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Canada's economy has ‘free money lying on the sidewalk’ and nobody is picking it up – National Post

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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.”

•Email: kcarmichael@postmedia.com | CarmichaelKevin

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How Fast Can China's Economy Bounce Back from Virus Lockdown? – Financial Post

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(Bloomberg) — The biggest question for the global economy right now is how quickly China can get back to anything like normal operations while it’s battling the coronavirus outbreak that has killed almost 1,900 people and sickened tens of thousands.

Government controls and people’s fears to go outside have decimated spending for businesses from local noodle joints and Starbucks stores to Alibaba delivery men. Meantime, many factories are still not working due to a lack of staff, with workers trapped in their hometowns or spending two weeks in quarantine.

China’s economy was likely running at just 40%-50% capacity last week, according to a Bloomberg Economics report. The following data track how much of the world’s second-largest economy remains out of action:

Human Movement

About the same number of trips by planes, trains, automobiles and boats was taken in the run up to the Lunar New Year this year compared to last year, but the fall off since the first day of the Year of the Rat on Jan. 25 has been stark. On average, there’s only about 20% as many trips being taken each day, meaning millions of people still haven’t traveled back to work. And with long-distance buses only allowed to operate at 50% capacity to reduce the risks of viral transmission, that backlog will take a long time to clear.

Industrial Demand

Although some companies, especially large state-owned industrial firms and those making medical equipment, have ramped up output, demand for electricity is still well below where it should be at this time of year. Along with anecdotal reporting from across China’s vast east-coast manufacturing heartland, the power numbers suggest much of the nation’s industrial capacity remains idle.

Emissions of nitrogen dioxide in the week after the holiday were 36% below where they were at the same point after the new year break in 2019, according to the Centre for Research on Energy and Clean Air, which cited satellite data. A slowdown of 25%-50% across industrial sectors such as oil refining, coal-fired power generation and steel production contributed to the drop, according to the independent research organization.

A survey of 109 American manufacturing companies in and around Shanghai showed that although almost 70% were operating last week and more than 90% expected to be back by this week, 78% of firms said they didn’t have sufficient staff to run a full production line.

Consumption

Alibaba Group Holding Ltd, the first major Chinese technology corporation to report results since the epidemic emerged in January, said the virus is undermining production and has changed buying patterns, with consumers pulling back on discretionary spending, including travel and restaurants.

That drop in discretionary spending can be seen clearly in the plunge in box office revenue this Lunar New Year.

Even if people do want to spend, many shops are shut, and online and offline retailers are facing logistical problems to supply customers. That situation may continue until the virus is contained, people are back at work and getting paid, and they feel confident to spend again.

Note: Economists at Australia and New Zealand Banking Group, Nomura Holdings and Goldman Sachs Group are among those that have referred to some of these indicators in recent research. Bloomberg News will update this item as the situation continues to involve, adding data as it becomes available.

Bloomberg.com

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Rand falls: Moody’s warns investors about South Africa's economy – Aljazeera.com

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South Africa’s rand weakened and bond yields rose after Moody’s Investors Service lowered its forecasts for economic growth, raising the risk the country may lose its last investment-level credit rating.

The rand declined as much as 0.7% to trade above 15 per dollar for the first time in a week. Yields on benchmark 2030 government bonds rose four basis points to 8.9%.

Moody’s, which is scheduled to review South Africa’s Baa3 credit rating in March, said the country’s lackluster economic performance was due to domestic challenges rather than external factors such as the coronavirus. A downgrade by Moody’s would see South Africa lose its place in investment-grade indexes, sparking outflows from its bond and stock markets.

South Africa Economy

“Markets are betting that this could be a precursor to a downgrade into junk at the March review, which follows next week’s budget,” said Christopher Shiells, an analyst at Informa Global markets in London. “However, the Treasury may be able to buy itself more time with a statement that outlines credible steps toward fiscal and general economic reform.”

Recent economic indicators suggest that industrial activity in South Africa remains weak amid low business and consumer confidence, while recurring power outages have weighed on manufacturing and mining output, Moody’s said in a report. The company lowered its forecast for gross domestic product growth to 0.7% in 2020, from 1%, and predicts expansion of just 0.9% in 2021.

“Slow growth of economic activity is hampering the rate of jobs creation,” Moody’s said. “Our sub-1% projections reflect our view that the pace of economic activity will remain subdued, well below the country’s potential, over our forecast horizon.”

Tight Policy

South Africa’s relatively high real interest rates are bolstering the rand while constraining economic growth, Moody’s said. While the central bank reduced its policy rate by 25 basis points in January, the real rate, which adjusts for inflation, remained above 2%, higher than the GDP growth rate.

“It’s not a huge surprise,” said Paul McNamara, a fund manager at GAM Investment Management in London. For South Africa, “it’s a long death march rather than anything more spectacular. We’re reluctant to own a lot of rand, but the bonds look priced for a lot of bad news already.”

While the country may avoid a credit downgrade in March, much hinges on the government’s commitment to curb spending and consolidate debt. That would require capping the public-service wage bill in the face of opposition from labor unions.

“A downgrade will happen anyway for lack of reform reasons rather than what forecast numbers are,” said Peter Attard Montalto, head of capital-markets research at Intellidex in London.

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Brazil says prolonged coronavirus outbreak would negatively affect economy – Financial Post

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BRASILIA — Brazilian Economic Policy Secretary Adolfo Sachsida said on Monday that a prolonged coronavirus outbreak could affect Latin America’s largest economy if commodities prices remain low for a long time.

Sachsida added that the government did not see a reason to reduce its GDP growth projection for 2020 from 2.4%, at a time when several economists have slashed forecasts.

(Reporting by Marcela Ayres; Editing by Peter Cooney)

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