Drama over the debt ceiling is the last thing America's economy needs - CNN | Canada News Media
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Drama over the debt ceiling is the last thing America's economy needs – CNN

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If Congress doesn’t raise the debt ceiling, the federal government will likely run out of cash by October or November, according to the Congressional Budget Office. Senate Minority Leader Mitch McConnell is already vowing that Republicans will not vote to raise the federal borrowing limit — even though failing to do so risks a default that would tank the economy.
This raises the specter of Washington repeating the mistakes of the 2011 debt ceiling debacle by gambling with the full faith and credit of the United States. That episode sent markets into a tailspin and resulted in the unprecedented downgrade of America’s prized AAA credit rating.
“The last thing the economy needs is an artificial crisis,” said Joe Brusuelas, chief economist at RSM. “The risk is that the political polarization in Washington is so intense that politicians who should know better begin to throw around words like ‘default.'”
A default would be disastrous. US debt is considered among the safest securities on the planet, the benchmark for measuring all other risk. Even a near-default could send interest rates spiking, lifting the cost of borrowing on everything from car loans to mortgages. Markets would tumble.
“Few policy matters in Washington have such destructive economic capability,” Chris Krueger, managing director at Cowen Washington Research Group, wrote in a note to clients Thursday.

‘Cascading catastrophe’

During a hearing in May, JPMorgan Chase (JPM) CEO Jamie Dimon urged lawmakers not to even think about going down this path again. An actual default, Dimon said, “could cause an immediate, literally cascading catastrophe of unbelievable proportions and damage America for 100 years.”
Brusuelas echoed that sentiment. “If one wants chaos across financial markets and a replay of the global financial crisis, this would be the quickest road to hell,” he said. “The adults in the room need to take control.”
Yet this week McConnell signaled a brewing fight over the debt ceiling.
“I can’t imagine there will be a single Republican voting to raise the debt ceiling after what we’ve been experiencing,” the Senate minority leader said in an interview with Punchbowl News published Wednesday.
President Joe Biden responded by pointing out that Republicans had no problem raising the borrowing limit when a Republican was in the White House.
“You know, for the last four years, they’ve just extended the debt limit,” Biden told reporters.
In 2019, Congress voted to suspend the debt limit altogether, but that two-year suspension expires at the end of this month.
The Treasury Department can take extraordinary steps to keep the lights on — but not for long. Those measures will most likely be exhausted in October or November, the nonpartisan CBO estimated on Wednesday.

‘We’ve been here before’

This situation adds to the numerous question marks facing the US economy over when soaring inflation will cool off and the summer spike in Covid-19 cases driven by the Delta variant will taper.
“The timing of the debt limit deadline and the intersection of the issue with the broader fiscal debate is likely to lead to elevated uncertainty in late September when Congress will need to extend spending authority,” economists at Goldman Sachs wrote in a report sent to clients Wednesday night.
Wall Street seems unfazed, for now at least.
Despite Monday’s slide, the US stock market remains within striking distance of all-time highs. There are no signs of alarm about this issue in the Treasury market, either.
“We’ve been here before,” Guy LeBas, chief fixed income strategist at Janney Capital Markets, wrote in an email.
LeBas said investors would become concerned only if there was a “real risk” that the US Treasury would fail to make payments on maturing Treasury bills. And he added that would probably be three to four months after emergency cash measures begin, suggesting “there’s plenty of time” for Congress to raise the debt ceiling.

The end game

Goldman Sachs economists expect Congressional Democrats will combine the debt limit vote with a must-pass spending bill, a brinksmanship gambit that has been done in the past.
“While Senate Republican Leader McConnell has indicated that Republicans will not vote for suspending the debt limit, they might ultimately support it if the alternative is voting against spending authority, which would lead to a government shutdown,” Goldman Sachs economists wrote in the note.
Ed Mills, Washington policy analyst at Raymond James, doubts this will get settled through bipartisanship. He predicts Democrats will lift the debt ceiling through budget reconciliation as part of a major spending program, which requires only a simple majority.
“To me, this has always been the end game,” Mills said.
Even though many see a way to avoid a debt ceiling disaster, the brinksmanship itself only amplifies concerns about the political health of the United States.
Fitch Ratings warned earlier this month that it could remove America’s perfect credit rating due in part to worsening political polarization and the ongoing assault on democracy displayed by the January 6 insurrection.
Fitch concluded that governance is a “weakness” in the United States — and another standoff over the debt ceiling will only solidify its thinking.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

The Canadian Press. All rights reserved.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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September merchandise trade deficit narrows to $1.3 billion: Statistics Canada

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OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.

The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.

Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.

Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.

Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.

In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.

This report by The Canadian Press was first published Nov. 5, 2024.

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