Economy

As Ukraine war drags on, Europe's economy succumbs to crisis – Financial Post

Published

2 years ago

August 23, 2022

Harry Miller

Reuters

Balazs Koranyi

FRANKFURT — It was meant to be Europe’s stellar year.

A post-pandemic spending euphoria, supported by copious government spending was set to drive the economy and help fatigued households regain a sense of normality after two dreadful years.

But all that changed on Feb. 24 with Russia’s invasion of Ukraine. Normality is gone and crisis has become permanent.

A recession is now almost certain, inflation is nearing double digits and a winter with looming energy shortages is fast approaching.

Though bleak, this outlook is still likely to get worse before any significant improvement well into 2023.

“Crisis is the new normal,” says the Alexandre Bompard, the Chief Executive of retailer Carrefour. “What we have been used to in the last decades – low inflation, international trade – it’s over,” he told investors.

The change is dramatic. A year ago most forecasters predicted 2022 economic growth near 5%. Now a winter recession is becoming the base case.

Households and businesses are both suffering as the fallout of the war – high food and energy prices – is now exacerbated by a devastating drought and low river levels that constrain transport.

At 9%, inflation in the euro area is at levels not seen in a half a century and it is sapping purchasing power with spare cash used up on petrol, natural gas and staple food.

Retail sales are already plunging, months before the heating season starts and shoppers are scaling down their buys. In June, retail sales volumes were down nearly 4% from a year earlier, led by a 9% drop recorded in Germany.

Consumers turn to discount chains and give up high end products, switching to discount brands. They have also started to skip certain purchases.

“Life is becoming more expensive and consumers are reluctant to consume,” Robert Gentz, the co-CEO of German retailer Zalando, told reporters.

Businesses have so far coped well thanks to superb pricing power due to persistent supply constraints. But energy intensive sectors are already suffering.

Close to half of Europe’s aluminum and zinc smelting capacity is already offline while much of fertilizer production, which relies on natural gas, has been shut.

Tourism has been the rare bright spot with people looking to spend some of accumulated savings and enjoy their first care-free summer since 2019.

But even the travel sector is hamstrung by capacity and labor shortages as workers laid off during the pandemic were reluctant to return.

Key airports, such as Frankfurt and London Heathrow were forced to cap flights simply because they lacked the staff to process passengers. At Amsterdam’s Schiphol, waiting times could stretch to four or five hours this summer.

Airlines also could not cope. Germany’s Lufthansa had to publish an apology to customers for the chaos, admitting that it was unlikely to ease anytime soon.

RECESSION LOOMS

That pain is likely to intensify, especially if Russia cuts gas exports further.

“The gas shock today is much greater; it is almost double the shock that we had back in the 70s with oil,” Caroline Bain at Capital Economics said. “We’ve seen a 10 to 11 fold increase in the spot price of natural gas in Europe over the last two years.”

While the EU has unveiled plans to accelerate its transition to renewable energy and wean the bloc off Russian gas by 2027, making it more resilient in the long run, supply shortages are forcing it seek a 15% cut in gas consumption this year.

But energy independence comes at a cost.

For ordinary people it will mean colder homes and offices in the short run. Germany for instance wants public spaces heated only to 19 degrees Celsius this winter compared with around 22 degrees previously.

Further out, it will mean higher energy costs and thus inflation as the bloc must give up its biggest and cheapest energy supplies.

For businesses, it will mean lower production, which eats further into growth, particularly in industry.

Wholesale gas prices in Germany, the bloc’s biggest economy, are up five-fold in a year but consumers are protected by long term contracts, so the impact so far has been far smaller.

Still, they will have to pay a government mandated levy and once contracts roll over, prices will soar, suggesting the impact will just come with a delay, putting persistent upward pressure on inflation.

That is why many if not most economists see Germany and Italy, Europe’s no. 1 and no. 4 economies with heavy reliance on gas, entering a recession soon.

While a recession in the United States is also likely, its origin will be quite different.

SILVER LINING

Struggling with a red-hot labor market and rapid wage growth, the U.S. Federal Reserve has been raising interest rates quickly and has made clear it is willing to risk even a recession to tame price growth.

By contrast, the European Central Bank has only increased rates once, back to zero, and will move only cautiously, mindful that raising the borrowing cost of highly indebted euro zone nations, such as Italy, Spain and Greece could fuel worries about the their ability to keep paying their debts.

But Europe will go into a recession with some strengths.

Employment is record high and firms have struggled with growing labor scarcity for years.

This suggests that companies will be keen to hang onto workers, especially since they head for the downturn with relatively healthy margins.

This could then sustain purchasing power, pointing to a relatively shallow recession with only a modest uptick in what is now a record low jobless rate.

“We see continued acute shortages of labor, historically low unemployment and a high number of vacancies,” ECB board member Isabel Schnabel told Reuters earlier. “This probably implies that even if we enter a downturn, firms may be quite reluctant to shed workers on a broad scale.”

(Reporting by Balazs Koranyi Additional reporting by Silvia Aloisi and Christopher Steitz Editing by Tomasz Janowski)

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Economy

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

Published

5 days ago

November 8, 2024

Anne Joseph

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.

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Economy

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

Published

7 days ago

November 6, 2024

Anne Joseph

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.

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Economy

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

Published

1 week ago

November 6, 2024

Anne Joseph

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.

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