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Core inflation puts pressure on Bank of Canada to raise interest rates again

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A person leaves a Toronto supermarket on Oct. 5.Alex Lupul/The Canadian Press

Canada’s inflation rate eased slightly in November but there were signs that underlying price pressures in the economy remain strong, increasing the odds that the Bank of Canada moves ahead with another interest-rate increase in January.

The Consumer Price Index rose 6.8 per cent compared with the previous year, as lower prices at the gas pump offset an acceleration in grocery prices and rent costs, Statistics Canada reported Wednesday. That’s down from 6.9 per cent in October, although slightly ahead of economist expectations of 6.7 per cent.

The rate of inflation has trended down since peaking near a four-decade high of 8.1 per cent in June. But key measures of core inflation, which strip out volatile food and gasoline prices, continued to rise in November. That suggests the economy is still running hot in the face of multiple interest-rate hikes, and makes it more likely that the Bank of Canada will raise rates at least one more time next month.

“Turning the temperature down on inflation is proving to be an achingly slow process, and we suspect this may be a theme for 2023,” Bank of Montreal chief economist Doug Porter said in a note to clients.

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After raising interest rates seven consecutive times to tackle inflation, the Bank of Canada said this month that it’s considering halting further moves. Whether that happens at its next meeting on Jan. 25 will depend on incoming economic data, central bank officials have said. The bank has a target of 2-per-cent annual inflation.

“While lower pump prices will help chop next month’s rate, the fact that many measures of core inflation are still nudging higher is a clear warning sign of persistent underlying pressures,” Mr. Porter said. “We are leaning to the view that the Bank of Canada hikes rates one more time in January to 4.5 per cent, and this firm report does nothing to doubt that call.”

Financial markets are now pricing in a roughly 60-per-cent chance that the central bank will announce another quarter-point rate hike in January.

Higher interest rates make it more expensive for households and businesses to borrow money, with the goal of lowering spending throughout the economy and slowing the pace of price increases. However, interest-rate changes work with a lag – often 18 to 24 months – making it difficult for the central bank to assess the impact of its policies in real time. That creates the risk that the bank will overtighten monetary policy and do unnecessary damage to the economy.

There are signs that inflation is trending in the right direction. On a monthly basis, the CPI rose 0.1 per cent compared with a 0.7-per-cent gain in October.

Canadians got a break at the gas pump in November, aided by the reopening of several oil refineries in the Western United States, Statscan said Wednesday. On a monthly basis, gas prices were down 3.6 per cent in November, after a 9.2-per-cent jump in October.

Since peaking in June in the wake of Russia’s invasion of Ukraine, falling global oil prices have helped drag down inflation in Canada. That said, the price of gasoline was still 13.7-per-cent higher in November than a year earlier.

There was little relief at the grocery store in November, where prices were up 11.4 per cent compared with the previous year – a bigger annual jump than in October.

Chicken prices were up 9.3 per cent compared with the year before, partly because of reduced global supply after an outbreak of avian influenza, Statscan said. Coffee and tea prices were up 16.8 per cent, while cereal prices rose 15.7 per cent.

Food price inflation has proved tough to tackle. Bank of Canada deputy governor Sharon Kozicki noted in a speech earlier this month that food prices “have continued to increase despite most agricultural commodity prices being well below their pandemic highs.”

Canadians also paid more for shelter in November. Homeownership expenses have marched higher as the Bank of Canada has raised interest rates and an increasing number of homeowners have renewed their mortgages. Mortgage interest costs were up 14.5 per cent in November compared with the previous year, the largest increase since 1983.

Meanwhile, rental prices rose by 5.9 per cent year over year, compared with a 4.7-per-cent increase in October, with the biggest jumps seen in Prince Edward Island, British Columbia, Quebec and Ontario.

Statscan noted that higher interest rates may be pushing up rental prices, as homeownership has become less affordable and more people are choosing to rent.

“The fact that rent is going up, that’s probably a reflection of interest rates, because landlords have to account for those costs as well,” Arlene Kish, director of Canadian economics at S&P Global Market Intelligence, said in an interview.

“To me the bigger concern is the fact that services inflation is rising at a steady rate. That probably is reflecting the increase in wages. We’ve seen wage inflation hitting 5.6 per cent year over year for the past two months,” she said.

The Bank of Canada has said that it is paying close attention to wage growth and labour-market tightness as increasingly important drivers of inflation. While wages have not kept pace with rising prices, labour costs are adding to inflation as companies compete for scarce workers and pass higher labour costs on to their customers.

“The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fuelling inflation and hurting all Canadians,” Bank of Canada Governor Tiff Macklem said in a speech in November.

The bank expects inflation to slow in the coming quarters as the economy stalls, unemployment increases, and higher interest rates bite into consumer spending. It expects inflation to be around 3 per cent by the end of 2023 and return to the bank’s 2-per-cent target by the end of 2024.

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IMF upgrades outlook for the global economy in 2023 – GuelphToday

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WASHINGTON (AP) — The outlook for the global economy is growing slightly brighter as China eases its zero-COVID policies and the world shows surprising resilience in the face of high inflation, elevated interest rates and Russia’s ongoing war against Ukraine.

That’s the view of the International Monetary Fund, which now expects the world economy to grow 2.9% this year. That forecast is better than the 2.7% expansion for 2023 that the IMF predicted in October, though down from the estimated 3.4% growth in 2022.

The IMF, a 190-country lending organization, foresees inflation easing this year, a result of aggressive interest rate hikes by the Federal Reserve and other major central banks. Those rate hikes are expected to slow the consumer demand that has driven prices higher. Globally, the IMF expects consumer inflation to fall from 8.8% last year to 6.6% in 2023 and 4.3% in 2024.

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“Global conditions have improved as inflation pressures started to abate,” the IMF chief economist, Pierre-Olivier Gourinchas, said at a news conference in Singapore. “The road back to a full recovery with sustainable growth, stable prices and progress for all has only started.”

A big factor in the upgrade to global growth was China’s decision late last year to lift anti-virus controls that had kept millions of people at home. The IMF said China’s “recent reopening has paved the way for a faster-than-expected recovery.’’

The IMF now expects China’s economy — the world’s second-biggest, after the United States — to grow 5.2% this year, up from its October forecast of 4.4%. Beijing’s economy eked out growth of just 3% in 2022 — the first year in more than 40, the IMF noted, that China has expanded more slowly than the world as a whole. But the end of virus restrictions is expected to revive activity in 2023.

Together, China and India should account for half of this year’s global growth, while the United States and Europe contribute 10%, according to Gourinchas.

“China’s reopening is certainly a favorable factor that’s going to lead to more activity,” Gourinchas said. “But this is in the context in which the global economy itself is slowing down.”

The IMF’s 2023 growth outlook improved for the United States (forecast to grow 1.4%) as well as for the 19 countries that share the euro currency (0.7%). Europe, though suffering from energy shortages and higher prices resulting from Russia’s invasion of Ukraine, proved “more resilient than expected,’’ the IMF said. The European economy benefited from a warmer-than-expected winter, which held down demand for natural gas,

Russia’s economy, hit by sanctions after its invasion of Ukraine, has proved sturdier than expected, too: The IMF’s forecast foresees Russia registering 0.3% growth this year. That would mark an improvement from a contraction of 2.2% in 2022. And it’s well above the 2.3% contraction for 2023 that the IMF had forecast for Russia in October.

The United Kingdom is a striking exception to the IMF’s brighter outlook for 2023. It has forecast its economy will shrink 0.6% in 2023; in October, the IMF had expected growth of 0.3%. Higher interest rates and tighter government budgets are squeezing the British economy.

“These figures confirm we are not immune to the pressures hitting nearly all advanced economies,’’ Chancellor of the Exchequer Jeremy Hunt said in response to the IMF forecast. “Short-term challenges should not obscure our long-term prospects — the U.K. outperformed many forecasts last year, and if we stick to our plan to halve inflation, the U.K. is still predicted to grow faster than Germany and Japan over the coming years.”

The IMF noted that the world economy still faces serous risks. They include the possibility that Russia’s war against Ukraine war will escalate, that China will suffer a sharp increase in COVID cases and that high interest rates will cause a financial crisis in debt-laden countries.

Asked about the impact of U.S. efforts to limit Chinese access to advanced processor chip technology due to security concerns, Gourinchas cautioned that curbs on semiconductor trade and government pressure to pull back industries to within their own borders and limit reliance on foreign partners “potentially could be harmful to the global economy.”

“Diversification of supply chains is much more important in trying to improve resilience, improve growth, improve standards of living, rather than moving toward re-shoring or ‘friend shoring,’” Gourinchas said.

The global outlook has been shrouded in uncertainty since the coronavirus pandemic struck in early 2020. Forecasters have been repeatedly confounded by events: A severe if brief recession in early 2020; an expectedly strong recovery triggered by vast government stimulus aid; then a surge in inflation, worsened when Russia’s invasion of Ukraine nearly a year ago disrupted world trade in energy and food.

Three weeks ago, the IMF’s sister agency, the World Bank, issued a more downbeat outlook for the global economy. The World Bank slashed its forecast for international growth this year by nearly half — to 1.7% — and warned that the global economy would come “perilously close’’ to recession.

___

AP Business Writer Joe McDonald in Beijing and AP Writer Danica Kirka in London contributed to this report.

Paul Wiseman, The Associated Press



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The $16 Trillion European Union Economy – Visual Capitalist

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The $16 Trillion European Union Economy

The European Union has the third-largest economy in the world, accounting for one-sixth of global trade. All together, 27 member countries make up one internal market allowing free movement of goods, services, capital and people.

But how did this sui generis (a class by itself) political entity come into being?

A Brief History of the EU

After the devastating aftermath of the World War II, Western Europe saw a concerted move towards regional peace and security by promoting democracy and protecting human rights.

Crucially, the Schuman Declaration was presented in 1950. The coal and steel industries of Western Europe were integrated under common management, preventing countries from turning on each other and creating weapons of war. Six countries signed on — the eventual founders of the EU.

Here’s a list of all 27 members of the EU and the year they joined.

Country Year of entry
🇧🇪 Belgium 1958
🇫🇷 France 1958
🇩🇪 Germany 1958
🇮🇹 Italy 1958
🇱🇺 Luxembourg 1958
🇳🇱 Netherlands 1958
🇩🇰 Denmark 1973
🇮🇪 Ireland 1973
🇬🇷 Greece 1981
🇵🇹 Portugal 1986
🇪🇸 Spain 1986
🇦🇹 Austria 1995
🇫🇮 Finland 1995
🇸🇪 Sweden 1995
🇨🇾 Cyprus 2004
🇨🇿 Czechia 2004
🇪🇪 Estonia 2004
🇭🇺 Hungary 2004
🇱🇻 Latvia 2004
🇱🇹 Lithuania 2004
🇲🇹 Malta 2004
🇵🇱 Poland 2004
🇸🇰 Slovakia 2004
🇸🇮 Slovenia 2004
🇧🇬 Bulgaria 2007
🇷🇴 Romania 2007
🇭🇷 Croatia 2013

Greater economic and security cooperation followed over the next four decades, along with the addition of new members. These tighter relationships disincentivized conflict, and Western Europe—after centuries of constant war—has seen unprecedented peace for the last 80 years.

The modern version of the EU can trace its origin to 1993, with the adoption of the name, ‘the European Union,’ the birth of a single market, and the promise to use a single currency—the euro.

Since then the EU has become an economic and political force to reckon with. Its combined gross domestic product (GDP) stood at $16.6 trillion in 2022, after the U.S. ($26 trillion) and China ($19 trillion.)

ℹ️ GDP is a broad indicator of the economic activity within a country. It measures the total value of economic output—goods and services—produced within a given time frame by both the private and public sectors.

Front Loading the EU Economy

For the impressive numbers it shows however, the European Union’s economic might is held up by three economic giants, per data from the International Monetary Fund. Put together, the GDPs of Germany ($4 trillion), France ($2.7 trillion) and Italy ($1.9 trillion) make up more than half of the EU’s entire economic output.

These three countries are also the most populous in the EU, and together with Spain and Poland, account for 66% of the total population of the EU.

Here’s a table of all 27 member states and the percentage they contribute to the EU’s gross domestic product.

Rank Country GDP (Billion USD) % of the EU Economy
1. 🇩🇪 Germany 4,031.1 24.26%
2. 🇫🇷 France 2,778.1 16.72%
3. 🇮🇹 Italy 1,997.0 12.02%
4. 🇪🇸 Spain 1,390.0 8.37%
5. 🇳🇱 Netherlands 990.6 5.96%
6. 🇵🇱 Poland 716.3 4.31%
7. 🇸🇪 Sweden 603.9 3.64%
8. 🇧🇪 Belgium 589.5 3.55%
9. 🇮🇪 Ireland 519.8 3.13%
10. 🇦🇹 Austria 468.0 2.82%
11. 🇩🇰 Denmark 386.7 2.33%
12. 🇷🇴 Romania 299.9 1.81%
13. 🇨🇿 Czechia 295.6 1.78%
14. 🇫🇮 Finland 281.4 1.69%
15. 🇵🇹 Portugal 255.9 1.54%
16. 🇬🇷 Greece 222.0 1.34%
17. 🇭🇺 Hungary 184.7 1.11%
18. 🇸🇰 Slovakia 112.4 0.68%
19. 🇧🇬 Bulgaria 85.0 0.51%
20. 🇱🇺 Luxembourg 82.2 0.49%
21. 🇭🇷 Croatia 69.4 0.42%
22. 🇱🇹 Lithuania 68.0 0.41%
23. 🇸🇮 Slovenia 62.2 0.37%
24. 🇱🇻 Latvia 40.6 0.24%
25. 🇪🇪 Estonia 39.1 0.24%
26. 🇨🇾 Cyprus 26.7 0.16%
27. 🇲🇹 Malta 17.2 0.10%
Total 16,613.1 100%

The top-heaviness continues. By adding Spain ($1.3 trillion) and the Netherlands ($990 billion), the top five make up nearly 70% of the EU’s GDP. That goes up to 85% when the top 10 countries are included.

That means less than half of the 27 member states make up $14 trillion of the $16 trillion EU economy.

Older Members, Larger Share

Aside from the most populous members having bigger economies, another pattern emerges, with the time the country has spent in the EU.

Five of the six founders of the EU—Germany, France, Italy, the Netherlands, Belgium—are in the top 10 biggest economies of the EU. Ireland and Denmark, the next entrants into the union (1973) are ranked 9th and 11th respectively. The bottom 10 countries all joined the EU post-2004.

The UK—which joined the bloc in 1973 and formally left in 2020—would have been the second-largest economy in the region at $3.4 trillion.

Sectoral Analysis of the EU

The EU has four primary sectors of economic output: services, industry, construction, and agriculture (including fishing and forestry.) Below is an analysis of some of these sectors and the countries which contribute the most to it. All figures are from Eurostat.

Services and Tourism

The EU economy relies heavily on the services sector, accounting for more than 70% of the value added to the economy in 2020. It also is the sector with the highest share of employment in the EU, at 73%.

In Luxembourg, which has a large financial services sector, 87% of the country’s gross domestic product came from the services sector.

Tourism economies like Malta and Cyprus also had an above 80% share of services in their GDP.

Industry

Meanwhile 20% of the EU’s gross domestic product came from industry, with Ireland’s economy having the most share (40%) in its GDP. Czechia, Slovenia and Poland also had a significant share of industry output.

Mining coal and lignite in the EU saw a brief rebound in output in 2021, though levels continued to be subdued.

Rank Sector % of the EU Economy
1. Services 72.4%
2. Industry 20.1%
3. Construction 5.6%
4. Agriculture, forestry and fishing 1.8%

Agriculture

Less than 2% of the EU’s economy relies on agriculture, forestry and fishing. Romania, Latvia, and Greece feature as contributors to this sector, however the share in total output in each country is less than 5%. Bulgaria has the highest employment (16%) in this sector compared to other EU members.

Energy

The EU imports nearly 60% of its energy requirements. Until the end of 2021, Russia was the biggest exporter of petroleum and natural gas to the region. After the war in Ukraine that share has steadily decreased from nearly 25% to 15% for petroleum liquids and from nearly 40% to 15% for natural gas, per Eurostat.

Headwinds, High Seas

The IMF has a gloomy outlook for Europe heading into 2023. War in Ukraine, spiraling energy costs, high inflation, and stagnant wage growth means that EU leaders are facing “severe trade-offs and tough policy decisions.”

Reforms—to relieve supply constraints in the labor and energy markets—are key to increasing growth and relieving price pressures, according to the international body. The IMF projects that the EU will grow 0.7% in 2023.

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UK to Be the Only G-7 Economy in Recession This Year, IMF Says – BNN Bloomberg

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(Bloomberg) — Britain faces the bleakest two years of any major industrial nation with a recession in 2023 and the slowest growth of peers in 2024, the International Monetary Fund predicts.

The UK will be the only Group of Seven member whose economy will shrink this year, with a contraction of 0.6%, the IMF said. The Washington-based institution downgraded its outlook by a massive 0.9 percentage point from October, saying higher interest rates and taxes along with government spending restraint will exacerbate a cost-of-living crisis.

The forecast highlights the challenges Prime Minister Rishi Sunak’s government faces in the leadup to the next election. Chancellor of the Exchequer Jeremy Hunt suggested the economy is likely to perform better than the IMF expects.

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“The governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted,” Hunt said in a statement. “We are not immune to the pressures hitting nearly all advanced economies. Short-term challenges should not obscure our long-term prospects.”

In 2024, the economy will rebound only slowly, growing at 0.9% — matching Japan and Italy at the bottom of the G-7 league table for growth.

The forecast anticipates the first UK recession, excluding the pandemic, since the financial crisis in 2009. Across the two years leading up to the deadline for Prime Minister Rishi Sunak to call an election, the economy will effectively stagnate — expanding just 0.3%. 

The IMF did not downgrade any other G-7 economy this year as it raised its global growth forecast from 2.7% to a still sluggish 2.9%. An escalation of the war in Ukraine or a health crisis in China as Covid spreads could set back the world economy, it said in its World Economic Outlook update. However, “adverse risks have moderated since October.”

The downgrade to UK growth is striking because the IMF’s October forecast was prepared before the £45 billion ($55.7 billion) unfunded tax giveaway in the September budget during the short-lived Liz Truss premiership. At the time, the fund said the fiscal splurge would have boosted growth.

Since then financial conditions have tightened, rising borrowing costs for businesses and households. The Bank of England has raised rates from 2.25% to 3.5%, and markets now expect rates to settle around 4.5%. The IMF said it’s downgrade also reflected “tighter fiscal” policy but, according to Treasury figures, fiscal policy is looser this year than at the last forecast.

In October, the IMF attacked the UK’s massive spending spree — arguing that fiscal and monetary policy should not be working at cross purposes and that the government needed to bring the public finances under control.

IMF Chief Economist Pierre-Olivier Gourinchas repeated the warning. In a blog post alongside the forecast, he said many countries are being too generous with their energy support, which is “costly and increasingly unsustainable.”

Instead, countries should “adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy,” Gourinchas said.

He also urged central banks, like the Bank of England, to press on with rate rises even if it means inflicting more misery on cash-strapped households. The BOE is expected to raise rates a half point to 4% on Thursday.

“Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path,” Gourinchas said. “Easing too early risks undoing all the gains achieved so far.” 

Read more:

  • UK Wage Inflation Points to Another Big Rate Hike This Week

–With assistance from Andrew Atkinson.

©2023 Bloomberg L.P.

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