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Jack M. Mintz: How uncertainty has played havoc with the real economy – Financial Post

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As this decade comes to close, markets are at an all-time high. The Dow Jones index is finishing within sight of 29,000, almost three times its level on Jan. 2, 2010. In part, this reflects the seemingly unstoppable American expansion since the 2008 financial crisis. But two-fifths of the decade’s jump happened from Nov. 8, 2016, to Jan. 22, 2018. During those 15 months the Dow rose 41 per cent.

How come? The U.S. economy obviously didn’t expand by two-fifths. Nor did anyone expect it to. Interest rates didn’t fall — in fact, they stayed flat until the first quarter of 2018 when tighter monetary policy finally started nudging them up. Corporate profits were also pretty flat during that period.

No, the real reason for the super-charged Dow Jones was the shift in investor perception of risks after the election of Donald Trump as U.S. president on Nov. 8, 2016. In the wee hours of election night, after it first became clear Trump had won, the market fell sharply, with investors worried about a very unpredictable president-elect. By morning, however, as investors reassessed the election’s outcome, the Dow reversed itself and began its breathless climb of the next 15 months as the Republicans pushed deregulation and tax reform. Even the U.S. economy was uplifted, with GDP growth hitting close to three per cent and nominal wage growth besting five per cent by 2018, the highest levels since the third quarter of 2014.

Canadians have a very good life even if we seek to do better

Since the first quarter of 2018, however, things have been decidedly less rosy. The Dow has been choppy, rising not much more than 10 per cent since then. The reasons? Shifting monetary policy, a slowing world economy, stalled policy development in a divided Congress and uncertainty from trade disruptive negotiations.

Uncertainty plays havoc with the real economy. If households, businesses and investors perceive more upside than downside risk, they will consume and invest more. If the world looks more than normally uncertain, however, confidence declines. Economic forecasters rarely include uncertainty in their economic models since it relies on what John Maynard Keynes called “animal spirits,” which are not easily measurable.

On the other side of the pond, U.K. economic growth has dropped from an annual rate of 2.1 per cent in the second quarter of 2016 to 1.4 per cent in 2019. The June 2016 Brexit referendum clearly left businesses and investors uncertain about Britain’s future. After Theresa May gambled on an election that led to a minority Conservative government, Parliament was too divided to vote for any outcome to resolve Brexit one way or the other. Uncertainty began to pull the economy down.

This cost of Brexit uncertainty was analyzed recently by France’s Fabien Tripier, who estimated a £16 billion annual loss to the U.K. economy. He calculated the number of media reports that mention “economy,” “politics” and “uncertainty” to develop an index of uncertainty going back 21 years. With these data, he then estimated the impact of this uncertainty on GDP growth, keeping in mind that some shocks to the economy happen immediately (like stock market valuation) while other impacts take time to trend (consumption and investment). What Tripier finds is that instead of the U.K. economy growing 1.9 per cent per year after the 2016 Brexit vote, it should have been growing 2.3 per cent annually.

It is therefore no surprise that Boris Johnson won a large Conservative majority on the promise to get Brexit done. The electorate still remains closely split between Remainers and Leavers, but many voters wanted to see an end to the parliamentary stalemate. Despite uncertainties about the trade talks that will dominate Brexit news in 2020, the FTSE index has risen five per cent since election day, better than the Dow Jones (at just 1.5 per cent).

As for Canada, the TSE index has risen this past decade by 45 per cent, far less than the Dow Jones. And unlike U.S. exuberance since Jan. 1, 2017, the TSE rose by a meagre 1,260 points to 17,120, a total of just eight per cent in three years. Much of this reflects our mixed economic record, which has undermined confidence. The economy has been boosted by U.S. growth but has also been hurt by trade frictions, higher business taxes and regulatory obstacles that have deterred investment, especially in the resource sector. Overall employment has grown by a solid 4.5 per cent since January 2017 although not so quickly in the resource and manufacturing sectors. But nominal business investment has grown only four per cent during this time and remains below where it was in 2014. That compares with 15 per cent growth in the U.S. over the same period.

As for 2020, Canadian growth should continue without a recession this year even if the economy is not booming, especially in the resource-rich provinces. Forecasts are never sure things, however, and a recession, if one arrived, would surely blow a hole in federal and provincial budgets.

As we enter this new decade, we can at least be thankful we do not face a worldwide war or economic depression, as many of our grandparents did almost a century ago now. Canadians have a very good life even if we seek to do better. So to the many readers of this column, I wish you continued good health and success in the coming decade.

Jack M. Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy.

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Vaccine-Resistant Variants Could Result in a Stop-Go World Economy – Bloomberg

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Despite the rise of the delta variant, Bloomberg Economics’ base case remains that the world economy will see a continued recovery in the second half of 2021, underpinned by strength in the U.S., acceleration in Europe and India moving out of its slump. Further out, the increase in cases is a reminder that Covid-19 is likely here to stay, raising the prospect of permanently lower output relative to the pre-Covid path as contact intensive services suffer. In the worst case scenario, the appearance of vaccine resistant variants could result in a stop-go world economy, with sporadic lockdowns and reopening dragging major economies in and out of recession.

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What Does the Delta Variant Mean for the U.S. Economy? – The New Yorker

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People dining in a restaurant both indoors and outdoors.
Veteran economists are optimistic yet concerned that the Delta variant could prompt new closures that might slow American economic recovery.Photograph by Andrew Lichtenstein / Corbis / Getty

What a difference a couple of months makes. “As hopes rise that the pandemic is ebbing in the United States and Europe, visions of a second ‘Roaring Twenties’ to match the last century’s post-pandemic decade have proliferated,” the Associated Press reported, in late May. “For some, it feels like party time.” That was when the daily tally of new COVID-19 cases in the United States had dipped to about twenty-two thousand and the number of people vaccinated was rising sharply. The travel-and-leisure sector appeared to be rebounding strongly. Economists were predicting that the gross domestic product would grow at an annualized rate of close to ten per cent in the second quarter, followed by continued strong growth through the rest of the year and into 2022.

Now that the spread of the Delta variant has pushed the seven-day average of new cases above fifty thousand, and the number of hospitalizations has jumped by more than fifty per cent in two weeks, economists and investors are reassessing the prospects. Last Monday, the stock market tumbled on concerns about the variant, before rebounding on Tuesday. Later this week, the Department of Commerce will publish its initial estimate of actual G.D.P. growth in the second quarter. The Federal Reserve Bank of Atlanta’s GDPNow model, which incorporates a range of recent economic releases, estimates the figure at 7.6 per cent. In normal times, that would be a blockbuster figure. However, it is significantly below some of the estimates from May, and it shows how in some regions and industries, even before the rebound in COVID cases, shortages of labor, computer chips, and other components were holding back the recovery. Now worries about the resurgent virus have been added to concerns about supply constraints. Where will the economy go from here?

On Friday, July 23rd, I spoke with two veteran economists who have been following developments closely since the start of the pandemic. They both expressed optimism that the Delta variant wouldn’t derail the recovery, but they also expressed some serious concern, especially if the spread of the variant persists into the fall. Mark Zandi, the chief economist at Moody’s Analytics, told me that he and his colleagues are still expecting a “very strong second half of the year.” More specifically, they are predicting that G.D.P. will expand at an annualized rate of about six per cent, and total employment will rise by more than five hundred thousand a month, on average. For the variant to have a major impact on G.D.P. and employment, Zandi said, businesses would have to close down again and people would need to go back to sheltering in place, both of which he considers very unlikely.

Moody’s Analytics has constructed a “Back-to-Normal Index,” which tracks real-time economic data, such as restaurant bookings, the number of people flying, and initial claims for unemployment benefits. At the national level, there is little sign that the variant is affecting these statistics, Zandi told me. However, the index has dropped in some hard-hit states, such as Florida, where case numbers are rising fast and the number of hospitalizations has returned to levels last seen in February. “Six or eight weeks ago, Florida had completely recovered from the pandemic: the index was back to one hundred,” Zandi said. “Now it’s moved back to the low nineties. That’s consistent with the idea that the Delta variant is having some impact.”

Ian Shepherdson, the chief economist at Pantheon Macroeconomics, pointed out that many of the states where the Delta variant is spreading rapidly are low in both population and G.D.P. “To move the needle on a macro level, things will have to get a lot worse,” he said. “I’m still bullish on the second half of the year because I don’t think Delta is going to go exponential nationally. If it just moves up fairly steadily, and it doesn’t lead to a big wave in hospitalizations, I think most people will be fairly relaxed about it, and won’t change their behavior much.”

Shepherdson, who works in both the United States and Britain, pointed to the example of the United Kingdom. The number of infections has increased dramatically since the start of June, particularly among younger people, but the number of hospitalizations and deaths has remained fairly low. Last week, the British government lifted nearly all of its COVID restrictions, which led to scenes of jammed night clubs and bars. “Most people still wear masks in shops, but they go out and spend,” Shepherdson said. “The general attitude is, I might get it, but it’s not going to make me really sick. After sixeen months of this, many people have had enough.”

As the Delta variant continues to spread on this side of the Atlantic, many Americans may adopt the same attitude. But Shepherdson also noted that it’s possible to build “a more negative scenario” for the United States. In the places where Delta-variant cases are multiplying fastest, far fewer middle-aged and older people have been vaccinated than in the United Kingdom, which makes the situation potentially more dangerous. Also, there is much less testing in this country, which makes it harder to know what’s really happening. On a per-capita basis, the number of tests being carried out in the United States is one-eleventh of the figure for Britain, Shepherdson said. “I can say right now Delta isn’t a big macroeconomic issue, but it can go from zero to sixty really quick,” he added.

Both economists said that a key moment will come in a month or so, when schools are scheduled to reopen across the country. The forecasts of rapid employment growth in the second half of this year hinge on many more parents, particularly women, returning to work as child-care concerns ease. Over the past twelve months, Shepherdson pointed out, there has been virtually no change in the labor-force participation rate of females aged thirty-five to forty-four, and the participation rate of women older than fifty-four has actually fallen a bit. “The reopening of the schools potentially brings a lot of people back into the labor force,” Shepherdson said. But if a surge in COVID prompts school boards in large population centers to reintroduce remote classes, that scenario could be upended.

Zandi said that the possibility of further school closures, or partial closures, is just one example of how a COVID-19 resurgence could stunt the longer-term growth of the economy. As the Delta variant spreads in other parts of the world, particularly Asia, it could accentuate problems in the global supply chain, which are already affecting the industries behind products like cars and semiconductors. And, on the demand side of the economy, the rise in cases could undermine the confidence of consumers and business leaders, which has rebounded sharply since the depths of last year. “It puts into clear relief the fact that the pandemic is still here—is raging in some areas,” Zandi said. “And why would this be the end of it? There will likely be other variants. We are in an arms race with the virus.” For reasons of both economics and public health, he added, policymakers should take steps to arrest the rising case numbers. “I would go back to the mask mandate, particularly in urban areas, for things like ball games, mass transit, and large gatherings. It would be prudent to be cautious here.”

Over all, the message from Zandi and Shepherdson was somewhat reassuring. But both of them emphasized that the Delta variant has added a lot of uncertainty to the economic outlook, and raised the risks to the downside. The darkest economic scenario is the one that Zandi alluded to: the emergence of another highly contagious strain of the virus, one that is more deadly and resistant to vaccinations than the Delta variant. Assuming that doesn’t happen, the economic recovery seems set to continue, but talk of another “Roaring Twenties” was premature, at best. “I think the chances of the economy really taking off are fast diminishing,” Zandi said.


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Action on climate change can provide a shot in the arm for the global economy, economist says – CNBC

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An employee with Ipsun Solar installs solar panels on the roof of the Peace Lutheran Church in Alexandria, Virginia on May 17, 2021.
Andrew Caballero-Reynolds | AFP | Getty Images

Ramping up investment in policies and technologies to tackle climate change could play a significant role in the global economy’s recovery from the coronavirus pandemic.

In a recent note, Charles Dumas, chief economist at U.K.-based investment research firm TS Lombard, said that action on climate change is often criticized as moving too slowly. However, with governments increasing spending to aid their post-Covid economies, they may start catching up. 

A key tenet of this is the ever-decreasing cost of electricity per megawatt hour, according to figures from TS Lombard, with costs of solar, offshore and onshore wind dropping over the last 10 years, while gas and coal have remained largely the same.

“Effectively by 2030 the cost of renewable electricity is going to be half that of coal and gas sourced electricity,” Dumas told CNBC.

These trends will bring many of the various pledges to reach net zero more closely in sight.

The fatal floods in Germany in recent weeks have put the impacts of climate change firmly in the spotlight again but they are only the latest in a series of devastating extreme weather events of late, including the sprawling wildfires in Oregon.

COP26 priorities

Amid this backdrop, the United Nations Climate Change Conference, better known as COP26, will meet in Glasgow in November. It will mark one of the most significant multilateral meetings on climate since the Paris agreement.

Dumas said that as COP26 approaches, governments need to understand their key priorities, and among them should be infrastructure investments as numerous technological and engineering challenges continue to obstruct renewable energy.

“I think the intermittency problem is pretty serious and it’s not just that the sun goes down at night,” Dumas said.

In the case of solar power, output can be mixed depending on the location of infrastructure like solar farms.

“There’s huge variation with sunny days in winter and sunny days in the middle of summer so the intermittency takes on a very big seasonal aspect,” Dumas said.

“You can have vicious weather for a long time in the middle of December or January and lo and behold you wouldn’t want to be depending on solar power.”

Energy transmission could be another bottleneck, he said. While the developing world, including several African nations, has great potential in developing sites for generating solar power, that power needs to move easily.

“The issue of transmission technology is really major. If you want Chad to be the new Saudi Arabia, because of the Sahara Desert there’s a lot of sun there, but you want the electricity to be used in Europe then you’re talking about some expensive processes and processes needing a lot of research and a lot of further investment.”

Storage and carbon capture are all areas that require hefty investment, Dumas added, if governments are to reach their net-zero targets.

“What we need is a very clear public policy lead in order to get anywhere near these net zero promises and I suspect that actually what it’s going to be about is a carbon tax, which the Americans may resist but will be necessary,” he said.

Job creation

Paul Steele, chief economist at an independent policy research institute called the International Institute for Environment and Development, said that climate action and renewable energy investments will serve the dual purpose of tackling the climate crisis while creating jobs for the post-Covid economy.

“One of the priorities coming out of Covid is to create labor intensive employment. Both in developed and developing countries, you can provide labor intensive employment through renewable energy,” Steele said.

One example, he said, was the retrofitting of boilers in homes in the U.K., which would help push the country toward its climate targets and create new jobs while being relatively inexpensive in the grand scheme of things.

Steele said that investments to drive a climate-friendly economy cannot be short term or have quick goals.

He pointed to the various government support schemes for the airline industry, which has been battered by the pandemic. Just this week, the European courts gave the nod to a $2.9 billion bailout for Air France-KLM’s Dutch business.

Bailout funds like these should be tied to sustainability commitments by the airline industry, he said, but that can be a dicey proposition to get over the line.

“Governments aren’t making the connections enough and traditionally treasuries and particularly the ministries of transport are still dominated by road building lobbies and people who like to build highways and increase transport rather than people who want to invest in sustainable alternatives.” 

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