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Is the world economy in a debt trap?

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An alternative explanation for why real interest rates have fallen since the 1980s is that many countries have become less equal. Richer people save more as a percentage of their income, so as they earn a bigger slice of the economic pie, aggregate savings rise. Atif Mian, Ludwig Straub and Amir Sufi, three economists, say that the American economy suffers from a “savings glut of the rich”, two-thirds of which has been used to finance the debt of the American government or borrowing of other households.

They also propose that rising inequality can cause economies to fall into a “debt trap”. The savings of the rich push down interest rates, encouraging other sectors to borrow and spend more. Over time, the indebtedness of the poor to the rich transfers income upwards, giving the rich even more savings. The cycle starts again, and real interest rates fall further. Policies to stimulate the economy in the short term, such as low interest rates or debt-financed fiscal stimulus, lead to even more debt, meaning lower rates and worse recessions in future.

Today central banks are raising rates to fight inflation. If Mr Mian, Mr Straub and Mr Sufi are right, economies will be more sensitive to higher rates than in the past. Rates will not need to rise much to squeeze indebted households and governments, who will see big chunks of income diverted to the rising costs of servicing mortgages and bonds. But over time the debt trap will assert itself and real interest rates will stay low.

One weakness of the framework for analysing the world economy is that in many rich countries household debt has not risen much as a percentage of gdp since the crisis of 2007-09. Even as rates fell close to zero, households repaired their balance-sheets rather than borrowing more. Governments are running up debts, but their spending is subject to the whims of politics and may not fall as interest rates rise, given the huge pressures on budgets.

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There are economies in which households have been on a borrowing binge, however. One is South Korea, where the household-debt-to-gdp ratio rose from 79% in 2010 to 109% at last count. Approximately half of household debt is linked to short-term interest rates, which are rising. In a report on the economy in March, imf staff estimated that the higher level of household debt would be enough to lop an additional 10% off spending in South Korea should rates return to around 5%, their level in 2000.

How might economies escape such a debt trap? Messrs Mian, Straub and Sufi say that only a reduction in inequality can do the trick, whether via redistribution or through structural reforms. But there is another force that might have the same effect: inflation. Unexpected inflation redistributes wealth from creditors to debtors, says Mr Straub, so long as it leads to strong wage growth for debtors, and is not just the result of newly expensive energy. Often economists see inflation as a veil—a “nominal” rather than a ”real” phenomenon. But, should central banks fail to tame price rises, they will redistribute from creditors to debtors, and so might alter the fundamentals of the world economy as well.

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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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