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Column: Recession by any other name will still reset the economy: Kemp – Reuters.com

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LONDON, Nov 2 (Reuters) – In most discussions, the economy is portrayed as existing in only two states – most often termed “growth” and “recession”.

The National Bureau of Economic Research (NBER)’s authoritative Business Cycle Dating Committee itself uses a two-part classification – “expansion” and “contraction”.

This binary approach encourages economists, investment analysts, journalists and politicians to produce endless forecasts about whether the economy will enter a recession or avoid one.

But it is an unhelpful oversimplification that glosses over many different states of the economy and their impact on output, incomes, employment, investment, interest rates and energy consumption.

In reality, the business cycle is a continuum ranging from boom, rapid recovery and strong growth at one extreme through soft patches and mild recessions to severe recessions and depressions at the other.

Explaining its interest rate decisions, the U.S. Federal Reserve has characterised economic activity with phrases including “rapid”, “vigorous”, “robust”, “solid”, “moderate”, “slowed considerably” and “severe disruption”.

Growth in business activity tends to accelerate and decelerate; outright declines in the level of activity are relatively rare.

UNDECLARED RECESSIONS

The NBER’s Business Cycle Dating Committee formally declared only six recessions between 1980 and the end of 2020.

The U.S. economy was in recession for just 58 out of 492 months (less than 12% of the time), on the NBER definition.

But there have been twice as many distinct cyclical troughs in the purchasing managers’ manufacturing index published by the Institute for Supply Management (ISM) over the same 41-year period.

These additional cyclical troughs centred on 1985, 1989, 1996, 1998, 2012 and 2016 were never formally declared as recessions by the NBER.

In the Fed’s discussions, these periods were characterised as periods of “moderate growth” or a “soft patch”.

They were periods of little or no growth in an otherwise uninterrupted business cycle expansion and tend to be forgotten.

But at the time these mid-cycle slowdowns or undeclared recessions often felt almost as painful for businesses and households as formally declared recessions.

Dissatisfaction with sluggish wage growth resulting from mid-cycle slowdowns in 2012 and especially 2016 likely contributed to the election of President Donald Trump in 2016.

Mid-cycle slowdowns also reset the economy by easing capacity constraints and relieving upward pressure on prices and wages.

The unusually long business cycle expansions of the 1980s (92 months), 1990s (120 months) and 2010s (128 months) were each punctuated by two mid-cycle slowdowns.

Mid-cycle slowdowns almost certainly helped prolong the formally declared expansions by freeing up spare capacity and taking some of the heat out of prices and wages.

If it hadn’t been for mid-cycle slowdowns in 1996 and 1998 during the long boom of the 1990s, the U.S. economy would almost certainly have run into capacity constraints and a recession before 2001.

Similarly, if it hadn’t been for mid-cycle slowdowns in 2012 and 2016, resetting capacity utilisation and sapping inflation and wage growth, it seems likely the most recent expansion would have ended before 2020.

From an analytical viewpoint, the distinction between mid-cycle slowdowns that prolong an expansion and cycle-ending recessions is somewhat arbitrary, a difference of degree rather than nature.

For that reason, it is more useful to focus on whether the growth in business activity is accelerating or decelerating rather than whether the economy is in recession or not.

SLOWDOWN HAS BEGUN

U.S. manufacturers reported activity was broadly flat in October as the merchandise and freight sector of the economy continued to lose momentum in the face of rapid inflation and excess inventories.

The ISM purchasing managers’ index slipped to 50.2 in October (30th percentile for all months since 1980) from 50.9 in September (36th percentile) and 60.8 a year ago (99th percentile).

The composite index has declined in nine of the last 12 months and is now at the lowest level since May 2020, when the economy was still in the grip of the first wave of the coronavirus epidemic.

The new orders component was below the 50-point threshold dividing expanding activity from a contraction for the fourth time in five months (“ISM manufacturing report on business”, Nov. 1).

More businesses reported new orders were lower (25%) than higher (18%) likely heralding a further slowdown in the months ahead.

Slower growth in manufacturing and freight is translating into slower growth in the consumption of diesel and other middle distillates.

The volume of distillate fuel oil supplied to the U.S. domestic market (a proxy for consumption) was up by less than 1% in the three months from June to August compared with the same period in 2021.

Distillate use is closely correlated with the ISM index so the continued decline in the index in September and October signals consumption growth likely slowed further.

Chartbook: Global manufacturing cycle

CYCLICAL SLOWDOWN

Between 1980 and the end of 2020, the ISM manufacturing cycle reached a distinct trough on average every 41 months or roughly every 3-4 years.

The current cyclical manufacturing upturn dates from April 2020 and is 30 months old; manufacturing activity accelerated through late 2020 and into 2021 but has been losing momentum since late 2021.

The manufacturing and freight cycle, rather than formal recessions alone, is what matters for the consumption of distillate fuel oil and other cyclical energy products.

The current downturn in the manufacturing cycle will dampen the rate of growth in distillate consumption and possibly even reduce fuel use outright.

In the United Kingdom, the European Union and China the cycle appears even more advanced, with purchasing managers’ surveys indicating activity is already falling in each case.

The Eurozone manufacturing purchasing managers’ index slipped to 46.4 in October (12th percentile for all months since 2006) and has been below 50 for four months running.

China’s manufacturing index slipped to 49.2 (4th percentile for all months 2011) and has been below 50 in six of the last eight months.

The slowdown will ripple out from the major economies at the core of the global economy (the United States, China and Europe) to the lower-value manufacturers and commodity producers on the periphery.

The cyclical slowdown will reset industrial capacity utilisation, labour markets, inflation and wage growth – whether or not it results in a formal recession being declared.

Related columns:

Recession will be necessary to rebalance the oil market (Reuters, Sept. 22)

Oil and interest rate futures point to cyclical downturn before end of 2022 (Reuters, July 22)

– Global business cycle starts to turn down (Reuters, June 30)

Diesel is the U.S. economy’s inflation canary (Reuters, Feb. 9)

John Kemp is a Reuters market analyst. The views expressed are his own

Editing by Tomasz Janowski

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Thomson Reuters

John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.

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Surprise Growth Makes South Africa’s Economy Bigger Than Before Pandemic Struck

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(Bloomberg) — South Africa’s economy is bigger than before the coronavirus pandemic struck, after growing faster-than-expected in the third quarter on increased farm output.

Gross domestic product expanded 1.6% in the three months through September, compared with a contraction of 0.7% in the previous quarter, Statistics South Africa said Tuesday in a report released in the capital, Pretoria. The median of 12 economists’ estimates in a Bloomberg survey was for growth of 0.4%. The economy grew 4.1% from a year earlier.

Full-year growth may also surprise on the upside. The central bank forecasts an expansion of 1.8% and the National Treasury 1.9%. For the nine months through September, an early indicator of where full-year growth may land, GDP grew by 2.3% from last year.

The 2.3% expansion in the first three quarters is a “reasonable indicator” of the annual number, said Joe de Beer, deputy director-general of economic statistics at the agency. “I can’t see it differing by more than” half a percentage point “from just a mathematics point of view,” he said.

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“After taking into account the firmer-than-expected third-quarter figure, we expect growth to average closer to 2.5% in 2022, before slowing to just above 1% next year,” said Sanisha Packirisamy, an economist at Momentum Investments.

At an annualized 4.6 trillion rand ($265 billion) in the third quarter, GDP is about 53 billion rand bigger than the fourth quarter of 2019, before the pandemic struck. A contraction in the prior three months had reversed gains made in the first quarter that made it bigger.

The quarterly expansion comes even after Africa’s most-industrialized economy experienced record power cuts because state electricity utility Eskom Holdings SOC Ltd. couldn’t keep pace with demand from its old and poorly maintained plants. Industries behind the better-than-expected growth were agriculture and transport, which grew 19.2% and 3.7% quarter-on-quarter respectively.

Strong exports of mineral, vegetable and paper products also contributed.

Still, South Africa’s economy remains stuck in its longest downward phase since World War II and hasn’t grown by more than 5% annually in 15 years. The government’s National Development Plan, a 2012 economic blueprint co-authored by President Cyril Ramaphosa, says that level of expansion is needed for sustainable job creation in a nation where almost a third of the workforce is unemployed.

Slow structural reforms, political uncertainty and high levels of crime continue to weigh on fixed-investment spending in South Africa, with private companies wary of committing large sums of money to domestic projects. Gross fixed capital formation climbed 0.3% from the previous quarter.

Household spending, which comprises about two-thirds of GDP, declined 0.3% in the third quarter. It’s likely to come under further strain from high inflation and interest rates that are at a level last seen more than five years ago.

Weak growth is forecast for the final quarter because of continued rolling blackouts and a strike over wages that took place at Transnet SOC Ltd., South Africa’s state-owned logistics company that operates most of the harbors in the nation, in October. The central bank forecasts expansion of 0.1% this quarter.

Lackluster economic growth and mounting price pressures pose a threat to social stability in one of the world’s most unequal societies and may stymie efforts to reduce fiscal deficits and debt.

–With assistance from Simbarashe Gumbo and Rene Vollgraaff.

(Updates with economist comment in paragraph five. An earlier version corrected household spending figure in paragraph 11)

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World Economy Heads for One of Its Worst Years in Three Decades

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(Bloomberg) — The world economy is facing one of its worst years in the three decades as the energy shocks unleashed by the war in Ukraine continue to reverberate, according to Bloomberg Economics.

In a new analysis, economist Scott Johnson forecasts growth of just 2.4% in 2023. That’s down from an estimated 3.2% this year and the lowest — excluding the crisis years of 2009 and 2020 — since 1993.

However, the headline figure is likely to mask diverging fortunes, with the euro area starting 2023 in recession and the US ending the year in one. By contrast, China is projected to expand more than 5%, boosted by a faster-than-expected end to its zero-tolerance Covid strategy and support for its crisis-hit property market.

Differences will also be on display when it comes to monetary policy after a year in which central banks “dashed toward restrictive territory in a pack,” Johnson wrote.

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“In the US, with wage gains set to keep inflation above target, we think the Fed is headed toward a terminal rate of 5%, and will stay there till 1Q24. In the euro area, meanwhile, a more rapid decline in inflation will mean a lower terminal rate and the possibility of cuts at the end of 2023.”

In China, where authorities are torn between a desire to support the recovery and concern about the weakness of the currency, “limited” rate cuts are on the cards.

Read more: Global Growth Set to Slow From 3.2% in 2022 to 2.4% in 2023

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Securing good jobs, clean air, and a strong economy – Prime Minister of Canada

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Autoworkers have been a keystone of the Canadian economy for generations. By investing in the future of the auto industry, we are not only securing good middle-class jobs, we are fighting climate change, and building an economy that works for generations to come.

Since January alone, Canada has secured several historic manufacturing deals for electric vehicles (EVs), hybrids, and batteries – deals that will create and secure thousands of good, middle-class jobs and provide the world with clean vehicles. Today, we are seeing the results of one of those deals start to roll off the line.

The Prime Minister, Justin Trudeau, was joined today by Premier of Ontario, Doug Ford, to open Canada’s first full-scale EV manufacturing plant, General Motors of Canada Company’s (GM) CAMI assembly plant in Ingersoll, Ontario. Starting today and going forward, the plant will build fully electric delivery vans – the BrightDrop Zevo 600 – which will help cut pollution and keep our communities healthy for our children and grandchildren.

Thanks in part to a $259 million investment from the Government of Canada, GM’s CAMI assembly plant was able to retool its operations to build these electric vans. By 2025, the plant plans to manufacture 50,000 EVs per year. This investment has helped secure thousands of well-paying, high-quality jobs across GM facilities, and is helping advance the electrification of Canada’s automotive sector.

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The Government of Canada will continue to work to attract investment from companies around the world as we build our EV supply chain – from mining critical minerals to manufacturing batteries, and vehicles. By taking action today, we are positioning Canada as a global leader in EVs, fighting climate change, securing good jobs, and building an economy that works for all Canadians – now and into the future.

Quotes

“When we invested in GM’s project to build Canada’s first full-scale electric vehicle manufacturing plant in Ingersoll, we knew it would deliver results. Today, as the first BrightDrop van rolls off the line, that’s exactly what we’re seeing. This plant has secured good jobs for workers, it is positioning Canada as a leader on EVs, and will help cut pollution. Good jobs, clean air, and a strong economy – together, that’s the future we can build.”

The Rt. Hon. Justin Trudeau, Prime Minister of Canada

“Today is proof that our historic investments in EV manufacturing are paying off. With the first BrightDrop vans coming off the assembly line, we’re seeing the skill of Canadian workers making a huge difference as the world moves to EVs. Our government, in partnership with GM, is cementing Canada’s leadership in the EV supply chain.”

The Hon. François-Philippe Champagne, Minister of Innovation, Science and Industry

“This milestone represents GM at our best – fast, flexible and first in the industry. The BrightDrop Zevo is a prime example of GM’s flexible Ultium EV architecture, which is allowing us to quickly launch a full range of electric vehicles for our customers. And, as of today, I am proud to call the CAMI EV Assembly team the first full-scale all-electric manufacturing team in Canada.”

Mark Reuss, President, General Motors

“This is a very exciting moment – a revolution in the way we transport people and goods. Today marks a huge day for BrightDrop, as we expand our footprint and begin producing the Zevo electric vans at scale, and a huge milestone for Canada on the road to a brighter future. Opening the CAMI plant is a major step in providing EVs at scale and delivering real results to the world’s biggest brands, like DHL Express, who will be our first Canadian customer.”

Travis Katz, President and CEO, BrightDrop

Quick Facts

  • The Government of Canada’s $259 million investment supports GM’s more than $2 billion project to reignite production at its Oshawa assembly plant, after operations stopped in 2019, and transform its CAMI assembly plant in Ingersoll.
  • The investment is being made through both the Strategic Innovation Fund and its Net Zero Accelerator Initiative.
  • The Government of Ontario made a matching contribution of up to $259 million toward the project.
  • Founded in 1918, General Motors of Canada Company (GM) is one of the largest automotive manufacturers worldwide. It is headquartered in Oshawa, Ontario, and is one of Canada’s largest automotive manufacturers.
  • GM is planning to introduce 30 new electric vehicles by 2025, eliminate tailpipe emissions from new light-duty vehicles by 2035, and become carbon neutral in its global products and operations by 2040.
  • The automotive sector contributes $16 billion to Canada’s gross domestic product and is one of the country’s largest export industries.
  • The automotive sector supports the employment of nearly 500,000 Canadians.
  • The 2030 Emissions Reductions Plan, released in March, puts Canada on track to achieving our goal of cutting emissions by 40 to 45 per cent below 2005 levels by 2030 while continuing to build a strong economy.
  • To make zero-emission vehicles more affordable and accessible, the Government of Canada offers incentives of up to $5,000 off the purchase or lease of a light-duty zero-emission vehicle through the Incentives for Zero-Emission Vehicles (iZEV) Program. Since May 2019, close to 176,000 Canadians have taken advantage of this program.
  • Since 2015, the Government of Canada has invested $400 million in building approximately 35,000 zero-emission vehicle charging stations across the country.

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