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How political uncertainty hurts the US economy: Lessons from Italy – Brookings Institution



Overseas observers of American politics are certainly disconcerted by the degree of domestic political animosity in the U.S., and by the self-inflicted delegitimization of its democratic institutions in the last two decades. Those who observe similar events from Italy feel a particular shiver run down their spine. Memories of what happened in the early 1990s, when Italy’s state and institutions suffered a severe loss of credibility and the political fight turned fierce and acrimonious, still haunt. Since then, the Italian economy has never recovered, in part because investors need a stable political framework to take risks, particularly around intangible investments.

At that time, Italy’s regional divide became so contentious as to cast doubt over the very unity of the state. The public debt grew at record levels for peace time. Financial instability was so severe that Italy’s exchange rate agreements with European partners were suspended. However, it was the discredit suffered by Italy’s political class that caused the economy to stop growing. The parties’ reciprocal accusations of corruption and hidden interests tore apart the citizens’ sense of community and created a climate of profound mistrust. In the mid-1990s, Italy’s GDP per capita was higher than the United Kingdom, and aligned with Germany’s and France’s. Since then, the income of Italians has dropped by 30% compared to European counterparts.

For economists, the “Italian disease” is still kind of a mystery. In fact, it is especially elusive because the causes of Italy’s economic decline were rooted in political events. In some ways, those events are perhaps similar to what we see in the U.S. today: Deep fractures in government degrade its efficacy, the legitimacy of the highest public offices has been denigrated, and there are attempts to manipulate judicial powers. All this has taken place amid a frenetic electoral cycle in a hyper-partisan media landscape.

On top of this, the International Monetary Fund (IMF) recently estimated that U.S. government debt may amount to 160% of the GDP by 2030, reaching exactly the same level as Italy today. Rising public debts, regardless of why they exist, are a strong amplifier of political uncertainty, and transmit instability to the rest of the economy. In Italy’s experience, this has happened mostly through the effects of political shocks on the prices of government bonds, which are the backbone (the “safe asset”) of the financial system. This produces what is called a “doom-loop” between sovereign and banks debts. In the U.S., the Federal Reserve can mitigate those effects, but this may happen at the cost of eroding the central bank’s credibility in pursuing its monetary objectives. In the long term, risk premiums on the government bonds might become permanently higher and affect economic growth.

The particular uncertainty originating from the state’s institutional framework especially affects “intangible” investments, such as those in research, intellectual property, software, and changes and improvements in labor and capital organization. These investments are riskier than tangible ones because they require high capital engagements and high start-up costs in the face of uncertain outcomes and returns that are postponed over time. Moreover, labor and capital reorganization requires associated political reforms. Finally, if a country’s stability is questioned, banks and financial investors are more wary of engaging and funding intangible investments, from which they will not be able to recover any material collateral in case of failure. Empirical experience and statistical data confirm that for intangible investments to flourish, a first requirement is stability in political and institutional frameworks.

Unfortunately, it is precisely those investments in new ideas, new ventures, new research, or still unknown advanced technologies that will be vital for every country’s development and well-being in the decades to come.

When Italy experienced its phase of exceptional political turbulence and the loss of credibility in its institutions, the economy suffered a dramatic setback. Public and private investments collapsed, and the intangible ones fell by more than 20% between 1992 and 1993. The consequences are still felt today because Italian productivity has never recovered. Entrepreneurs were afraid of immobilizing their capital in an unstable political context. Instead, they chose to cut costs, beginning with the number of employees, and piled pressure on the government to introduce any form of flexibility that allowed firms to expatriate at the first signs of instability. Thirty years later, none of the major Italian private corporations of the time — Fiat (now FCA), Luxottica, Fininvest, or Pirelli, among others — has its legal seat in Italy.

Of course, the early 1990s were a spectacularly wrong time for skirting intangible investments. It was the time in which information technologies emerged as the most transformative power in the production of traditional goods and services, opening the way to innovative solutions, higher productivity, and better-paying jobs.

In many ways, the present moment is an exceptional one too, albeit with differences from the 1990s. Whatever one thinks of the claim that we entered an age of secular stagnation or of excess of savings over investments, there is no doubt that the U.S. needs significant infrastructure investment to bring the quality of the capital stock in line with other advanced or “advancing” economies. The most striking hole is where public and private investments should leverage each other: Just think of the American delays in 5G networks and other important infrastructures, where the material component is indistinguishable from the immaterial one, from air and ground transportation to medical services. The state’s role in incentivizing lower-emission means of power generation or greener transportation, either private or public, is far behind the curve. There is ample space for a catch-up, but making the government work proficiently with the private requires political stability.

Maintaining people’s trust is of paramount importance. The political climate in the U.S. in recent years has been disappointing for anyone who understands the relevance (economic and otherwise) of public consensus around democratic rules and values. Governments must demonstrate to citizens that they (the people) ultimately benefit from the democratic system. In order to do that, improving social policies, such as by upgrading the federal and state safety nets, is key, as well as increasing poor families’ access to quality education. The Italian experience shows that the loss of political credibility and the weakening of the economy are self-sustaining. Once a vicious circle is generated, it is extremely difficult and enormously painful to reverse it.

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Northern Development reports unexpected pandemic related benefits to Northern BC's economy –



(Files by Dione Wearmouth-MyPGNow)

The 2020 State of the North Economic Report by Northern Development outlined some surprising impacts the pandemic had on Northern BC’s economy.

According to the report, the overall impact of COVID-19 has been more moderate in the North as the region’s economy doesn’t depend as heavily on hospitality and recreation.

“Our economy in the North is more traditionally on industries like mining, forestry, oil and gas and clean energy,” explained Joel McKay, CEO of Northern Development, “and those particular sectors weren’t hit as hard by the shutdowns involved with the pandemic.”

Since there are fewer service-sector jobs that were heavily impacted by the changing provincial health guidelines, the North was better off than other areas of the province.

The forestry sector managed to do surprisingly well in the North throughout 2020, as the pandemic presented a unique opportunity to the sector.

“Once COVID hit, a lot of people at home took on home improvement and renovation projects and housing starts remained relatively strong, both of which are key indicators of the lumber being manufactured in BC,” noted McKay.

This led to the price of lumber reaching a record high last summer.

This comes after a particularly hard 2019 for forestry, as nine mills closed permanently in Northern BC, resulting in over 1,000 lost jobs.

According to the report, lumber prices are expected to remain relatively high through the end of 2020 and into 2021.

McKay also explained that major energy projects including Site C, Coastal Gaslink projects and the LNG Canada site had a major impact on the North’s economy last year.

“The multi-year construction horizon, the thousands of workers, all the companies and businesses in places like Prince George that are working to support the construction of those projects meant that there was money flowing in the North,” he explained, “which saved the North’s economic bacon.”

Even though the tourism and hospitality sectors didn’t see as many visitors in 2020,  there were many construction workers that came and supported businesses such as restaurants and hotels.

“These three projects are expected to bring people to spend money in the North for the next 4 to 5 years,” McKay added.

Commodity prices for some base and precious metals such as copper spiked as well, which presented an opportunity for the mining industry to thrive in the North.

“That’s driving renewed interest in exploration activity and also some projects that are well established could also start being built for the first time,” McKay added, “we single out the Blackwater project south of Vanderhoof in the report.”

He explained that the Blackwater project could create significant long-term construction jobs filled by people that will spend money on hospitality businesses in the North.

Even though 2020 presented some significant opportunities for economic development in the North, the report explained the region will continue to face economic challenges for some time.

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Indian economy to get shot in the arm from federal budget: Reuters poll –



By Tushar Goenka and Shaloo Shrivastava

BENGALURU (Reuters) – India’s path to economic recovery will be stronger than previously thought as fiscal expansion and vaccine hopes help the country heal from COVID-19, a Reuters poll of economists showed.

The world’s second-most populous country has begun a huge vaccination drive and a steep fall in new coronavirus cases over the past few months is supporting a recovery in Asia’s third-largest economy.

Alongside that, nearly 60% of respondents, 18 of 31, who responded to an additional question in the Jan. 13-25 poll said India’s federal budget, due on Feb. 1, would help a significant economic recovery in financial year 2021/22 and has already sent stocks to record highs.

“We expect global economic activity to return to normality in fiscal Q2 and India to grow in fiscal 2021/22, with government stimulus packages expecting to contribute,” said Hugo Erken, head of international economics at Rabobank.

“There is a strong sentiment the budget will aim to continue expenditure as growth is the only way India can come out of recent setbacks.”

The poll of over 50 economists showed the economy would grow 9.5% next fiscal year – the highest since polling began for the year in March 2020 – after contracting 8.0% in the current fiscal year.

It was expected to grow 6.0% in fiscal year 2022/23. The poll predicted the economy would grow 21.1%, 9.1%, 5.9% and 5.5% in each quarter of the 2021/22 fiscal year, largely upgraded from a poll taken two months ago.

But when asked how long it would take for the economy to recover to its pre-COVID-19 level, 26 of 32 respondents said it would take up to two years, including six analysts said longer than that. Twelve analysts said within a year.

“There is a lack of fiscal space to boost growth sufficiently and India is unlikely to reach its pre-COVID-19 levels any time soon despite policy support,” said Sher Mehta, director at Virtuoso Economics.

“Economic momentum will struggle to gain traction as there are fears of stagflation and the possible end of monetary policy easing.”

The Reserve Bank of India, which has slashed its main repo rate by 115 basis points since March 2020 to cushion the shock from the coronavirus crisis, was expected to keep its benchmark lending rate at 4.0% through at least 2023.

That was a shift in expectations from a survey taken two months back when a 25 basis point cut to 3.75% was predicted in the April-June period.


India’s government will focus on fiscal expansion in next week’s budget and revise its borrowing target higher for the 2021/22 fiscal year, prompted by the expected economic slowdown and weak jobs growth, according to the latest poll.

Government borrowing has ballooned due to pandemic spending while revenues have severely dampened.

The median forecast showed the government would revise its fiscal deficit target for next fiscal year up to 5.5% from 3.3% of gross domestic product.

Around 55% of economists, 18 of 33, who answered an additional question about the focus of the budget said it would be more on fiscal expansion than prudence.

“Tight fiscal policy can do lasting damage by hurting potential growth that would have been negatively affected on account of the pandemic,” said Abhishek Upadhyay, senior economist at ICICI Securities PD.

(For other stories from the Reuters global long-term economic outlook polls package:)

(Reporting by Tushar Goenka and Shaloo Shrivastava; Polling by Vivek Mishra and Md. Manzer Hussain; Editing by Jonathan Cable and Steve Orlofsky)

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Consumer Confidence in US Improves on Outlook for Economy – BNN



U.S. consumer confidence rose in January as Americans grew more upbeat about the outlook for the economy and job market in light of further fiscal aid and the distribution of coronavirus vaccines.

The Conference Board’s index of sentiment increased to 89.3 from a revised 87.1 reading in December, according to a report on Tuesday. The median forecast in a Bloomberg survey of economists called for a reading of 89.

The gauge of expectations rose to a three-month high of 92.5, while a measure of sentiment about current conditions decreased to 84.4, the worst reading since May.

The overall improvement in sentiment follows last month’s passage of a US$900 billion aid package and coincides with a proposed US$1.9 trillion in additional stimulus. While the confidence index remains well below pre-pandemic levels as the health crisis prompts tighter restrictions on activity, a more widespread roll out of the vaccine and additional financial assistance could shore up sentiment.

“Consumers’ appraisal of present-day conditions weakened further in January, with COVID-19 still the major suppressor,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement. “Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future.”

The number of Americans that said jobs were currently hard to get increased to the highest level since May, underscoring a rocky labor market. The cutoff date for the preliminary results was Jan. 14.

Still, the share of survey respondents who said better business conditions in the next six months increased to a three-month high of 33.7 per cent from 29.5 per cent. The share anticipating more jobs during that period climbed to 31.3 per cent, also the highest since October.

At the same time, a little more than two-thirds see their incomes remaining flat in the next six months, while the rest of respondents were about evenly split on whether their wages will rise or fall.

Respondents indicated they were more likely to make big purchases in the months ahead. The share expecting to buy a new car increased to 10.7 per cent from 9.8 per cent, and more said they intended to buy a home.

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