Canadian economy avoids contraction in May, economists expect continued slowdown
OTTAWA — The Canadian economy stayed flat in May, with growth slowing down as businesses continue to face supply constraints and rising interest rates, though economists say the current cycle of interest rate increases is expected to continue into the fall.
Real gross domestic product was unchanged in May after a 0.3 per cent expansion in April, Statistics Canada reported Friday.
Growth in services-producing industries was offset by a decline in goods-producing industries, the federal agency said.
RBC assistant chief economist Nathan Janzen said the economy is hitting long-term production capacity constraints, in part because of the ongoing labour shortage.
“We’re expecting growth to slow, but part of the reason for that is because the economy right now is incredibly strong,” Janzen said, noting that the economic recovery from the pandemic was much faster than expected.
A preliminary estimate for second-quarter GDP points to 4.6 per cent annualized growth, up from 3.1 per cent for the three months of the year.
After taking a significant hit at the onset of the pandemic, real GDP surpassed the pre-pandemic level in November 2021.
“We’ve reached a very strong point in the economic cycle, earlier than expected. But the challenge from there [is] it’s just not sustainable,” he said.
The strength of the Canadian economy will have implications on the Bank of Canada’s next key interest rate decision, as it aims to cool high inflation.
Earlier this month, the central bank raised its key interest rate by a full percentage point, the largest single rate hike in more than 20 years.
CIBC senior economist Andrew Grantham said solid annualized growth in the second quarter means the Bank of Canada will likely go ahead with another supersized rate hike in September.
“That solid growth, combined with the details of today’s data which suggests supply constraints, rather than slowing demand, were holding back overall growth, means that the Bank of Canada is still on course to deliver another non-standard rate hike at its next meeting,” Grantham said in an email.
The Bank of Canada will make its next interest rate announcement on Sept. 7.
RBC is forecasting two consecutive quarters of negative growth next year, which would meet the definition of a technical recession. However, Janzen said the downturn is likely to be moderate and given early signs that global pressures on inflation are easing, the Bank of Canada may start reversing rate hikes next year.
With the inflation rate at a 39-year-high of 8.1 per cent, the central bank said it will continue to raise the cost of borrowing to decrease demand in the economy, hoping it can bring down inflation without triggering a recession.
Janzen said he expects a half-percentage point rate hike in September, with the Bank of Canada eventually bringing its key interest to a high of 3.25 per cent before it starts reversing its rate hikes.
According to the report released on Friday, the largest declines in May were experienced in the construction and manufacturing sectors, while transportation and warehousing saw the largest gains.
Statistics Canada said construction worker strikes in Ontario during May led to delays in projects. However, construction activity remained well above pre-pandemic levels.
Manufacturing contracted for the first time in eight months, with motor vehicle manufacturing stalled by a semiconductor chip shortage.
Transportation gains were driven by growth in air travel, which rose by 14.1 per cent.
The results are better than expected. StatCan’s preliminary estimate suggested the economy contracted by 0.2 per cent in May.
On Thursday, the U.S. Commerce Department said the U.S. economy contracted for a second consecutive quarter, but CIBC economists expect growth to bounce back over the remainder of the year.
This report by The Canadian Press was first published July 29, 2022.
The Canadian Press
Note to readers: This is a corrected story. A previous version included an erroneous comparison to April’s GDP reading.
IMF approves Sri Lanka’s $2.9bn bailout – Al Jazeera English
Sri Lanka’s president has said that the International Monetary Fund (IMF) has approved its request for a $2.9bn bailout and the country’s presidency said the programme will enable it to access up to $7bn in overall funding.
The IMF’s board confirmed it has signed off on the loan, which clears the way for the release of funds and kicks off a four-year programme designed to shore up the country’s economy.
The decision will allow an immediate disbursement of about $333m, the IMF said, and will spur financial support from other partners, potentially helping Sri Lanka emerge from its worst financial crisis in decades.
But IMF Managing Director Kristalina Georgieva warned that Colombo must continue pursuing tax reform and greater social safety nets for the poor – and rein in the corruption that has been partly blamed for the crisis.
“I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda,” Sri Lanka’s President Ranil Wickremesinghe said in a statement on Monday.
The country defaulted on its foreign debt in April 2022 as it plunged into its worst economic downturn since independence because of a major shortage of foreign currency reserves.
The Indian Ocean nation of around 22 million people ran out of cash to finance even the most essential imports, leading to widespread social unrest.
Mass protests over economic mismanagement, acute shortages of food, fuel and medicines, and runaway inflation forced President Gotabaya Rajapaksa to flee the country and resign in July.
Rajapaksa was replaced by President Wickremesinghe, who has implemented tough spending cuts and tax hikes in an attempt to secure IMF assistance.
IMF staff had provisionally approved the bailout in September, but the final green light was held up until China, the island’s biggest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year that it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of IMF expectations for the sustainability of the island’s debt.
Wickremesinghe had said after China agreed to restructure its loans that he expected the first tranche of the IMF package would be made available within the month.
Earlier on Monday, Wickremesinghe’s office said he was seeking a 10-year moratorium on Sri Lanka’s foreign debt as the country was out of foreign reserves to service its loans.
Officials involved in the negotiations said the terms of debt restructuring must be finalised and agreed upon by all parties before June, when the IMF is expected to review the bailout programme.
Wickremesinghe’s office said in a statement that the IMF programme will help improve the country’s standing in international capital markets, making it attractive for investors and tourists.
Wickremesinghe told the country’s parliament earlier that there were signs the economy was improving, but there was still insufficient foreign currency for all imports, making the IMF deal crucial so other creditors could also start releasing funds.
Call to tackle corruption
Colombo is also banking on the IMF deal to unfreeze billions of dollars in foreign aid for projects suspended since Sri Lanka defaulted on its loans last year.
The government has already doubled taxes, increased energy tariffs threefold and slashed subsidies in an effort to meet the preconditions of the IMF bailout.
The austerity measures have also led to strikes that halted the health and logistics sectors last week. Wickremesinghe has said he had no alternative but to go with an IMF programme.
Georgieva said Sri Lanka must stick with its controversial tax reforms, manage government expenditure and do away with energy subsidies.
In a statement, she said that “the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor”.
She also urged Colombo to tackle endemic corruption.
“A more comprehensive anti-corruption reform agenda should be guided by the ongoing IMF governance diagnostic mission that conducts an assessment of Sri Lanka’s anti-corruption and governance framework,” she said.
Sri Lanka’s economy shrank by a record 7.8 percent last year as it grappled with its worst foreign exchange shortage since independence from Britain in 1948.
Sri Lanka secures $3B IMF bailout to help salvage bankrupt economy – CBC.ca
The International Monetary Fund (IMF) said Monday that its executive board has approved a nearly $3 billion US ($4.1 billion Cdn) bailout program for Sri Lanka over four years to help salvage the country’s bankrupt economy.
An IMF statement said about $333 million US ($455 million Cdn) of the funding will be disbursed immediately and the approval will also open up financial support from other institutions.
“Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities,” the IMF statement quoted managing director Kristalina Georgieva as saying.
“Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.”
The office of Sri Lanka’s president said the IMF approval will unlock financing of up to $7 billion ($9.6 billion Cdn) from the fund and other international multilateral financial institutions.
Earlier this month, the last hurdle for the approval was cleared when China joined Sri Lanka’s other creditors in providing debt restructuring assurances.
“From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors,” president Ranil Wickremesinghe said in a statement from his office. “I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda.”
Wickremesinghe said he has made some tough decisions to ensure stability, debt sustainability and to grow an inclusive and internationally attractive economy.
Sri Lanka increased income taxes sharply and removed electricity and fuel subsidies, fulfilling prerequisites of the IMF program. Authorities must now discuss with Sri Lanka’s creditors on how to restructure its debt.
“Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program,” Georgieva said.
“The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome,” she said.
Sri Lanka announced last year that it is suspending repayment of its foreign debt amid a severe foreign currency crisis, because of a fall in tourism and export revenue due to the COVID-19 pandemic, mega projects funded by Chinese loans that did not generate income and releasing foreign currency reserves to hold the exchange rates for a longer period.
The currency crisis created severe shortages of some foods, fuel, medicine and cooking gas leading to angry street protests that forced then-president Gotabaya Rajapaksa to flee the country and resign.
Since Wickremesinghe took over, he has managed to reduce shortages and ended hours-long daily power cuts. The Central Bank says its reserves have improved and the black market no longer controls the foreign currency trade.
However, Wickremesinghe’ s government is likely to face hostility from trade unions over his plans to privatize state ventures as part of his reform agenda and public resentment may increase if he fails to take action against the Rajapaksa family, who people believe were responsible for the economic crisis.
Wickremesinghe’s critics accuse him of shielding the Rajapaksa family, who still control a majority of lawmakers in Parliament, in return for their support for his presidency.
Australia Puts Policy Pause Back on the Table as Economy Slows – BNN Bloomberg
(Bloomberg) — Australia’s central bank will consider pausing its policy tightening cycle next month given interest-rate settings are already restrictive and the economic outlook remains uncertain, minutes of its March meeting showed.
The Reserve Bank delivered its 10th consecutive rate hike two weeks ago to take the cash rate to 3.6% as board members judged inflation in Australia is “too high” and the labor market “very tight,” minutes of the March 7 meeting showed Tuesday.
Even so, the RBA board returned to the question of standing pat during its discussions.
“Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy,” the minutes showed. ”At what point it will be appropriate to pause will be determined by data and the board’s assessment of the outlook.”
While the minutes are dated given the banking sector stress that has roiled financial markets across the world, they show Australian policymakers were already focused on economic uncertainties ranging from the outlook for household consumption to credit growth.
“Members noted that monetary policy was in restrictive territory and that the economic outlook was uncertain,” the minutes showed. “The outlook for consumption remained a key source of uncertainty.” Board members also discussed the “significant financial pressures” that some households are experiencing.
Overnight indexed swaps have swung significantly since the banking crisis in the US and Europe and now imply the RBA will stand pat at its April 4 meeting and then begin cutting in August. Money markets now signal that the global monetary tightening cycle is all but done.
All eyes will be on a number of major central bank meetings over the coming days, led by the Federal Reserve with its decision likely to influence the RBA’s call next month.
Assistant Governor Chris Kent this week sought to alleviate concerns the banking crisis will become systemic, maintaining Australian lenders are “unquestionably strong” with solid balance sheets and capital positions.
Australia has lagged international peers in the scale of its rate increases, reflecting Governor Philip Lowe’s efforts to bring the economy in for a soft landing. The minutes showed the RBA’s tightening bias remained intact however, with a monthly inflation indicator and retail sales data – due next week – gaining extra prominence.
The RBA’s rapid-fire rate hikes have created a political problem for Prime Minister Anthony Albanese as he tries to persuade a heavily indebted electorate grappling with rising living costs that the pain of increased borrowing costs is preferable to entrenched inflation.
The government will release its budget in May, which is likely to have some targeted cost relief measures, although Treasurer Jim Chalmers has said it will keep a tight leash on fiscal spending to avoid further fueling consumer prices.
©2023 Bloomberg L.P.
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