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Economy

BoE's Saunders says economy might have more spare capacity than thought – The Guardian

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By Andy Bruce and William Schomberg

LONDON (Reuters) – Britain’s economy may have more room to bounce back from the COVID-19 pandemic before it generates excess inflation than the Bank of England predicted last month, one of its policymakers said, signalling no rush to start reining back on stimulus.

Michael Saunders said the recovery from last year’s 10% slump might be quicker than the BoE’s central forecasts, made in early February. Those forecasts include a 5% recovery in 2021 as the country races ahead with coronavirus vaccinations.

But that did not automatically mean inflation pressure will surge too, the rate-setter said in a speech on Friday.

It was reasonable to think slack in Britain’s economy – the output gap – was “much greater” than the BoE assumed last month, Saunders said, citing a rising jobless rate and surveys that show many companies are working below capacity.

“My hunch, taking account of a somewhat more optimistic assessment of the outlook for potential output, is that it will take longer to close the output gap than forecast,” he said.

The risk posed by an incomplete recovery with a persistent output gap was greater than a scenario in which the gap closes quickly and generates inflation, Saunders said.

This meant that “risk management considerations” might be needed when weighing up how much stimulus the economy needs.

Saunders’ comments put him broadly in the centre of the range of views among the nine members of the Monetary Policy Committee and contrast with those of Chief Economist Andy Haldane, who has warned of an inflation “tiger”.

Saunders said the unemployment rate would be a good future benchmark in judging the extent to which the output gap is closing.

“In my view, a jobless rate of well above 5% (the February … forecast for Q1-2022 was 5.7%) would almost certainly indicate that we are some way from closing the output gap sustainably,” he said.

Officials are debating how the BoE might eventually unwind some of the stimulus it has pumped into the economy, first to offset the global financial crisis and more recently to tackle the COVID-19 pandemic.

Saunders said the BoE’s record-low interest rates might not need to rise as high as 1.5% before the central bank starts to bring down the size of its 895 billion pound bond-buying scheme.

“There are arguments to set a slightly lower threshold on the grounds that … a slightly negative policy rate will be in the toolkit, whereas it wasn’t previously,” he said in answer to an audience question.

(Reporting by William Schomberg and Andy Bruce; Editing by Catherine Evans)

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Economy

Philip Cross: Welcome to our new economy of shortages, comrades – Financial Post

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Shortages imply that inflation is much greater than the official measures suggest

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Since the pandemic began, governments have focused almost exclusively on boosting aggregate demand — in the belief that understandably cautious spenders were the main threat to economic growth. But it is becoming increasingly clear that the pandemic’s more enduring impact is disruption of supply. The result is price increases exceeding forecasts and the prospect that persistent shortages will fuel inflation well beyond the three or four months that would qualify as transitory. As is often the case with crises, the pandemic has unleashed unexpected and unintended effects, bedeviling government planners everywhere.

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Few people foresaw shortages as a likely outcome. In summer 2020, the Bank of Canada predicted the “decline in supply is likely to be relatively short-lived” — even though shortages had been emerging in many regions and industries before the pandemic. With immigration plummeting as borders closed, it was predictable that COVID would trigger a drop in labour supply, yet policy-makers were fixated on propping up demand for fear slow growth would put downward pressure on prices.

The most obvious manifestations of shortages are soaring prices for housing and commodities, notably oil and gas. Housing prices across Canada took off during the pandemic. But housing demand has outstripped housing supply since early 2015, when the Bank of Canada lowered interest rates, and the imbalance between the two has been slow to resolve itself, which is usually the case when governments interfere in the market’s normal adjustment to high prices. Government regulations, often at the local level, have prevented housing supply from rising quickly enough to dampen prices. As for oil and gas prices, firms are reluctant to invest after prices cratered in 2020, partly because some governments are blocking further development of fossil fuels. Compare these clogged markets with the market’s quick resolution of this spring’s spike in lumber prices.

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Pandemic shortages worsened when problems surfaced in the global supply chain. A shortage of semiconductor chips first appeared in the auto industry when a reduction in orders by manufacturers coincided with soaring demand from the technology sector as work and shopping shifted on-line. The shortage of new autos triggered a surge in used-vehicle prices, which on its own accounted for nearly half the increase in the U.S. CPI this summer. More recently, growing supply problems in Asia caused by pandemic-related government shutdowns and power outages have been compounded by transportation shortages, notably for container ships and truckers.

Shortages have spread this year to most sectors as many firms struggle to re-hire workers who either have left the labour force or moved to other jobs. The result is the unusual coexistence of both high rates of unemployment and job vacancies, a measure of the distortions introduced into our economy by the pandemic and government programs to support people. So far, labour shortages have not resulted in sharply higher wages, although firms are clearly feeling the pressure; just this week I received a postcard from Amazon offering employment at $17.10 an hour.

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  1. A nearly empty Saint-Catherine Street in Montreal on March 27, 2020.

    Philip Cross: Business ambition needs to be a Canadian value

  2. Statistics Canada this week reported that energy exports reached $12.0 billion in August, more than recouping all their losses during the pandemic.

    Philip Cross: If oil and gas are dead, why are exports booming?

  3. People walk at the Eaton Centre in Toronto on June 24, 2020.

    Philip Cross: Poor policy is what’s causing slower economic growth

Shortages imply that inflation is much greater than the official measures suggest. Statcan’s CPI rose 4.1 per cent in the past year. But it was designed to measure prices in an economy where goods and services are abundant, not a Soviet-style economy of rampant shortages. Shortages are de facto price increases. Higher prices, longer wait times, fewer product options and lower quality of service all represent an increased cost to consumers, yet only list prices are incorporated into the CPI. Furthermore, Canada’s CPI does not include used-car prices, which alone account for the current gap between our 4.1 per cent inflation rate and the Americans’ 5.4 per cent.

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There are ways to measure the cost to consumers of less choice or longer wait times, but they would be costly to implement. The Liberal government was quick to provide Statcan with funding to measure the pandemic’s unequal impact on various minorities in the Labour Force Survey, intentionally stoking woke feelings of victimhood. But money to improve the CPI, which affects everyone since the government’s entire tax-and-transfer system is indexed to it, was not forthcoming.

In Statcan’s latest Survey of Business Conditions, firms said the six largest impediments to their business were directly related to cost increases and supply shortages; just one quarter earlier, three of the six largest obstacles had been demand factors related to attracting customers. In some industries, shortages are pervasive; for example, 98.5 per cent of Quebec manufacturers cited shortages, which are forcing firms to pay penalties for being late or to turn down new contracts because they cannot meet demand.

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Eventually, problems in the global supply chain should be resolved, especially once demand slows after Christmas. But high energy prices and labour shortages may not dissipate quickly, while the retirement of older workers will prove hard to reverse. And to judge by recent U.S. experience, not even withdrawal of emergency support programs and the start of a new school year will provide the hoped-for boost to labour supply. If labour shortages do necessitate higher wages, that will reinforce upward pressure on prices, pushing central banks to raise interest rates and slow demand to re-align it with constrained supply.

Philip Cross, former chief economic analyst at Statistics Canada, is a senior fellow at the Macdonald-Laurier Institute.

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Economy

Biden, Allies Agonize Over Cutting Economy Plan to Eke Out a Win – BNN

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(Bloomberg) — President Joe Biden’s team and Democratic lawmakers are agonizing over the size and scope of his multi-trillion dollar economic plan, as Biden’s approval rating sags and upcoming elections threaten to show his party’s vulnerability.

Negotiations over the legislation — a package of social programs, tax increases and climate measures Biden calls “Build Back Better” — have dragged on for weeks. White House officials are trying to raise pressure for the talks to wrap up, according to one administration official.

Speaker Nancy Pelosi and Democratic centrists want to scale back the bill to focus on a handful of well-funded programs that can be quickly implemented, so Democrats can boast about the accomplishments in 2022 mid-term campaigns. But progressives want to keep the legislation expansive, even if programs are partially funded or expire after only a few years.

Senior White House aides recognize that Biden’s legacy is bound to the economic plan. The legislation would bring into law a number of his campaign promises, including ensuring greater racial equity, fighting climate change and helping women, seniors, children and working families. Without it, the president and his party will be open to criticism from Republicans that they’re unable to govern.

The political repercussions may be imminent. Virginia will elect a new governor on Nov. 2, and the contest, between former Democratic Governor Terry McAuliffe and Republican Glenn Youngkin, may foreshadow midterm congressional elections in 2022.

Polls show a tighter race than Democrats had hoped. First lady Jill Biden and former President Barack Obama plan to travel to the state this month to try to boost McAuliffe.

Only Chance

Many Democratic lawmakers, meanwhile, regard the “Build Back Better” legislation as their only chance to advance favored policies in a narrowly divided Congress, including climate and tax measures. Some have threatened to withhold their support unless their pet projects are included.

“The problem they have is getting 218 votes,” in the House, said Thomas Kahn, a former Democratic staff director of the House Budget Committee who now teaches at American University. “The way to get there is to offer everyone a little something.”

But he added that it’s “much better to have two, three or four programs that you really fund and get off the ground and can point to when the bill is enacted and say, for example, ‘I got you the child tax credit.”’

House and Senate Democratic leaders are split on whether to concentrate spending on a handful of programs and eliminate others entirely or enact the full menu of programs but only for a few years, setting up expiration dates in the not-too-distant future.

While Pelosi wants fewer programs, Senator Dick Durbin, the no. 2 Democratic leader, said he’s confident popular programs with short expiration dates would be renewed by future Congresses. Senate Finance Committee Chairman Ron Wyden told reporters he’d also “favor a shorter number of years” over eliminating programs. 

One potential casualty of the negotiations is an expansion of Medicare, the health program for the elderly and disabled, that would add dental, vision and hearing benefits. The provision is favored by progressives, but at $350 billion over 10 years, it is one of the costliest pieces of the bill. Worse, the new benefits wouldn’t begin until 2028, providing little immediate political benefit.

But Senator Bernie Sanders, a Vermont independent, and some other liberals have called the Medicare expansion non-negotiable.

Senators have also discussed scaling back the bill’s child tax credit, viewed as an especially popular provision. Senator Mark Warner, a Virginia Democrat, has floated restricting the credit to people under an income threshold, while Senator Joe Manchin, a West Virginia Democrat, has suggested requiring parents to prove they’re employed to claim the tax break. 

The House version of the bill would extend the credit through 2025 at an estimated cost of $556 billion. Biden allies say both the president and Pelosi are strong proponents of keeping the child tax credit intact.

Time for ‘Choices’

“There are choices that need to be made,” White House Press Secretary Jen Psaki said at a briefing this week. Biden’s view, she said, is that even a scaled-back bill “can still do something historic and that will fundamentally change — change the economy for the American people.”

Ultimately, Pelosi and Senate Majority Leader Chuck Schumer will likely have to combine paring back the cost of programs and cutting some altogether in order to appease both liberals in the House and the Senate’s two holdout centrists, Manchin and Kyrsten Sinema of Arizona. 

The House-passed bill costs at least $3.5 trillion over a decade, while Manchin has said he won’t support more than $1.5 trillion. Biden has floated a range of about $2 trillion as a compromise.Representative Pramila Jayapal, who co-chairs the House Progressive Caucus, said that the left flank of the party is willing to negotiate, but largely prefers shorter expiration dates for programs rather than erasing them from the bill. “If we have to cut the numbers slightly, then we would reduce the number of years because the universality of benefits and the immediacy of benefits is absolutely critical,” Jayapal said. “Something we’re willing to look at is cutting back the years, say for example, on free community college.” 

But she said that’s more difficult for programs with longer-term impact, such as measures to combat climate change. And reducing funding or expiration dates for some programs, such as paid family and medical leave or funding for child and senior care, could backfire. States and organizations responsible for implementing the programs might not bother if it’s uncertain the funding will continue.

“Pelosi has a very difficult job. I think she has to gather the things that are going to be the most dispositive, the most impactful, for the largest number of member votes,” said Chris Campbell, a former staff director for the Senate Finance Committee and former Treasury official. “There are going to be a lot of sleepless nights between now and December.”

©2021 Bloomberg L.P.

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Saskatoon's economy 80 per cent back from pandemic plunge, study says – Saskatoon StarPhoenix

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While many key sectors have completely recovered, the Saskatoon region still has nearly 4,000 fewer people working than before the pandemic.

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Saskatoon’s economy still needs to make up 20 per cent to be fully recovered from the COVID-19 pandemic, a new study shows.

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Alex Fallon, president and CEO of the Saskatoon Regional Economic Development Authority, said that represents better news than he expected at this point of the pandemic.

An online SREDA tracker of key metrics measuring economic recovery shows that the region’s economy is now considered 79.3 per cent recovered, based on measuring 15 key economic sectors. Nine of the 15 sectors are now considered recovered, Fallon said.

The overall recovery has improved from 67.1 per cent at the end of this year’s second quarter in June.

“I think overall I would take that, if you’d asked me at the start of COVID where we’d be in about a year and a half,” Fallon said. “So it’s creeping up, which is good.”

Despite the positive economic news, employment remains a challenge with 3,900 fewer people working in August — 170,800 — than were working in February 2020. Job numbers cratered in June 2020 to 153,600 before bouncing back to 172,400 in May.

Fallon described the decline in jobs over the summer as “a little bit curious.” The unemployment rate in the Saskatoon region at the end of last month was 8.1 per cent.

The region’s gross domestic product has bounced back to an adjusted 95.8 per cent of pre-pandemic output, to $22.3 billion.

Some sectors, like retail sales and manufacturing shipments, are considered completely recovered, although neither experienced a huge drop during the pandemic. The number of active businesses also bounced back to 7,905 in June from more than 800 fewer in June 2020.

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Fallon said there’s a connection between the drop in jobs and the new businesses.

“It’s an interesting thing because when the economy slows down, actually, entrepreneurship goes up because people are worried about their job security,” he said.

The SREDA study projects Saskatoon’s economy will grow by 5.4 per cent this year, behind the 6.8 per cent growth rate for Saskatchewan and 6.3 per cent for Canada. Fallon attributed the lower Saskatoon numbers to the city’s larger hospitality sector, which is taking longer to recover.

Airport passenger traffic rose in August to its highest level during the pandemic (nearly 76,000), but remained well below the 127,387 in February 2020.

Hotel occupancy also hit its highest point during the pandemic in August, at 59.8 per cent, up substantially from a low of 11.5 per cent in April 2020. This sector is deemed 58.3 per cent recovered.

Investment in building construction soared in the first quarter of this year to peak at $196.7 million in March before dropping to $103.4 million in July.

The Saskatoon zone continues to experience the highest COVID-19 rates of any urban area in Canada. As of Thursday, the zone led the province with 1,036 active cases.

ptank@postmedia.com

twitter.com/thinktankSK

A help wanted sign hangs in a business window along Broadway Avenue in Saskatoon on  Oct. 14, 2021.
A help wanted sign hangs in a business window along Broadway Avenue in Saskatoon on  Oct. 14, 2021. Photo by Matt Smith /Saskatoon StarPhoenix

SASKATOON STATS

Here are the the key recovery statistics as of Sept. 30 from a report by the Saskatoon Regional Economic Development Authority, with the most recent data and the low points listed in parentheses:

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— Economy 79.3 per cent recovered (combining 15 sectors)

— GDP 95.8 per cent ($22 billion, up from $19.6 billion in the second quarter of 2020)

— Employment 81.5 per cent (170,800 in August, up from 153,600 in June 2020)

— Unemployment 80 per cent (8.1 per cent unemployment rate)

— Participation rate 41.2 per cent (67.9 per cent in August, up from 66.5 per cent in June 2020)

— Retail sales 100 per cent ($8.3 billion, up from $6.7 billion in the second quarter of 2020)

— Building construction investment 65.1 per cent ($103.43 million in July, up from $100.8 million in April 2020)

— Airport passenger traffic 38.3 per cent (75,857 in August, up from 2,925 in April 2020)

— Hotel occupancy 58.2 per cent (59.8 per cent in August, up from 11.5 per cent in April 2020)

— Active businesses 100 per cent (7,905 in June, up from 7,068 in May 2020)

  1. Premier Scott Moe addresses media in a press conference announcing mandatory masking and the implementation of a vaccine passport in response to rising COVID-19 infections and increased hospitalizations. Photo taken in Saskatoon, SK on Thursday, September 16, 2021.

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  2. Premier Scott Moe holds a press conference regarding COVID-19 vaccinations. Photo taken in Saskatoon on Thursday, Sept. 30, 2021.

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The news seems to be flying at us faster all the time. From COVID-19 updates to politics and crime and everything in between, it can be hard to keep up. With that in mind, the Saskatoon StarPhoenix has created an Afternoon Headlines newsletter that can be delivered daily to your inbox to help make sure you are up to date with the most vital news of the day. Click here to subscribe.

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