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Mumbai, India – Waiting outside a popular lunch spot in Mumbai after a Sunday morning game of cricket, textile exporter Rishi Patel has more on his mind than the performance of his team.
“The wholesale market is just flooded right now with Chinese products, while consumption is down at home,” Patel, 22, who runs his family’s business, told Al Jazeera in the Matunga neighbourhood of India‘s financial capital. “We’ve been laying off some people over the past year.”
The problems that Patel faces are also plaguing much of India’s economy, issues that Finance Minister Nirmala Sitharaman tried to address in her annual Budget speech on February 1. But many analysts say the government’s proposals are unlikely to help people like Patel or many others.
But government policies have also played a part in reducing India’s economic growth rate to its slowest in 11 years, resulting in an uncompetitive domestic manufacturing sector, a shrinking job market and consumers tightening their purse strings, leaving many businesses in despair.
“Employment and therefore the economy can only go up if the government helps small and medium enterprises like ours,” says Patel. “We were expecting more action.”
While Sitharaman did introduce tariffs on “cheap and low quality” imports like footwear and furniture in a protectionist move to help businesses like Patel’s, many in his position wish the government had used the budget to lay out a more concrete plan to tackle the slowdown in India, which was until just a few years ago, the world’s fastest-growing large economy.
Analysts acknowledge that, in some ways, the government’s hands are tied.
According to the International Monetary Fund, the Indian government’s debts amounted to 68.5 percent of gross domestic product (GDP), the most commonly used yardstick of the size of an economy. That is far higher than the average for emerging and developing economies of 55.7 percent of GDP.
In its latest Economic Survey for its 2019-20 fiscal year, presented in Parliament a day before the budget, the government said it spent more than it received in revenues by a margin of 3.8 percent of the size of India’s economy, the so-called fiscal deficit. That figure missed the government’s own target of restricting overspending to 3.3 percent of gross domestic product (GDP).
Many analysts believe the government needs to spend aggressively to stimulate growth, even if it means widening the fiscal deficit. Those who were looking for big-ticket spending plans in Sitharaman’s budget were disappointed.
The IMF agrees that growth needs a boost. In a recent assessment of India, it said economic development projects will be vital in the coming years.
“But to generate the revenue needed to get them off the ground, India’s debt – among the highest in emerging markets – must be reduced,” it said. “Despite some improvement in reported fiscal deficits, debt as a share of GDP remains little changed over the past decade partly due to increases in off-budget financing.”
In what was one of the longest ever budget speeches, the slowdown was not mentioned once, but the government’s goal to become a $5 trillion economy in the next five years remained in place.
Critics argue that while the budget was mildly expansionary, it was mostly filled with populist handouts.
“The budget has provided little steer in any direction and so it is now up to luck,” Maitreesh Ghatak, an economics professor at the London School of Economics told Al Jazeera.
“One can hope for good weather providing some relief on the agricultural front or some positive tailwinds from the global economy – however even for that, the budget’s direction towards an inward-looking import substitution policy does not augur well,” Ghatak added.
Little effect on consumption
To boost consumption, Sitharaman announced $5.6bn worth of annual income tax cuts for India’s middle classes.
“This is the Budget to boost their incomes and enhance their purchasing power”, she said.
But analysts say the system’s recent redesign, which asks taxpayers to choose between two methods of taxation, is unnecessarily complicated and may cancel out any gains.
“The basic idea of this budget should have been to put more money in the hands of people and encourage them to consume,” Vivek Kaul, an economist and author of the Easy Money trilogy told Al Jazeera, “But instead, it has left the income tax payer confused on a basic question: Has my income gone up?” It is likely that many taxpayers are better off staying with the current system, he added.
India’s rural population, whose incomes have remained stagnant while food prices have surged – rising as much as 14 percent last year – saw minor relief in the form of increased spending on rural roads and housing programmes, as well as investments in food storage and transport infrastructure. But the Budget also took away fertilizer, food and petroleum subsidies.
The government says it remains committed to doubling farm incomes by 2022. Such moves are also in line with the policy recommendations in its Economic Survey. The report suggests targeting subsidies towards a smaller segment of society, but comes at a time of significant rural distress.
Avani Kapur, director at Accountability Initiative, Centre for Policy Research, a research think-tank, explains the decision by pointing out that “gross tax revenue receipts were three trillion rupees ($42bn) lower this year than projected in the budget estimate”. She adds that the government has already had to dip into “extra-budgetary resources like the National Small Savings Fund (NSSF) to meet the food subsidy requirements”.
Another disappointment for those looking for help for some of India’s poorest communities was a cut to a rural jobs programme. India’s unemployment rate remains near a three-year high at 7.2 percent according to the Centre for Monitoring the Indian Economy.
The Mahatma Gandhi Rural Employment Guarantee Scheme saw a $1.3bn funding cut although welfare schemes “should be raised or at least maintained when slowing demand from the masses is a leading cause behind the economic slowdown,” says Ghatak.
The government proposed a boost in investment for its National Skills Development Agency, an initiative to improve youth employability to help tackle the unemployment problem.
But “several people have flagged serious concerns with the limited nature of the skilling programmes,” Amit Basole, head of the Centre for Sustainable Employment at Azim Premji University told Al Jazeera.
Basole did welcome a new proposal for engineering graduates to intern with urban local bodies. “This resembles a part of our proposal for an urban job guarantee scheme that we made last year,” he added, “but falls well short of what is needed.”
The government believes its $1 trillion investment in infrastructure could also be a “huge employment opportunity”.
No ‘trickle-down’ benefits
Another source of concern for investors and consumers has been India’s ailing non-banking financial sector – companies such as insurers and mortgage issuers – and government-controlled banks.
Many observers had expected the budget to make special provisions to boost the sector’s productivity and spur lending, especially with memories of a 2018 debt default by Infrastructure Leasing & Financial Services, a large so-called shadow lender, still fresh in people’s minds.
Instead, the budget was “notably silent on relief measures,” Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Management, told Al Jazeera. He urges the government to work with the Reserve Bank of India, the country’s central bank, to protect investors who buy debt issued by such non-bank lenders.
Though the government has tried to address the lack of liquidity with a $10bn bank recapitalisation programme, investor confidence remains low and credit lines restricted. Patel, the textile exporter, says businesses like his are not receiving the “trickle-down benefits” of such actions even after the central bank cut lending rates to commercial banks.
The introduction of a national goods and services tax (GST) in mid-2017 which was supposed to simplify the country’s tax policy, but instead left companies reeling under mountains of paperwork and delayed payments, has also dented company cash flows.
“We have no capital to play with,” says Patel. “The banks are still reluctant to lend and because of GST, we are often left waiting for up to a year for money to come back to us.”
Taiwan's Economy Could Take Serious Damage if China Trade Hit Persists – Bloomberg
In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later – The New York Times
For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.
“There is nothing to cut back on,” she said.
Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.
And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.
“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”
Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.
That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.
In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.
“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”
America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.
But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.
The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.
But job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.
“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”
Lower-income people are already hurting. Mr. Brown’s organization has seen more requests for help in recent months, he said, as local families fall behind on their bills. The size of the typical request has gone up, too, from a few hundred dollars to a few thousand. And he has noticed financial pain creeping up the income spectrum.
Mr. Brown’s observations are backed up by government data: About 12 percent of households reported they were struggling to get enough to eat in early July, up from about 10 percent at the beginning of the year, according to the Census Bureau.
Families can’t easily cut back what they spend on rent, gas or electricity as those prices climb, said Brian Greene, chief executive of the Houston Food Bank, which provides food to Mr. Brown’s organization and other charities across the region. So they cut back on food.
“Food insecurity isn’t about food,” Mr. Greene said. “Food insecurity is about income.”
Many poorer families’ incomes held up relatively well early in the pandemic because government aid — expanded unemployment benefits, stimulus checks and other programs — helped offset lost wages when businesses shut down. Then, as the economy reopened, pay soared for restaurant workers, delivery drivers and other low-wage workers.
But pandemic aid programs have ended and wage growth is slowing in many sectors — average hourly earnings in leisure and hospitality, which rose rapidly last year, actually fell in July from a month earlier for rank-and-file workers. Prices have risen so fast that even unusually quick wage growth has failed to keep up.
The gaping divide between the rich and the poor in this inflationary moment is clear in corporate earnings calls. At Boot Barn, a Western wear retailer, sales of men’s Western boots were down in the first quarter, but sales of higher-priced exotic skin boots picked up. At LVMH, which owns luxury brands like Louis Vuitton and Tiffany, American revenues have been growing strongly, while at Walmart, customers are pulling back as they struggle to afford basic necessities, particularly food, which has run up sharply in price.
“This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel,” Walmart said in its July 25 guidance.
It’s not just apparel: Consumers across the economy are buying less milk and fewer eggs, as prices for those products rise significantly, according to an analysis of government figures by Michelle Meyer, chief U.S. economist for Mastercard. Yet they are also going out to eat at restaurants more often.
The fissures are clear in the car market. Demand for new cars, which generally sell to higher-income buyers, has remained strong and prices continue to soar amid supply shortages — putting upward pressure on inflation. But used-car demand is ebbing and prices have begun to depreciate again.
“We see bifurcation in many parts of the economy and the auto market,” Jonathan Smoke, chief economist at Cox Automotive, said in an interview. “The new vehicle buyer has shown much less price sensitivity.”
Housing is another realm where fates have diverged. Home costs have run up sharply since the pandemic and mortgages are now more expensive, making buying unaffordable for many families. Because would-be buyers can’t afford homes, they are renting, keeping apartments for lease in short supply and pushing rents ever higher. Those soaring rents hit lower-income households especially hard: Roughly six in 10 people in the bottom quarter of earners rent their homes.
By contrast, homeowners have both seen their houses rise in value and often enjoy a built-in inflation hedge, since many refinanced their mortgages and locked in low monthly payments when rates were low in 2020 and 2021.
“The haves are really comfortable right now,” said Nicole Bachaud, an economist from Zillow, also noting that “we’re going to see this gap getting wider between people who are homeowners and people who are probably never going to be homeowners.”
Ms. Clarke, the New Canaan retiree, recently got off the wait list for an affordable apartment for herself and her 24-year-old daughter, who has autism and cannot work. Their new unit has just one bedroom, but it is clean and has new appliances, and at about $1,350 a month, she can squeeze it into her budget.
The lease lasts only a year, however, and Ms. Clarke is worried about finding somewhere to live if it isn’t renewed. Even now, she is barely making ends meet: She lost her car keys recently and had to spend nearly $500 replacing them, wiping out nearly all her small rainy-day fund and leaving her one crisis away from financial disaster.
“When you don’t have money, you’re on a fixed income, you’re constantly thinking, ‘Well, maybe I shouldn’t have bought that,’” she said. “There’s no cushion. There really never was.”
More financially secure families also face headwinds, of course, which could eventually prompt them to slow down spending. The cash savings they built up during the pandemic won’t last forever, and rising prices could prompt many households to pull back their spending.
And swooning stock markets could prompt richer families, who tend to have more money invested, to spend less than they otherwise would. Some economists think that the people in this demographic have mostly kept spending recently — despite their falling economic confidence — because they are eager to take vacations that they had put off earlier in the pandemic.
“Where I’m budgeting, it’s to make room for travel,” said Mr. Trevino of Los Angeles. “I feel like I’ve missed out on that a little bit.”
Economists have speculated that richer consumers’ resilience could fade as autumn approaches and they take stock of their finances amid a slowing economy. But for now, the reality that America’s wealthier consumers have yet to sharply pull back in the face of rising prices may be setting up a tough road ahead for the nation’s poorer ones.
“We really, in a way, haven’t noticed the inflation very much,” Mr. Schoenfeld said. “This economy is very unfair.”
Jason Karaian contributed reporting.
Posthaste: Sorry, but the economy isn't over COVID — and won't be for some time – Financial Post
A lot of weird things have been happening in our economy lately. Roaring inflation that took everybody by surprise, a drum-tight labour market and now the prospect of sputtering growth, if not outright contraction.
The explanation for these unexpected and in some cases unprecedented conditions, argue CIBC economists, is that COVID continues to disrupt the functioning of the economy.
Canada, the U.S. and Europe have tried to move on from the pandemic, lifting vaccine mandates and restrictions on activity, thus resulting in an increase in consumer demand.
“But COVID isn’t fading away as a supply constraint, or as a health issue,” CIBC economists Avery Shenfeld and Andrew Grantham wrote in a recent note.
Variants that spread more rapidly have meant that more people have died of COVID in 2022 than the previous year, even though fewer cases were fatal, they said.
And while demand has recovered, supply chains have not, partly because of the war in Ukraine, but also because of COVID.
The lockdowns this year in China are the most obvious example. Omicron restrictions here caused exports to fall even more than during the first 2020 lockdown.
In Canada it is showing up in employee illness. “Flights are cancelled when crew members call in sick, hospitals cut back services because staff members are ill and live entertainment shows are postponed for the same reason,” wrote the economists. Omicron has been associated in Canada with a significant increase in working hours lost to illness.
Long COVID has caused some to actually withdraw from the workforce. The numbers are small in Canada, they said, but the U.K. serves as an example of what could happen if we fail to control future waves of the virus.
In Britain, where public health restrictions have been lighter, 0.6% of the population have been “severely affected” by Long COVID, according to a recent study.
COVID is also impacting capital spending, said the economists. An uncertain outlook due to potential waves of the virus in future may be contributing to businesses’ reluctance to spend, but COVID supply-chain issues have also made getting capital equipment more difficult as well.
“The result is less production capacity in sectors where equipment is on back order, or where COVID uncertainties have forestalled investment,” they said.
The unprecedented COVID recession and recovery is also why there is a mismatch between job availability and hiring in the economy today, argue the economists.
During the pandemic some work was almost completely shut down and stayed dormant for a long period. Now that the economy has reopened, those employers are scrambling to rehire in great numbers, a situation we have not seen before, they said.
“A typical recession doesn’t see air travel drop by 90% and doesn’t see live theatres close outright. A typical recovery doesn’t see the sudden opening we’re experiencing in these same sectors,” they wrote.
Workers who held these jobs, like restaurant staff and baggage handlers, in 2020 had two years to move on, unlike a typical recession that lasts just two or three quarters.
CIBC believes this mismatch will eventually even out, but the impact of COVID on supply chains and missed work could remain.
So what does the future hold?
While traders are already talking about rate cuts after the hiking cycle winds up either at the end of this year or early 2023, CIBC sees the Bank of Canada keeping rates at 3.25% through the whole of 2023.
It also sees GDP growth slowing to 0.9% in the fourth quarter of this year and gaining only 1.5% in 2023.
“Even if a recession is avoided, we’re in for a protracted period of sub-par growth,” said the economists.
The policy of dropping COVID mandates meant to improve the economy may actually be working to extend the economics costs of the virus, they said.
“While helping on the demand side, diminished public health restraints, particularly during surges in case counts, are cutting into the economy’s supply capabilities. Their absence is likely elevating the peak levels for COVID cases, and thereby increasing the costs of worker absenteeism, and perhaps, as we’ve seen in the UK, risking longer term labour market damage due to Long COVID,” they said.
The economists said lockdowns should be behind us, but a push for the use of masks, global vaccination and improvements of indoor air quality would help reduce the economic impact of COVID.
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Check out the latest from Sea Doo maker BRP Inc. This electric surfboard called the Sea-Doo Rise in one of three products that Bombardier Recreational Products announced recently in its first foray into electric vehicles. The EV push also means a return to the award-winning two-wheeled motorcycles that BRP produced in the ’70s and ’80s. The Can-Am Origin and Can-Am Pulse motorcycles, along with the Sea-Doo Rise, will all be electric and will be available to purchase in mid-2024, said BRP. Photo by BRP
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