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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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B.C.’s debt and deficit forecast to rise as the provincial election nears

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VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

The Canadian Press. All rights reserved.

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Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

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NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

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HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

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