Economy
JPMorgan says the U.S. is probably headed for a recession as economic ‘engines are about to turn off’
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A series of banking crises this month headlined by the failure of Silicon Valley Bank has forced analysts from multiple banks, including JPMorgan Chase, to rewrite their recession forecasts from scratch, as months of small victories against inflation and a relatively strong economy were potentially swept away in under two weeks.
Even if the government and the private sector are able to successfully contain contagion from the bank collapses spreading through the economy, the failures may still lead to lasting damage for the U.S. financial system. Some banks are teetering on the edge in Europe and the U.S., while jittery markets and the promise of stricter regulation could lead to a credit crunch—a steep decline in banks’ willingness to lend caused by a lack of funds.
It adds up to an impossible choice the Federal Reserve has to make when officials meet on Wednesday: Slow down the pace of interest rate hikes or plow ahead to bring down resurgent inflation and risk amplifying damage to the economy. But as far as the Fed is concerned, hopes of engineering a soft landing for the economy and avoiding a recession may already be in the rearview mirror.
“The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return,” JPMorgan strategists led by Marko Kolanovic, the bank’s chief global markets strategist, wrote in a note to clients Monday. “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”
It is still unclear how far contagion from SVB will spread. New York–based Signature Bank failed days after SVB, requiring sweeping government measures to restore confidence that account holders in both banks would be made whole, but other small-sized and regional banks remain in precarious positions. San Francisco–based First Republic remains at high risk, although larger U.S. banks banded together last week to provide a $30 billion deposit to prop up its finances. Treasury Secretary Janet Yellen also pledged Tuesday that the government was prepared to step in again if issues at other banks “pose the risk of contagion.” But even if depositors are safeguarded, the damage may have already been done.
“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” JPMorgan wrote.
The analysts referred to current challenges as a possible “Minsky moment,” named after the American economist Hyman Minsky, who famously predicted that extended bull markets naturally end in epic and monumental collapses. A Minsky moment happens when the inevitable check comes due and the house of cards finally falls down. JPMorgan analysts wrote our Minsky moment is nearing as the past few weeks alone have seen a number of economic and geopolitical threats to the world, including banking crises on both sides of the Atlantic, China striking a new diplomatic deal with Saudi Arabia and Iran, and Chinese President Xi Jinping’s high-profile trip to Moscow and visit with sanctioned Russian counterpart Vladimir Putin, who was recently issued an international arrest warrant for war crimes committed in Ukraine.
Investors and historians have warned for years that an extended bull market in the U.S. since 2009 would inevitably lead to an economic overcorrection: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” investor and market historian Jeremy Grantham wrote in 2021. More recently, Grantham has been warning of an all-consuming “everything bubble,” which he called “pretty damn big” during an interview this month with economist David Rosenberg.
“‘There are decades where nothing happens; and there are weeks where decades happen,’” JPMorgan analysts wrote, citing a famous Vladimir Lenin quote.
JPMorgan isn’t the only major bank to have downgraded its economic forecasts in recent weeks; Goldman Sachs also told clients last week the banking crisis could deliver a severe blow to U.S. economic growth. And former Treasury Secretary Larry Summers has warned multiple times in recent months even before the banking crisis that the economy could be headed for a “Wile E. Coyote moment,” having already run off a cliff edge but still blissfully unaware of the sudden crash about to happen.
The longest bull market in U.S. history that began in 2009 only ended in 2020 because of the COVID-19 pandemic. The short-lived 2020 recession was quickly replaced by another ferocious bull market in 2021, but after a year of slowing growth, the long-awaited Minsky or Wile E. Coyote moment may have finally arrived.
OTTAWA –
Serious money is heading for Canadian industries looking to reduce emissions after the federal government unveiled its answer to the U.S. Inflation Reduction Act.
The spending commitments announced in Tuesday’s federal budget include tax credits for investments in clean electricity, clean-tech manufacturing, and hydrogen that together are expected to cost some $55 billion through to the 2034-35 fiscal year.
Total tax incentives amount to almost $83 billion over that timeframe when the carbon capture and storage and clean-tech investments credits announced last year are factored in, both of which saw minor boosts this round.
The government says the funding is necessary to boost clean economy spending from some $15 billion a year to the $100 billion a year needed. The spending is also needed to not fall behind as other countries roll out subsidies, most notably with the US$369 billion contained in the landmark U.S. legislation passed last year.
“In what is the most significant economic transformation since the Industrial Revolution, our friends and partners around the world, chief among them the United States, are investing heavily to build clean economies,” said Deputy Prime Minister Chrystia Freeland as she introduced the budget.
Tax credits are the backbone of the effort because they are stable and efficient way to roll out government support, while leaving decision-making with the expertise of the private sector, said a senior government official in the budget lockup.
Clean electricity is the biggest focus of the credits, costing $6.3 billion over the first four years starting in 2024, and $25.7 billion through to the 2034-35 year. Notably, provincial utilities and Indigenous-owned corporations will be eligible for the credits.
The spending is meant to help spur both more generation, as well as a better-connected east-west grid to meet the expected doubling of electricity demand by 2050.
The clean electricity package is where the government has likely done enough to meet its goals, said Michael Bernstein, executive director of Clean Prosperity.
Other funding areas however, including the $11.1 billion in credits for manufacturing and $12.4 billion for carbon capture through to 2034, likely aren’t enough to close the gap with what the U.S. is offering, he said.
“It really is one of those situations where your competitor has stepped up and said we are going to be providing an almost unthinkable amount of money.”
Canada has opted for construction-focused project support, while the U.S. IRA covers operational costs with payments based on production volumes. It’s like Canada is offering a single large cup of soda, whereas the U.S. is offering endless kiddy-cup sized refills, meaning Canada needs to offer a pretty big cup to compete, said Bernstein.
Since it’s not covering operations, Canada needs to move quickly on offering the carbon pricing backstop that it’s promised to develop in the budget, he said.
The so-called contracts for difference would provide certainty to industry on future carbon pricing and credits, but so far they’re still in consultation, as are several other key policies.
“What surprised me was how many things are still left to be determined,” said Rachel Samson, vice-president of research at the Institute for Research on Public Policy.
Along with the contacts for difference, she noted that details are scarce about how the $15 billion Canada Growth Fund will be spent.
The government announced in the budget that the fund will be administered independently by the Public Sector Pension Investment Board, with money starting to flow in the first half of the year, but didn’t provide guidance on priority areas.
Samson said it was good the government isn’t trying to direct the money itself, but worried that pension fund managers are too cautious to put the money in the bold projects needed.
“We need projects that are more on the cutting-edge, that are riskier.”
The government also pushed down the road any commitments on biofuels such as sustainable jet fuels, which surprised Samson as Canada is currently exporting the raw wood pellet feedstock and knows companies have projects ready to go.
The budget was also notable for what wasn’t in it for the oil and gas industry. While it did tweak last year’s carbon capture incentives, it didn’t go as far as some were pushing for, while the emissions cut-off for hydrogen production will likely exclude most carbon-capture based hydrogen projects.
“Oil and gas did not get a lot of what I think it wanted in this,” said Samson.
The lack of funding comes as climate advocacy groups have pushed against support for both programs as wasteful projects that don’t achieve the emission cuts needed in the near term, while also pushing against support for an industry that has reported record profits.
The government has also framed the budget as one of fiscal restraint that it hopes will allow private capital to do much of the heavy lifting to keep Canada in the running.
“Canada must either meet this historic moment, this remarkable opportunity before us, or we will be left behind as the world’s democracies build the clean economy of the 21st century,” said Freeland.
This report by The Canadian Press was first published March 28, 2023.
Justin Trudeau’s basic argument is that Canada and the world face both historic challenges and unique opportunities — and the Liberals are better suited than the Conservatives to overcoming those challenges and seizing those opportunities.
Mind you, the two parties don’t entirely agree on which issues are most deserving of attention right now. But there is no bigger challenge than climate change and the transition to a low-carbon future it requires. And Tuesday’s federal budget — described by the Canadian Climate Institute as “the most consequential budget in recent history for accelerating clean growth in Canada” — could be a pivotal piece of the Liberal response.
The actual consequences of this budget will take years to measure. But in response to political and economic pressure, Trudeau’s Liberals have at least significantly upped the ante.
“In our minds, there is probably no more pressing issue of economic policy than accelerating Canada’s transition to a low carbon economy,” a senior finance official told reporters during a briefing on Tuesday. “We cannot, as a country, afford to be left behind.”
Keeping up with the neighbours
The obvious impetus for all of this is the Inflation Reduction Act recently passed in the United States. Though it was couched in terms of affordability, the American legislation was actually a massive package of subsidies for clean energy and technology.
Comparisons with President Joe Biden’s signature legislation are somewhat unfair — the United States has to lean heavily on subsidies because there is no chance of Congress passing any kind of carbon-pricing policy. But the Trudeau government could not afford to ignore it.
“In what is the most significant economic transformation since the Industrial Revolution, our friends and partners around the world — chief among them the United States — are investing heavily to build clean economies and the net-zero industries of tomorrow,” Finance Minister Chrystia Freeland said Tuesday.
“Today, and in the years to come, Canada must either meet this historic moment — this remarkable opportunity before us — or we will be left behind as the world’s democracies build the clean economy of the 21st century.”
Freeland’s third budget as finance minister offers $16.4 billion in tax credits for clean tech manufacturing, clean electricity and hydrogen over the next five years, adding to the $6.7 billion in supports for clean tech investment announced last fall. Freeland also has agreed to add $500 million to the $4.1 billion in support announced last year for carbon capture, utilization and storage.
Beyond those subsidies, the government has committed billions toward a handful of potentially lucrative funds, including $15 billion for the Canada Growth Fund, $8 billion for a “net zero accelerator” and $20 billion through the Canada Infrastructure Bank.
WATCH: Provinces need to be at the table as Canada competes with U.S., Freeland says
“Message to provinces – you guys have a strong fiscal position right now,” said Finance Minister Chrystia Freeland. “When it comes to supporting investments in the clean economy, provinces are going to need to be at the table too.”
The Liberals also are moving to shore up the federal carbon price. Under a mechanism called “contracts for difference,” companies that receive funding through the Canada Growth Fund would be eligible for compensation if the industrial carbon price fails to rise as scheduled.
In other words, if some future government pauses or outright repeals the price, it would come at a direct cost to the government.
The “backbone” of the plan, the senior official said, is funding for clean electricity — billions of dollars that will go toward cleaning and expanding Canada’s grid.
“If there’s one single input that is essential to the transition to a low-carbon economy in Canada, it is the availability of low cost, clean electricity,” the official said.
Ideally, these actions would boost Canada’s economic growth. But they also give the Liberal government a positive and forward-looking economic narrative.
The clean economy ‘pyramid’
The enthusiastic technocrats in the Liberal government envision their approach as a four-level pyramid. Carbon pricing and regulation form the foundation. Atop that sit investment tax credits and “strategic finance,” with “targeted programming” at the apex.
Voters probably aren’t going to commit the graphic to memory but “it feels like a coherent package,” said Dale Beugin, executive vice president at the Canadian Climate Institute.
“To me, that’s the right way to think about this. Don’t try to do the [Inflation Reduction Act] from scratch because you don’t have to — you don’t have to spend all that money. [But] do some things. Make sure it’s as targeted as you can and aim that support at the places of comparative advantage, or where the market’s not going to [act].”
Some pieces of the pyramid may prove sturdier than others. Contracts for difference will have to be carefully designed, Beugin said. Tax credits always run the risk of “free ridership” — of rewarding actions that would have happened anyway. Electrification requires working with provinces and, as Beugin notes, “federalism is always a tricky game.”
The Climate Action Network also pointed out on Tuesday that one piece of the government’s promised climate agenda — eliminating subsidies for fossil fuel industries this year — was conspicuously missing from the budget.
But neither the Conservatives nor the New Democrats were eager to condemn the promised new spending for clean energy and technology. Conservative Leader Pierre Poilievre repeated his condemnation of the federal carbon price, cast aspersions on the notion of contracts for difference and repeated his belief that the Trudeau government is spending altogether too much money — but he did not single out any of the government’s clean economy measures for criticism.
WATCH: Poilievre says Conservatives reject the budget
Speaking ahead of the tabling of the federal budget, Pierre Poilievre urged the prime minister to cancel tax hikes and inflationary deficit spending.
Maybe that means Poilievre has found some climate policy he can support.
Both Poilievre and NDP Leader Jagmeet Singh did criticize the budget’s lack of emphasis on housing. Liberals might counter they are already taking action to make housing more affordable, but it’s not obvious that what they’re doing is enough. If that’s still the case when the next election comes, the Liberal government’s chances of retaining power might be severely diminished.
The same could be said of crime or inflation, or any of the other issues that can grind away at a government’s standing and leave more voters craving change.
The measures announced on Tuesday may be relatively unchallenged — and this budget may prove to be truly consequential in building the economy of Canada’s future. But if the Liberals want to see this plan to fruition, there are other challenges to overcome and opportunities to seize.
Ministry of Commerce says move will ease cost and time of legal and financial transactions by Pakistani entities and individuals.
Islamabad, Pakistan – The European Union has removed Pakistan from its “list of high-risk third countries”, a move that is expected to improve conditions for business activity.
In a statement announcing the news on Wednesday, Pakistan’s Ministry of Commerce said the listing of Pakistan in 2018 had resulted in creating a regulatory burden affecting Pakistani companies doing business with the 27-member bloc.
“The new development would add to the comfort level of the European economic operators and is likely to ease the cost and time of legal and financial transactions by Pakistani entities and individuals in EU,” the statement said.
Foreign Minister Bilawal Bhutto-Zardari said in a Twitter post that Pakistani businesses and individuals “would no longer be subjected to Enhanced Customer Due Diligence” by European legal and economic operators.
EU authorities have removed Pakistan from the List of High Risk Third Countries which have strategic deficiencies in their AML/CFT regime. Pakistani businesses & individuals would no longer be subjected to Enhanced Customer Due Diligence by European legal & economic operators.
— BilawalBhuttoZardari (@BBhuttoZardari) March 29, 2023
The high-risk third countries list includes nations that, according to the EU, do not have a robust enough regulatory and legal system to prevent financial crimes and “terrorism” financing that could pose significant threats to the financial system of the bloc.
When a country is added to the list, it is subjected to particularly enhanced scrutiny and additional measures that increase the cost of doing business.
The Pakistani entities that will no longer be subjected to enhanced EU scrutiny include credit and financial institutions, auditors, external accountants, tax advisers, notaries and independent legal professionals, among others.
Pakistan’s delegation in the EU called the removal from the list a “positive step”.
“In line with last year’s FATF decision, the EU has decided to remove Pakistan from its list of countries with high risk regarding money laundering & financing of terrorism,” it tweeted, referring to the decision by the global money laundering and financing watchdog, the Financial Action Task Force (FATF), to remove Pakistan from its list of countries under “increased monitoring” after four years.
Khaqan Najeeb, a former adviser to Ministry of Finance, hailed the EU decision as evidence of Pakistan’s success in removing “strategic deficiencies” that were highlighted under the FATF listing, which can severely restrict a country’s international borrowing capabilities.
“This announcement shows that the EU has accepted that weaknesses in the country’s legal and regulatory systems have been upgraded and Pakistan can now prevent financial crimes and terrorist financing,” he told Al Jazeera.
Inside the Very Tough Business of Trying to Disrupt Media – Vanity Fair
Federal budget 2023: Canada's clean economy tax credit plan – CTV News
Post Politics Now: Biden to press for democratic renewal in speech to global summit – The Washington Post
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