On the days the Bank of Canada sets policy, my inbox fills with commentary from various economists and sundry currency analysts.
This week’s commentariat included a new addition. Trevin Stratton, chief economist at the Canadian Chamber of Commerce, expressed dismay over the central bank’s revised outlook, which assumes the economy essentially stalled in the fourth quarter, and foresees only lacklustre growth of 1.6 per cent in 2020.
In a shift, Stephen Poloz, governor of the Bank of Canada, told reporters on Jan. 22 that interest-rate cuts might be necessary to offset deflationary pressures. For now, the central bank thinks the economy will pull out of this current soft patch, but the slope of the recovery will be gradual.
And that’s the problem. The central bank also raised its estimate of the economy’s non-inflationary speed limit to two per cent. The gap between that measure and the 2020 outlook suggests that Canada, despite its all-star potential, is performing like a third-liner.
“We have entered an era of low interest rates and sluggish growth as our economy has not been able to build any sustainable momentum,” said Stratton. “This is why the Canadian business community continues to press the government for a national economic strategy that can address our declining competitiveness.”
The biggest of the Big Business lobbies have upped their games over the past couple of months. In November, the Business Council of Canada, which represents the leaders of the country’s largest companies, released a report on what it thinks it will take to get the economy out of third gear. At the end of this month, the Chamber is hosting an “economic summit” in Toronto that will confront what it describes as “monumental transformation.”
Corporate leaders may have discovered what complacency gets you: nothing. Business was a non-entity in last year’s election campaign, meaning every member of Parliament has a mandate to ignore the concerns of the hiring class if he or she desires.
Another reading of Corporate Canada’s newfound urgency is that its members sense that the economy has drifted badly off course. “One month isn’t a trend,” said Goldy Hyder, head of the Business Council of Canada, when Statistics Canada reported a big drop in hiring in November, “but it’s important nonetheless to get ahead of things starting with having an actual economic plan for growth.”
One month wasn’t a trend; hiring rebounded in December.
Still, as the central bank observed, “job creation has slowed,” albeit at levels that are consistent with full employment. Poloz and his deputies also expressed concern over the trajectory of business investment, consumer confidence, and household spending. The momentum that resulted in the addition of more than one million jobs in Justin Trudeau’s first term as prime minister is petering out.
Bottom line: better-than-sluggish growth in 2020 is going to require stimulus of some kind. The question is, who should provide it?
In the fall, the Bank of Canada nudged finance ministers to do it. The Oct. 30 policy statement said officials would be paying particular attention to “fiscal policy developments.” If that was too ambiguous, Poloz told BNN Bloomberg later that day that $5 billion of fiscal stimulus was as good as a quarter-point cut in interest rates. The implication was that the central bank had been doing most of the work for years and that the time had come for others to help out.
Finance Minister Bill Morneau, for one, appears to have taken the hint. With interest rates already very low, the ability of central banks “to be effective in the face of challenges is different than it was in the last real challenge,” he told Bloomberg Television at the World Economic Forum in Davos, Switzerland, referring to the Great Recession. “That’s a reflection back on people like me,” Morneau added. “The world we’re in today is not the same as when rates were at a higher starting point.”
One of the first things Morneau did after the election was propose a modest income-tax cut worth about $6 billion per year once fully implemented. That sounded like it would take some pressure off the central bank, but rules of the thumb don’t always hold up in the real world. Poloz said the tax reduction probably will have only a modest impact on economic growth.
“It’s a targeted tax cut as opposed to a general fiscal stimulus,” he said.
At the same time, reduced spending in Ontario and Alberta will offset increased federal stimulus. The Bank of Canada said “fiscal tightening” in these provinces might partially explain weaker consumer confidence. Morneau probably also is near his limit, as the Parliamentary Budget Officer predicts he will struggle to keep his promise to shrink debt as a percentage of gross domestic product.
“There is zero net incremental fiscal stimulus in Canada,” said Derek Holt, an economist at Bank of Nova Scotia, which has been calling for lower interest rates since the fall. “The onus is on the BoC to step up to the plate if stimulus is needed.”
It might be possible to revive the economy without spending more money or tempting households to taken on more debt.
In the fall of 2018, the Trudeau government promised to ease the regulatory burden, in part by ordering regulators to take the economy into account when setting new rules. But little has happened since, and it’s not obvious that anyone in Ottawa cares. Ryan Greer, a policy director at the Chamber, said the sight of the federal government getting serious about de-regulation would be a “game-changer” for business investment.
The same goes for inter-provincial trade barriers. The International Monetary Fund estimates the free trade within Canada would increase per capita GDP by almost four per cent, massive stimulus that could be paid for with political capital, rather than more debt.
“That’s a huge number,” Poloz said at an event in Vancouver this month. “That’s free money, lying there on the sidewalk and everybody is refusing to pick it up.”
How China’s Economy Is Taking a Hit From Coronavirus – Barron's
China’s spreading new virus has killed 26 people, with confirmed infections approaching 1,000—a number health experts say is likely a fraction of the actual cases.
As the disease has spread to nearly 10 other countries, including the U.S., airports around the world are screening passengers from China. Airline and travel-related stocks are taking a hit. The Dow Jones Industrial Average fell sharply Wednesday and early Thursday but has largely recovered since.
But what is happening on the ground in China’s domestic economy, which is facing this outbreak amid its lowest growth rate in 30 years?
Authorities there have locked down ground zero of the viral outbreak—the enormous city of Wuhan, which is geographically 10 times the size of Dallas or San Diego, and contains 11 million residents. At least eight other cities in the region are under transport lockdown, meaning some 40 million people are restricted from traveling, according to Chinese state media reports.
Predicting how the outbreak and subsequent consumer panic and investor uncertainty will affect certain sectors is often easy, but less clear-cut for several areas.
Morningstar Investment Management Asia forecasts that Chinese airlines with Wuhan-connected routes will suffer in the short term, but “barring a ‘black swan’ event, we expect airline operations to normalize over time,” Ivan Su, a Morningstar equity analyst, said in an emailed statement.
Also expected to take a hit are China’s leading travel site
(ticker: TCOM) and the tourism and gambling sectors in Macau, which recently announced its first coronavirus case.
Macau’s economy was hit hard in early 2003 by the SARS epidemic, though central government support helped it rebound soon after. As China is experiencing significant economic cooling, investors are waiting to see what, if any, stimulus measures are rolled out for various sectors once the disease is better understood and contained.
One hard-hit sector looks to be China’s movie industry. The disease struck smack in the middle of the country’s biggest annual holiday, Lunar New Year, which often rakes in a substantial portion of each year’s box office receipts—close to $10 billion last year. An industry source told entertainment outlet Deadline that the disease’s effects could cost the industry $1 billion globally this year.
The dour news spread quickly on Chinese social media, but one clever studio spun straw into gold. The makers of one film, the much-anticipated comedy “Lost in Russia,” decided to not only release the movie online, but to offer it for free. Within hours Friday, the announcement became the top-trending topic on China’s
-like Weibo, and Hong Kong-listed
Huanxi Media Group’s
(1003:HK) share price had skyrocketed an eye-popping 43%.
Although many industries and stores close their doors during the holiday, one exception is large, higher-end restaurants, where families and big groups go to treat each other to lavish meals. There is scant data on how they are faring so far, but one Chinese woman who returned to her hometown for the holiday in Henan, a province not far from Wuhan that has reported its own viral cases, said she had urged her friends and family to skip the festive dinners and play it safe at home.
“My brother and mother were on the fence about going to the big dinner,” Lü Gaili, a 33-year-old illustrator, told Barron’s. “I couldn’t seem to convince them, so I secretly used each of their phones to text the family saying ‘I’m not going tonight.’ This way everyone thought we had all decided against going.”
Many Chinese haven’t gone to this extreme to convince their loved ones to avoid crowded Lunar New Year events. Three other Chinese citizens told Barron’s they and numerous friends had canceled big gatherings because of the perceived risk.
And these are only examples of voluntary avoidances of activities that would generate economic activity. Beijing authorities have outright banned events, including its major new year festival, and have shuttered several of its preeminent tourist attractions, including the Forbidden City, the National Museum, and parts of the Great Wall.
Shanghai has shut down several events as well, including some of its river cruises, but none have provoked the despondency that arose online Friday when Shanghai Disneyland announced it was closing its doors for an unspecified duration.
Hong Kong, Macau, and several other cities have taken similar precautions. Despite only moderate ups and downs for overseas stocks, mainland Chinese markets ended the week on a palpably sour note, with the benchmark Shanghai Composite Index having its worst Lunar New Year’s eve in its 30-year history, falling nearly 3% Thursday before the start of the seven-day trading break.
Because of China’s enormous population, the enervation of economic activity, even for as little as a week—and this epidemic could have longer staying power—is enough to significantly dent the country’s overall economy, experts say.
If the virus continues to spread, “the economic impact for China—and potentially elsewhere—will be significant,” according to a study by the Economist Intelligence Unit, which said up to one percentage point could be shaved off the country’s 2020 real GDP growth rate.
Other analysts were more pessimistic. “The current outbreak’s likely impact will range from a 0.8% cut to real GDP if the epidemic is controlled within three months, to a 1.9% cost to GDP if the epidemic lasts nine months,” said Mo Ji, chief economist of Greater China for asset management firm AllianceBernstein.
“Most likely, the duration of the outbreak will be something in between,” he said. “For at least another three to four months, China will have to fight not only the spread of the disease but also the damage it causes to economic growth. We currently anticipate a possible one percentage point cost to real GDP growth.”
Tanner Brown is a contributor to Barron’s and MarketWatch and producer of the Caixin-Sinica Business Brief podcast.
Stronger Growth, but With Caveats, Predicted for Global Economy – The New York Times
DAVOS, Switzerland — Top economic policymakers and business leaders from around the world made fairly upbeat predictions for global economic growth this year at the World Economic Forum on Friday, but cautioned that already low interest rates mean there is limited room to respond if new problems arise.
Kristalina Georgieva, the managing director of the International Monetary Fund, said the global economy’s prospects had improved noticeably even in the three months since the fund’s annual meeting with the World Bank last October.
That improvement was partly due to a recent lessening of trade tensions, including the agreement earlier this month between the United States and China, she said. She also cited interest rate cuts by 49 central banks and signs that industrial production around the world was starting to bottom out.
Ms. Georgieva predicted that the global economy would grow 3.3 percent this year and 3.4 percent next year, but cautioned that, “3.3 percent is not a fantastic growth, it is sluggish.”
She warned that with interest rates already very low or even negative in many places, it would not be easy to respond if new difficulties emerged. In what appeared to be a veiled reference to possible economic consequences from a new virus in China and bushfires in Australia, Ms. Georgieva said that January had already produced events that posed new risks, and policymakers would need to be able to respond more quickly than in the past when things went wrong.
Treasury Secretary Steven Mnuchin alluded indirectly to the new coronavirus that has led Beijing to quarantine more than a dozen cities in China this week, saying that health challenges need to be watched closely. Problems at Boeing — which has temporarily halted production of its 737 Max jets after two crashes — could trim American economic growth by as much as half to three-quarters of a percent in the short term, he said, while adding that the United States still has a “very robust economic outlook through 2020.”
Europe and Japan have been at the center of concerns that negative interest rates leave little room for policymakers to ease monetary policy and stimulate growth if needed. The top central bankers from both places acknowledged on Friday the dangers of negative interest rates even as they said that they saw no immediate opportunity to tighten monetary policy.
Christine Lagarde, the president of the European Central Bank, said she welcomed figures showing lower unemployment in Europe and wages rising at a rate of 2.5 percent a year. But she warned that inflation had not yet risen to the point that the central bank could tighten monetary policy — which would push up short-term interest rates and leave room to cut them later.
“We are seeing inflation moving a teeny tiny bit,” she said.
Haruhiko Kuroda, the governor of the Bank of Japan, said that the Japanese economy was likely to keep growing at its recent pace of 1 to 1.5 percent a year. While that has been enough to keep unemployment very low, inflation is also so low — well below 1 percent — that the central bank “will continue accommodative monetary policy for some time,” he said.
Vice Chancellor Olaf Scholz of Germany, who is also the finance minister, defended his country’s fiscal policies against recent international criticism that it was too tight. He said that Germany has cut taxes and increased infrastructure spending, and plans large investments in its electricity grid and wind energy as it starts to shift away from coal-fired electricity as a way to address climate change.
In a clear reference to the this month’s Phase 1 trade agreement between the United States and China, Ms. Lagarde said that the European Central Bank would be watching for whether recent pacts would divert trade from previous patterns. The Phase 1 agreement requires China to increase very sharply its purchases of American manufactured products, farm goods, energy and services, raising worries particularly in Europe that China will shift its orders away from them and toward American suppliers.
The European Central Bank is looking at “who will lose out from that re-diversion in various agreements,” Ms. Lagarde said.
The only person from China on the stage was the moderator, Zhu Min, who is a former deputy governor of the People’s Bank of China and a former deputy managing director of the International Monetary Fund. He did not offer predictions about the Chinese economy.
In interviews on the sidelines of the World Economic Forum, corporate executives tended to share the general optimism of policymakers while echoing their worries about the difficulty of cutting interest rates to stimulate growth if something goes wrong.
“The dangers of something has increased,” said Thomas Buberl, the chief executive of Paris-based AXA, which is one of the world’s largest insurers. “The instruments that we have to react to that are much more limited.”
The digital economy is becoming ordinary. Best we understand it – The Conversation Africa
The digital economy has been getting a lot of attention, with increasingly strong headlines offering apocalyptic as well as breathtakingly exciting scenarios. Some warn of job losses due to automation, some wonder at the things digital technology can do. And then there’s real scepticism about whether this will translate into delivering to people who need it most.
With all of this discussion, however, there is seldom an explanation of what the digital economy actually is. What makes it different from the traditional economy? Why we should care about it?
The digital economy is a term that captures the impact of digital technology on patterns of production and consumption. This includes how goods and services are marketed, traded and paid for.
The term evolved from the 1990s, when the focus was on the impact of the internet on the economy. This was extended to include the emergence of new types of digitally-oriented firms and the production of new technologies.
Today the term encompasses a dizzying array of technologies and their application. This includes artificial intelligence, the internet of things, augmented and virtual reality, cloud computing, blockchain, robotics and autonomous vehicles.
The digital economy is now recognised to include all parts of the economy that exploit technological change that leads to markets, business models and day-to-day operations being transformed. So it covers everything from traditional technology, media and telecoms sectors through to new digital sectors. These include e-commerce, digital banking, and even “traditional” sectors like agriculture or mining or manufacturing that are being affected by the application of emerging technologies.
Understanding these dynamics has become non-negotiable. The digital economy will, soon, become the ordinary economy as the uptake – and application – of digital technologies in every sector in the world grows.
I have been part of a team of researchers looking at what this means for a society like South Africa. In particular, we have been focused on looking at what the proliferation of the digital economy means for inclusion – making sure that everyone can access it – and economic opportunities.
But the first step was to get absolutely clarity on what this multifaceted phenomenon is.
The digital core
At the centre of the digital economy is a ‘digital core’. This includes the providers of physical technologies like semiconductors and processors, the devices they enable like computers and smartphones, the software and algorithms which run on them, and the enabling infrastructure these devices use like the internet and telecoms networks.
This is followed by ‘digital providers’. These are the parties that use these technologies to provide digital products and services like mobile payments, e-commerce platforms or machine learning solutions.
Lastly, there are the ‘digital applications’. This covers organisations that use the products and services of digital providers to transform the way they go about their business. Examples include virtual banks, digital media, and e-government services.
A concrete example helps paint the pictures. Consider a typical agriculture value chain: a smallholder farmer needs inputs (like financing) to produce and then sell crops to, say, processors or directly to consumers. Today smallholders can obtain financing through their mobile phones from digital financial services providers rather than physically visiting a bank. These digital financial services are able to assess the risk of lending to the farmer by building a profile using AI algorithms in conjunction with alternative data sets, such as mobile phone usage or satellite farm imagery.
Then there are the mobile applications that can help farmers produce better crops. They can provide advice on the best time for planting, soil quality and dealing with pests. It means that a farmer no longer has to rely on face-to-face advice from friends or agro-dealers.
Another example in the agriculture arena is the ability of farmers to rent tractors. Known as asset-sharing platforms, these enable farmers to gain access to a tractor they wouldn’t ordinarily be able to afford.
Digital versus traditional
So what makes the digital economy different to the traditional economy?
Firstly, digital technologies allow firms to do their business differently as well as more efficiently and cost-effectively. They also open up a host of new possibilities. Take navigation apps. No team of people would ever be able to provide real time, traffic-aware navigation in the way that smartphone apps do.
This means that products and services can be offered to more consumers, particularly those who couldn’t be served before.
Secondly, these effects are giving rise to entirely new market structures that remove, among other things, transaction costs in traditional markets. The best example of this is the rise of digital platforms such as Amazon, Uber and Airbnb. These companies connect market participants together in a virtual world. They reveal optimal prices and generate trust between strangers in new ways.
Lastly, the digital economy is fuelled by – and generates – enormous amounts of data. Traditionally when we made purchases in a brick-and-mortar store using cash, no-one was keeping an account of our personal consumption or financial transactions on a large scale. Now, ordering online and paying electronically means that many of our consumption and financial transactions generate electronic data which is recorded and held by someone.
The collation and analysis of this data provides enormous opportunities – and risks – to transform how a range of economic activities are performed.
The digital economy is with us. Yet the boundaries between digital and traditional are blurring as technological change permeates every facet of of modern life. We all need to understand the nature of this change to be able to respond at every level: society, corporate and personal.
The South Africa in the Digital Age initiative has been convened by Genesis Analytics in partnership with the Gordon Institute of Business Science and the Pathways for Prosperity Commission at Oxford University. A multi-stakeholder initiative, it has developed a forward-looking digital economy strategy for the country.
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