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Delta variant likely slammed brakes on U.S. economic growth in third quarter

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The U.S. economy likely grew at its slowest pace in more than a year in the third quarter as COVID-19 infections flared up, further straining global supply chains and causing shortages of goods like automobiles that almost stifled consumer spending.

The Commerce Department‘s advance gross domestic product report on Thursday is also expected to show strong inflation, fueled by the economy-wide shortages and pandemic relief money from the government, cutting into growth. Ebbing fiscal stimulus and Hurricane Ida, which devastated U.S. offshore energy production at the end of August, also weighed on the economy.

But there are signs that economic activity picked up towards the end of the quarter amid declining coronavirus cases driven by the Delta variant.

“Delta is the biggest reason why we have this noticeable deceleration,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We’re going to see growth re-accelerate in the fourth quarter and the first half of next year as the effect of the Delta variant begins to wane. It doesn’t mean that we won’t have future waves of COVID, but with each passing wave, the economic costs continue to diminish.”

GDP growth likely increased at a 2.7% annualized rate last quarter, according to a Reuters survey of economists. The poll was, however, conducted before the release of data on Wednesday showing a sharp widening in the goods trade deficit in September amid a slump in exports.

The biggest goods trade deficit on record prompted some Wall Street banks to cut their GDP growth estimate, including Goldman Sachs, which trimmed its forecast by half a percentage point to a 2.75% rate. The Atlanta Federal Reserve trimmed its already low forecast to a 0.2% pace from a 0.5% rate.

Regardless of the actual number on Thursday, the economy’s performance last quarter was probably the weakest since the second quarter of 2020, when it suffered a historic contraction in the wake of stringent mandatory measures to contain the first wave of COVID-19 infections. The economy grew at a 6.7% rate in the second quarter. The Delta variant worsened labor shortages at factories, mines and ports, gumming up the supply chain.

The anticipated meager growth is seen coming mostly from a moderate pace of inventory drawdown. Overall inventory accumulation likely remained weak owing to shortages, especially of motor vehicles. Outside the shutdown in spring 2020, September was the worst month for motor vehicle production since 2010 because of a global shortage of semiconductors.

“The largest boost to GDP should come from a slower drawdown of inventories compared to in the second quarter, as supply shortage issues initially presented through weaker inventories but now have become a constraint on consumption instead,” said Veronica Clark, an economist at Citigroup in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is forecast to have stalled after a robust 12% growth pace in the April-June quarter. Though automobiles will account for a chunk of the anticipated stagnation, the Delta variant also curbed spending on services like air travel and dining out.

GLIMMERS OF HOPE

Inflation, which overshot the Federal Reserve’s 2% flexible target, also reduced households’ spending power. Price pressures and the supply chain disruptions saw the International Monetary Fund this month cutting its 2021 growth estimate for the United States to 6.0% from 7.0% in July.

Slower growth will have no impact on the Fed’s plans to start reducing as soon as next month the amount of money it is pumping into the economy through monthly bond purchases.

But there is light at the end of the tunnel. The summer wave of COVID-19 infections is behind, with cases declining significantly in recent weeks. Vaccinations have also picked up. The improving public health helped to lift consumer confidence this month. The number of Americans filing new claims for unemployment benefits has dropped to a 19-month low.

That declining trend is expected to be confirmed by a separate report from the Labor Department on Thursday.

According to a Reuters survey, initial claims for state unemployment benefits likely held at a seasonally adjusted 290,000 last week. That would mark the third straight week that claims remained below the 300,000 threshold.

Economists are split on whether business investment in equipment maintained its pace of double-digit growth last quarter. Data on Wednesday showed a surge in shipments of capital goods excluding aircraft in September.

While some economists saw this as an indication of strong equipment spending, others cautioned that high prices flattered the value of shipments. There are also concerns that the scarcity of motor vehicles hindered efforts by companies to replace or increase their auto fleet.

“Just as the collapse in motor vehicle sales is dragging down consumption, the corresponding collapse in fleet sales is also weighing on business equipment investment,” said Michael Pearce, a senior U.S. economist at Capital Economics in New York. “The sharp fall in auto and truck shipments means that, rather than a double-digit annualized gain, business equipment investment probably contracted slightly in the third quarter.”

Trade was likely a drag on GDP growth for a fifth straight quarter also following a sharp drop in industrial materials exports in September. Expensive building materials and soaring house prices likely weighed on the housing market again last quarter, while government spending probably rebounded.

 

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Economy

What Olaf Scholz means for the world economy – BBC News

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Olaf Scholz

EPA

It is an important moment for Europe. A new German chancellor. And what happens in the German economy affects us all.

It also happens to be the elevation of an incumbent finance minister to the most powerful position in European politics.

I did the last lengthy English-language interview with Olaf Scholz, when he was visiting London in summer to seal a deal on global multinational taxation, before he became favourite for the German chancellorship.

He was almost tearful with joy at the G7 agreement, on a topic he had suggested years before. The agreement “will really change the world”, he told me, of a move impossible a year before with President Trump.

A political rival once likened his grin to that of the Smurf cartoon characters. He retorted that they are “small, crafty and always win”.

Signature policies

There are three signature economic policies he has been associated with that are of ongoing significance.

For one, he told me of his pride that the short-time working schemes, whose use was promoted in Germany by his ministry in the aftermath of the global financial crisis, were now being used around Europe, including the UK, in the guise of the furlough scheme.

“It was right that we gave very strong fiscal answers to fight against the pandemic,” he told me.

“We supported the health of our people with the money we spent, but also the economy and many jobs.

“Short-term allowances, Kurzarbeit – the method which I used when I was the minister of labour in Germany 10 years ago with the last crisis – are now something that is used, not just in Germany, but all over the EU and many other countries of the world. And this shows that it is right to do something against a crisis like this.”

He was also responsible for the Agenda 2010 reforms of the last centre-left Chancellor Gerhard Schröder. Those reforms saw significant reductions in labour costs in Germany, the establishment of low-paid “mini jobs” and also a rapid rise in German export competitiveness, as well as the revival of its economy.

The inability of southern Europe to compete helped lead to the profound eurozone crisis. The view in Germany, that the rest of Europe had to go through the same “internal devaluation” before Germany would sign off on bailouts of bankrupt eurozone nations, prolonged that crisis.

Amid that fearful moment, he also signed off on the “debt brake” policy that meant in normal times, Germany would not invest. It has been suspended during the Covid pandemic for obvious reasons.

The brake will return under the coalition agreement just struck with the Greens and Liberals, but not before a splurge in investment spending. The challenge is how to square ongoing spending plans with no tax rises and controls on borrowing.

Germany’s long history of state-backed investment lending institutions such as KfW will help bridge this gap. But this will be a source of tension in this untested three-party coalition.

But lessons have been learnt from the eurozone crisis. Mr Scholz now backs non “mini-jobs”, but a €12 minimum wage. As finance minister, he helped Brussels sign off its own centralised capacity to borrow money to help growth and deal with crises.

Climate club

Chancellor Scholz is very focused on climate change, in the home of the European automotive industry. His concept is massive investment to further green Germany’s industrial base. And internationally, the establishment of a “climate club” of like-minded nations to manage frictions over trade.

“Success in fighting against climate change will only be feasible if we include all the nations and if everyone understands why it’s good for himself and for his people. We are now discussing the question of co-operation,” he told me.

How German industry deals with, for example, the EU-proposed border tax on carbon emissions will be a crunch point on the path to net-zero.

All this comes at a time when inflation has spiked up to 6% in the famously inflation-averse nation. And German industry has been hit for six by the supply chain constraints on microchips and other parts in the post pandemic rebound.

Pre-Omicron, most forecasts suggest the German economy will avoid the feared “bottleneck recession”, but the situation is definitely more challenging than at the time of the election in September.

And then there is Brexit and fears over a trade war. Will the famous German carmakers force a new chancellor to fold over Article 16 to protect their exports to the UK? It is not a priority in the Bundeskanzleramt, the washing-machine-like version of the White House in Berlin.

There will be continuity with the policies of the Merkel administration. When I asked about frictions with the UK, Olaf Scholz was diplomatic but pointed.

“I’m always optimistic and happy that we got a deal in the end on the relationship between the European Union and the UK, and I hope that everyone will follow the deal and that everything will be exactly to what we have just written down,” he told me.

“And if this is the case, I think we can be assured that we will have good trade relations also in the future, which would be good for the people of the UK as well as for the European Union.”

So some reason for optimism, as long as the deal is followed. For now, Chancellor Scholz has his own economic challenges closer to home.

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French Economy Shows Little Sign of Succumbing to Omicron Angst – BNN

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(Bloomberg) — French economic activity will continue to rise in December, despite another wave of the Covid-19 pandemic and fresh uncertainty over the omicron variant, according the Bank of France.

Completed at the end of last week, the central bank’s monthly survey of 8,500 firms is the first indicator of how businesses in the euro area’s second-largest economy are faring since the new coronavirus strain emerged.

Based on their responses, the bank estimates economic activity was 0.5% above pre-crisis levels in November and will be 0.75% higher this month. That means output for the whole fourth quarter will also expand by almost 0.75%.

The report provides some reassurance on the capacity of European economies to weather the latest virus surge. It follows bullish remarks last week by Bank of France Governor Francois Villeroy de Galhau, who said omicron wouldn’t change the outlook “too much.”

While France late Monday introduced further restrictions — including closing nightclubs — to slow the spread of the disease, the moves are designed to have limited economic impact and the government has pledged to compensate those affected.  

Even so, the central bank’s survey found that some companies “indicated difficulties in giving a short-term outlook” because of the uncertainties — particularly in industries like hospitality and air travel.

In addition, hiring difficulties and supply disruptions persist. About half of firms polled said they’re struggling to find staff and 57% of industrial companies said supply snarls have dented activity, according to the Bank of France.

©2021 Bloomberg L.P.

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Japan economy contracts 3.6% in Q3 on weaker consumer spending, trade – Business Standard

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Japan’s contracted at a 3.6% annual rate in July-September, according to a revised estimate released Wednesday.

The downgraded growth estimate for the last quarter, down from an earlier report of a 3.0% contraction, reflected weaker consumer spending and trade, the government said.

The world’s third-largest has been mired in recession and struggling to recover from the impact of waves of coronavirus infections.

The latest outbreak, in the late summer, has receded for now with a sharp drop in cases. But it hit during the usually busy summer travel season, with calls for restricted business activity and travel hurting restaurants, hotels and other service sector industries.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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