Economy
John Ivison: No painless way out for Liberals from the worst economic blow in history – National Post
The initial reaction on reading the new report by the Parliamentary Budget Officer was to curl up into a ball and turn out the lights.
The “illustrative scenarios” presented by the PBO reveal the combination of the COVID pandemic and the oil-price shock has put Canada on course to rack up a deficit of $252.1 billion this year, or 12.7 per cent of the country’s economic output.
In that event, the value of goods and services produced in Canada will have fallen by 12 per cent for the fiscal year, even with a modest rebound in the second half.
If the outlook proves correct, tax revenues will fall by $60 billion, while program spending will increase $168 billion — fully one-quarter of GDP — compared with the previous year.
To put those numbers into context, they are the worst in Canadian history.
Even in the depths of the Great Depression, real GDP did not fall by 12 per cent in a single year (there were four consecutive years in the early 1930s where growth was in negative territory, but the drop was never as precipitous). The deficit would also be greater than in any single year during the Depression, as a percentage of the economy.
So is Canada insolvent? Can it ever pay back a national debt that may total nearly $1 trillion?
The good news is debt can be rolled over. Economic historian Livio Di Matteo of Lakehead University notes that Britain was still paying off Napoleonic-era debt well into the 20th century.
Interest rates on new debt are also at historic lows and, in theory, much of the $146 billion in emergency spending is temporary in nature.
If the economy is growing slowly and you raise taxes on income and capital, it is going to slow growth even more
The PBO sees the federal debt-to-GDP ratio rising to 48.4 per cent this year, but that is nowhere near the 66.6-per-cent peak in 1995–96, when 38 cents of every tax dollar was used to pay the interest on the national debt.
The Liberals can be justly criticized for entering the crisis in fiscal deficit but, even then, the Canadian economy was in a much healthier state than it was in the mid-90s.
That perspective may be enough to persuade readers to uncurl from the foetal position.
However, there is no room for complacency.
A curious editorial in The Globe and Mail this week suggested the government’s game plan should be similar to that employed in the immediate post-war period when, not only did Canada not pay off the national debt, it added to it.
This was manageable because the weight of the debt fell. The economy grew faster than debt.
However, replicating those conditions smacks of wishful thinking. GDP growth in the 1950s and 1960s averaged 5.7 per cent, thanks to the liberalization of world trade, a demographic surge, a rise in consumer spending, a natural resource boom and the auto pact with the U.S.
Canada experienced 35 consecutive years of growth in the post-war period, according to Di Livio’s calculations.
Given the uncertainty in the economy, the PBO does not make any growth projections beyond the end of the year. But does anyone think that Canada is on the brink of a new golden age of prosperity that will rejuvenate the economy?
People see the handwriting on the wall
The comparison with the post-war period is not pretty. We are currently seeing a rise in trade protectionism. To compound things, we have an aging population, a resource price crash and record household debt.
It’s clear now, if it wasn’t before, that the exit from this crisis is going to be painful and protracted.
There are going to be more demands to provide relief to specific industries not yet covered by government aid programs. This week has already seen the Canadian Federation of Agriculture seeking $2.6 billion, as processing plant closures and other supply-chain disruptions threaten food security. The National Airlines Council says the airline industry is under “significant threat” as its members try to cope with a 90 per cent drop in capacity.
The PBO noted that additional fiscal measures may also include stimulus spending to ensure the economy reaches “lift-off speed.”
The government is going to be faced with some unpalatable choices that will require a retreat from emergency spending and may necessitate an increase in taxation.
The most logical move for any government desperate for cash would be an increase in the goods and services tax.
Yet as Brian Mulroney noted in his autobiography, the tax on everything that moves was and remains “as unloved as any measure could possibly be.” Raising it would be political martyrdom.
A more palatable and natural alternative for this most progressive of governments would be to squeeze the rich, either through an increase in capital gains tax or the kind of wealth tax that the NDP proposed in the last election — one per cent of the value of household assets above $20 million.
The PBO estimated that the tax might raise $9 billion, but the experience in other jurisdictions like France was the introduction of wealth taxes leads to a flight of capital. The tax was criticized, and subsequently reformed, by French President Emmanuel Macron, who said it was unfair to those who invested in the productive economy.
One tax lawyer I spoke with said that high-net-worth individuals are already anticipating their departure from Canada at a time when their asset values have decreased and the exit tax is cheaper. “People see the handwriting on the wall,” he said.
Even before the crisis hit, there was speculation that the Liberals were keen to raise the capital-gains inclusion rate to 75 per cent from the current 50 per cent — a measure the PBO estimated could raise $8 billion in tax revenues.
But cooler heads may caution against such a tax grab. Marginal income tax rates in most provinces are already over 50 per cent and Canada has had trouble attracting capital. Real business investment has fallen 10 per cent in the past four years.
“If the economy is growing slowly and you raise taxes on income and capital, it is going to slow growth even more,” said Di Livio.
What the PBO report makes stark is that there are going to be no easy choices.
jivison@postmedia.com
Twitter.com/IvisonJ
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
(Bloomberg) — The International Monetary Fund expects OPEC and its partners to start increasing oil output gradually from July, a transition that’s set to catapult Saudi Arabia back into the ranks of the world’s fastest-growing economies next year.
“We are assuming the full reversal of cuts is happening at the beginning of 2025,” Amine Mati, the lender’s mission chief to the kingdom, said in an interview in Washington, where the IMF and the World Bank are holding their spring meetings.
The view explains why the IMF is turning more upbeat on Saudi Arabia, whose economy contracted last year as it led the OPEC+ alliance alongside Russia in production cuts that squeezed supplies and pushed up crude prices. In 2022, record crude output propelled Saudi Arabia to the fastest expansion in the Group of 20.
Under the latest outlook unveiled this week, the IMF improved next year’s growth estimate for the world’s biggest crude exporter from 5.5% to 6% — second only to India among major economies in an upswing that would be among the kingdom’s fastest spurts over the past decade.
The fund projects Saudi oil output will reach 10 million barrels per day in early 2025, from what’s now a near three-year low of 9 million barrels. Saudi Arabia says its production capacity is around 12 million barrels a day and it’s rarely pumped as low as today’s levels in the past decade.
Mati said the IMF slightly lowered its forecast for Saudi economic growth this year to 2.6% from 2.7% based on actual figures for 2023 and the extension of production curbs to June. Bloomberg Economics predicts an expansion of 1.1% in 2024 and assumes the output cuts will stay until the end of this year.
Worsening hostilities in the Middle East provide the backdrop to a possible policy shift after oil prices topped $90 a barrel for the first time in months. The Organization of Petroleum Exporting Countries and its allies will gather on June 1 and some analysts expect the group may start to unwind the curbs.
After sacrificing sales volumes to support the oil market, Saudi Arabia may instead opt to pump more as it faces years of fiscal deficits and with crude prices still below what it needs to balance the budget.
Saudi Arabia is spending hundreds of billions of dollars to diversify an economy that still relies on oil and its close derivatives — petrochemicals and plastics — for more than 90% of its exports.
Restrictive US monetary policy won’t necessarily be a drag on Saudi Arabia, which usually moves in lockstep with the Federal Reserve to protect its currency peg to the dollar.
Mati sees a “negligible” impact from potentially slower interest-rate cuts by the Fed, given the structure of the Saudi banks’ balance sheets and the plentiful liquidity in the kingdom thanks to elevated oil prices.
The IMF also expects the “non-oil sector growth momentum to remain strong” for at least the next couple of years, Mati said, driven by the kingdom’s plans to develop industries from manufacturing to logistics.
The kingdom “has undertaken many transformative reforms and is doing a lot of the right actions in terms of the regulatory environment,” Mati said. “But I think it takes time for some of those reforms to materialize.”
©2024 Bloomberg L.P.
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
©2024 Bloomberg L.P.
Rules limiting short-term rentals in effect May – Times Colonist
DJT Stock Rises. Trump Media CEO Alleges Potential Market Manipulation. – Barron's
Dragonfly: NASA Just Confirmed The Most Exciting Space Mission Of Your Lifetime – Forbes
Silver investment demand jumped 12% in 2019
12 Bizarre Things People Did Just To Make Social Media Content
Global Media Markets, 2015-2020, 2020-2025F, 2030F – TV and Radio Broadcasting, Film and Music, Information Services, Web Content, Search Portals And Social Media, Print Media, & Cable – GlobeNewswire
-
Investment22 hours agoUK Mulls New Curbs on Outbound Investment Over Security Risks – BNN Bloomberg
-
Sports20 hours ago
Auston Matthews denied 70th goal as depleted Leafs lose last regular-season game – Toronto Sun
-
Business19 hours ago
BC short-term rental rules take effect May 1 – CityNews Vancouver
-
Media3 hours ago
Trump Media alerts Nasdaq to potential market manipulation from 'naked' short selling of DJT stock – CNBC
-
Art19 hours ago
Collection of First Nations art stolen from Gordon Head home – Times Colonist
-
Media51 mins ago
DJT Stock Rises. Trump Media CEO Alleges Potential Market Manipulation. – Barron's
-
Investment19 hours ago
Benjamin Bergen: Why would anyone invest in Canada now? – National Post
-
Tech21 hours ago
Save $700 Off This 4K Projector at Amazon While You Still Can – CNET
