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



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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.

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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.

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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.

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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.


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

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“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.

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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.

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


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.

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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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JobsOhio and the long-term, innovative revitalization of a state's economy – McKinsey



October 6, 2022Ohio’s economy, like so many in the Midwest and elsewhere, was struggling after the Great Recession. With the evisceration of manufacturing jobs, it needed a major transformation.

In 2011, the state had a novel idea. Using profits from the beverage industry, Ohio formed a new entity—a first-of-its-kind, state-authorized non-profit—to stimulate economic growth through new industries: JobsOhio. Over the next decade, the state saw nearly one million jobs created or protected.

McKinsey was a key early partner, helping develop JobsOhio’s growth plan that identified ten sectors with opportunities for employment, such as aerospace and aviation, healthcare, logistics and distribution, technology, and financial services. Since 2001, Ohio had lost over 230,000 jobs in these sectors and ranked 47th out of all 50 states in growth. By 2017, it was 23rd and had added $30 billion in payroll.

The state’s job creation was its best ever, but JobsOhio wanted to ensure its strategy would be effective going forward. In 2018, the initiative asked McKinsey to issue a report evaluating its performance.

“JobsOhio was in a class by itself in terms of economic development organizations as far as dollars per job, attracting companies, capital investments, and more,” says Ben Safran, a partner at McKinsey who worked on the report. “But we also found it needed to address approaching headwinds in the broader macro economy.”

Brendan Buescher, a McKinsey senior partner based in Cleveland, says the findings encouraged JobsOhio to think locally.

“They were certainly performing well against comparable organizations,” says Brendan, “but we urged them to measure success against the needs of Ohioans.”

The report helped shape JobsOhio’s 2.0 strategy, which expanded its industry-focus to include a new emphasis on workforce, innovation, infrastructure and investment throughout the state. From this, JobsOhio developed Innovation Districts in Cleveland, Columbus, and Cincinnati; these multi-organization partnerships have created 60,000 jobs and established Ohio as a global leader in healthcare, life sciences, and technology in these three regions.

As the new strategy was getting off the ground, COVID-19 rocked the state’s economy. Partnering with McKinsey again, JobsOhio quickly created a strategy for the pandemic economy, leading to the launch of Ohio to Work. Designed for displaced workers, Ohio to Work offered skills assessments, career coaching, virtual career fairs, and connection with employers who had signed on to interview or hire workers from the program.

Specifically, McKinsey helped JobsOhio develop a unique program for reskilling and upskilling for higher-tech jobs: JobsOhio paid for tuition costs for technical degrees, and enrollees gradually repaid JobsOhio through a marginal percentage of their income—if they got a job that paid a good wage. Those repaid funds are not kept by JobsOhio; instead, the organization invests them in the next cohort. The program has been a success. Its funds have continued to replenish because of the high employment rate of participants.

“With this strategy, not only is Ohio coming back strong from COVID-19, but Ohioans have the opportunity to pursue new careers they might have never thought possible,” says Ben. “A woman who had been a back-office worker and lost her job is now a nurse assistant—a whole new, stable career that feels like a calling. There are many powerful stories like this.”

As we have worked to improve the lives of all Ohioans, we’ve valued McKinsey’s partnership over the last several years. Their data-driven approach combined with creative thinking led to solutions that fit the unique needs of our state—and supported our success in creating hundreds of thousands of jobs.

JP Nauseef, JobsOhio President & CEO

Most recently, the decade of growth and economic investment in Ohio helped attract a new investment from Intel, which announced earlier this year that it would be opening a new chip manufacturing plant in Central Ohio. This huge project is the largest single private-sector company investment in the state. It will create 3,000 new jobs at the plant with an average salary of $135,000.

“As we have worked to improve the lives of all Ohioans, we’ve valued McKinsey’s partnership over the last several years,” says JP Nauseef, president & CEO of JobsOhio. “Their data-driven approach combined with creative thinking led to solutions that fit the unique needs of our state—and supported our success in creating hundreds of thousands of jobs.”

The turnaround of the state’s jobs growth, Ben adds, suggests a potential way forward for other challenging situations. “Their success has been a paradigm shift,” says Ben Safran. “They are a model for growth in a changing economy.”

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IMF chief sees ‘darkening’ outlook for global economy – Al Jazeera English



The International Monetary Fund (IMF) will next week downgrade its forecast for 2.9 percent global growth in 2023, Managing Director Kristalina Georgieva said on Thursday, citing rising risks of recession and financial instability.

Georgieva said the outlook for the global economy was “darkening” given the shocks caused by the COVID-19 pandemic, Russia’s invasion of Ukraine and climate disasters on all continents, and it could well get worse.

“We are experiencing a fundamental shift in the global economy, from a world of relative predictability … to a world with more fragility — greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters,” she said in a speech at Georgetown University in Washington, DC.

Georgieva said the old order, characterised by adherence to global rules, low interest rates and low inflation, was giving way to one in which “any country can be thrown off course more easily and more often.”

She said all of the world’s largest economies — China, the United States and Europe — were now slowing down, which was dampening demand for exports from emerging and developing countries, already hit hard by high food and energy prices.

The IMF would lower its 2023 growth forecast from 2.9 percent, its fourth downward revision this year, when it releases its World Economic Outlook next week, she said. The global lender would leave its current forecast for 3.2 percent growth in 2022 unchanged, she said and gave no number for the new 2023 forecast.

The war in Ukraine and global economic risks will dominate next week’s annual meetings of the IMF and the World Bank in Washington, DC, which bring together finance ministers and central bankers from around the world.

The IMF estimates countries accounting for about one-third of the world economy will see at least two consecutive quarters of contraction this year or next, Georgieva said.

“And, even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices,” she said.

Overall, the IMF expects global output to shrink by $4 trillion between now and 2026. That is roughly the size of the German economy and amounts to a “massive setback,” she added.

Global divisions

Georgieva said the division of the global economy into blocs that are either supporting Russia, opposing it, or “sitting on the bench” following its invasion of Ukraine would wind up reducing important efficiencies and hurting poor people the most.

“We cannot afford the world to break apart,” she said. “If we go to a point where we cut off parts of the world from each other, it will be the poor in rich countries and it will be the poor countries that will bear the brunt of the impact of it.”

Uncertainty remained high and more economic shocks were possible, she said, warning that high debt levels and liquidity concerns could amplify the rapid and disorderly repricing of assets on financial markets.

Georgieva said inflation remained stubbornly high, but central banks should continue to respond decisively, even if the economy slowed down.

A customer shops in a grocery store during a power cut in Beirut, Lebanon
Inflation is stubbornly high, but central banks should continue to respond decisively, the International Monetary Fund said on Thursday[File: Francesca Volpi/Bloomberg]

She told CNBC in an interview that US Federal Reserve Chair Jerome Powell was walking a “very, very narrow” path in shaping monetary policy, but the IMF expected interest rates to be “somewhere in the 4 percent territory” in 2022 and 2023.

“If he doesn’t tighten enough, inflation may de-anchor. If he tightens too much, there could be a recession. So Jay Powell is doing his best to watch the parameters in the economy to calibrate what he does, and I trust that he will make the right call,” she said.

Fiscal measures adopted in response to high energy prices should be targeted and temporary, she said in the speech.

“In other words, while monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride.”

The United Kingdom this week reversed plans to cut taxes for the richest, which had sparked market turmoil and a sharp rebuke from the IMF, that warned the country’s financial plans risked increasing inequality and were at cross purposes with tightening monetary policy.

Asked on CNBC about the IMF’s criticism of UK policy, Georgieva said, “This is a message we convey to everybody.”

Georgieva urged greater support for emerging markets and developing countries, noting that high interest rates in advanced economies and the strong dollar had triggered capital outflows. The probability of portfolio outflows had risen to 40 percent.

She also called on China and private creditors — who hold the lion’s share of global debt — to address the risk of a widening debt crisis in emerging markets.

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IMF chief issues gloomy assessment of global economy



The global economy will feel like it is in recession next year, the head of the IMF warned on Thursday, as the fund prepared to downgrade its economic forecasts again.

Speaking ahead of the annual meetings of the fund and the World Bank, Kristalina Georgieva said a third of the world’s economy would suffer at least two quarters of economic contraction in 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel like they were in recession even if they avoided outright declines in output.

The remarks signal that the IMF is set to downgrade its economic forecasts again next week, for the fourth consecutive quarter.

Blaming “multiple shocks”, including Russia’s invasion of Ukraine, high energy and food prices, and persistent inflationary pressures, she said growth in all of the world’s largest economies was slowing down, leaving “severe strains” in some places.

The situation was “more likely to get worse than to get better” in the short term, she said, partly because there are emerging financial stability risks in China’s property market, in sovereign debt and in illiquid assets. The near collapse of some UK pension funds last week following UK chancellor Kwasi Kwarteng’s announcement of £45bn worth of unfunded tax cuts has sparked concerns that low growth and higher borrowing costs will trigger market turmoil.

However, the IMF wants central banks to continue to tighten monetary policy at pace to deal with the persistence of inflationary pressures and to ensure that rising prices do not become ingrained in company attitudes to their charges and wages.

“Not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” said Georgieva.

She acknowledged, however, that it would be very difficult for monetary policymakers to judge the impact of their policies when they were moving in sync with each other so quickly. Too many big rate rises could lead to a “prolonged recession”, but the risk of doing too little was at present greater, she said.

In an interview with CNBC later on Thursday, the IMF’s managing director said the task confronting the US central bank was particularly challenging and described the path chair Jay Powell has to navigate as “very narrow”.

“If he doesn’t tighten enough, inflation may de-anchor. If he tightens too much, there could be a recession,” she said, also noting the material impact that the Federal Reserve’s aggressive campaign to tighten monetary policy was having globally.

“The combination of a strong dollar and high interest rates is hitting emerging markets with weaker fundamentals and, practically across the board, low-income countries quite significantly,” Georgieva warned. That would “inevitably” cause defaults, as had already been the case for Sri Lanka and Zambia, she added.

“Both official creditors and the private sector, please come together. Face the music.”

Meanwhile, Janet Yellen, the US Treasury secretary, on Thursday implored central banks, whose “prime responsibility” is to restore price stability, to “recognise that macroeconomic tightening in advanced countries can have international spillovers”.

Without naming the UK or Germany, the managing director took a swipe at their recently announced measures to tackle high energy prices that insulated households and companies from much of the rise in prices.

The IMF has already publicly rebuked the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech showed the fund was in no mood to offer more nuanced advice ahead of the visits of finance ministers and central bankers to Washington next week.

Calling for temporary and targeted support for vulnerable families, she said that “controlling prices for an extended period of time is not affordable, nor is it effective”.

She highlighted the inflationary risks of pumping too much money into the economy to protect households at a time when central banks were raising interest rates to slow spending and return inflation to low levels.

“While monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride,” said Georgieva.

High food prices were causing pain for households in emerging economies and unsustainable debt crisis in many countries, she added. For countries with an urgent need for food this winter, she offered a new “food shock” borrowing line, where countries could claim up to half of the money they have pledged to the IMF.

The pain in the global economy would not be permanent, she said, but a speedy resolution of the world’s economic problems would depend on co-operation, especially on food security, climate change and debt relief for the most vulnerable countries.

Also on Thursday, 140 civil society groups called on the IMF to issue at least $650bn in emergency aid through another allocation of its special drawing rights, a reserve asset.

“The great majority of the world’s countries are struggling amid multiple historic, overlapping, and generally worsening crises,” the organisations wrote in a joint letter to the multilateral lender. “The world’s wealthiest countries must act quickly to assist them.”

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