Paralysis is not supposed to be one of the symptoms of COVID-19, the disease caused by the new coronavirus sweeping the world.
But drastic action by the world’s central banks — the “bazooka” as German Finance Minister Olaf Scholz labelled it, a term quickly adopted by the financial media — has left economic actors stunned and immobilized.
As markets continue to gyrate and tumble there is increasing evidence that even free money, now being offered at nearly zero per cent, is simply not enough to reassure the world facing an inscrutable future.
Evidence of that paralysis came from close to home yesterday.
While the headline from the Canadian Real Estate Association’s monthly release boasted of a resurging property market, far more revealing was what the group’s economists said about the future.
“As providers of the most accurate and timely housing data and statistics, CREA cannot credibly update its quarterly forecast at this time,” said the association in bold type at the top of its data report for February.
Less than two weeks ago, when Bank of Canada governor Stephen Poloz announced his first big interest rate cut, there were fears the sharp fall in lending costs would goose the Canadian property market with the attendant danger of recreating a real estate bubble.
Now even the experts aren’t sure. And things are changing quickly. Only last week there were accusations that the central bank was scheming to restart the economy on the backs of overborrowed Canadians.
Suddenly, what seemed like a reasonable concern over the threat of more reckless borrowing has transformed into new worries that the spring property market and the retail sector are crumbling as house hunters and shoppers stay home.
And housing is only one sector under assault by a tangle of interdependent consequences of the new coronavirus for which no one had developed strategies. Canada’s fossil fuel sector knew there were challenges ahead, but they did not include a sudden plunge in demand followed by a vicious price war.
“The macroeconomic backdrop is completely uncharted waters for oil and gas companies,” said Tom Ellacott, vice-president of the energy research company Wood MacKenzie.
With no way to know what energy prices for the rest of the year will be, investment plans made a few weeks ago have become meaningless.
The caricature of so many of us closeting ourselves with bales of toilet paper and emergency supplies in the safety of our homes applies to investors as well. As world leaders, including Prime Minister Justin Trudeau, repeatedly announce updated ways of coping with the virus, investment plans made yesterday are out of date today.
As the Bank of Canada governor once told us during the disputes with the U.S., the main economic impact of trade uncertainty was that companies and individuals considering whether to spend money cut their investment plans until they could see the way forward.
If that is how investors reacted to ambiguity over the future of trade, it is no wonder the current set of unknowns has them bewildered.
Will government rules to slow the spread of the virus get stricter yet? Will the shortage of parts we saw when Asian factories closed recur in the U.S., our biggest trading partner, as cases and deaths climb? Will the path of the disease in the U.S. and Canada be staggering like in Italy or mild like in Singapore?
Will job losses lead to a vicious circle of collapsing demand? How many consumers or businesses will default on loans? Can the consumer confidence that has recently been leading the economy bounce back?
And just as the bizarre quest for too much toilet paper was accelerated by social media feedback, a new round of uncertainty for investors has been caused by investors themselves.
Why do markets keep selling off even as experts reassure us stocks will bounce back? Is there something wrong that we don’t know and everyone else does? Will the economy and the market structure crack under the strain?
With so many questions unanswered, even more rate cuts and a suite of government plans to inject money into the economy at various levels apparently are not enough to make that uncertainty go away. And there is no point in telling people not to panic.
“First, those who are already panicking are unlikely to listen. Second, those who aren’t will start to wonder if they should,” wrote emergency preparedness expert Simon Wessely in the Financial Times on the weekend.
Everything will change when we know — or at least think we know — the answers to some of those questions. And while we are waiting, rather than staring into the abyss, perhaps this is the time to think ahead and imagine an inevitably brighter future.
Follow Don on Twitter @don_pittis
Don’t count on a fast global economy bounceback – Getaka.co.in
The world economy is experiencing a sudden stop that is without precedent in peacetime. Investors have now accepted that as an unpleasant fact and started to ask how the next stage — the exit from this sudden stop — will unfold. That, though, depends entirely on how fast the coronavirus lockdowns can be reversed.
The major economies have entered lockdown at different times — first China, then Europe and last the US — but most forecasts suggest that the annualised rate of decline in global gross domestic product in the first quarter of 2020 could approach minus 20 per cent, triple that recorded in the worst quarter of the Great Recession in 2009.
Federal Reserve officials have accepted that the US economy is probably already in recession, with new weekly activity estimates by the New York Fed showing a drop in GDP that is as deep, and much more rapid, than in 2008/09.
The latest US forecasts from Goldman Sachs show the trough of recession being reached in the second quarter of 2020, with GDP likely to be 11-12 per cent below the pre-virus reading. This would involve a dramatic decline at an annualised rate of 34 per cent in that quarter.
GDP is then projected to rise very gradually, not reaching its pre-virus path before the end of 2021. This pattern, implying almost two “wasted” years in the US, has been common in recent economic forecasts. A similar picture is expected in the eurozone, which is experiencing a collapse in manufacturing output more precipitous than in the 2012 euro crisis.
There is some cause for optimism from the partial recovery recorded in China in March. The Fulcrum Chinese nowcast shows that the month-on-month annualised growth rate rebounded to 4.6 per cent in March, compared with minus 2.0 per cent in February.
But China’s exports orders are weakening as foreign markets decline sharply. Industrial output growth is still markedly negative from a year earlier, and the State Council has had to announce new measures to restore economic growth in the second quarter. Beijing has also reintroduced partial lockdowns in several major cities in the past week.
The central expectation of mainstream economic forecasters is of a strong global recovery in the third quarter (see graphs below). This would follow the pattern in mainland China and Hong Kong after the Sars crisis in 2003.
Since then, economists have generally viewed epidemics as inherently temporary events that need not cause long-term structural damage to productive capacity, provided widespread business failures and long-term unemployment are avoided. That is the basis for today’s consensus forecasts of recovery this year.
Coronavirus, however, is clearly having much more pervasive effects on worldwide economic activity than other epidemics, such as Mers, Ebola or swine flu. If there is a prolonged path to economic normalisation, lasting more than a few quarters, fiscal and monetary support for private corporate activity might encounter political resistance. Deep-seated recessionary forces could then take hold. The widespread weakness in equities last week suggested that markets think these risks are rising.
Is there any early escape route for the world economy?
An intelligent road map to reopening the economy, recently published by the American Enterprise Institute, suggests there is indeed a way of avoiding a very prolonged recession, based on virus and antibody testing with partial quarantining of affected citizens and localities. A localised, stop-start recovery is therefore about the best we can expect. But the institute has given no timetable for the stages of its plan, and it is hard to believe it could be completed before the end of this year.
Successfully managing the exit from lockdown will require skill and resolve across many areas of government policy. Unfortunately, the disorganised response to the virus so far in most of the major nations does not inspire much confidence about the likely speed of global economic recovery.
A sudden stop but no depression?
A new activity tracker released by the New York Fed shows US GDP growth slumping to -4.5 per cent, year-on-year, in the week of 21 March.
The latest “representative” forecasts by leading market economists, collected by Fulcrum, show the quarterly annualised growth rate in the advance economies bottoming in the second quarter of 2020, then rebounding strongly in the third quarter.
COVID response offers chance to shift direction of Canadian economy: experts – National Post
The end of the COVID-19 pandemic may be a long way off, but analysts are already looking ahead to how Canada could hasten its recovery and position itself for a low-carbon economy.
“The main thing we need to be doing right now is protecting Canadians’ health and well-being,” said Josha MacNab of the Pembina Institute.
“Within that context, we’re starting to turn our minds to what does economic recovery look like.”
Downturns like the one being caused by the global pandemic routinely reduce carbon dioxide emissions. In the past, they’ve always recovered as economies rebuild.
This time, many are asking how the economy can be restored without greenhouse gases tagging along. Open letters on the issue have already been signed by hundreds of thousands of Canadians, from academics to church groups.
Groups such as the World Resources Institute in the United States are calling for clean energy tax credits, programs to increase the energy efficiency of public buildings and a switch from diesel to electric transit buses. It notes similar measures after the 2009 crash saw 900,000 jobs supported.
Pembina has its own list: funding and training for jobs more resilient to market swings, incentives for switching to electricity, support for industries that produce lower-carbon goods.
“We see this as a once-in-a-generation opportunity to make a down payment on a resilient economy and a healthier future,” MacNab said.
Once the immediate crisis has passed, the Canadian Institute for Climate Choices wants any upcoming stimulus package to focus on making the country more resilient to climate-related shocks such as wildfires or floods.
“These are what we perceived as (remote) risks in the past,” said the group’s economist, Dave Sawyer. “Suddenly, they’re happening all the time.”
The long-term response to COVID-19 could be a chance to do things the Canadian economy will have to do anyway, he said, such as retrain workers from high-carbon industries.
“We know that some industries under this low-carbon future will shed workers,” Sawyer said.
“Where do these workers go? There has been a growing trend to think about transitions for workers.”
Not everyone thinks a post-pandemic green stimulus is appropriate.
“Maybe, to some extent,” said Mark Jaccard, an energy economist at Simon Fraser University.
He suggests the need for relief is going to be so great that governments will at first simply try to restore normalcy.
“Governments are going to pour the money in, short-term, to where workers are already skilled and to regions where they’re already working,” he said. “So it’s going to be in to fossil fuel-endowed areas.”
The real challenge, Jaccard said, will be to not let COVID-19 derail policies already planned or in place.
“It isn’t government spending that will lead to a decarbonized economy. It’s policies.”
Groups such as the Canadian Taxpayers’ Federation and the federal Conservatives have already called for the planned increase in the federal carbon tax to be delayed. The increase, to $30 per tonne, has gone ahead.
Still, Keith Stewart of Greenpeace said that once the immediate dangers of the novel coronavirus have passed, the upset it will leave behind is a chance for a reset.
“It’s a shock to the system that makes things that once seemed natural and inevitable seem unnatural and avoidable.”
Stewart said any money that does go to companies must be accompanied by promises of change — much as car manufacturers promised fuel efficiency improvements in accepting their 2009 bailout.
Once initial needs of public health and well-being are funded, government spending should have an eye to the future, said Stewart.
“That investment could entrench existing systems or it could be an investment in the clean-energy economy.”
This report by The Canadian Press was first published April 5, 2020.
— Follow Bob Weber on Twtter at @row1960
Reeling World Economy Slammed by Dangerous Disinflationary Shock – Financial Post
(Bloomberg) — The sinking global economy is suffering through a colossal disinflationary shock that could briefly push it into dangerous deflation territory for the first time in decades.
With many national economies all but shutting down in an effort to contain the coronavirus, prices on everything from oil and copper to hotel rooms and restaurant take-out are tumbling.
“A powerful disinflationary tide is now rising,” said Joseph Lupton, global economist at JPMorgan Chase & Co.
That’s worrying because it could lengthen what may be the deepest recession since the Great Depression. Ebbing pricing power makes it harder for companies that piled on debt in the good times to meet their obligations. This could prompt them to make additional cuts in payrolls and investment or even default on their debts and go bankrupt.
While weak or falling prices may seem like an unalloyed good for consumers, a widespread deflationary price decline can be deleterious for the whole economy. Households hold off buying in anticipation of ever lower prices, and companies postpone investments because they see limited profit opportunities.
Even after the coronavirus crisis eases, the scars from the shutdown — elevated unemployment, shattered consumer and company confidence, and staggered returns to work — may keep price pressures in check, prompting central banks to hold interest rates at rock-bottom levels for a protracted period.
“They’re at zero for at least the next two years,” Ethan Harris, head of global economic research for Bank of America Corp., said of the Federal Reserve.
Further down the road, though, there’s a chance that all the monetary largess — coupled with a massive outpouring of government debt to pay for measures to fight the virus — could spawn a build-up in price pressures.
“It’s possible that the response to this over the longer term could have an inflationary consequence,” former New York Federal Reserve Bank of New York President Bill Dudley told an April 2 webinar organized by Princeton University. “But in the near term, it’s very definitely on the disinflationary/deflationary side.”
Lupton and his fellow JPMorgan economists forecast that their global consumer-price index will temporarily fall below its year-ago level sometime around the middle of 2020, the first time that’s happened in many decades.
Much of that is due to plunging oil prices. Even with their rebound last week on reports of potential production cutbacks, they’re still down about 55% since Jan. 1.
But other prices are also slipping, including for services. They have long been resistant to the downward tug that prices for internationally traded goods have been subject to, but now service-sector businesses are being slammed by the shutdowns. Lupton sees worldwide core inflation — excluding food and energy costs — falling below 1% and says there’s a risk it could stay there.
“The overwhelming disinflationary force is quite large,” Diane Swonk, chief economist at Grant Thornton in Chicago, told Bloomberg Radio on April 3.
While industrial countries — with the exception of Japan — avoided falling into deflation in the wake of the 2008-09 financial crisis, they’re entering this one with inflation already at depressed levels.
Perhaps the world’s biggest source of deflation right now is China, where producer prices registered a 0.4% decline in February compared with a year ago after rising 0.1% in January. That’s a drag on the price of goods being shipped overseas from the world’s biggest trading nation.
But China isn’t the only country in pain.
Chain restaurants across Japan have rolled out discount plans for takeout menus, including Yoshinoya Co., which serves bowls of beef on rice and is running a 15%-off campaign.
Read more: Deflation a Real Risk for Japan, Former BOJ Economy Chief Says
The British Retail Consortium reported on April 1 that shop prices fell 0.8% in March, the biggest decline since May 2018, following a 0.6% February drop.
And in the U.S., domestic air fares plunged by an average of 14% between March 4 and March 7, according to booking site Hopper.com. Average revenue per hotel room plummeted 80% during the March 22-28 week from year-ago levels, hospitality-data firm STR reported.
“In terms of our business, COVID-19 is like nothing we’ve ever seen before,” Marriott International Inc. Chief Executive Officer Arne Sorenson said in March 19 video. “For a company that’s 92 years old, that’s borne witness to the Great Depression, World War II and many other economic and global crises, that’s saying something.”
Investors seem to be looking for a long period of very low inflation, according to trading in inflation-protected securities, although some analysts caution the readings may be distorted by a dash for cash.
Even before the crisis, monetary-policy makers were worried inflation was too low for the good of their economies. Now they have even more reason for concern.
“Deflation cannot be ruled out, but I refuse to make an estimate,” European Central Bank Governing Council member Robert Holzman said. “If deflation is due to a slump in the real economy, it will be difficult to solve this through monetary-policy instruments alone.”
Some economists think it’s inflation, not deflation, that’s the problem.
“What will then happen as the lock down gets lifted and recovery ensues, following a period of massive fiscal and monetary expansion?” London School of Economics Emeritus Professor Charles Goodhart and Talking Heads Macroeconomics founder Manoj Pradhan wrote for VOX on March 27. “The answer, as in the aftermath of wars, will be a surge in inflation, quite likely more than 5% and even in the order of 10% in 2021.
Former chief White House economist Jason Furman said faster inflation should be welcomed, not worried about.
“I don’t think we should be afraid of getting inflation,” Furman, who is now a professor at Harvard University, told Bloomberg Radio on April 2. “If we get inflation that would be good. That would be a good sign that we have adequate demand.”
©2020 Bloomberg L.P.
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