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Bank of Canada says economy will likely be scarred by COVID-19 until 2023

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Maybe it’s his job to prepare us for the worst, but Canada’s chief central banker, Tiff Macklem, has warned of a long, slow recovery as successive rounds of COVID-19 lead to a “scarring” of the domestic and world economy.

After what some see as a false dawn this summer as the economy resurged, Macklem, governor of the Bank of Canada, and his senior deputy, Carolyn Wilkins, offered a gloomy outlook for an economy that they say is unlikely to get back on track until 2023.

Not only that, but jobs — hit harder in this recession than the last one — are disproportionately affecting Canadians with the lowest wages. While 425,000 jobs disappeared following the 2008 credit crisis, this time around, employment has been cut by 700,000.

And Macklem said some of those jobs may never come back.

“We’re going to get through this, but it’s going to be a long slog,” he said at a virtual meeting with financial reporters on Wednesday.

Good news? Lower for longer

The good news, if you could call it that, was that the central bankers have committed to keeping interest rates at current extraordinarily low levels until inflation climbs back to between two and three per cent, which they don’t foresee as likely for three years.

Forecasting the economy is always something of a guessing game, but Macklem and Wilkins said that this time there was added uncertainty because of not knowing what the novel coronavirus is going to do next.

The central bankers made it very clear that the current outlook depends on a number of assumptions about the path of the pandemic that may turn out to be better or worse than they currently foresee.

Among those assumptions is that the virus will return in succeeding waves, each less damaging than the last. Another is that a vaccine will not become widely available until 2022, a sobering estimate from sober central bankers that may be disheartening for those who had hoped U.S. President Donald Trump’s optimistic outlook of an October vaccine launch was more than just electioneering.

 

In the past, U.S. President Donald Trump — shown during a tour of the Fujifilm Diosynth Biotechnologies’ Innovation Center in Morrrisville, N.C., in July — has suggested a vaccine would be available before the Nov. 3 election, but Canada’s sober central bankers are more pessimistic. (Carlos Barria/Reuters)

 

By promising that interest rates will stay low until 2023 — something central bankers call “forward guidance” — Macklem said he hopes businesses and consumers can confidently borrow for the medium term without fear that interest rates, and therefore loan repayments, will suddenly shoot up.

That’s good if you are buying a new stove but not for a home, or for a longer-term business investment. To influence those longer-term rates, the central bank has shifted the way it buys bonds as part of its quantitative easing plan that it initiated for the first time following the COVID-19 market disruption.

When the market crisis hit in early spring, the bank bought short-term bonds to help increase the amount of money in circulation, reassuring investors, Macklem said. But now that markets are working more normally, the Bank of Canada has reduced its monthly bond purchases from $5 billion to $4 billion and is switching to buying bonds that don’t mature for up to 30 years, in theory making longer-term loans cheaper.

Economy scarred by COVID-19

But while making borrowing cheap will help, the central bank worries that it won’t be enough to prevent the economy from being scarred by large employment losses as some people’s jobs never come back.

“We’ve assumed that a fraction of these people are permanent,” Wilkins said. “That’s because with COVID, not only is the recovery going to take longer so that there is more chance there’ll be scarring, it’s also the types of jobs created.”

As the economy rebounds, she said, the new jobs available will not match the skills of those who became unemployed. Among those worst hit will be women and young people.

“The effects of this pandemic have been extremely uneven,” Macklem said, directing reporters to a “particularly stunning” chart in the Monetary Policy Report, reproduced below, showing low-income workers have suffered more and their jobs have uniquely failed to recover.

 

 

Just as we saw during the long climb out of the last recession, replacing those jobs will require new private investment, some of it in entirely new sectors. But with so much uncertainty — and so much permanent structural change — Macklem said many companies will be hesitant to invest until things begin to stabilize.

“Clearly we are seeing a resurgence of the virus — it’s happening in Canada and it’s happening elsewhere,” he said.

Macklem’s current economic outlook is only a best guess based on so many unknowns. It may be that the virus gets even worse, he said, and it may be that a vaccine does not arrive until later than the bank has estimated or that it is ineffective.

But while the central bank is compelled to consider the bleakest case in its economic planning, Macklem does not exclude the possibility of a far less gloomy outcome, which he said would be “wonderful.”

“There’s certainly scenarios where a vaccine is available early next year and it proves effective, and we can deploy it at scale so that by the end of the year, we don’t need to physically distance anymore.”

And from a central banker, that is a positive ray of sunshine.

Follow Don Pittis on Twitter: @don_pittis

Source: – CBC.ca

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Unchanged from early estimate, US economy grew 33.1% in Q3 – OrilliaMatters

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WASHINGTON — The second of three estimates on U.S. growth for the July-September quarter was unchanged at a record pace of 33.1%. But a resurgence in the coronavirus is expected to slow growth sharply in the current quarter with some economists even raising the spectre of a double-dip recession.

While the overall increase in the country’s total output of goods and services was static, the Commerce Department reported Wednesday, some components were revised.

Bigger gains in business investment, housing and exports were offset by downward revisions to state and local government spending, business inventories and consumer spending.

The 33.1% gain was the largest quarterly gain on records going back to 1947 and surpassed the old mark of a 16.7% surge in 1950.

Still, the economy has not fully recovered from output lost in the first six months of the year when GDP suffered a record-shattering drop of 31.4% in the second quarter. That followed a slide at an annual rate of 5% in the first quarter as when the pandemic shut down much of the economy and triggered millions of layoffs.

Economists are concerned that growth has slowed sharply in the current October-December and there are fears that GDP could dip back into negative territory in the first three months of next year.

Mark Zandi, chief economist at Moody’s Analytics, said he had forecast GDP growth of around 2% in the fourth quarter, with the real possibility of GDP turning negative in the first quarter of next year.

Economists at JPMorgan Chase have trimmed their forecast for the first quarter to a negative 1% GDP rate. “This winter will be grim and we believe the economy will contract again in the first quarter,” the JPMorgan economists wrote in a research note.

“The economy is going to be very uncomfortable between now and when we get the next fiscal rescue package,” Zandi said. “If lawmakers can’t get it together, it will be very difficult for the economy to avoid going back into a recession.”

While lawmakers have returned for a lame-duck session, there has been no progress so far in narrowing the differences between Democrats who are pushing for a big package of $1 trillion or more, and Senate Republicans who are refusing to approve anything above approximately $500 billion.

More than 9 million people will lose their unemployment benefits at the end of the year when two jobless benefit programs are set to expire unless Congress extends them.

At the same time virus cases are surging, triggering a number of states to re-impose business limits such as earlier closing times for bars and restaurants and stricter limits on the number of in-store shoppers.

Martin Crutsinger, The Associated Press


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World economy risks buckling into 2021 despite vaccine nearing – BNN

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The surging coronavirus is stoking fears of a fresh downturn for the world economy, heaping pressure on central banks and governments to lay aside other concerns and do more to spur demand.

Hopes are mounting that COVID-19 vaccines will become available as soon as December, but widespread delivery will take months and infections are rising again in many large economies. Authorities are responding with more restrictions to limit the virus’s spread at the price of weaker economic activity.

Wall Street economists now say that it wouldn’t take much for the U.S., euro area and Japan to each contract again either this quarter or next, just months after they bounced from the deepest recession in generations. Bloomberg Economics guages of high-frequency data point to a double-dip downturn, with European factory indexes on Monday justifying that worry, though a U.S. measure of business activity was upbeat.

That leaves policy makers hearing calls for more stimulus, even when central banks are already stretched and starting to worry about froth in financial markets. Meantime, politicians from the U.S. to Europe are clashing over just how much they can and should do with fiscal policy.

“While there is much excitement over the progress of vaccine development, it will not be the quick fix that many expect it to be,” Singapore’s Trade & Industry Minister Chan Chun Sing told reporters on Monday. “Manufacturing enough doses, then distributing and vaccinating a significant population of the world, will take many months, if not years.”

Against such a backdrop, the European Central Bank is set to ease monetary policy again next month, while the Federal Reserve could concentrate more of its bond purchases on longer-term securities to push down interest rates.

But there are concerns the central banks have run out of room to act decisively and that even easier financial conditions won’t translate into an economic boost. The International Monetary Fund is among those also warning elevated asset prices potentially point to a disconnect from the real economy and so may pose a financial stability threat.

“There is a glut of savings and a shortage of investment,” which is the core problem facing developed economies, former Fed Chair Janet Yellen, who is set to be nominated for Treasury Secretary by President-elect Joe Biden, told Bloomberg’s New Economy Forum last week. “We have to have fiscal policy, structural policy other than just relying on central banks to achieve healthy growth.”

The problem is fiscal policy in the U.S. and Europe isn’t racing to the rescue. Lawmakers in the U.S. are at loggerheads over how much more to spend as Biden prepares to take office. President Donald Trump’s Treasury Department last week reduced the Fed’s ability to aid some credit markets.

In Europe, US$2 trillion in aid is being held up by a fight over political control.

“Exactly at the time central banks everywhere are acknowledging the centrality of fiscal policy in dealing with the economic consequences of the pandemic, governments are facing difficulties in implementing the next leg of their stimulus,” said Gilles Moec, chief economist at AXA SA.

Embedded Image

What Bloomberg Economics Says...

“Our base case is a contraction of 4.1 per cent in global output in 2020, followed by a rebound to 4.9 per cent growth in 2021. Uncertainty on the course of the virus, extent of stimulus, and timing of a vaccine mean the range of possible outcomes remains unusually wide.”

— Tom Orlik

For the U.S., the pace of infections prompted JPMorgan Chase & Co. analysts to forecast an economic shrinkage next quarter as various states impose social distancing curbs and some government benefits expire. Recent data show more people filing for unemployment benefits and fewer dining out at restaurants.

“It is possible we could have negative growth if this resurgence gets bad enough and mobility falls off enough,” Dallas Fed President Robert Kaplan told Bloomberg Television last week.

In Europe, further evidence arrived on Monday that a double-dip recession is on the way, with a survey of purchasing managers dropping sharply.

Japan’s manufacturing and service sectors worsened at a faster pace in November, early purchasing managers’ indexes showed, adding to concern over the strength of the recovery. Prime Minister Yoshihide Suga has called for a third extra budget to keep the economy on a growth path.

Both the International Monetary Fund and the Group of 20 — which comprises the world’s richest nations — warned during the G20’s meetings last weekend that the recovery is at risk of derailing despite positive news around vaccines buoying global stocks.

China is the world’s only major economy tipped to grow in 2020 as the government’s early control of the virus allowed lockdowns to be eased months ago. While its trade-led recovery is offering a boost to global commerce for now, even it’s vulnerable to the global outlook.

Reality Check

Fed Chair Jerome Powell and ECB President Christine Lagarde are among the central bankers warning against exuberance on news of successful vaccine trials.

The main reason for caution is the time needed to roll out shots for the world population to an extent enabling an end to growth-sapping movement restrictions. The announcement of a vaccine itself may drive market optimism, but doesn’t re-open economies for now.

“The vaccine gives more of a vision for what may be late next year, and what 2022 will look like, but not for the next six months,” ECB chief economist Philip Lane said in an interview with Les Echos. “The situation will not materially improve in the last weeks of 2020.”

The ECB’s downbeat tone on the immediate outlook is the backdrop to the likely arrival of a boost to the central bank’s 1.35 trillion-euro (US$1.6 trillion) emergency bond-buying program and its cheap bank loans. Policy makers meet on Dec. 10.

The worst affected sectors continue to shed jobs as companies warn on profits. Boeing Co. is almost doubling its planned job cuts while Adidas AG became one of the first consumer-goods companies in Europe to warn that renewed lockdowns will weigh on its earnings again and bring a swift end to a recent sales rebound.

The JPMorgan analysts are though hopeful that a vaccine and another round of fiscal support totaling US$1 trillion in the U.S. will be enough to deliver average growth of more than five per cent in the middle quarters of 2021. Even then, the virus’s legacies of record debt and elevated unemployment will endure.

Economists at ABN Amro Group NV however see mobility restrictions around the world lasting well into 2022.

“Only then can the global economy break into a growth spurt to make up the lost output versus trend growth,” analysts including chief economist Sandra Phlippen wrote in a report on Monday. “The vaccine is tantalizingly close, but still out of reach.”

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National child-care system would boost women's job numbers and economy, report says – CP24 Toronto's Breaking News

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Jordan Press, The Canadian Press


Published Wednesday, November 25, 2020 7:31AM EST

OTTAWA – A new report estimates that hundreds of thousands of women could get back into the labour force if the Liberals follow through on a pledge to create a national child care system.

The paper to be released Wednesday makes the case that federal spending to create a national program would “pay for itself” in the form of extra income tax, extra spending and reduced social costs as more parents entered the workforce.

There is also the potential for tens of thousands of construction jobs as new centres and spaces are built, along with an employment boost in the child-care sector as it expands.

Report author and economist Jim Stanford says the lack of accessible and affordable daycare is a key reason why fewer women in their 30s and 40s are in the workforce than men the same age.

He estimates that between 363,000 and 726,000 women in the “prime parenting age cohort” between 25 and 50 could join the labour force over a 10-year period as a national child-care program is developed.

Among them would be up to 250,000 women moving into full-time jobs.

Stanford’s paper builds on previous research into the economic spinoffs of Quebec’s publicly funded daycare system, but develops estimates based on how a national system might look.

The Liberals have promised to make a long-term spending commitment to create a national child-care system, seeing it as a key avenue to help women harder hit during the pandemic in what has been dubbed a “she-cession.”

“Economists have agreed for years that child care has huge economic benefits, but we just can’t seem to get the ball over the line in Canada,” says Stanford, director of the Centre for Future Work.

“I finally think the ducks are being lined up here and we can actually make this happen,” he adds.

“This really is the moment when we can finally move forward, and it is a moment when Canada’s economy needs every job that it can get.”

A recent report by RBC economists Dawn Desjardins and Carrie Freestone calculated that 20,600 women fell out of the labour force between February and October even as 68,000 more men joined it.

The situation was most acute for women ages 20 to 24, and 35 to 39; one of the reasons the duo cited for the sharper drop was the pandemic-caused closure of child-care centres.

Child-care centres, which often run on tight margins and rely on steep parental fees, couldn’t keep up with costs during spring shutdowns and shed about 35,000 jobs between February and July. Some centres have closed for good.

The worry Stanford notes is that many of the job losses will become permanent and more centres will close without financial assistance from governments.

Scotiabank economists Jean-Francois Perrault and Rebekah Young suggested in September that creating nationally what Quebec has provincially would cost $11.5 billion a year.

Their analysis also suggested federal coffers could reap billions in new tax revenue as women in particular would get into the workforce in greater numbers, offsetting some of the overall cost.

Stanford’s estimate is for a boost to government revenues of between $18 billion and $30 billion per year, split between federal and provincial governments.

“This literally is a social program that pays for itself,” Stanford says.

“The economic benefits of giving this first-class care to early-age children, and getting their mothers in the labour market working to their full potential, are enormous.”

He argues that provinces, mired in a fiscal quagmire worse than the federal government’s, shouldn’t stand in the way of “reasonable demands” from the federal government to create a national system.

Provinces have responsibility for child-care delivery. Stanford says they cannot afford to look this gift horse of new revenues in the mouth given the federal government would foot most of the bill.

This report by The Canadian Press was first published Nov. 25, 2020.

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