications for the global economy and the U.S. economy are highly uncertain,” is how Jerome Powell, chair of the U.S. Federal Reserve, began his address Wednesday as he announced the central bank would raise interest rates by one quarter of a percentage point.

That is the same increase announced by Tiff Macklem at the Bank of Canada two weeks ago. Of course Macklem’s small rate hike was too late to stop Wednesday’s rise in Canadian inflation which hit a 30-year high of 5.7 per cent.

As Powell said in his speech, most of the recent surge in inflation cannot be blamed on Russian President Vladimir Putin. The exception is gas price hikes caused by the war, which have already aggravated the latest Canadian rise.

But while its full effect has yet to show up in the statistics, Putin’s war is already pushing North American consumer prices higher than if the war had never happened.

Asked directly about the impact of sanctions on the U.S. dollar and its place as the default currency for world trade, Powell explicitly refused to address the question other than offering general support for sanctions and to say they were the remit of politicians. He said central bankers had only been technical advisors.

Watching for war’s ‘spillovers’

But Powell made it clear that the Russian invasion of Ukraine, and the world’s response, held both actual and potential implications for the U.S. economy and for its monetary policy.

“In addition to the effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy through trade and other channels,” said Powell.

There are increasing signs that the new European war has been the catalyst for a series of shifts in the global economy, of which even higher than expected inflation is only a single result.

A firefighter works in Kharkiv, Ukraine on Wednesday trying to keep flames from spreading. (Oleksandr Lapshyn/Reuters)

“The volatility in financial markets, particularly if sustained, could also affect credit conditions and affect the real economy,” said Powell.

The Federal Reserve chair said that while the central bank had to be aware of those potential challenges, his principle goal remained fighting domestic inflation with a stream of interest rate hikes over this year and next that is expected to take rates to 2.8 per cent by the end of 2023.

But with Europe facing its biggest war since the 1940s, there are plenty of unknowns.

“While we have pretty sophisticated economic models, none of them are going to give us the understanding of how prolonged or what the magnitude of the shock in Eastern Europe is going to be,” said Frances Donald, global chief economist and strategist at Manulife Investment Management.

Contracting economies

So far analysts at Reuters and Bloomberg say the economies of Ukraine and Russia will be the worst affected by the war, though any figures can only be estimates.

An International Monetary Fund report released Monday said the Ukraine economy would contract 10 per cent in 2022 which is more than 13 per cent below what it was expected to achieve had there been no invasion, although in a worst case the decline could be more like 35 per cent.

In the case of Russia, the impact of sanctions including the collapse of the ruble and the country’s stock market could lead to a GDP decline of about 9 per cent in 2022 according to Bloomberg Economics although other estimates range from a decline of 15 per cent to a drop of 7 per cent.

WATCH | Russian shells hit Kyiv apartment buildings:

New Russian bombardment hits Kyiv, striking 2 apartment blocks

22 hours ago

6:54

Shrapnel from an artillery shell slammed into a 12-storey apartment building in central Kyiv, obliterating the top floor, according to a statement and images released by the Kyiv emergencies agency. The neighbouring building was also damaged. 6:54

Exactly how that will affect the rest of the world is even less clear. Despite its enormous military and a population of nearly 150 million people, recent IMF figures indicate Russia’s pre-war economy was already smaller than that of Canada or South Korea.

Denmark has forecast a slowdown in GDP from 3.1 to 2.1 per cent that the central bank attributes to Putin’s war as fuel costs feed into inflation. German car companies have already been affected by the loss of steel from Ukraine.

So long as it is moderate, Powell indicated that a slowdown in the global economy would not necessarily be a bad thing as the U.S. faced an overheated job market where there are “1.7 job openings for every unemployed person,” he said.

With such a hot economy Powell told reporters that the central bank had no expectations of a recession. But as he said, that does not rule out further financial shocks.

Complicated linkages

A falling out with China could create a worse disruption but this week Chinese Foreign Minister Wang Yi is reported to have told his Spanish counterpart China was anxious to avoid further damage to the global economy.

The global economy is linked in complicated ways that may not be obvious at first. For example, a default on Russian bonds in 1998 resulted in a meltdown of Long Term Capital Management, an aggressive hedge fund that some say could have caused a collapse in U.S. markets if it had been forced to sell off its assets to cover losses.

At the time, the Federal Reserve under Alan Greenspan slashed interest rates to prop up markets in what then became an all-purpose contrivance for fixing problems, and which may have helped contribute to the low, low rates we have today.

Now, with interest rates already near zero and inflation soaring to near eight per cent, that is a tool Powell would have trouble using again.

Follow Don Pittis on Twitter @don_pittis

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

Published

2 days ago

September 10, 2024

Anne Joseph

VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

Published

3 days ago

September 10, 2024

Anne Joseph

NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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Economy

Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

Published

3 days ago

September 10, 2024

Anne Joseph

HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

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