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Freeland’s fall economic update to include measures for students and workers, pledge fiscal discipline

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Finance Minister Chrystia Freeland speaks during question period in the House of Commons on Parliament Hill in Ottawa on Oct. 3, 2022.Sean Kilpatrick/The Canadian Press

Finance Minister Chrystia Freeland will release a fall economic statement Thursday that includes new money for students and low-income workers, while also delivering a message that Ottawa is committed to fiscal discipline and won’t fan the flames of inflation.

Two government sources say the update will also include new details on the Canada Growth Fund, which was first announced in the April budget as a $15-billion plan to spur investment in a net-zero emission economy.

There will also be new details regarding Canada’s response to the recently approved Inflation Reduction Act in the United States, a massive bill that contains a host of government incentives for green energy investments that Canadian business leaders have said creates competitiveness concerns.

The Globe and Mail is not identifying the sources as they were not authorized to comment publicly on the matter.

Private-sector forecasts suggest Ms. Freeland, who is also Deputy Prime Minister, will be in a position to announce that the deficit for the current fiscal year could be smaller than the $52.8-billion projected in the April budget.

The Parliamentary Budget Officer released a report last month saying this year’s deficit is on track to be $25.8-billion, but that doesn’t account for new spending that will be announced in Thursday’s update. The PBO also projected a steadily declining deficit in future years. Other economists have offered a different take, projecting a recession in 2023 that will push next year’s deficit higher.

Federal Innovation Minister François-Philippe Champagne laid out the government’s dual message Wednesday while speaking with reporters.

“It’s a time to support Canadians. I mean, we have all seen the price of milk, the price of bread, the price of energy. It’s a time to help Canadians,” he said when asked whether Thursday’s statement will show Ottawa is reining in spending. He later added: “It is certain that we are in an economic period where caution is in order.”

A key challenge is ensuring that fiscal policy and monetary policy are not acting at cross purposes in the current inflationary environment. The government may be inclined toward new spending or tax relief measures to support Canadians struggling with rising prices. But this can be counterproductive, as new spending or tax cuts add to overall demand in the economy, boosting inflation.

The April budget said the deficit would drop to $8.4-billion by 2026-27. The PBO said in its report that the deficit will drop to $3.4-billion by that year.

An economic update typically includes an overview of the Finance Department’s expectations for the Canadian economy and often announces some new spending. The documents include revised estimates for what the latest economic and spending trends mean for Ottawa’s projected bottom line over the coming years.

Through a series of recent speeches ahead of Thursday’s update, Ms. Freeland has presented an economic message focused on fiscal discipline and encouraging economic growth through programs that boost research and development and investment in clean energy.

Perrin Beatty, president and chief executive officer of the Canadian Chamber of Commerce, said in an interview Wednesday that he’d like to see the update show a clear path to a balanced budget. While he said support for those most in need may be required, he hopes to see an update that provides a clear agenda for economic growth.

“We’re moving past the pandemic now. And what we need to do is to make sure that we have a path to getting our financial or fiscal house in order,” he said. “You can’t cut your way back to balance given the size of the deficit and debt. Nor should we be looking at inflating our way out of the debt that we’ve accumulated. The only responsible way to achieve it is through growth. And that means then that we’ve got to unlock investment from the private sector.”

The Liberal government announced a $4.6-billion package of inflation-relief measures in September aimed at lower-income Canadians.

Canadian Labour Congress president Bea Bruske said in an interview Wednesday that more is needed, but she is not expecting much from Thursday’s statement.

“We expect to see very few new investments announced in this update, and so we’re a little bit concerned about that,” she said. “We do think that there’s a dire need for some of those investments, because workers are certainly feeling very stretched these days, with the rate of inflation and with everything else that’s going on in the world.”

The economic outlook has worsened in recent months. The Bank of Canada’s aggressive push to tackle inflation with higher interest rates is hitting the housing market, squeezing consumer spending and dampening business investment. Exports are also expected to drop as commodity prices fall and key trading partners tip into recession in the coming months.

The Bank of Canada now expects near-zero GDP growth in Canada for the rest of the year and the first half of 2023.

“It’s not a severe recession, it’s not a major contraction, but you could certainly get a couple of quarters of negative growth,” Bank of Canada Governor Tiff Macklem told a Senate committee on Tuesday.

Multiple forces are coming together to produce the slowdown. Having allowed inflation to surge to a multidecade high, central banks around the world are rapidly increasing interest rates in one of the most comprehensive monetary policy tightening episodes on record. The U.S. Federal Reserve, the world’s largest and most important central bank, announced another 0.75-percentage-point rate hike on Wednesday.

Meanwhile, Russia’s invasion of Ukraine has caused an energy crisis in Europe, and China’s COVID-19 lockdowns have further disrupted global supply chains.

The International Monetary Fund said last month that roughly a third of the global economy will be in recession next year and warned that “the worst is yet to come.” Canada does have some advantages, and the IMF expects it to post the second strongest growth next year among G7 countries, after Japan.

“We are fortunate that this war is a bit further away from us,” Mr. Macklem told the Senate committee. “The other advantage we have is we produce many of the commodities that are in short supply. We export oil, we export natural gas, we export wheat, we export potash. The prices of those things are high.”

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Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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