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Bank of Canada says economy can handle higher rates despite household debt risks – Sudbury.com

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High household debt and elevated housing prices have become bigger vulnerabilities in the past year, but the economy can still handle the rising interest rates needed to tame inflation, Bank of Canada governor Tiff Macklem said Thursday.

“We think the economy needs higher interest rates, and it can certainly handle higher interest rates,” he told a news conference in Ottawa discussing the central bank’s latest financial system review.

The review notes high debts and home prices have increased the downside risks to overall economic growth, as rising rates meant to counter inflation increase the chance of households having to divert consumption towards debt repayments.

However, Macklem emphasized the overall financial health of Canadian households, as the average net worth increased by about $230,000 during the pandemic, and the focus of the central bank on reducing inflation over concerns of how higher rates may affect the housing market.

“Our primary focus is getting inflation back to target. You know, monetary policy is not housing policy,” he said. 

“The increases in housing prices we’ve seen have been unsustainably elevated and we are expecting to see some moderation in housing activity and frankly, that would be healthy.”

He said that while the housing market is an important part of the economy, and the bank is watching the dynamics closely, the bank needs to slow demand in the economy and bring it in line with supply.

The bank has indicated, and Macklem repeated Thursday, that it may have to move its key interest rate to upwards of three per cent to bring inflation back on target. He said the bank may need to “move more quickly, may need to take a larger step” to avoid inflation becoming entrenched.

The Bank of Canada raised its key interest rate target by half a percentage point last week to 1.5 per cent, a move that prompted the big commercial banks to raise their prime rates.

The report Thursday noted that increasing rates will put strain on mortgage holders, especially those who bought into the housing market during the pandemic as an increasing number of households have stretched themselves financially to purchase a home.

To illustrate the risks, the central bank ran a hypothetical scenario where five-year variable- and fixed-rate mortgages taken out in 2020 and 2021 renewed at median rates of 4.4 per cent and 4.5 per cent, respectively, in 2025 and 2026.

In this scenario, households that took out a fixed-rate mortgage during that period would see a median increase in their monthly payment of $300 or 24 per cent, while high loan-to-income ratio borrowers with a fixed-rate loan would see a median increase of $490 or 26 per cent.

However, those with variable-rate mortgages would face even larger increases with a median increase of $720 or 44 per cent in their monthly payment at renewal. High loan-to-income ratio borrowers who opted for a variable-rate loan would see a median increase of $1,020 or 45 per cent in their monthly payment.

Higher mortgage servicing costs mean less money to spend elsewhere which could have a negative hit on the overall economy, the report noted. Looking ahead to the first quarter of 2024, the trends have increased the probability of negative growth to 15 per cent, up by five percentage points compared to what it would have been had debt levels not changed during the pandemic.

Rising rates also increase the risk of a correction in the real estate market, which would erode equity and the ability for households to respond.

The report notes that the recent run-up in home prices, which gained about 50 per cent in the first two years of the pandemic, has been fuelled in part by increased buying by investors and the overall expectation that prices would continue to rise, both of which could “amplify” the decline in prices as the market reverses.

The real estate market has already started to cool since the bank has started raising its key rate, but the central bank said it’s too early to tell if it’s the start of a deeper, lasting decline.

The financial review noted that Canada’s banking industry could weather a downturn in both the housing market and overall economy. A stress-test where the economy declines 5.8 per cent over six quarters showed that while it would lead to sizable decline on bank capital buffers, the banks would still be broadly resilient. 

The Bank of Canada noted in its review that other vulnerabilities to the financial system include cyber threats given the interconnected nature of the financial system, a risk that has increased from Russian aggression related to its invasion of Ukraine.

It said Russia’s invasion of Ukraine has also further complicated the transition to a low-carbon economy and increased the risks of a repricing of assets exposed to climate change.

But the key challenge for the bank remains high inflation rates, which Macklem said the bank hopes to reduce without pushing the economy into a recession despite the increased complexity of the challenges.

“Our objective is very much to to achieve a soft landing with inflation coming back to target, but it is going to be delicate and there are risks around that.”

This report by The Canadian Press was first published June 9, 2022.

Ian Bickis, The Canadian Press

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Charting the Global Economy: Factories Slow Down From US to Asia – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Manufacturing from the US to Asia is very much in a slowdown as factories continue to struggle with supply snarls, labor shortages and elevated materials costs.

A measure of US manufacturing activity weakened in June to a two-year low, and several regional Federal Reserve surveys indicated business activity shrank. Factory purchasing managers’ gauges across Asia eased, with South Korea, Thailand and India among those showing the biggest declines, according to S&P Global.

Similar indexes in Poland, Spain and Italy also showed weaker activity compared to May.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

US

Consumer spending fell in May for the first time this year and prior months were revised lower, suggesting an economy on somewhat weaker footing than previously thought amid rapid inflation and Fed interest-rate hikes.

Regional Fed manufacturing surveys have taken on a grimmer tone, with four of five indicating business activity shrank in June. Separately, a measure of overall manufacturing slid to a two-year low as new orders contracted, restrained by lingering supply constraints and some softening in demand.

The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high.

Europe

Confidence in the euro-area economy slipped as households become more pessimistic amid fears a Russian energy cutoff will spark a recession. At the same time, they’re less worried about inflation than they were a month ago, though there’s a split between core and peripheral euro-area countries.

After suffering from unprecedented shocks in recent years, the UK is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.

Asia

China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.

Japan’s factory output shrank at the fastest pace since the height of the pandemic as the lagged impact of China’s virus lockdowns continued to disrupt supply chains and economic activity in the region. The weakness in manufacturing extended across Asia, particularly in South Korea, Thailand, India and Taiwan.

Emerging Markets

Colombia’s central bank delivered its biggest interest rate increase in over two decades. Policy makers are bracing for another spike in annual inflation that’s already above 9%. 

Two years after Argentina emerged from its latest default, a debt crisis in brewing once again. This time, the immediate trouble is in the local bond market, where creditors have become reluctant to roll over maturing government bonds.

Zambia’s inflation rate dropped below 10% for the first time in almost three years in June, bucking a global trend of record consumer-price growth. Optimism over the nation’s economy since the election of Hakainde Hichilema as president in August, a potential debt restructuring and a $1.4 billion bailout package from the International Monetary Fund has seen a rally in the local currency, which has helped contain prices.

World

Differences in underlying inflation trends call for different policy outlooks among the world’s top central banks, according to Bloomberg Economics. The Fed will have to go well into restrictive territory, the Bank of England may go a little above neutral and the European Central Bank might not even get that far.

©2022 Bloomberg L.P.

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Quarterly Investment Guide 3Q 2022: US economy on shaky ground – CNBC

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Minister Of The Economy Franz Fayot On Luxembourg’s Transition Towards A Green Economy – Forbes

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Just last week, Luxembourg’s Minister of the Economy, Franz Fayot, came to the cities of Toronto and Montreal as part of an economic mission organized by the Luxembourg Chamber of Commerce in close cooperation with the Ministry of the Economy. I had the opportunity to sit down with Minister Fayot at the InterContinental Toronto Centre, and get some insights into the Grand-Duchy’s economic transition towards sustainability.

A transitioning economy

With up to one-third of its GDP related to the finance sector, Luxembourg’s economy is widely dominated by the financial sector. However, the past 20 years have been characterized by a push for economic diversification, and increased transparency and regulations following the financial crisis, said Minister Fayot.

“What we are trying to do is diversify [the economy] even more into new sectors to make us less dependent on the financial sector and adaptable to new circumstances,” he said. “We are also more and more developing a green finance sustainable finance sector, which is doing very well.”

A green state responsibility

Minister Fayot, whose guiding principles are a strong welfare state and sustainability, firmly believes that the government must assume its pivotal role in shifting the economy towards sustainability — “both in terms of environmental sustainability, but also social sustainability,” he added.

In June 2020, an international consultation was launched to gather strategic spatial planning project ideas considering the climate-related challenges and social issues, and support for the country’s ecological transition towards a zero-carbon territory by 2050.

“We need to understand that we have to help businesses innovate, and invest in the future,” said Minister Fayot.

A rising startup ecosystem

Luxembourg has seen a steady growth in startups over the past decade.

Earlier this year, the Ministry of the Economy launched a strategic initiative aimed at providing a thorough understanding of the startup ecosystem based on data analysis and interviews with key stakeholders.

Luxinnovation, the national innovation agency, identified over 500 active startups offering innovative digital and data-driven solutions in its latest mapping.

These assessments will also provide relevant comparisons with international markets, and aim to identify the necessary next steps for development opportunities in the upcoming years.

“Our innovation agency is there to guide startups, but also other more established businesses, to get access to grants,” explained Minister Fayot. “We have a state aid framework in Europe which we have to comply with, but the main message is that there is an obvious need to co-finance innovation, particularly in times when we are in this transition towards a more green economy.”

Going above the limits of territory

Surrounded by Belgium, France and Germany, Luxembourg is one of the smallest countries in the world — slightly smaller than Rhode Island. Yet, despite its dependence on its neighboring countries’ energy supplies, it is making continuous efforts to increase its share of renewable energy by also investing in projects across its borders, said Minister Fayot.

“We don’t have that much sun in Luxembourg, and we don’t have an unlimited space to build wind power,” he said. “It’s a bit of a limiting factor, but it shouldn’t excuse anything.”

“We are investing a lot into energy efficiency,” he added. “We are trying to get people to e-mobility and pushing for geothermal heating and energy in new constructions.”

A growing space sector

Luxembourg might not be the first to come to mind when we think of space, but, the country owns one of the world-leading satellite operators, and is increasing its investment into space resources.

“The SpaceResources.lu is an initiative that we launched about six years ago, and it is very much focused on the space resources segment of the space industry,” he said. “We are not launching anything in space out of Luxembourg, but focusing on services like space traffic management.”

As part of the economic mission, a group of space companies participated in a distinctive program set up by the Luxembourg Space Agency in collaboration with the Canadian Space Agency. This included on-site company visits, workshops and B2B opportunities that led to the signing of a Memorandum of Understanding between the two national space agencies.

Stephanie Ricci contributed to this story.

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