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Economy Is at Risk of Recession by a Force Hiding in Plain Sight – The New York Times

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Well more than two years into the worst pandemic in a century, the accompanying economic shock continues to assault global fortunes.

This past week brought home the magnitude of the overlapping crises assailing the global economy, intensifying fears of recession, job losses, hunger and a plunge on stock markets.

At the root of this torment is a force so elemental that it has almost ceased to warrant mention — the pandemic. That force is far from spent, confronting policymakers with grave uncertainty. Their policy tools are better suited for more typical downturns, not a rare combination of diminishing economic growth and soaring prices.

Major economies including the United States and France reported their latest data on inflation, revealing that prices on a vast range of goods rose faster in June than anytime in four decades.

Those grim numbers increased the likelihood that central banks would move even more aggressively to raise interest rates as a means of slowing price increases — a course expected to cost jobs, batter financial markets and threaten poor countries with debt crises.

On Friday, China reported that its economy, the world’s second-largest, expanded by a mere 0.4 percent from April through June compared with the same period last year. That performance — astonishingly anemic by the standards of recent decades — endangered prospects for scores of countries that trade heavily with China, including the United States. It reinforced the realization that the global economy has lost a vital engine.

The specter of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world suffered similar problems: stagflation.

Most of the challenges tearing at the global economy were set in motion by the world’s reaction to the spread of Covid-19 and its attendant economic shock, even as they have been worsened by the latest upheaval — Russia’s disastrous attack on Ukraine, which has diminished the supply of food, fertilizer and energy.

“The pandemic itself disrupted not only the production and transportation of goods, which was the original front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking this past week during a discussion convened by the Brookings Institution in Washington. “Pretty much everything in our lives has been disrupted by the pandemic, and then we layer on to that a war in Ukraine.”

It was the pandemic that prompted governments to impose lockdowns to limit its spread, hindering factories from China to Germany to Mexico. When people confined to home then ordered record volumes of goods — exercise equipment, kitchen appliances, electronics — that overwhelmed the capacity to make and ship them, yielding the Great Supply Chain Disruption.

Mark R Cristino/EPA, via Shutterstock
Lena Mucha for The New York Times

The resulting scarcity of products pushed prices up. Companies in highly concentrated industries from meat production to shipping exploited their market dominance to rack up record profits.

The pandemic prompted governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit joblessness and bankruptcy. Many economists now argue that they did too much, stimulating spending power to the point of stoking inflation, while the Federal Reserve waited too long to raise interest rates.

Now playing catch-up, central banks like the Fed have moved assertively, lifting rates at a rapid clip to try to snuff out inflation, even while fueling worries that they could set off a recession.

Given the mishmash of conflicting indicators found in the American economy, the severity of any slowdown is difficult to predict. The unemployment rate — 3.6 percent in June — is at its lowest point in almost half a century.

But anxiety over rising prices and a recent slowing of spending by American consumers have enhanced fears of a downturn. This past week, the International Monetary Fund cited weaker consumer spending in slashing expectations for economic growth this year in the United States, from 2.9 percent to 2.3 percent. Avoiding recession will be “increasingly challenging,” the fund warned.

The pandemic is also at the center of the explanation for China’s unnerving economic slowdown, which will probably extend shortages of industrial goods while limiting the appetite for exports around the world, from auto parts made in Thailand to soybeans harvested in Brazil.

China’s zero-Covid policy has been accompanied by Orwellian lockdowns that have constrained business and life in general. The government expresses resolve in maintaining lockdowns, now affecting 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate from Nomura, the Japanese securities firm.

But the endurance of Beijing’s stance — its willingness to continue riding out the economic damage and public anger — constitutes one of the more consequential variables in a world brimming with uncertainty.

Laetitia Vancon for The New York Times

Russia’s offensive in Ukraine has amplified the turmoil. International sanctions have restricted sales of Russia’s enormous stocks of oil and natural gas in an effort to pressure the country’s strongman leader, Vladimir V. Putin, to relent. The resulting hit to the global supply has sent energy prices soaring.

The price of a barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, though recent weeks have seen a reversal on the assumption that weaker economic growth will translate into less demand.

Germany, Europe’s largest economy, relies on Russia for nearly a third of its natural gas. When a major pipeline carrying gas from Russia to Germany cut the supply sharply last month, that heightened fears that Berlin could soon ration energy consumption. That would have a chilling effect on German industry just as it contends with supply chain problems and the loss of exports to China.

If Germany loses complete access to Russian gas — a looming possibility — it would almost certainly descend into a recession, say economists. The same fate threatens the continent.

“For Europe, the risk of a recession is real,” Oxford Economics, a research firm in Britain, declared in a report this past week.

For the European Central Bank — which next gathers on Thursday to much apprehension in markets — the prospect of a downturn further complicates an already wrenching set of decisions.

Ordinarily, a central bank ministering to an economy sliding toward recession lowers interest rates to make credit more available, spurring borrowing, spending, and hiring. But Europe is confronting not only weakening growth but also soaring prices, which customarily calls for lifting rates to snuff out spending.

Raising rates would support the euro, which has surrendered more than 10 percent of its value against the dollar this year. That has increased the cost of Europe’s imports, another driver of inflation.

Hiroko Masuike/The New York Times
Alessandro Grassani for The New York Times

Adding to the complexity is that the usual central banking tool kit is not built for this situation. Navigating the balance between protecting jobs and choking off inflation is difficult enough in simpler times. In this case, rising prices are a global phenomenon, one amplified by a war so far impervious to sanctions and diplomacy, combined with the mother of all supply chain tangles.

Neither the Fed nor the European Central Bank has a lever to pull that forces action from Mr. Putin. Neither has a way to clear the backlog of container ships clogging ports from the United States to Europe to China.

“Everyone following the economic situation right now, including central banks, we do not have a clear answer on how to deal with this situation,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. “You have a lot of things going on at the same time.”

The most profound danger is bearing down on poor and middle-income countries, especially those grappling with large debt burdens, like Pakistan, Ghana and El Salvador.

As central banks have tightened credit in wealthy nations, they have spurred investors to abandon developing countries, where risks are greater, instead taking refuge in rock-solid assets like U.S. and German government bonds, now paying slightly higher rates of interest.

This exodus of cash has increased borrowing costs for countries from sub-Saharan Africa to South Asia. Their governments face pressure to cut spending as they send debt payments to creditors in New York, London and Beijing — even as poverty increases.

The outflow of funds has pushed down the value of currencies from South Africa to Indonesia to Thailand, forcing households and businesses to pay more for key imports like food and fuel.

The war in Ukraine has intensified all of these perils.

Adam Dean for The New York Times
Khaled Elfiqi/EPA, via Shutterstock

Russia and Ukraine are substantial exporters of grains and fertilizers. From Egypt to Laos, countries that traditionally depend on their supplies for wheat have suffered soaring costs for staples like bread.

Around the globe, the ranks of those considered “acutely food insecure” have more than doubled since the pandemic began, rising to to 276 million people from 135 million, the U.N. World Food Program declared this month.

Among the biggest variables that will determine what comes next is the one that started all the trouble — the pandemic.

The return of colder weather in northern countries could bring another wave of contagion, especially given the lopsided distribution of Covid vaccines, which has left much of humanity vulnerable, risking the emergence of new variants.

So long as Covid-19 remains a threat, it will discourage some people from working in offices and dining in nearby restaurants. It will dissuade some from getting on airplanes, sleeping in hotel rooms, or sitting in theaters.

Since the world was first seized by the public health catastrophe more than two years ago, it has been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession and a war with no end in sight, that observation retains currency.

“We are still struggling with the pandemic,” said Ms. Haugland, the DNB Markets economist. “We cannot afford to just look away from that being a risk factor.”

Kevin Frayer/Getty Images

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Charting the Global Economy: Job Growth in US Powers Ahead – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The strongest US job growth in five months and firmer-than-expected worker pay assuaged recession concerns, while also helping clear the path for the Federal Reserve to continue large interest-rate hikes.

In Europe and Asia, factory production weakened on lingering supply-chain constraints that are contributing to persistent price pressures. The Bank of England stepped up its inflation fight with the biggest rate increase in more than a quarter century, while also cautioning that the UK is headed for more than a year of recession. 

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

World

Central banks around the world continued raising interest rates this week. Australia, Brazil, India and the UK were among those hiking by 50 basis points, while Romania went for 75 basis points and Madagascar for 90 basis points.

The standoff between the US and China over Taiwan has thrown a spotlight on growing risks to one of the world’s busiest shipping lanes — even a minor disruption could ripple through supply chains. Almost half of the global container fleet and a whopping 88% of the world’s largest ships by tonnage passed through the Taiwan Strait this year, according to data compiled by Bloomberg. 

European factory activity plunged and Asian manufacturing output continued to weaken in July amid lingering supply-chain complications and a slowing global economy. Purchasing managers’ indexes for the euro area’s four largest members all indicated contraction, while China, South Korea and Taiwan took the biggest hit in Asia.

US

Employers added more than double the number of jobs forecast, illustrating rock-solid labor demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.

Household debt increased by 2% to $16.2 trillion in the second quarter, with mortgages, auto loans and credit-card balances all seeing sizable jumps, according to a report by the Federal Reserve Bank of New York.

With almost two openings for every person looking for work, US companies are increasingly tapping high school students for skilled jobs. As a result, apprenticeships are seeing a renaissance after failing to gain a foothold over the past few decades.

Europe

The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession under the weight of soaring inflation. The half-point increase to 1.75% was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed.

German factory orders sank for a fifth month in June as rampant inflation and global supply disruptions continued to weigh on the outlook in Europe’s largest economy.

Germany’s presidential palace in Berlin is no longer lit at night, the city of Hanover is turning off warm water in the showers of its pools and gyms, and municipalities across the country are preparing heating havens to keep people safe from the cold. And that’s just the beginning of a crisis that will ripple across Europe.

Asia

It’s 2025 in Beijing, five years since the start of the pandemic, and Chinese President Xi Jinping’s Covid Zero policy is still an inescapable part of daily life. As omicron sub-variants become ever-more infectious, Xi’s resolve to avert virus fatalities is growing stronger – leading many experts to warn that Covid Zero could continue well beyond 2022.

Major South Korean firms are agreeing to the biggest pay rises in 19 years, according to a government survey, fueling concerns that a wage-price spiral is taking hold in the economy. Salary agreements at companies with 100 workers or more climbed 5.3% in the first half of the year, exceeding every increase since 2003, a labor ministry poll showed.

Emerging Markets

Turkish inflation accelerated again and may be months away from peaking, soaring to levels unseen since 1998 as the central bank sticks with its ultra-loose monetary course.

Brazil’s central bank raised its key interest rate by half a percentage point and left the door open for a smaller boost in September as it shifts its focus to the outlook for inflation more than a year ahead. 

©2022 Bloomberg L.P.

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The economy is growing by one measure, shrinking by another – The Washington Post

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Friday’s blowout jobs report may have quieted claims that the U.S. is in a recession, but it did not end the mystery about the state of the economy or resolve questions about where it is headed.

Government data showing the economy had contracted for the second consecutive quarter — meeting one informal definition of recession — was still fresh, as the Labor Department on Friday said employers had added 528,000 jobs in July. That was more than twice as many as economists expected.

Only eight days separated the two government reports, yet they seemed to describe entirely different realities.

The first showed a weak economy that — coupled with the highest inflation in 40 years — offered consumers nothing but grief. The second reflected a juggernaut that was minting jobs faster than workers could be found to fill them, with an unemployment rate that matched the pre-pandemic low of 3.5 percent.

The factors driving inflation higher each month

“It’s normal for different economic indicators to point in different directions. It’s the magnitude of the discrepancies right now that’s unprecedented,” said Jason Furman, formerly President Barack Obama’s top economic adviser. “It isn’t just that the economy is growing in one measure and shrinking in another. It’s growing incredibly strongly in one measure while shrinking at a pretty decent clip in another.”

In Washington on Friday, President Biden took a victory lap for the job growth while claiming credit for gas prices having declined for more than 50 consecutive days. Yet he also acknowledged the disconnect between the sunny employment report and the inflation headaches that afflict many households.

What causes a recession?

“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel it in their own lives,” the president said, speaking from a White House balcony. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re dealing with rising prices, food and gas, and so much more. I get it.”

The surprisingly robust jobs number seemed to call into question the president’s argument that the economy is undergoing a “transition” from its faster growth rates last year to a slower, more sustainable pace.

No one expects the economy to continue producing half a million new jobs each month. No one thinks it could without inflation remaining at uncomfortable heights.

Almost five months after the Federal Reserve began raising interest rates to cool off the economy and to bring down the highest inflation since the early 1980s, the labor market report showed that the nation’s central bank has more work to do. Average hourly earnings for private sector workers rose by 5.2 percent over the past year, which hints at the sort of wage-price spiral that the Fed is determined to prevent.

Last month, the Fed lifted its benchmark interest rate to a range of 2.25 percent to 2.5 percent, its highest level in almost four years. Yet in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, which acts as a spur to economic growth.

Fed Chair Jerome H. Powell said last month that additional rate increases are likely when policymakers next meet on Sept. 21. The size of the next increase – either half a percentage point or three-quarters of a point – will “depend on the data we get between now and then,” he told reporters.

Soaring dollar could help Fed in fight against inflation

Investors see a 70 percent chance of the larger move, according to CME Group, which tracks purchases of derivatives linked to the central bank’s key rate.

On Wednesday, the government is scheduled to release inflation readings for July, which are expected to show a modest improvement compared to June’s 9.1 percent figure, thanks to falling energy prices.

Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” of its plans is itself a sign that the current environment is murkier than usual.

“A lot of what’s happening in this economy is being driven by the pandemic, and then the pandemic response. And so, we are in a very unusual time, in many ways [it’s] challenging to sort of read through those data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, and a voting member of the Fed’s rate-setting committee, told The Washington Post this week.

Fed’s interest rate hikes may mark start of tough, new economic climate

Almost 22 million Americans lost their jobs between February and April of 2020 in covid’s first months. The unemployment rate hit 14.7 percent, the highest figure recorded by the Labor Department in a series that began in 1948.

With July’s gains, the economy now has recovered all of the lost jobs.

But the workforce has been reshaped. There are more warehouse and logistics workers today and fewer employees working for hotels and airlines.

Employers are reacting differently than they did before the pandemic to indications that the economy may be slowing, according to Gregory Daco, chief economist for EY-Parthenon. Rather than immediately resorting to significant layoffs, they are instead scaling back hiring or engaging in targeted job cuts.

Weekly first-time unemployment claims are up, but only to 260,000 from their 54-year low of 166,000 in March.

Consumers have also acted differently, buying more goods than normal while trapped at home during the pandemic’s initial wave. Retailers that ordered unusual volumes of furniture, electronics and apparel from overseas suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores stuffed with unwanted goods.

On top of the pandemic’s lingering ills, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.

All of these forces combined to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. Yet housing starts have fallen for the past two months and the latest ISM manufacturing reading was the weakest in two years.

“We are in somewhat of a dizzying business cycle. We’re getting economic data that is fluctuating quite rapidly and it’s very hard to get a precise read on where the economy is at any point in time,” Daco said.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at the Rand Corp.

Friday’s Labor Department report tallied up jobs gained in July. The last consumer price index reading covered June. And the gross domestic product reading that started the recession furor described activity that occurred between April and June – and will be revised twice.

“It’s a challenge for an economist, but also for a reader who wants to understand how at risk they are for an economic downturn,” she said.

Labor market and output data have been telling different stories about the economy all year. After six straight months of shrinkage, the economy is roughly $125 billion smaller than it was at the end of 2021, according to inflation-adjusted Commerce Department data.

Yet employers have hired 3.3 million new workers over that same period.

How could more workers be producing fewer goods and services?

One explanation is that workers are less productive today than during the emergency phase of the pandemic, when companies struggled to keep producing their required orders with fewer workers, Furman said.

Indeed, non-farm business productivity in the first quarter fell 7.3 percent, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be made public on Tuesday and are likely to show the largest two-quarter drop in history, he said.

Those figures may overstate the change. During the pandemic, companies may have been able to maintain output with a covid-thinned workforce by exhorting or incentivizing the remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by citing emergency conditions.

“They worked extra hard, but they wouldn’t work extra hard forever,” Furman said.

World Bank warns global economy may suffer 1970s-style ‘stagflation’

Likewise, the labor force participation rate usually rises when employers are adding jobs and the unemployment rate is falling. But since March, it has fallen, according to the Bureau of Labor Statistics.

Some Americans retired instead of risking working during the pandemic. Others — mostly women — who lacked adequate child care, stayed home with young children or other vulnerable relatives.

An April paper by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.”

Participation by Americans in their prime working years, ages 25 to 54, has almost entirely recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the outset of the pandemic. And for younger workers, age 20 to 24, participation is lower now than at the end of last year.

“I don’t think we have a great handle on why other workers are not coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual period.”

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Canadian economy sheds jobs for second straight month – BNN

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Canada’s economy lost 30,600 jobs in July, according to data from Statistics Canada on Friday. This marks the second consecutive month of employment losses for the country.

The data came in weaker than expected. The median estimate among economists tracked by Bloomberg was for a gain of 15,000 jobs last month and an unemployment rate of 5.0 per cent.

The country’s unemployment rate remained steady at a historic low of 4.9 per cent. 

The wholesale and retail trade, health care and social assistance, and educational services sectors collectively saw a loss of 53,000 jobs. The losses were partially offset by the goods-producing sector which gained 23,000 jobs, the labour force survey revealed. 

The decline in jobs was roughly the same in both part-time and full-time work, though employment fell the most among women aged 55 and over. 

The overall participation rate fell 0.2 per cent to 64.7 per cent in July, compared to the 0.4 percentage point drop in June.

The average hourly wages of employees rose 5.2 per cent on a year-over-year basis, matching the pace set in June.

“This is a notoriously noisy survey, especially in the summer months, July and August. The numbers bounce around a lot. I think what’s important here is that the North American economies are slowing,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute and a former chief economic analyst of Statistics Canada, said in an interview Friday morning. 

He also cautioned that Canada’s housing sector is vulnerable to the rising interest rate environment and could lag behind the U.S. 

“There are some pockets of resilience in the economy. The resource sector is one,” Cross said.

The Bank of Canada has attempted to rein in runway inflation with aggressive interest rate hikes. Friday’s jobs data will likely help inform the central bank’s next scheduled interest rate decision in September. 

“While today’s figures muddied the waters further for policymakers, the Bank of Canada will likely focus on the historic low unemployment rate and still strong wage growth to justify another non-standard rate hike at its next meeting,” Andrew Grantham, a senior economist at CIBC Capital Markets, wrote in a note to clients on Friday. 

The Bank of Canada remains committed to reaching its target rate of two per cent inflation. 

“Evidence that the economy is slowing due to weakening demand, rather than supply constraints, will bring a pause in this rate hike cycle following the next hike,” Grantham said. 

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