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A flood of corporate debt could make the economic recovery more difficult – CNN



That added debt could make an economic recovery much more difficult. Companies will have to pay down those borrowings, forcing them to scale back planned investments, defer capital spending projects or postpone bringing back employees they let go during the crisis.
“If a company is borrowing just to survive through the pandemic, that borrowing could in the future impact their ability to invest in other things,” said Will Caiger-Smith, associate editor of research firm Debtwire. “It’ll be a headwind to the recovery. They won’t just answer to their shareholders or employees, they’ll have to answer to their lenders.”
The value of investment-grade corporate bonds issued in 2020 so far by companies outside the financial sector is $425 billion, according to data from Refinitiv. That’s nearly twice what was issued a year ago at this time. More than $300 billion of that came in March and the first three weeks of April alone — the two biggest months for corporate bond issues on record.
That increase in corporate debt is “very broad based,” said Matt Toole, the deals intelligence director at Refinitiv. “At the point where your industry is shut and [has] no date to come back, [they’re working to] insure that they are keeping adequate levels of cash.”
The amount of non-investment-grade debt, or junk bonds, has not grown as fast, as investors shied away from riskier debt early in the crisis.
“The high-yield market was essentially shut for about three weeks in a row in March,” said Toole. But now that debt is growing again, adding more than $91 billion in that riskier debt to balance sheets.
Companies have also turned to lines of credits they had arranged before the crisis, sometimes years ago. They have drawn down most, or in many cases all, of the cash available to them. More than 50 companies have accessed at least $1 billion from their credit lines in the last two months, according to Refinitiv.
Since March 11, companies have drawn down more than $220 billion in cash on existing credit lines, Debtwire estimates. About $52 billion of those draws were by Boeing (BA), General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) alone.
Companies such as those, along with airlines, restaurants, retailers and hotel chains, are trying to make up for the steep plunges in their sales. Exxon Mobil (XOM), hurt by the nosedive in oil demand and prices, has sold $18 billion in bonds.
General Electric (GE) and Disney (DIS), two other companies badly hurt by the virus-inspired shutdowns, each sold nearly $6 billion in bonds.

Healthy companies are adding debt, too

Some companies that are not suffering are also adding debt. Netflix (NFLX), which is growing its revenue and subscriber base as people are locked at home, announced Wednesday that it was adding $1 billion in debt to finance more shows and movies.
“The reason some of them are going to market [with debt offerings], the reason they’re drawing down cash is to be safe,” said Kenneth Emery, senior vice president at credit rating agency Moody’s.
Some of those firms are issuing new debt because rates are extremely low for companies with good credit. The largest debt issue was by Oracle (ORCL), the software company that gets most of its revenue from cloud services and reported improved results before the crisis began. It sold $20 billion in bonds, sying it said it will use those proceeds for “general corporate purposes, which may include stock repurchases, payment of cash dividends on its common stock, repayment of indebtedness and future acquisitions.”
Corporate bonds stood at a record $9.6 trillion heading into 2020, according to the Securities Industry and Financial Markets Association. That’s a 20% increase in just the last five years.
“There was concern about the level of corporate debt even before this,” said Toole.
Why Corporate America's mountain of debt matters
Last May, Federal Reserve Chairman Jerome Powell gave a prophetic speech in which he warned about the risk posed by the rising amount of corporate debt, especially what would happen in the next economic downturn.
“Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect. If a downturn were to arrive unexpectedly, some firms would face challenges,” he said at the time. “A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments.”

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BoC eyeing supply, consumer demand for July economic outlook, deputy says –



OTTAWA — A senior official at the Bank of Canada says the central bank will be paying close attention to what the post-pandemic economy can supply and what consumers demand.

Deputy governor Toni Gravelle said Thursday it’s possible that supply could recover faster than demand if businesses reopen quickly while consumers remain cautious.

In a speech by video conference to the Greater Sudbury Chamber of Commerce, he said it will be key for the bank’s governing council to understand how the pandemic has affected demand, employment and the economy’s capacity to produce goods and services by its next interest rate decision in mid-July.

At that time, the bank will also release an updated economic outlook.

The Bank of Canada held its key policy rate at 0.25 per cent on Wednesday, but said the economy appears to have avoided a worst-case scenario due to the COVID-19 pandemic.

Gravelle made clear that’s as low as the bank believes the rate can go before it causes problems in markets, a nod toward talk about negative interest rates to spur spending.

The bank also reduced some of its market operations after it “cranked up the volume to 11” to allow the banking system to tap directly into much-needed funding liquidity, Gravelle said.

“Despite the positive signs, though, many risks and uncertainties remain,” Gravelle said, according to a text of his speech released by the bank.

“A lot will depend on whether we as a country are successful in managing the risk of possible future waves of COVID-19, and the pace at which containment measures are lifted. This applies to the global economy as well as Canada’s.”

He said the bank will pay close attention to how the pandemic is affecting growth and demand in key markets for Canadian exports.

Statistics Canada said the domestic economy shrank by 2.1 per cent in the first three months of the year. The Bank of Canada now expects output to drop a further 10 to 20 per cent in the second quarter, which is below its April expectations of a 15 to 30 per cent drop.

As bad as that sounds, Gravelle said, it would be closer to the best-case scenario the bank envisioned in April.

Gravelle pointed in his speech to silver linings in otherwise gloomy economic data.

Statistics Canada jobs figures showed that three million workers became unemployed over March and April as the pandemic took hold, but 43 per cent said they expected to return to their jobs once the pandemic passes. Gravelle said that figure was 15 per cent during the global financial crisis over a decade ago.

“These are all sort of subtle indications,” he said during a media teleconference following the speech.

“It was just more of a hopeful sign that the attachment rate of these employees will be stronger in this crisis or this environment than it was in 2008-2009.”

Inflation has dropped close to zero, driven mainly by plunging gasoline prices, and Gravelle said inflation will remain below the bank’s two per cent target in the near-term due to temporary factors.

Despite the positive tone of the speech, it’s clear no one at the central bank is breathing a sigh of relief just yet, said TD senior economist Brian DePratto.

“The multiple references to its ability to provide further stimulus, and the reiterated goal of keeping asset purchases running until the bank is certain the economic recovery is well underway make it clear that the foot will be firmly on the accelerator for some time to come,” he wrote in a note.

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How does Canada save its economy? | The Star – Toronto Star



Canada’s economic numbers are staggering, for all the wrong reasons. In the span of two months, more than three million Canadians have lost their jobs and another 2.5 million have had their work hours reduced. Unemployment has soared to 13 per cent as businesses and corporations have taken on mass layoffs.

A record number of Canadians are turning to government aid to keep their families and businesses afloat. Meanwhile, the GDP is shrinking at a record rate, at levels unseen in more than a decade. Many economists say a plunge of this severity is comparable to the Great Depression of the 1930s. In short: Canada, along with many parts of the world, have seen its economies devastated during the pandemic.

But where is the bottom? Have we seen the worst of it or is there more bad news to come?

Jim Stanford, economist and director of the Centre for Future Work, talks to Adrian Cheung about the big picture of Canada’s economy, why re-opening too quickly could lead to further disaster and ideas on how we can begin recovering financially from this mess.

Listen here or subscribe at Apple Podcasts, Spotify, Google Podcasts or wherever you listen to your favourite podcasts.

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The U.S. economic slide is likely bottoming out, but a recovery could take years – The Washington Post



On Thursday, the latest sign that the economic decline may be bottoming out came as the government reported that 1.9 million Americans had applied for unemployment insurance during the last week of May — a painfully high number but the lowest since the novel coronavirus started spreading widely in the country in March.

The jobs data follows modest signs that the economy may be inching toward the beginnings of a recovery as the nation reopens. Mortgage applications have surged in recent weeks amid record-low interest rates. Consumption of oil and petroleum products is up. The number of travelers at airports, as measured by the Transportation Security Administration’s precheck numbers, has begun increasing in recent weeks. Even restaurant reservations have inched up.

“This covid recession will go down as the shortest and arguably the most severe in history,” said Mark Zandi, chief economist at Moody’s Analytics.

Zandi said the recession caused by the pandemic is likely to be over, almost as abruptly as it started. He points out that private payrolls declined by 2.76 million people in May, according to a report released Wednesday by payroll processor ADP. That was far below analysts’ estimates.

Yet, even when economists declared the Great Recession officially over in June 2009, the unemployment rate did not return to prerecession levels until 2017, a reminder that the economic pain can linger for years. Similarly, experts predict that this recovery will take years.

Cheered on by President Trump, some states have lifted some of their most severe restrictions in recent weeks, more businesses have reopened — at least partially — and brought back workers. But there is still no sense of when commerce will resume at the scale seen late last year. Until there’s a widely available vaccine against the novel coronavirus, the economy is likely to continue struggling at a low rate. And public health officials continue to warn of a second wave of infections in the fall or winter, which could bring on another round of shutdowns.

For now, the U.S. economy is in limbo, with many companies operating at half capacity and a big question mark about how long firms can survive that way. Idled workers aren’t sure when they will be called back, so they are hoarding cash. State and local budgets have been decimated, which is likely to trigger more layoffs later this year.

“These are extremely ugly numbers, but because there were so many forecasts talking about a total collapse of the economy, the numbers we’re seeing, while extremely bad, aren’t the worst-case scenario,” said Lindsey Piegza, chief economist at Stifel Fixed Income. “It’s not as bad as it could have been. It’s an odd silver lining.”

The dueling stories about this economy — it is improving yet remains greatly depressed — are likely to play out all the way through the presidential election. Trump is seizing on any data showing a rebound and is taking credit for the bounce-back in the stock market, where the S&P 500 index just experienced its best 50-day rally since 1952.

“By the time of [the] election, I believe the economy will be doing phenomenal numbers. Big job increase, big GDP increases, and that’ll be before the election,” Trump said Wednesday on Fox News Radio’s “The Brian Kilmeade Show.”

“The stock market is booming,” he said.

But presumptive presidential nominee Joe Biden and other Democrats have been quick to point out that millions of Americans remain out of work and that the job losses aren’t as bad in other countries, raising questions about the U.S. government’s response to the pandemic. Biden predicts a slow recovery.

“Economic growth is likely to be back in positive territory by the third quarter,” Stifel’s Piegza said, but “what we’re really talking about is going from extremely terrible to slightly less terrible.”

Official government growth data looks at how much the economy changes from quarter to quarter. Since the April-to-June period is likely to be one of the worst in U.S. history, the third quarter, even if sluggish, will look like a big surge, giving Trump a talking point just before the election.

What matters to many Americans is the job situation. When Americans feel it is easy to get work, they tend to give the economy more-positive ratings and spend more. When people fear they will lose their jobs, have to take pay cuts or have trouble finding new work, they tend to save more. In April, the U.S. savings rate hit a record high of 33 percent, a sign of how scared people are.

“The savings buildup over the past two months can hardly be considered firepower for future consumption,” Bob Schwartz, senior economist at Oxford Economics, said in a recent note. “The stimulus checks were a one-time payment that has already run its course.”

The CBO also said that the pandemic will shrink the size of the U.S. economy by nearly $8 trillion in the next decade, assuming there are no more coronavirus waves that trigger crippling shutdowns in coming months.

More than 40 million people have applied for unemployment benefits during the pandemic, and roughly 30 million are receiving them, previously unimaginable figures that wiped out a job market in which unemployment was at historic lows as recently as February.

“Whatever optimism there is from seeing some people return to work, we’re not seeing a drastic move off unemployment,” said Jay Shambaugh, a senior fellow at the Brookings Institution. “If anything, we’re seeing a stable number of people on unemployment. Last year it was around 1.5 million.”

Still, signs that the economy is no longer plunging are an encouraging start, forecasters said.

New data from the Census Bureau’s weekly Small Business pulse survey shows businesses are starting to get back on their feet. In the week ending May 30, about 3 in 5 small businesses reported revenue of above $15,000. That’s a massive reversal from a month earlier, when 60 percent of businesses reported little or no revenue.

Other signs of a turning point are that only a quarter of businesses closed locations in the past week, down substantially from a month earlier, and businesses are reporting fewer supply-chain problems and missed loan payments.

Flights are also picking up. American Airlines announced Thursday an expansion next month as travel demand picks up again. For July, the airline expects to fly 55 percent of last year’s domestic trips, up from a mere 20 percent in May.

Americans are also beginning to eat out again. Restaurant reservations on the online platform OpenTable showed that more than 30 percent of its participating restaurants had begun taking bookings as of June 3, vs. zero throughout most of April.

The Federal Reserve has scaled back its purchases of government bonds, a vote of confidence that the worst probably is over.

Yet, the manufacturing sector is a telling example of just how modest any rebound is.

The industry experienced its worst contraction in April since the Great Recession. The Purchasing Managers’ Index slumped to 41.5 in April, signaling a deep contraction. In May, the index rose to 43.1, an improvement but far below the 50-mark that is considered healthy and expansionary.

Such contradictions are also apparent in the job-market data, economists say. New jobless claims are trending lower, but even with so much of the economy reopening, nearly 2 million people filed new applications for unemployment aid.

“It’s a sign that things are not getting as worse as they were before,” said Nick Bunker, economic research director at Indeed Hiring Lab. “We have seen a reduction in the pace of people becoming jobless. So that’s positive. But we’re still seeing claims at astronomical levels than what we saw before this crisis.”

Job postings tell a similar story. The number of jobs posted on Indeed’s site in May was 5 percent higher than in April. But those numbers were still 34 percent lower at the end of May than at the same date in 2019 — a staggering drop.

“It is, at most, an extremely partial rebound,” Bunker said. “Postings are still growing at a rate far slower than we saw last year. I think it’s worthwhile celebrating that the pace of things getting worse has slowed down. But that means we haven’t hit a bottom yet. There are still a fair amount of folks losing their jobs and folks not hiring yet.”

Andrew Van Dam contributed to this report.

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