After a rocky 2018 and truly rough patches in 2019, especially particular sectors such as global manufacturing and U.S. agriculture, the consensus outlook for the global economy next year is surprisingly sanguine.
Most mainstream forecasters expect that the worst of the storms are past, and they are expecting global growth to rebound: the International Monetary Fund by 3.4 percent, the World Bank by 2.7 percent. One big reason for the dose of optimism is the generally looser approach to the money supply taken by central banks around the world, which helped offset some of the pain of trade wars and falling investment in 2019 and promises to allow a modest rebound next year (but which carries its own risks).
But those growth expectations are premised, in both cases, on a couple of potentially tenuous foundations: a rebound in emerging markets, such as Argentina and Turkey, that have been hammered in recent years, and a halt to further nasty surprises like trade wars, imploding markets, debt time bombs, and the like. Economists expect the wild cards for 2020 to point in one direction: downward.
“[D]ownside risks seem to dominate the outlook,” noted the IMF in its latest big report on the global economy’s prospects. Whether it’s still-simmering trade tensions, the ongoing Brexit saga, China’s economic transformation, worries about a sharp market correction, central banks with few bullets left to fire, historically massive piles of debt, or the usual geopolitical risks that could upend the best of projections, here is a look at some things to keep an eye on that could make or break the global economy next year.
Despite the preliminary agreement between the United States and China of a “phase one” trade deal that promises at least a cease-fire between the world’s two biggest economies, the trade wars are far from over. That “phase one” deal with China isn’t yet a done deal—and similar agreements have come undone in months past.
Even if U.S. President Donald Trump and Chinese President Xi Jinping finally ink some sort of truce that will see a partial restoration of trade amity between the two countries, most of the tariffs the Trump administration imposed on China (and those Beijing slapped on the United States in return) will remain in place. What the Peterson Institute for International Economics calls a “new normal of high tariffs” will mean that about two-thirds of Chinese imports to the United States and more than half of U.S. exports to China will remain taxed at relatively high levels. That means a guaranteed, continued drag on U.S. manufacturers that rely on many of those goods as inputs for their own finished products, adding financial pain for firms, consumers, or both.
And trade tensions aren’t limited to the fight between Washington and Beijing. With a new NAFTA wrapped up and an apparent China truce in hand, Trump’s trade negotiators are returning their gaze to ongoing trade fights with Europe, which include ongoing spats over U.S. tariffs on European steel, U.S. tariffs on European goods due to the Airbus-Boeing dispute (with potentially another set of European retaliatory tariffs in the pipeline), and U.S. tariffs on French goods in response to a controversial French digital tax—a tax that is under serious consideration in several other countries and that could spread that trade fight even further.
There’s more: The United Kingdom will formally exit the European Union at the end of January, but that will only sound the starting pistol for the really heavy lift: negotiating a free trade agreement between the U.K. and Europe before the end of the year, a deadline that European officials feel is almost impossible to meet. Failure to sort out key issues, such as tariff rates between Britain and the continent or regulatory standards between the two sides, could lead to another Brexit cliff edge at the end of the year, with all that entails for new investment, business and consumer confidence, and growth.
To make things more interesting, the United States hopes to negotiate its own free trade deal with the U.K. next year. But that would mean pulling Britain closer to the United States in terms of economic regulation—making it that much harder for the U.K. to close any meaningful deal with Europe.
Ultimately, greater trade tensions between big economies, coupled with the end of the World Trade Organization’s ability to resolve disputes between countries, could mean a return to relatively fettered trade, with countries slapping tariffs on imports at will. The World Bank warns that a return to higher duties across the board could be as devastating for global trade as was the great financial crisis a decade ago.
And then there’s the China question—or rather, questions—which, given the size of the Chinese economy, inevitably loom large in the outlook for the rest of the world.
First, the Chinese economy is clearly slowing, and not just because of the impact from Trump’s tariffs. One big question is what will Chinese growth, already at three-decade lows, look like this year? The IMF expects GDP growth of a paltry 5.8 percent, well below that of recent years, while the World Bank expects a slightly better 6.1 percent growth. As the World Bank notes, one big tool that China has to juice growth—fiscal stimulus—risks aggravating one of the very ills that plague the Chinese economy, namely massive indebtedness. It might work in the short run, but it would risk making barely profitable companies less productive and would impact future growth.
If China does face a big slowdown, the pain will be felt elsewhere, especially among many developing countries that are the linchpin of next year’s consensus expectations for global growth.
“I think a hard landing in China isn’t nearly as likely as many of the other major risks on the horizon for 2020—such as a chaotic Brexit—but if that were to occur, it would have massive effects on other economies and global growth, because China is so deeply interconnected with all other major economies,” said Julian Gewirtz, a China expert at the Weatherhead Center for International Affairs at Harvard University.
And there is a bigger question about the future of the Chinese economy: Will it continue to be as deeply interconnected, or will it redouble its efforts to unwind its economic interdependence with the rest of the world, something that hawks in both Beijing and Washington seem to want?
“The single biggest thing that worries me is U.S.-China decoupling,” said Cliff Kupchan, the chairman of Eurasia Group, a risk consultancy. “The inexorable march by the two countries to separate at least the technology sectors, and possibly more—I fear it will lead to the weaponization of tariffs as the new normal, force third countries to take sides, and act as a real drag on growth.”
And that’s not just a Trump effect. What Kupchan calls the “petrification” of U.S.-China relations is now enshrined in U.S. politics, with lawmakers and Democratic presidential hopefuls all vying to be tougher on China. “It’s a real threat to the global economy and global stability,” he said.
The case of Huawei and Chinese technology already gave a taste of what it will mean if China seeks to make its own economy, rather than its trading partners, its main supplier. Expand that to the rest of the economy, including renewed efforts (despite Washington’s efforts to the contrary) to expand the Chinese model of state subsidies and industrial policy, and you have a taste of the fundamental transformation that could be in store, with potentially big implications for nearly all other economies.
“The big uncertain question is what this truly epochal reassessment of interdependence by top leadership means for the future of the Chinese economy,” Gewirtz said.
Such a move, he said, would involve state capitalism on a massive scale, with the creation of national suppliers for key industries, dismantling of existing supply chains, a reinvigorated industrial policy, and even more industrial subsidies. It would also likely entail China playing offense with the many levers of economic coercion that China has, from punishing South Korea over missiles and trade to cowing the NBA over critical tweets. And it would only invigorate China’s on-again, off-again efforts to finally break free of U.S. financial dominance by accelerating Chinese moves to help craft alternatives to the U.S.-dominated global payments system and the central place of the dollar, which give Washington outsized leverage in pressuring other countries to do its bidding.
“If you are a top-down system and have decided that in multiple domains, from commodities to technology—potentially finance—that you need to become profoundly more self-reliant, that would be a very profound change for 2020,” Gewirtz said. “Things long predicted would finally be coming true.”
The Debt Bomb
Globally, debt—whether corporate debt, household debt, or national debt, whether in developed or developing economies—is at record-high levels, which is itself partly a product of the loose-money policy many central banks pursued to cushion trade and other shocks to the economy. That is itself a cause for concern, as those central banks, with interest rates already low, don’t have a lot of room to cut further to cushion any fresh debt shocks.
And the debt pile is huge. The World Bank, in a special report, noted that global debt levels reached an all-time high of 230 percent of GDP in 2018 and have grown since. Debt growth is particularly alarming in emerging markets, the World Bank says, which hold about $50 trillion in debt, making them particularly vulnerable to any shock, whether a generalized slowdown, or more trade wars, or a financial markets correction stemming from either of the other two. Developing countries have already been through three debt crises—in the 1980s, the 1990s, and the 2000s—with hugely painful consequences. A fourth might be on the way, the World Bank warned, with similarly nasty implications: “The fourth wave looks more worrisome than the previous episodes in terms of the size, speed, and reach of debt accumulation” in emerging markets, the bank found.
The sheer amount of global debt means that any financial market correction—whether triggered by continued trade wars or corporate bankruptcies and defaults or something else—would have immediate impacts, especially on countries with few built-in shock absorbers.
“Renewed episodes of substantial financial market stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness,” the World Bank said.
Even advanced economies such as the United States are potentially vulnerable, with a heavily indebted corporate sector. If corporate defaults rise, which could lead overvalued stock markets to plummet, that would have knock-on effects on consumer sentiment, which in turn would have huge impacts on U.S. growth expectations: Fitch Ratings agency expects that would halve its outlook for U.S. growth in 2020 to just 0.8 percent.
“Long-term valuation metrics for US equities are near historic highs increasing the probability of a correction, especially as potential risk triggers such as a hard landing in China or trade-related uncertainties are likely to persist,” said Fitch.
And there are all the usual troubles in the world, from ongoing tension among Iran and Saudi Arabia and the United States to spreading chaos throughout North Africa to the prospect for heightened tensions in Asia, whether over North Korea’s nuclear program or China’s ambitious designs on the South China Sea, Hong Kong, and Taiwan.
There are also good old-fashioned political risks, such as the global resurgence of populism around the world, which in many cases means taking aim at market economics, to the detriment of what drove growth for decades.
“Global leaders have their heads in the sand when it comes to the Fourth Industrial Revolution, and they are going to pay for it,” Kupchan said. “There is little systemic thinking about how to deal with automation, the backlash against globalization, the structural factors against what I call ‘nativistic populism.’” If that were merely a local problem, whether in the United States or Hungary or elsewhere, that would be one thing. But such political upheavals also threaten many of the very economic sinews that have driven broad-based prosperity since the end of World War II.
“Populism doesn’t trust markets. If you have a structural driver away from markets, you have a hell of a long-term economic problem,” Kupchan said.
In the shorter term, there is enough to worry about. Greater tension, or outright conflict with Iran as a result of the Trump administration’s maximum pressure campaign, would likely send oil prices higher, which would act as a brake on global growth. Intensified protests in the broader Middle East and North Africa, coupled with renewed fighting in Libya and an adventurous Turkey, raise questions about the economic resurgence of many of the region’s emerging economies, themselves a key for global growth this year.
And in Asia, China’s internal economic woes could well find expression in foreign policy, whether in the South China Sea, or over the standoff in Hong Kong, or over Taiwan’s future, which could in turn further roil markets and broader economic confidence.
“A downturn in China would also have significant global effects if it prompted the leadership to adopt an even more nationalistic or adventurist foreign policy,” Gewirtz said.
'Full-blown war' of housing NIMBYism threatens Canada's economy: CAPREIT CEO – BNN
The head of one of the nation’s largest residential landlords is warning Canada can ill afford a “full-blown war” on higher density housing projects led by single-family home owners intent on opposing those developments.
Canadian Apartment Properties Real Estate Investment Trust (CAPREIT) chief executive officer Mark Kenney said widespread pushback against higher density supply only serves to raise asset prices, and could have a dire impact on immigration levels and by extension long-term economic growth.
“Canada has had affordable housing for decades upon decades upon decades. It’s only in the last, I’ll say 10 years that affordability has started emerging as a really serious problem. But we can’t have immigration – responsible immigration – without responsible housing policy,” he said in an interview Tuesday.
“The reality is that if we want to have these ambitions, we have to have a different housing policy. It can’t be a full-blown war against housing when we really need people coming to our country to help build our economy.”
While home ownership affordability pressures have eased slightly – average prices in Toronto fell 6.4 per cent month-over-month in April to $1,202,819 – CAPREIT has seen some of the heat seep into the rental market.
In its most recent quarter, CAPREIT’s monthly rental prices rose 10.2 per cent at units where there was tenant turnover.
Kenney said his company and the REIT sector at large are ready and willing to step in to help address supply constraints, but said the industry has been stymied by zoning rules, which are under the purview of municipalities.
“We’re very much in the acquisition of new construction apartment buildings now. CAPREIT has been building up its zoning, we have over 10 thousand units of market-viable land. It takes so long to zone this land,” he said.
“The apartment REITs are a big part of the supply solution for Canada. The apartment REITs are definitely a big part of the supply solution for Canada. We’re capitalized properly, we have the experience and we have the land.”
Kenney also pointed to modular housing as a potential solution for Canada, which badly lags the United States in adoption of that form of housing.
“This is one of the most affordable forms of home ownership there is out there. The U.S. has a very large segment of manufactured homes – close to 17 per cent of people in the U.S. live in one, versus less than one per cent in Canada – so we have an affordable home ownership solution sitting right in front of us, it’s a matter of getting zoning to allow these homes to be put in,” he said.
Kenney said part of the challenge is the stigmatization of modular homes, with perceptions they’re no different from the mobile homes of years past.
“The reality is that the quality of these homes are better than homes that are built in subdivisions, because they’re built in a controlled environment,” he said, adding they have “high, high energy efficiency — they’re probably the most eco-friendly form of housing you can buy.
“Terrible stigmatization, but the reality and the opportunity out there for Canada, we’re trying our hardest to get the messaging across. It’s a big part of the answer – not for big cities, but definitely in the rural areas.”
CFL collective bargaining scuffle impacting Regina economy – Global News
As the Canadian Football League (CFL) and the CFL Player’s Association continue to negotiate a new collective bargaining agreement, the start of the season hangs in the balance.
With players striking until a new deal is reached, fans and local businesses are keeping a watchful eye on the situation with games potentially getting cancelled.
“You can feel the energy in the city when the Riders are playing. It’s infectious, it’s exciting and to think that we might not get that experience in the same sense as we have in the past, it’s disappointing,” said Tyler Burton, assistant general manager at Regina’s Cathedral Social Hall.
That infectious energy on a Rider game day translates to dollars for local businesses which are now waiting in limbo on whether or not Monday’s preseason contest between Saskatchewan and Winnipeg at Mosaic Stadium will even be played.
“Rider games are often the biggest show in town. They give a much-needed boost to our tourism and hospitality sector anytime we can host a game in Regina so we are anticipating a busy weekend with the upcoming game,” said Chelsea Galloway, Chief Tourism and Visitor Growth Officer for Economic Development Regina.
“We are really excited to have that in town and our restaurants, our hotels, and airport are all ready to welcome people back.”
CFL season once again on hold as CBA looms
The potential cancellation of Monday’s pre-season game — not to mention possible further cancellations depending on how long the work stoppage lasts — affects the entire economy. This is especially critical in markets like Saskatchewan where CFL game days provide a major financial boost.
“You see it all over our city, but I think definitely in our restaurants and our hotels it’s those last minute cancellations, business that they’re anticipating. They get that schedule, they see those games, they’re trying to staff up, they’re building budgets around that so our entire hospitality sector gets impacted by things like this,” said Galloway.
“Rider events are the games that we plan forward to months in advance. We make sure the staff can’t book off the days just because we know we are going to get slammed pre-game and post-game. It’s huge for us; we look forward to it every year.
“Last year obviously was a little different with COVID but this year was supposed to be the first normal year back so it’s tough to know that we might be losing some of those games, if not all of them. The numbers don’t lie, they are some of our busiest days of the year.”
Even vendors at Mosaic Stadium like Fresh Carnival are stuck managing 40 staff members and preparing perishable food items for an event that may or may not happen this coming long weekend.
“We do plan as far ahead as possible for that so we do have all this extra product coming in which is already hard enough to find these days with all the other factors out there in the world,” said Burton.
“But for us to plan so far ahead and then to have it just not happen last minute it makes you stand back a bit and shows how volatile the industry can be and how all the little events around a city like Regina make such a big difference.”
But the biggest boost for Regina’s economy will come in November when the city hosts the Grey Cup and its accompanying festival.
“The Grey Cup is very significant. We’ve hosted it three times in Regina in the past. This time we actually have 10 more hotels, over 1,000 new rooms, so it’s big. We’re projecting a sellout at this point so it’s a massive event for our city,” said Galloway.
After two tough pandemic years, businesses are hoping for a quick solution to the latest collective bargaining situation.
“The timing couldn’t be worse, obviously, and that goes without saying. I mean, after coming out of COVID and after going through a year that’s kind of week-by-week where we don’t know what to expect, to see the finish line or whatever that may be and think, ‘Oh we have this first Rider pre-season game coming up’ and everyone is talking about it and then all of a sudden for it to be pulled out from under our feet, it’s disappointing,” said Burton.
Focus Saskatchewan: CFL Struggles
© 2022 Global News, a division of Corus Entertainment Inc.
Opinion: Tokenization, not crypto, is the future for Canada's digital economy – The Globe and Mail
Mark Wiseman is a Canadian investment manager and business executive serving as a senior adviser to Lazard Ltd., Boston Consulting Group and Hillhouse Capital, and the chair of Alberta Investment Management Corp.
The dual threats of inflation and further financial downturns are real and require immediate action from policy makers – and they arise at a time when a litany of disruptive global events have darkened the economic outlook.
In order to be effective, both monetary and fiscal policy must be surgical, centralized, based on data and implemented with accountability. We must also be cautious when the likes of Conservative leadership candidate Pierre Poilievre advocate to “opt out” of inflation and create economic value with bitcoin or other cryptocurrencies. The political appeal of such voices ignores both economic reality and the larger opportunity in this digital space: tokenization.
Having been an investor for more than two decades, including many years spent managing the pension investments of millions of Canadians, I care about the principle of intrinsic value: pricing assets based on their underlying attributes and, in turn, generating a reasonable risk-adjusted return from those assets.
Unlike traditional investment alternatives, cryptocurrencies have been – and are – extremely volatile, with their value tied to speculative activity as opposed to intrinsic worth.
While one can envision how central-bank digital currencies or stablecoins could change our financial system and create significant efficiency value down the road, the real benefit that exists today is in the blockchain and distributed-ledger technology behind cryptocurrencies.
Tokenization is a tool created by such technology and has the potential to immediately create and redistribute value for everyday Canadians. It allows owners of assets with intrinsic value – ranging from real estate, to securities, to commodities, to fine art (or the digital equivalent) – to tokenize their assets into a form that is usable on a blockchain application. In practical terms, it enables asset owners to sell fractional ownership of their asset akin to a publicly traded company issuing equity, but in a much more accessible way.
Tokenization leverages smart contract functionality (the same technology that supports many cryptocurrencies) that has the potential to unlock immense value and liquidity for many investors, big and small. This is the aspect of the blockchain and distributed ledgers that our political leaders and regulators should be focused on.
The tool is incredibly attractive because it can provide investors with easier ways to purchase, hold and trade assets that have real underlying value, including digital assets such as the NBA’s incredibly successful TopShot – a platform that allows fans to trade collectible NFTs of past plays (think of them as digital trading cards).
Cryptocurrencies, which have no clear intrinsic value, are an impressive demonstration of the power of blockchain. But like the early BlackBerry products, it turns out that the software that underlies many cryptocurrencies, such as bitcoin, is far more valuable than the initial application.
Tokenizing and selling part ownership of one’s assets can improve liquidity and increase the transparency of the value of their assets, allowing them to borrow against them more easily. Valuing an artwork is notoriously difficult, but if a sculpture is tokenized and a liquid market in those tokens develops, price discovery for the object as a whole becomes far easier. After the tokenization of a skyscraper, a token holder would be able to secure financing against their tokenized portion of the building, as opposed to having to mortgage the entire structure to gain funding.
Were Canada to become a leader in tokenization, retail investors would be able to access assets beyond the public equities and bonds to which they are now mostly limited. Institutional investors – many of whom have already begun to significantly increase their investments in private companies, real estate, infrastructure and other alternative investments – are desperate to find havens for their capital, particularly given the recent fluctuations in equity markets.
Tokenization would allow them to invest in assets that would otherwise be unavailable, creating potential value for both buyers and sellers. With fewer barriers to selling fractional ownership of large infrastructure projects, this class of investor can drastically expand the type of large projects into which they can invest.
Undoubtedly, regulation will be an important consideration. Publicly traded companies have a significant amount of disclosure regulations they must adhere to, which may cause many asset owners to shy away from listing their assets on public exchanges. Regulation will have to ensure adequate information is available about the underlying asset, so that investors purchasing tokens can understand what they’re buying, without being overly burdensome to the point that it dissuades asset owners from participating.
If we want to lead as a country in the blockchain and distributed-ledger technology sector, it is tokenization toward which we should be focusing our efforts – not on the misguided idea that bitcoin can solve the inflationary pressures brought about by an excess of demand over supply in the economy.
In fact, the support for cryptocurrencies by such voices as Mr. Poilievre, driven by criticism of our central bank, shows exactly why we need such independent institutions. Politicians are kept at arm’s length from them for good reason – just look at what happened to the Turkish economy when President Recep Tayyip Erdogan ignored and eroded the authority of the country’s central bank in favour of a misguided, politicized monetary strategy.
Instead of political theatre on the steps of a venerable institution, Mr. Poilievre and other cryptocurrency supporters ought to be more responsible and advocate to make Canada the leader in tokenization. That requires investing in the necessary training, technology and governance structures for this revolutionary technology, and building a system of laws and regulations to support it.
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