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Budget cuts will take a big chunk out of the world economy next year – Financial Post

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Governments are hitting the brakes on pandemic spending with austerity poised to be bigger than after 2008 crisis

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Financial markets are fixated on how the world’s central banks will adjust monetary policy as they grapple with inflation. But it’s fiscal tightening — the withdrawal of pandemic spending — that will likely have more impact on the global economy next year. Public programs to support households and businesses have been the most powerful engine of recovery from the COVID slump — and now governments are hitting the brakes. The money they’ll pull out of their economies in 2022 amounts to some 2.5 percentage points of the world’s gross domestic product, five times bigger than anything that happened during the turn to austerity after the 2008 crisis, according to UBS estimates.

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The belt-tightening points to slower economic growth, though it could also help to cool the inflationary pressures bubbling up in some countries. It’s happening at different speeds in different parts of the world, and for a variety of reasons.

In the U.S., emergency programs are ending but President Joe Biden’s administration is pushing a longer-term spending plan. Europe’s austerity debate from last decade is poised to flare up again, while U.K.’s leaders claim a moral duty to start trimming budget deficits.

Japan’s new premier plans more spending, but it won’t match the size of the country’s record pandemic stimulus. China has been cautious with its budget, a stance that could shift as the economy slows. In some emerging nations like Brazil, soaring inflation is driving a debate about spending limits.There are reasons why the drag on global output might not be as big as headline numbers suggest. Budget plans for next year aren’t set in stone, and governments can adjust them if the virus persists. And some of the past 18 months’ stimulus got stashed away — so it can be spent next year or afterward, cushioning the blow.

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Following is a round up of where fiscal policy is headed in some of the world’s key economies.

U.S.

Budget policy swung from being a support for U.S. growth to a drag on it in the second quarter of this year, according to the Brookings Institution’s gauge of fiscal impact, and it’s set to remain that way next year with an average quarterly impact of about 2.4 per cent of GDP (though those calculations don’t include upcoming legislation).

There have been some offsets to the withdrawal of pandemic programs like enhanced unemployment benefits. The Biden administration has extended child tax credits, providing a monthly payout worth about US$300 per child — a temporary policy that may get renewed as part of a social-spending bill worth US$1.75 trillion over a decade, about 0.6 per cent of GDP.

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U.S. President Joe Biden.
U.S. President Joe Biden. Photo by Brendan Smialowski/AFP via Getty Images

That legislation, already scaled down by about half, is still being hashed out by Democrats in Congress, so its final shape and fiscal impact aren’t clear yet. The White House has penciled in tax measures worth US$2 trillion over the same period to finance it.

A separate US$550-billion infrastructure bill passed with bipartisan support and is due to be signed by Biden on Monday, though only a small amount of that total would likely get spent next year.

Euro area

Negotiations over how to get back to fiscal normality have already revived tensions between a German-led “sound finance” camp and those more concerned with avoiding a repeat of last decade’s austerity-driven slump.

That clash won’t be resolved quickly, because the debt and deficit rules that were suspended during the pandemic will remain so throughout 2022.

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In Germany, who gets the finance ministry job in ongoing coalition talks could be an indicator of budget policy — and the favourite, Christian Lindner, has a reputation as a hawk. The country’s combination of thrift and red tape has already left it with an investment backlog worth hundreds of billions of euros.

France, whose President Emmanuel Macron is leading the charge for pro-growth policies across Europe, recently boosted spending plans in its 2022 budget to protect households from higher energy prices. Finance Minister Bruno Le Maire acknowledges the challenge of debt reduction, but says there are higher priorities post-crisis — like tackling inflation and inequality, and investing to bring industry and jobs back to France.

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U.K.

Chancellor of the Exchequer Rishi Sunak surprised investors by announcing a fiscal loosening in his Oct. 27 budget. The giveaway, equal to around 0.8 per centof GDP, was designed to help households struggling with rising energy prices and the withdrawal of pandemic supports like wage subsidies.

Still, that’s far from offsetting the sharp tax hikes on individuals — to pay for health care — and businesses announced earlier in the year. Sunak, who’s said it would be “immoral” to rack up more debt, is on track to eliminate borrowing for day-to-day spending and put the national debt on a declining path by the middle of the decade, targets enshrined in his new self-imposed fiscal rules.

Japan

Japan’s new Prime Minister Fumio Kishida’s is poised to unveil another fiscal stimulus package, which could include cash handouts and a revival of subsidies for domestic travel. The scale isn’t clear yet, but economists surveyed before the premier’s election win were expecting something around 30 trillion yen, more than 5 per cent of GDP.

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People walk underneath the autumn leaves in Tokyo.
People walk underneath the autumn leaves in Tokyo. Photo by Philip Fong/AFP via Getty Images

How much of that headline figure is actually new money — as opposed to funds already appropriated but not spent yet — will be a key clue to how aggressive Kishida intends to be in using fiscal policy to support the economy.

China

China’s government has been relatively restrained in deploying fiscal firepower, signalling early this year — when the economy was rebounding strongly — that support would be gradually reined in. It’s targeting a deficit of around 3.2 per cent, down from more than 3.6 per cent in 2020, and recent data suggest it could be smaller — perhaps not far off a balanced budget. That’s partly driven by Beijing’s push to cut wasteful spending and reduce local-government debt. With growth momentum slowing, though, some economists are now calling for a stronger fiscal impulse. Spending this year is more weighted toward projects which “significantly improve the people’s well-being,” such as renovation of old housing, public services and pension increases.

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  1. For every unemployed American in September, there were 1.4 openings.

    A record 4.4 million Americans quit their jobs in September

  2. Mario Aricci of Ponesse Foods at St. Lawrence Market in Toronto on Oct. 21, 2021.

    Food prices may sow seeds of next inflation crisis, Nomura says

  3. Bank of Canada Governor Tiff Macklem. The Bank has ended its bond-buying program and advanced its timetable on rate increases.

    Pep talk for central bankers: don’t fear the return of the bond vigilantes

  4. Federal Reserve Chairman Jerome Powell.

    Fed to start tapering asset buys by $15 billion later this month

Emerging markets

Brazil, which had the most generous pandemic stimulus among emerging economies, pared back much of it this year. But now President Jair Bolsonaro wants to increase cash transfers to the poorest households into 2022, when he faces a tough battle for re-election, and that requires changes to a spending cap in place since 2016. That’s caused a storm on financial markets, and helped drive interest rates up amid concerns that inflation — already above 10 per cent — could get worse. Mexico took the opposite approach in the pandemic, keeping a tight grip on spending. There were some signs of loosening in September’s budget proposal for 2022, which foresees a deficit of 3.1 per cent of GDP compared with 2.4 per cent in the preliminary version in March. Still, President Andres Manuel Lopez Obrador says he won’t negotiate his austerity drive or increase the debt burden.

Stimulus spending has kept up across much of emerging Asia as the region recovers from this year’s brutal second wave of infections. India has signalled it won’t pull back on pandemic stimulus, while Thailand and Malaysia have raised debt ceilings to accommodate more spending and Vietnam is considering a massive new support package. Indonesia, meanwhile, has pared back its budget and raised taxes as it aims to bring its deficit back under 3 per cent of GDP by 2023.

Bloomberg.com

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Nobody seems to know what's going on with the economy – CNN

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A version of this story appeared in CNN’s What Matters newsletter. To get it in your inbox, sign up for free here.

(CNN)If you’re confused by the US economy, which simultaneously shows signs of strength and cause for concern, you’re not alone.

The economy is on the road to recovery from the coronavirus pandemic, reeling from inflation or a source of disappointment on jobs creation, depending on who you’re talking to.
It’s probably all three, and what happens from month to month seems to be something of a surprise. That element of unpredictability might be the most normal possible thing given the shock of the pandemic — the extraordinary government intervention to save the economy is unlike anything anybody alive today has ever seen.
It’s hard to decide how important any single thing is.
Let’s look today at jobs.
Government data released Friday showed the US economy gained 210,000 jobs in November and the unemployment rate fell to 4.2%. A low rate traditionally signals full employment, meaning that nearly everyone who wants a job has one.
And yet!
Most stories about the November jobs report described it as “disappointing” in the first sentence, but also proof that the pandemic recovery is moving along.
Why the disappointment? Tappe wrote: “Economists had expected more than double the number of jobs created in November, forecasting a continuation of the buoyant economic recovery over the past two months. Instead, the November jobs gain was more reminiscent of the pre-pandemic economy, when employers added a smaller but steady number of positions, at least on the face of it.”
At the same time, there’s the good news. The jobs report suggests the pandemic recovery is progressing. The country has created more than 6 million jobs this year, and labor force participation increased to 61.8%, the highest level since the pandemic hit.
Much of the disappointment stems from expectations. The jobs report is based on two surveys — one of businesses with payrolls and one of households about their economic situation — that are conducted by the government mid-month and released by the Bureau of Labor Statistics in tandem on the first Friday of each month.
“Weird jobs numbers,” tweeted Jason Furman, who led the Council of Economic Advisors during the Obama administration.
“Very strong household survey: unemployment down to 4.2% & labor force participation up as employment up 1.1 million,” he tweeted. “But the normally more reliable payroll survey shows only 210K jobs added.”
He’s not sure what’s going on: “Some explanations may emerge but it may just be measurement error.”
Where do expectations come from? Leading up to the monthly release, economists and banks publish their own expectations for what the surveys will find. If the government data doesn’t hit those expectations, disappointment follows.
I talked to Elise Gould, a senior economist at the Economic Policy Institute, about what we do and do not learn from these reports.
She said they need to be viewed as pieces of information, not the full picture, in part because the surveys can overstate things and miss the changing composition of the workforce.
Revisions to jobs reports from recent months have confirmed stronger job growth than what was shown by the surveys.
Still, it’s best to know the latest information, even if we know it’s likely to change, she said.
Also, the pandemic. There is also the pandemic element to confound economic expectations, just like it has confounded people’s lives.
“Everyone in this economy today and the people that are making these predictions have never lived through a pandemic that hit the labor market so strong,” said Gould. “And so their models are not necessarily capturing the ebbs and flows of the pandemic.”
I asked David Goldman, managing editor of CNN Business, for his thoughts on why these reports seem to confound expectations each month. He came back with three points:
  • This is a particularly unusual environment. It is making predictions really difficult for economists. The labor shortage, supply chain crisis, energy crunch, inflation and Covid-19 situations all wrapped into one make for a delicate balancing act. We should cut economists a break.
  • Right in the long run. Economists actually have been proven correct over the past several months when they initially were thought to be wrong. That’s because the reports keep getting revised higher in subsequent months as Labor Department economists get more data. It’s not only hard for economists at Goldman Sachs and JPMorgan to figure out — it’s hard for the government, too.
  • Don’t focus on expectations. The forecasts aren’t the important thing here — it’s the actual data. And one month doesn’t a trend make. We’ve had some shockingly good jobs data in recent months, and November wasn’t all that bad — just not quite as good as we had expected.
There’s uncertainty elsewhere. Leaders at the Federal Reserve, like Chairman Jerome Powell, had been preaching that inflation was temporary — calling it “transitory,” meaning it wouldn’t permanently affect the economy.
But in a signal that inflation may last a little longer than expected, Powell told lawmakers this week the Fed may end some of its pandemic stimulus efforts — they call it “tapering” — earlier than expected.
“At this point the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Powell said.
One wrench thrown into the economy has been the resilience of the coronavirus. We may not quite understand how the surge of the Delta variant over the summer and fall arrested progress.
CNN’s Tappe and Nathaniel Meyersohn wrote about the Delta effect back in August.
Now that the Omicron variant is emerging, it, too, could send things in a new direction.

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Omicron Variant May Be Good For Economy – Forbes

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The omicron variant of Covid-19 has sparked great fear. With time, we may find the fear to have been justified, but we may find the opposite: that this is good news for the economy.

It’s still early days for our knowledge of omicron. Waiting to learn more seems to make sense, but consider this: Business decisions are being made every day. Any person who waits for perfect certainty—about the economy, technology or Covid-19—will never make a single decision. In many areas decisions have to be made this week. So it’s worthwhile to consider how omicron may be good for the economy.

Omicron seems to be displacing the delta variant in South Africa. Ted Wenseleers showed that delta’s share of total Covid-19 cases in South Africa has plummeted while omicron has surged. Because the early indications show that omicron was highly transmissible, it could well displace the delta variant around the world.

So far omicron has triggered a surge in infections in South Africa, but not a comparable increase in deaths. There’s good reason for the virus to mutate to be less dangerous. Bugs that kill their hosts don’t replicate as much as bugs that allow their hosts to remain alive. Many viruses in the past have evolved to be milder. We cannot take this idea too far, however.

The omicron virus may have mutated so that it has greater ability to infect those who already had been exposed to earlier variants. That’s no surprise to South African scientists, who have observed a very high past infection rate in their population. The virus could not get ahead by finding people never exposed to any version of Covid-19, so it found a way to infect the previously ill, this theory goes.

BioNTech CEO Ugur Sahin said recently that current vaccines probably help protect against severe illness from the omicron variant, and that new vaccines are under development that would be more targeted against omicron. Given the speed with which our vaccines were developed, we may have new versions being tested in the lab right now. The question will be how long we have to wait for regulatory approval.

From an economic forecasting viewpoint, business leaders should consider the upside potential of omicron. Although it is way too early to be sure, we may find that the disease becomes dominated by a less dangerous mutation. Illness would continue if this happens, but with fewer deaths and hospitalizations. People would come to feel more comfortable dining out, traveling and seeking routine non-Covid healthcare tests and procedures. The rosy view is far from certain, but current evidence is not more pessimistic.

Companies that that are especially sensitive to the Covid pandemic should try to delay big decisions. We’ll have better information in the coming weeks. But decisions that cannot be delayed should probably consider the possibility of a stronger economy rather than greater Covid problems.

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Can the global economy battle through another COVID-19 setback? – Aljazeera.com

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Video Duration 26 minutes 00 seconds

From: Counting the Cost

A new coronavirus variant has forced governments to impose travel bans just as economies were starting to recover.

Last week, after scientists in South Africa identified a new coronavirus variant, borders were suddenly closed off to passenger travel from Southern African countries, oil prices fell more than 10 percent, and stock markets took a hit.

Markets and economies are expected to face weeks of uncertainty as investors closely watch for updates on Omicron. What comes next largely depends on what scientists discover and how quickly they do so.

Also, green hydrogen has been hailed as the energy of the future; can it help decarbonise economies?

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