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Canadian economy expands 3.3% in second-quarter, shrinks in July – BNN Bloomberg

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The Canadian economy accelerated in the second quarter as the nation benefited from surging commodity prices and got a boost from the lifting of COVID-related lockdowns, though signs are emerging momentum is waning.

Gross domestic product rose at a 3.3 per cent annualized rate after a revised 3.1 per cent increase in the first three months of the year, Statistics Canada reported Wednesday. Growth was led by stronger household consumption and business spending on inventories.

The numbers paint a picture of an economy running hot for much of the first half of 2022, even as the U.S. and other countries stumbled, but is now entering a period of much slower growth in the face of decades-high inflation and rising interest rates.

The latest monthly readings show the economy contracted by 0.1 per cent in July, after a weak 0.1 per cent gain in June and flat growth in May, adding to evidence of slowing economic momentum.

Economists anticipate Canada’s growth rate will fall to below 1.5 per cent annualized in the second half of this year and into 2023, with some even predicting a recession possible amid one of the most aggressive hiking cycles ever by the Bank of Canada.

A median estimate in a Bloomberg survey of economists expected a 4.4 per cent annualized growth rate in the second quarter. The Bank of Canada forecast 4.0 per cent in their July Monetary Policy Report.

The weaker-than-expected reading reflects strong growth in imports. The part of household and business spending that is used to buy goods and services from other countries is not counted as domestic output.

RATE HIKES

The nation’s central bank has already increased its overnight policy rate by 2.25 percentage points since March, and is expected to continue hiking through the rest of the year. Investors are almost fully pricing in another 75 basis point increase at the Bank of Canada’s next policy decision on Sept. 7.

Canadians are also facing higher prices for virtually everything, with wage gains not keep up with the pace of inflation, which has hovered around 8 per cent in recent months.

To be sure, higher prices didn’t stop households from accelerating their spending in the first half. Household consumption jumped by an annualized 9.7 per cent in the second quarter.

Canada’s resource-rich economy in the first half also benefited from surging commodity prices, driving incomes higher and stoking demand.

Growth in nominal output rose 4.2 per cent on a non-annualized basis due to rising prices for national produced goods and services — the strongest increase outside of the pandemic recovery since 1981. Worker compensation was up a robust 2.0 per cent.

Businesses took advantage of the buoyant demand and strong commodity prices to accumulate inventories, totaling $47 billion. Inventory buildup was the biggest contributor to growth in the second quarter.

Business investment in structures and machinery and equipment also came in at a very strong 14 per cent annualized pace.

U.S. DECOUPLING

The strong demand helped Canada experience a rare economic decoupling from the U.S. Over the past six months, the U.S. expansion went into reverse with back-to-back quarterly contractions, even as Canada record one of the strongest six-month periods of growth in recent decades.

But that outperformance, at least compared to the U.S., represents in part a catching-up. Canada suffered through more strict lockdowns than the U.S., where the full recovery in GDP was faster.

Economists anticipate the Canadian and U.S. economies will converge in the second half of this year, and grow by about the same pace over the next couple of years.

In Canada, the impact of higher interest rates is already being felt, the data show. Residential investment fell by an annualized 28 per cent rate in the second quarter, the second-largest drop since the early 1960s. The largest quarterly decline in housing investment was during the depths of the pandemic.

The bulk of the gains in household consumption, meanwhile, were in services and semi-durables. Spending on interest-sensitive durable goods fell.

TRADE DRAG

Strong consumer demand in the first half, meanwhile, isn’t fully translating into more economic activity. Much of the spending is going abroad, with imports shooting up an annualized 31 per cent in the second quarter.

While exports also jumped by an annualized 11 per cent, shipments abroad failed to keep up with the pace of imports. Overall, the trade sector acted as a drag on growth, lowering growth by an annualized 5.2 percentage points.

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Demand for Aluminum Slows in Another Sign of Troubled Economy – Bloomberg

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Demand for Aluminum Slows in Another Sign of Troubled Economy  Bloomberg



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4 experts explain how to prepare for a new economic reality and protect the most vulnerable – World Economic Forum

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  • Chief Economists are mostly in agreement that the outlook for the economy is bleak and that recession is likely.
  • This new reality will take its toll on inequality and widening societal gaps.
  • Four experts explain how policies might address the immediate crisis with an eye to beefing up resilience in the long term.

The latest World Economic Forum Chief Economists Outlook suggests a global recession is “somewhat likely” and the fallout will take its toll on inequality. Just this week, the OECD put out a similar message in its interim report, warning that recent indicators have “taken a turn for the worse”.

Chief Economists have been nearly unanimous in predicting wages to fail to keep pace with surging prices, with nine in ten expecting real wages to decline in low-income economies in 2022 and 2023, alongside 80% in high-income economies.

This will see a continuing deterioration of household purchasing power compounded by aggregate pressures on basic necessities such as food and energy.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Saadia Zahidi, Managing Director at the World Economic Forum highlights “Growing inequality between and within countries” as the “ongoing legacy of COVID-19, war and uncoordinated policy action.” She says, “With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable hardest. As policy-makers aim to control inflation while minimizing the impact on growth, they will need to ensure specific support to those who need it most.”

We asked four chief economists who took part in the survey which policies they think will protect the most vulnerable and how this new economic reality might be steered to better prepare for the future.

‘Pricing carbon (globally) must play a central role’

Christian Keller, Head, Economics Research, Barclays

The one change I would make to the global economy to better prepare us for the future would be to implement a global carbon pricing mechanism. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned, because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare.

Pricing carbon emissions – or the internalization of their negative externality – is the first step to solve this ‘market failure’. Increasing their price, dis-incentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and/or fund public goods such as low-carbon energy infrastructure.

Such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage.The principles of such a mechanism are textbook economics, but many more questions arise in practice, including how to determine the true ‘marginal external costs’. Naturally, it would be a discovery process and there would be glitches. However, if one does believe climate change is a threat and that it is caused by carbon emissions, pricing carbon (globally) must play a central role.

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Chief Economists Outlook September 2022

Image: World Economic Forum

‘Build a resilient and sustainable pricing strategy’

Gregory Daco, Chief Economist, EY-Parthenon, USA

The various drivers of economic activity that were previously taken as a given will now warrant much more attention from businesses, investors and consumers. There will be five central tenets to this new paradigm: inflation, labour, supply chain, the cost of capital, and environmental, social and governance (ESG) and sustainability issues.

While the current focus is that inflation is hovering at multi-decade highs in many places around the world, there doesn’t appear to be a broad realization that inflation persistence and volatility are likely to be a key feature of the outlook over the next few years. As such, businesses will need to consider building a resilient and sustainable pricing strategy that is nimble enough to navigate a world where demand will ebb and flow more significantly than in the past few decades. Cost management and productivity gains will likely also have to be central to companies’ holistic inflation strategy.

In an environment, where talent is not just more expensive but is also perceived as more valuable and where pricing power will be limited by softening final demand, business executives will increasingly have to focus on productivity and efficiency gains to offset higher labor costs. This won’t be easy, but it will be central to their success.

Supply chain issues have been a central part of the inflation story of the last few years, and it would be misguided to believe that these issues will dissipate overnight. Businesses will need to build supply chain resilience while being aware of economic, geopolitical and political undercurrents.

The rise in the cost of debt has led business executives to put some investment plans on hold, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perception of the true value of an asset. In addition, the significant US dollar appreciation against most other currencies has created a new set of considerations for multinationals having to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.

Over the last few years, businesses have increasingly focused on ESG and sustainability issues to create long-term value, develop a sense of purpose, and provide trust and confidence to the market. The last few months have brought about a sense of urgency to these developments.

‘Address structural factors to reduce future vulnerabilities ’

Eric Parrado, Chief Economist; General Manager, Research Department, Inter-American Development Bank

The global inflationary crisis is having profound consequences on the well-being of populations around the world, especially in emerging and developing economies. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Policies should have a short term and long-term focus. In the short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates.

Long-term policies address structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research and climate change adaptation are key to improving productivity in agro-industries, food system resilience and strengthening food security in the long run.

A greater focus should be placed in climate change mitigating policies to ensure agricultural frontiers are not displaced further, and food supply is not restricted. At the same time, countries can avoid directing scarce fiscal resources to cover the costs of dealing with costly man produced natural disasters.

‘Drive employment opportunity and protection’

Svenja Gudell, Chief Economist, Indeed

Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labour market perspective, policies which could dramatically benefit vulnerable populations include: skills-based hiring, pay and wage transparency, second chance hiring, accessibility tools and accommodations, and inclusive and unbiased hiring – to name a few. While some leaders look to a one-size-fits-all policy to address cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.

As we face hardships ranging from increased cost of living, global warming, geopolitical tensions, etc., employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable an increased quality of life and well-being, opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers.

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What next for the global economy? 3 experts have their say – World Economic Forum

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License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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