Rising prices, fallout from the war in Ukraine and continuing supply chain chokeholds slowed growth around the world in the first months of the year and hobbled efforts by major economies to recover from the pandemic.
The latest evidence came on Friday, when the European Union said that the 19 countries that use the euro grew only 0.2 percent overall during January, February and March compared with the previous three months.
That figures came just one day after the United States announced that its economy shrank 0.4 percent over the same period. Earlier this month, China, the world’s second largest economy behind the United States, reported signs of significant weakness as another wave of Covid-19 prompted widespread lockdowns.
“The overarching message is that the global growth outlook is souring and it is deteriorating at a faster rate and in a more serious way than most analysts have anticipated,” said Neil Shearing, chief group economist at Capital Economics.
There is significant variation in the causes, as well as the forecasts, among the three major economic blocs.
Although total output in the United States contracted, analysts tended to be more sanguine about the American economy’s prospects, noting that consumer spending was strong despite high inflation and that the labor market remained tight. The downturn during the first quarter was most likely the result of one-time measuring quirks.
By contrast, China’s report of 4.8 growth percent in the first quarter masks just how much that economy is suffering from a slump in the real estate industry, overinvestment and pandemic-related shutdowns.
As for Europe, it is much more affected by the war in Ukraine.
The common problem they all face, though, is inflation.
“Growth around the world is evolving at different speeds,” said Gregory Daco, chief economist of EY-Parthenon, but “inflation is present almost everywhere in most sectors.”
Those divergent economic backdrops may cause governments and central banks to choose different, or even conflicting, policies as countries try to slow inflation without tipping into recession.
In the United States, the Federal Reserve is set on raising interest rates to bring down inflation, Mr. Daco said, while governments in Europe may end up funneling more money to their citizens to blunt the impact of rising energy prices. And China, he said, is caught in a bind: “They do not want to let go of their Covid-zero policy, but they realize the drag on economic activity from that policy is massive.”
Even though the current slate of risk factors — like the coronavirus and tensions between Russia and Ukraine — were all present when the year began, the economic outlook then was much brighter. Restrictions related to the Omicron variant of the coronavirus were beginning to ease in Europe and elsewhere, and there were hopes that the movement of goods and supplies around the world were about to pick up.
But Russia’s invasion of Ukraine injected a jarring level of uncertainty and undermined economic confidence. The war and resulting sanctions imposed by the United States, Europe and their allies have aggravated shortages of food, energy and crucially important minerals, disrupting trade and driving inflation to wince-inducing levels.
China’s economy expanded in the first quarter but at a pace that was barely faster than the final three months of last year, underlining more trouble ahead. The government has responded to renewed outbreaks of Covid with severe lockdowns and mass quarantines, which have kept millions of workers and consumers in several cities at home. Shanghai, the country’s biggest city, has been closed for more than a month, while further shutdowns of businesses and residential complexes were announced in Beijing on Friday.
Patrick P. Gelsinger, the chief executive of Intel, the Silicon Valley giant, cited the Shanghai lockdown and the war in Ukraine in warning on Friday that the shortage of computer chips that has bedeviled technology, automotive and electronics companies worldwide for more than a year would continue “until at least 2024.” He made his remarks on a call with industry analysts.
Risks, especially those related to a possible energy embargo and other disruptions caused by Russia’s invasion of Ukraine, have intensified. This week, Russia cut off gas supplies to Poland and Bulgaria. At the same time, the European Union has been inching closer to an agreement to stop the flow of Russian oil.
The impact of an abrupt halt in gas and oil supplies has generated sharp debate. In Germany, which has the largest economy in Europe, the central bank recently warned that a gas embargo would cause the country’s economic output to decline as much as 5 percent this year.
Some economists have offered more optimistic estimates, but Melanie Debono, senior Europe economist for Pantheon Macroeconomics, said a gas embargo would almost certainly throw Germany into recession and would probably “drag the rest of Europe down with it.”
During the first three months of this year, Germany’s gross domestic product — the broadest measure of economic output — grew 0.2 percent.
“The economic consequences of the war in Ukraine have had a growing impact on the short-term economic development since late February,” the Federal Statistics Office in Germany said on Friday.
Across the eurozone, growth varied. The economy in Spain performed slightly better than other European countries’, growing 0.3 percent over the same period. Still, the improvement was much smaller than the 2.2 percent recorded in the last quarter of 2021.
In France, where Covid restrictions remained in place for much of the first quarter, growth came to a dead stop. In Italy, G.D.P fell 0.2 percent from the previous three months.
“Clearly the picture for the first quarter is one of pretty weak growth,” said Ángel Talavera, head of European economics at Oxford Economics. “Consumer confidence has tanked everywhere pretty sharply,” he noted, adding that household spending weakened as wages failed to keep pace with inflation.
Average growth among the 27 countries that make up the European Union was 0.4 percent in the first three months of 2022, Eurostat, the European Union’s statistical office, stated, twice the figure reported for the eurozone.
Inflation has been a persistent thorn, rising to an annual rate of 7.5 percent across the eurozone in April from 7.4 percent in March, Eurostat said.
Food and other prices rose sharply. Although energy prices fell 3.7 percent this month, they are still more than a third higher than last year. “There is a squeeze in real incomes for households,” Ms. Debono of Pantheon said.
Rising inflation could test the American economy’s resilience as well. During the first quarter of this year, consumer prices rose at a 7 percent annual rate, the fastest in four decades. Taking inflation into account, after-tax incomes dropped for the fourth quarter in a row.
Even before this latest round of measurements, intense uncertainty had dimmed forecasts. Last week, the International Monetary Fund revised its estimate of global growth to 3.6 percent from the 4.4 percent it predicted in January. Its estimate for the eurozone declined 1.1 percent to 2.9 percent for the year.
Russia’s invasion of Ukraine “will have severe economic consequences for Europe, having struck when the recovery from the pandemic was still incomplete,” the I.M.F. said in its most recent regional outlook. “The war has led to large increases in commodity prices and compounded supply-side disruptions, which will further fuel inflation and cut into households’ incomes and firms’ profits.”
The outlook for the rest of the year may darken further.
“Overall, 2022 is going to be a year where growth is going to be significantly weaker than most analysts expect,” said Mr. Shearing of Capital Economics.
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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Sri Lanka's Shattered Economy Awaits New Finance Head, Rate Hike – BNN
(Bloomberg) — Authorities in Sri Lanka this week are expected to name a new finance minister and raise interest rates as they struggle to stabilize an economy spiraling into chaos by a lack of dollars and surging inflation.
Prime Minister Ranil Wickremesinghe, appointed last week, is expected to soon choose a finance minister, who will help lead talks with the International Monetary Fund over badly needed aid.
Click here for the latest on developments in Sri Lanka
Meanwhile, the Central Bank of Sri Lanka is expected to raise its benchmark standing lending rate by 75 basis points on Thursday from 14.5%, the median in a Bloomberg survey shows as of Tuesday, as it tries to battle Asia’s fastest inflation.
The decisions come as the South Asian country barrels toward its first official default, with the 30-day grace period for missed interest payments on dollar bonds ending Wednesday.
Read more: Sri Lanka Stumbles Toward Its First Default on Foreign Debt
The prime minister on Monday warned that the country was down to its last day of gasoline supplies, as it doesn’t have the dollars to pay for shipments aboard tankers anchored just offshore. He also said it would need to print money to pay government salaries, a move that will certainly worsen inflation already running near 30%.
What Bloomberg Economics Says…
“Facing a cratering currency and the risk of hyperinflation, the Central Bank of Sri Lanka is sure to hike rates further — crushing growth. But we think the worst of the inflation storm will pass fairly quickly. The prospect of consumer price gains cooling into 2023 should allow the central bank to limit its remaining rate increases to 400 basis points.”
— Ankur Shukla, Economist
For the full note, click here
Sri Lanka is suffering a shortage of food, medicine and energy while its currency has been in a free fall, fueling protests and violence that pushed Prime Minister Mahinda Rajapaksa to resign last week. His brother Gotabaya, the president, appointed long-time opponent Wickremesinghe in a bid to calm the situation and restore order. Central bank Governor Nandalal Weerasinghe had earlier threatened to resign if political stability wasn’t established.
The country’s monetary authority has raised interest rates by 850 basis points so far this year. Meanwhile, the currency has lost more than 40% against the dollar since the end of February, while its foreign exchange reserves dipped 4.7% in April to $1.8 billion. Officials, however, warned earlier this month that the country has about $50 million in usable reserves.
©2022 Bloomberg L.P.
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