(Bloomberg) — A twin-speed economy is developing in Australia and posing a challenge for the central bank, as Chinese demand for iron ore buoys the resource-rich west while eastern states struggle with Covid-19 outbreaks and border closures.
The diverging fortunes of east and west are reminiscent of conditions created by the mining boom a decade ago, and are playing out in Australia’s property market.
“Our market’s quite hot,” said Bev Haymans, a real estate agent in the upmarket coastal suburb of Cottesloe in Western Australia’s state capital of Perth. “There’s a real sense of positivity.”
Meanwhile, 3,300 kilometers (2,050 miles) to the east in Sydney’s beachside suburb of Bronte, Hannan Bouskila is struggling. April’s coronavirus lockdown was “very tough” for the housing market, the 17-year veteran of the real-estate industry said, and the renewed outbreak in neighboring Victoria state has made everyone nervous again.
The divergence poses a challenge for Reserve Bank of Australia chief Philip Lowe as he seeks to tackle spiraling unemployment and the economy sinking into its first recession in nearly 30 years.
The central bank cut its benchmark interest rate to a record low of 0.25% in March and is expected to keep it there Tuesday to support the economy. Data the following day is expected to show the country officially fell into recession in the second quarter, with economists predicting a 6% contraction from the previous quarter.
“The divergences across the states at the moment are vastly larger than normal, as multi-speed economies have opened up,” said Stephen Walters, chief economist for New South Wales Treasury and previously an official at Western Australia’s Treasury. “This is an age-old problem for the Reserve Bank. It has flared up regularly since monetary policy became independent in the 1990s.”
Driving the divergence is demand from China, the first major economy to resume growing after the pandemic. With Chinese factory activity roaring back to life, iron ore shipments from Western Australia’s Port Hedland have surged to record highs.
Now, with iron ore trading for more than $100 a ton and gold near a record, miners in Western Australia are set to ramp up investment to replace aging capital stock and retiring mines. Rio Tinto Group, the world’s No. 2 miner, last November lifted planned sending on new iron ore mines in Australia to $4 billion, while rivals BHP Group and Fortescue Metals Group Ltd. are each investing more than $3 billion in their own developments.
Western Australia “has been able to continue safely operating our resources sector throughout the pandemic, with sustained demand from China and higher commodity prices putting our exports on course for continued growth,” said Chris Rodwell, chief executive officer at the state’s Chamber of Commerce and Industry.
On the east coast, in contrast, households have been gripped by renewed fears about the virus. Consumer sentiment collapsed 15.5% in New South Wales — the country’s most populous state — amid panic that virus cases there would spike following Victoria’s outbreak.
Walters, a former chief economist at JPMorgan Chase & Co., said the RBA’s unconventional policies help it address the different speeds in the economy.
“They have a lot of discretion about which bonds they buy,” he said, referring to purchases of state government securities. “So they can actually have some impact on these different regional economies.”
What Bloomberg’s Economists Say
“Australia’s key mining state, Western Australia, is finally beginning to shrug off the hangover from the mid-2000s mining booms. Once the virus is contained, the two- or even three-speed dynamic within Australia’s economy will begin to test policy makers. This is a good problem to have, but it is yet another challenge for fiscal policy, as cross-state stabilization frameworks could be seen to penalize Covid-free states as they divert funding toward those impacted by the virus.”
James McIntyre, economist
The record-low cash rate and buoyant terms of trade already have sent Australia’s currency soaring: The local dollar is up about 28% since March 19, when the RBA cut rates and set a three-year government bond yield target, both at 0.25%. The Aussie was trading at 73.67 U.S. cents at 11:49 a.m. in Sydney and the central bank on Monday offered to buy another A$2 billion of government bonds.
Westpac Banking Corp. expects the currency to climb to 80 U.S. cents by the end of 2021.
The currency’s upswing, “which began in March 2020 and is partly associated with China’s extraordinary recovery from its 10% contraction in the March quarter, looks set to last at least two years,” said Bill Evans, chief economist at Westpac. He expects Australia’s current-account surplus to swell to A$46 billion ($33.6 billion) this year, further supporting the currency.
Confidence in Perth and its property market is mimicking the path of the Australian dollar.
“We have a lot of people who are mining or resource-based and they all feel particularly optimistic” about Western Australia, said Haymans, the Perth realtor. “Everyone is quite buoyant.”
(Updates with currency and RBA bond-purchase offer in 15th paragraph.)
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Trudeau Poised to Announce Three-Pillar Economic Recovery Plan – Yahoo Canada Finance
(Bloomberg) — Prime Minister Justin Trudeau is set to unveil a new plan to try to contain the spread of Covid-19 and recharge Canada’s pandemic-battered economy, according to a senior government official.
The broad themes in this week’s so-called Throne Speech — which outlines his government’s priorities — will be a focus on the immediate task of tackling the coronavirus, a medium-term commitment to support Canadians through the pandemic and a “resiliency agenda” to spur recovery and reconstruction.
Trudeau’s agenda won’t establish budget targets, which will be left for Finance Minister Chrystia Freeland to detail later this year in a fiscal update, the official said, speaking on condition they not be identified because the document isn’t yet public.
Wednesday’s speech is one of the most anticipated in Trudeau’s five years in power, with questions mounting over how his governing Liberals plan to navigate their next policy steps amid surging Covid-19 case numbers and soaring budget deficits.
The prime minister needs to balance the need for more health-care spending with pledges to engineer an ambitious and green post-pandemic agenda. And he needs to do it without further eroding the nation’s financial credibility after one major credit-rating agency downgraded Canada’s debt.
“This government has set certain expectations and now the pressure is on them to meet their own expectations,” pollster Shachi Kurl, executive director of the Angus Reid Institute, said by phone.
Health care spending will be the first pillar for the economic recovery, the official said. This includes spending for vaccines, Covid-19 testing and support to localize outbreaks to maintain control over a resurgence of cases.
The second will be a pledge to provide financial support to Canadians who are struggling economically due to the pandemic, with a focus on shifting people back into the workforce.
Economic recovery and reconstruction efforts are the third pillar. This will include a pledge to help foster green investments, resolve major health issues such as long-term care for seniors and bolster support systems for the most vulnerable, like low-income women and minorities.
Trudeau has spoken publicly about plans to overhaul the employment insurance system, provide support for childcare and long-term care and build a cleaner economy through climate initiatives like retrofitting buildings and electric vehicles.
The prime minister suspended all parliamentary business last month after a public rift with his previous finance chief prompted Freeland’s appointment, claiming he needed a new legislative slate in order to move ahead with a “bold” new spending plan to help drive the recovery.
Canada has already budgeted C$380 billion ($289 billion) in new debt this year as a response to the downturn, spending that will likely drive the federal government’s debt to about 50% of economic output, from 31% last year. That’s triggered a backlash from business groups and economists, who are calling on Trudeau to commit to specific new debt targets to impose discipline on the budgeting process.
To assuage those concerns, Freeland vowed last week to preserve Canada’s reputation for sound fiscal management as her government considers the next steps to drive the recovery.
Trudeau is prepared to spend whatever it takes to combat the immediate impacts of Covid-19, given the emergency expenditures will only be temporary, the official said. Any future spending deemed structural, however, would be within new “fiscal tracks” that will be laid out by the finance minister later this year.
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Swedish government promises $12 billion to kick-start economy in 2021 budget – The Journal Pioneer
By Simon Johnson
STOCKHOLM (Reuters) – Sweden’s government will pump 105 billion crowns ($12 billion) into the economy in 2021 through tax cuts and spending in a record giveaway aimed at getting the economy back on its feet after the coronavirus pandemic-induced slump.
Sweden’s economy will shrink around 4.6% this year, the minority coalition said its budget on Monday, a milder hit than many other European countries, some of which are being forced to re-impose COVID restrictions after a surge in new cases.
“Economic policy is going into a new phase,” Finance Minister Magdalena Andersson told reporters. “It is about a record-large budget to restart the Swedish economy: 100 billion so that we can work our way out of the crisis.”
The Social Democrat and Green coalition said the budget would focus would be on boosting jobs, welfare and supporting the switch to a carbon-free future.
Most measures, agreed with two small, centre-right parties which help keep the coalition in power, were already known.
Individuals and companies will get a tax cut and local authorities and welfare services more cash while around 10 billion crowns will go toward fighting climate change.
The budget is expected to create around 75,000 jobs.
LONG TERM WINNERS
While Sweden looks to have got off relatively lightly economically in the short term, analysts caution that it is too early to pick the longer term winners and losers from the pandemic.
Much will depend on how government largesse, including Europe’s 750 billion euro recovery find, is spent.
Sweden also faces a number of structural challenges, not least in the labour market where unemployment among young people and immigrants is uncomfortably high.
A dysfunctional housing market also threatens long-term economic stability while funding the country’s comprehensive welfare model as society as a whole ages will require a huge increase in productivity.
The government has promised to keep the taps open, at least for the next few years – tax cuts and spending will boost the economy by 85 billion in 2022.
But with a general election due that year, longer term policies remain unclear. The last national vote resulted an a virtual stalemate between the centre-left and centre-right blocs and there is little evidence that voters are any clearer about what they want now.
(Reporting by Simon Johnson, additional reporting by Johan Ahlander; Editing by Niklas Pollard and Toby Chopra)
US household wealth hits record even as economy struggles – CKPGToday.ca
Sep 21, 2020 9:07 AM
WASHINGTON — Americans’ household wealth rebounded last quarter to a record high as the stock market quickly recovered from a pandemic-induced plunge in March. Yet the gains flowed mainly to the most affluent households even as tens of millions of people endured job losses and shrunken incomes.
The Federal Reserve said Monday that American households’ net worth jumped nearly 7% in the April-June quarter to $119 trillion. That figure had sunk to $111.3 trillion in the first quarter, when the coronavirus battered the economy and sent stock prices tumbling.
Since then, the S&P 500 stock index has regained its record high before losing some ground this month. It was up 2.8% for this year as of Friday. The tech-heavy Nasdaq has soared more than 20% this year.
The full recovery of wealth even while the economy has recovered only about half the jobs lost to the pandemic recession underscores what many economists see as America’s widening economic inequality. Data compiled by Opportunity Insights, a research group, show that the highest-paying one-third of jobs have almost fully recovered from the recession, while the lowest-paying one-third of jobs remain 16% below pre-pandemic levels.
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