Everyone knew the International Monetary Fund’s projections about the speed of Argentina’s recovery after agreeing to bail-out the beleaguered nation with a record US$56-billion loan were unrealistic. They were as much of a fiction as the projections underlying the 2018 Budget passed by the Mauricio Macri administration in late 2017, which hours after passing the legislation through both chambers of Congress decided to tell the Central Bank, then led by Federico Sturzenegger, to abandon inflation targeting, effectively raising expectations about what it had just committed itself to before the Legislature.
While no-one could’ve predicted the magnitude of the Argentine economic meltdown, it was clear that a quick recovery was highly improbable. Still, the structural program that accompanied the IMF’s loan – supposedly put together by technical teams responding to both the Fund and Argentina’s then-economy minister Nicolás Dujovne – prescribed tough austerity on both the fiscal and monetary fronts. One could argue there was no alternative, as in Macri’s first two years in office the fiscal expansion worsened the deficit, while monetary contraction sought to tackle inflation ineffectively. Once international debt financing dried up, the market took care of the correction Macri was unable to execute. It is clear now that the IMF and Macri’s economic team are directly responsible for what has happened since.
The current state of Argentina’s economy is perilous. The typical metaphor is that of a ticking time-bomb, the same one that was used when Macri took over the reins from Cristina Fernández de Kirchner.
In charge of the Economy Ministry now is Martín Guzmán, an anti-austerity economist who cut his teeth under Nobel laureate Joseph Stiglitz at the prestigious Columbia University in New York. Quoted by the Financial Times, Stiglitz praises Guzmán thusly: “The thing about Martín is that he is terrific at mathematical models and high theory [of the sort that orthodox economists and markets love] but he’s also interested in changing things in the real world.” While Stigtlitz is taking a stab at his orthodox colleagues, what he’s indicating is that Guzmán is a skilled economist from a theoretical standpoint. His Argentine mentor, economist Daniel Heymann of the Universidad Nacional de la Plata, told Noticias magazine Guzmán is “valuable” and “pragmatic.” In December, Guzmán was named chair of the Currency, Credit, and Banks department of that university, replacing Heymann.
While Guzmán’s economic plan isn’t entirely clear yet, initial signs of moderation have pleased the market. In his first major public address as economy minister a few weeks ago, Guzmán spoke of “macroeconomic consistency” while making it clear that the policy framework his team plans to put in place has the intention of stabilizing the economy. Probably his most important message was that there is no margin for excessive fiscal stimulus, and that the use of the printing press to jumpstart the economy would be “destabilizing.” While this appears to be a message aimed at foreign creditors in the context of the coming debt restructuring (which will be the key to his success or failure in the hot seat that is the Economy Ministry) it is a welcome statement given pressure from different segments to rely on monetary expansion in the current context where Argentina is effectively locked out of international markets, over-indebted and still in situation of fiscal deficit.
The contours of the plan are beginning to come into view. Guzmán – along with Matías Kulfas at the Production Ministry, Miguel Ángel Pesce at the Central Bank, and the rest of the related official entities – will look to provide relief to the lower sectors of society, at the expense of the agricultural sector and overall higher taxes on personal wealth. Currency controls will be tightened, with taxes aimed at disincentivizing dollar-denominated consumption and savings, while export taxes will be raised. Along with Alberto Fernández’s “Social Solidarity and Productive Activation” Law, the idea is to freeze public service costs for 180 days, while ordaining increases in pension payments and private sector salaries by decree.
There’s more to the plan, but the basic idea is that through a “social pact” that includes the major economic and political actors, price increases will be contained while real wages should rise above inflation, therefore aiming at producing a consumption shock that should drag the economy out of recession. This will be financed to a small degree by monetary expansion, by higher taxes on specific sectors (which, by definition, reduces output), and should all happen in the context of a move toward fiscal balance and a trade surplus due to a competitive peso-dollar exchange rate. There is a clear break with the IMF’s orthodoxy, and Macri’s obsession with fiscal surplus. A Keynesian wink of sorts.
It isn’t entirely clear how Argentina will improve its productivity, therefore generating the conditions for a competitive export sector that produces enough dollars to break the eternal vicious cycle that has destroyed the national currency. Yet, it is the first time in a while that there is a plan on the table. And the feeling of security and predictability of actually having a plan, something Guzmán indicated he will put down on paper, has sent positive signs to the market.
Guzmán became a known name in Argentina a few months before Fernández’s electoral victory, mainly as a sovereign debt restructuring specialist. “Restoring debt sustainability is a necessary condition for economic recovery. Economic recovery is a necessary condition for restoring debt sustainability,” he explained in a recent presentation, in which he argued for a two-year moratorium on debt payments, the rejection of any additional IMF money, and a successful negotiation with creditors that avoids a default and should be concluded by March 2020. He also wants a “convergence to primary fiscal surpluses and trade balance consistent with sustainable reprofiled debt at a speed that does not create destabilising macroeconomic effects.”
Austerity, as a general remedy to a public debt crises, does not work. Half of the countries that went through a sovereign debt restructuring with private creditors were forced to default or restructure again within three years, Guzmán argued, noting that only Ireland in 1987 successfully came out of a default through austerity. Why? Its main trading partner was experiencing an economic boom at the time. Without the stroke of good luck, nations are set on a path to more distress and the constant risk of default. The memory of Greece is all too fresh, a nation which lost 25 percent of its GDP from 2007 to 2013 in the context of a series of IMF bailouts and structural austerity programmes.
It is unclear if the social pact that Fernández and his team are looking to introduce will succeed in rooting inflationary momentum and activating the economy. Yet, the rejection of austerity as the only way out of Argentina’s crisis, which appears to be Guzmán’s main contribution, seems like the right way out of this mess. And, the idea of macreconomic coherence, in particular given the fiscal deficit and the size of the debt pile, gives the rejection of austerity a logical framework. Now, it’s time to see if the economist can put his theoretical toolbox to work on the real economy.
Ottawa's economy to shrink 5.7% in 2020 before rebounding next year: Conference Board – Ottawa Business Journal
Even the insulating effect of the federal government won’t be enough to prevent Ottawa-Gatineau’s economic output from contracting for the first time in nearly a quarter-century in 2020 as COVID-19 continues to wreak havoc with key sectors, a leading think-tank says.
The National Capital Region’s GDP is expected to shrink by nearly six per cent this year, the Conference Board of Canada predicts in its latest economic outlook released this week. To put that number in context, the city’s economy has grown by an average of 2.7 per cent annually over the last five years.
“Ottawa-Gatineau’s position as the nation’s capital and home to the federal government often insulates the city from big swings in economic growth,” said the organization, which forecast back in May that the region’s economy would contract by 2.4 per cent in 2020. “However, the city will not escape the impacts of the COVID-19 pandemic.”
It would be the first time Ottawa-Gatineau’s GDP has contracted since 1996, but the think-tank says the capital region is still in better economic shape than most other Canadian centres.
The Conference Board forecast says Canada’s overall GDP will shrink by 6.6 per cent in 2020 as households tighten their pursestrings and many sectors struggle to recover from a devastating spring and summer. The organization paints an even grimmer long-term picture for industries such as air transportation, accommodations and food and beverage services, declaring they “might never fully return to normal.”
The organization says public administration is the only sector of the local economy that’s expected to grow in 2020. Not surprisingly, the accommodation and food services industry – which has been largely shuttered for much of the pandemic as part of public health efforts to contain the virus – is expected to take the biggest hit, with the Conference Board’s forecast calling for the sector to decline by a whopping 35.6 per cent.
Other sectors facing big declines include retail, which is expected to shrink 6.4 per cent – only the third time in the last two decades its output has fallen year-over-year.
Still, the think-tank says it expects both the local and national economies to bounce back in a big way in 2021, with Ottawa-Gatineau’s GDP expected to grow by 5.2 per cent and the national GDP forecast to rise by 5.6 per cent.
The Conference Board is predicting Ottawa-Gatineau to continue on a growth path in the years ahead, albeit at a slower rate, forecasting GDP increases of 3.6 per cent in 2022 followed by consecutive 1.3 per cent bumps in 2023 and 2024.
The organization made several other economic forecasts, including:
- Ottawa-Gatineau’s unemployment rate – which peaked at 9.5 per cent in June – will finish at 7.4 per cent for the year, compared with a mark of 4.8 per cent in 2019. Employment in accommodation services will feel the biggest impact, plummeting 34 per cent from last year;
- Housing starts – which reached a 35-year high of 11,200 units in 2019 – will fall to 10,700 units this year before dipping below 10,000 in 2021 and the next few years ahead;
- The region’s population will grow 1.5 per cent in 2020, its smallest annual increase in the last five years;
- Ottawa-Gatineau’s per capita household income will rise 3.8 per cent this year, while per capita disposable income is forecast to grow 5.8 per cent.
Why the US economy won't gain any traction until 2021 – CNN
Fed's Brainard calls for more fiscal aid for economy – TheChronicleHerald.ca
By Dan Burns and Ann Saphir
(Reuters) – Despite a “heartening” bounceback from the initial hit to the U.S. economy delivered by the COVID-19 pandemic, the recovery is uneven and uncertain and will require continued support to ensure it becomes broadbased and sustainable, Federal Reserve Governor Lael Brainard said on Wednesday.
The economy’s overall improvement, however, masks big disparities among sectors and among Americans that could hold back the recovery.
The Fed, she told an online conference of the Society of Professional Economists, is committed to providing “sustained accommodation” to the economy for as long as needed, and won’t raise rates if inflation rises temporarily above 2%.
That could happen as early as next spring, she said, as data registers year-over-year gains from the nadir of the coronavirus crisis.
At the same time, the biggest risk to her outlook for recovery is that fiscal support from the federal government will be withdrawn too soon. It’s a view widely shared by her Fed colleagues. Talks on a new pandemic relief package are ongoing, but prospects remain dim for the Republican-controlled Senate to approve any aid before the Nov. 3 election.
“This strong support from monetary policy – if combined with additional targeted fiscal support – can turn a K-shaped recovery into a broad-based and inclusive recovery that delivers better outcomes overall,” Brainard said.
Brainard’s reference to a “K-shaped” recovery nods to an increasingly popular description of the rebound from the spring’s low point in activity, under which many households and small businesses have seen little improvement.
“Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity,” Brainard said.
Among the more troubling developments from the recession caused by the pandemic, she said, are that job losses have occurred disproportionately among minority populations and, more recently, that prime-age working women have left the labor force.
“If not soon reversed, the decline in the participation rate for prime-age women could have longer-term implications for household incomes and potential growth,” she said.
Brainard signaled that the Fed will not only keep rates at their current near-zero level for years, but will, even after liftoff, raise them only gradually to keep rates at levels designed to stimulate economic growth.
That approach, laid out in a newly adopted framework that Brainard repeatedly called “powerful” on Wednesday, ensures the Fed will not tighten policy too soon.
Brainard said it will take time to see a sustainable rise in inflation, which she expects to linger below the 2% target for the next few years.
The central bank will also “have the opportunity” in the months ahead to clarify how the Fed’s asset purchase program could best work in combination with forward guidance on rates, she said.
Asked about the risk of a potentially contested U.S. presidential election, Brainard sidestepped a direct response but said the Fed is in a “good place” to maintain financial stability through its extensive monitoring and its existing backstop facilities.
(Reporting by Ann Saphir and Dan Burns; Editing by Andrea Ricci)
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