Economy
Liberals are ‘running out of time’ heading into fall economic update. Here’s why
Prime Minister Justin Trudeau’s Liberal government faces pressures from two ends heading into Tuesday’s fall economic statement.
On one end, multiple recent polls show the three-term government’s popularity sliding in the eyes of voters as opposition parties land attacks on the Liberals’ track record.
On the other, Canada’s economy is slowing and limiting Ottawa’s capacity to deliver relief to Canadians who are feeling the pinch of higher interest rates and the rising cost of living.
Experts tell Global News that Finance Minister Chrystia Freeland will have a tall task ahead of her when she rises in the House of Commons on Tuesday afternoon to deliver an update on the federal government’s finances.
“This is a difficult time for any finance minister to give an update to the nation,” says Sahir Khan, executive vice-president of the Institute of Fiscal Studies and Democracy at the University of Ottawa.
“Normally, you get to these economic statements and you’re either dealing with political pressure or you’re dealing with economic pressures. Minister Freeland has to contend with both of them.”
Affordability issues top of mind for voters
Much of the Liberals’ fall agenda in the House of Commons has revolved around affordability and housing issues; Freeland has signalled in recent weeks that the fall update will focus on the same themes.
The annual inflation rate has cooled from last year’s highs but remained at 3.8 per cent in the latest reading, with grocery costs still rising above that pace. Much of what’s driving up the cost of living today are mortgage payments, with Canadians renewing into higher interest rates from the Bank of Canada.
Darrell Bricker, global CEO of Ipsos Public Affairs, says that when the polling firm speaks with Canadians about what issues are top of mind, cost of living is dominating the conversation.
The Liberals have rolled out a slew of measures in recent months aimed at boosting housing supply and helping Canadians cope with rising prices. The government again doubled the GST credit for lower-income Canadians as part of a so-called “grocery rebate” this past summer.
But Bricker says that so far, initiatives like the grocery rebate have not swayed voters back to the Liberals’ wheelhouse.
Instead, when voters are asked which party and leader are best equipped to deliver on the issues they’re concerned about most, he says Pierre Poilievre and the Conservatives have a “pretty big lead.”
If the Liberals aren’t able to win back voters with the fall economic statement, the timeframe to stem the bleeding may be fleeting, Bricker says.
“Quite frankly, they’re running out of opportunities to do this because public opinion is really getting settled,” he says. “They have to find a way to shake things up. An economic statement is one way to start that process.”
Interest rate pain hits Ottawa’s books
Rising interest rates aren’t just affecting Canadians’ finances.
Trevor Tombe, economist with the University of Calgary, explains that the government’s own debt costs are ballooning under the pressure of higher interest rates — threatening to deepen the federal deficit.
In the 2023 budget, released in the spring, the Liberals projected a federal deficit of $40.1 billion for the fiscal year. Tombe says that will almost certainly be revised up in the fall update — the Parliamentary Budget Officer is expecting the figure to hit $46.5 billion — thanks largely to higher than expected interest costs on the federal debt.
“Federal borrowing costs will be considerably larger than what were previously projected, just because many, the Bank of Canada included, now think that interest rates will be higher for longer,” he says.
The government’s fiscal anchor, the debt-to-GDP ratio, is likely to rise in the fall economic update thanks to new government spending initiatives and higher interest rates since the 2023 budget was unveiled, Tombe says.
While Tombe doesn’t think Canada is nearing a “fiscal cliff” — especially compared to its counterparts in the Organisation for Economic Co-operation and Development (OECD )— he says fiscal hawks will be scouring for signs of a plan to address the federal deficit in the fall update.
“A rising debt-to-GDP ratio isn’t sustainable. It must end at some point,” he says.
While the Bank of Canada’s monetary policy affects the government’s books, fiscal policy in turn can impact the effectiveness of interest rates in cooling inflation. If the government raises its spending plans, that puts more demand into the economy — the very thing the central bank is trying to tamp down to return annual inflation to the two per cent target.
Tiff Macklem, governor of the central bank, has said recently that the current pace of spending from provincial and federal governments is “not helpful” for taming inflation.
While the Bank of Canada and the federal government operate independently, Khan says the two arms steering the country’s economy ought to be rowing in the same direction.
“What you don’t want is fiscal policy to be working against (monetary policy),” he says. “Taking an economy that might be overheated and putting more money into it, driving inflationary forces.”
Tombe says that if the federal government does add demand to the economy with net new spending, that could drive the Bank of Canada to leave its policy rate at elevated levels for longer, or even hike again.
He notes that the Liberals could find ways to address affordability and housing concerns by “shifting” allocated funding from other envelopes without adding net new spending.
Liberals are ‘running out of time’
Heading into the fall economic statement, Freeland has said that the federal government will be fiscally prudent with its spending.
Trudeau, on Friday, said that the Liberal government has “always exercised fiscal restraint.”
But Bricker notes that the Liberals have typically looked to spend their way out of jams over the past eight years in power, putting them in a tight spot for this fall economic statement.
“If they’ve got something else other than spending to recommend to Canadians, that would be one of the first times they really have done that,” he says.
The Liberals may also avoid fuelling inflation with “targeted” relief and smaller measures, but Khan notes that big-ticket, permanent items like national pharmacare — a pledge critical to the Liberal’s supply-and-confidence agreement with the NDP — will require tight fiscal management to avoid risking long-term financial stability.
But Bricker notes that fiscal prudence doesn’t necessarily translate to votes. Canadians are less concerned with big picture issues like the size of the deficit and more about the day-to-day issues like ballooning mortgage payments and grocery bills, he says.
He says it will be tough for the Liberals to turn their prospects around in the fall economic statement alone when Canadians are eager for support — or at the very least, a change.
“They’re running out of time,” he says.
“Once people have made up their minds about things, it’s very difficult to get them to change.”
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Economy
Norway’s Economy Ekes Out a Gain for Third Straight Quarter
(Bloomberg) — The Norwegian economy recorded a third consecutive quarter of expansion, as a recovery in purchasing power bolstered car purchases and a weak krone underpinned exports.
Mainland gross domestic product, which excludes offshore energy industry and shipping, grew by 0.1% in the second quarter from the previous three months, according to a release from Statistics Norway published Thursday. First-quarter growth was revised lower to 0.1%.
Thursday’s reading was just below the 0.2% growth estimated by both the central bank and economists in a Bloomberg survey.
The outcome shows the energy-rich Nordic nation is dented more than previously assumed by the fallout from interest rates at a 15-year high, even as the slowing inflation and wage growth above 5% fuel consumption.
The weaker-than-forecast figures, together with revision of earlier data, may still increase the odds of Norges Bank reducing borrowing costs before next year. The Norwegian policymakers have kept delaying monetary easing as one of the most aggressively hawkish in the rich world, forecasting no change “for some time ahead” at their meeting last week.
“Negative revisions clearly leave a picture of a weaker mainland economy than Norges Bank projected back in June,” said Kristoffer Kjaer Lomholt, head of FX and corporate research at Danske Bank A/S. “All in all, a report that should keep the door open for a December cut.”
Household consumption grew by 1.6% on quarter due to a “strong upswing” in car purchases, the statistics office said, while noting the figures for the sector can fluctuate “widely.” Trade and power supply also helped boost mainland growth, it said.
The krone is hovering near four-year lows, helping demand for Norwegian exports, as well as its tourism sector. It was little changed following the report, trading 0.1% lower at 11.7233 versus the euro at 8:50 a.m. in Oslo.
Total exports grew 5.6% on quarter, the fastest increase in almost two years, as oil and gas shipments were less affected by maintenance works that are usual for the season.
The country’s largest lender, DNB Bank ASA, on Wednesday kept its forecast for full-year growth of 0.8% in 2024 and projected next year’s growth at 1.6%, largely due to higher purchasing power of consumers. That compares with Norges Bank’s estimates of expansion of 0.8% and 1.3%, respectively, published in June.
Analysts at DNB and Svenska Handelsbanken AB said the deviation from the central bank’s estimates was too small to clearly affect policymakers’ rate outlook.
–With assistance from Joel Rinneby.
(Updates with analyst comment, market reaction from fourth paragraph.)
©2024 Bloomberg L.P.
Economy
Gaza war extends toll on Israel’s economy
Last week, Fitch Ratings downgraded Israel’s credit score from A+ to A. Fitch cited the continued war in Gaza and heightened geopolitical risks as key drivers. The agency also kept Israel’s outlook as “negative”, meaning a further downgrade is possible.
After Hamas’s deadly attack on October 7, Israel’s stock market and currency nosedived. Both have since bounced back. But concerns about the country’s economy persist. Earlier this year, Moody’s and S&P also cut their credit ratings for Israel.
So far, Israel’s war on Gaza has killed more than 40,000 Palestinians and decimated the economy in the besieged Palestinian enclave.
There are signs of a blowback in Israel, too, where consumption, trade and investment have all been curtailed.
Separately, Fitch warned that heightened tensions between Israel and Iran could incur “significant additional military spending” for Israel.
The Bank of Israel has estimated that war-related costs for 2023-2025 could amount to $55.6bn. These funds will likely be secured through a combination of higher borrowing and budget cuts.
The upshot is that combat operations are putting a strain on the economy. On Sunday, Israel’s Central Bureau of Statistics estimated that output grew by 2.5 percent (at an annual rate) in the first half of 2024, down from 4.5 percent in the same period last year.
Slowing growth
Before the outbreak of the war, Israel’s economy was forecast to grow by 3.5 percent last year. In the end, output expanded by just 2 percent. An even sharper drop was avoided thanks to the country’s all-important tech sector, which has been largely unaffected by fighting.
Other parts of the economy have taken a significant hit. In the final quarter of last year and in the weeks after the war began, Israel’s gross domestic product (GDP) shrank by 20.7 percent (in annual terms). The slump was driven by a 27 percent drop in private consumption, a drop in exports and a slash in investment by businesses. Household expenditure snapped back at the start of the year, but has since cooled.
Israel also imposed strict controls on the movement of Palestinian workers, forgoing up to 160,000 workers. To tackle those shortages, Israel has been running recruitment drives in India and Sri Lanka with mixed results. But labour markets remain undersupplied, particularly in the construction and agriculture sectors.
According to the business survey company CofaceBDI, roughly 60,000 Israeli companies will close this year due to manpower shortages, logistics disruptions and subdued business sentiment. Investment plans have, in turn, been delayed.
At the same time, tourist arrivals continue to fall short of pre-October levels.
Meanwhile, the war has triggered a steep rise in government spending. According to Elliot Garside, a Middle East analyst at Oxford Economics, there was a 93 percent increase in military expenditure in the last three months of 2023, compared to the same period in 2022.
“In 2024, monthly data suggests military expenditure will be around double the previous year,” Garside said. Much of that increase will be used on reservist wages, artillery, and interceptors for Israel’s Iron Dome defence system.
Garside told Al Jazeera these expenditures “have mostly been financed by issuance of domestic debt”.
Israel has also received some $14.5bn supplemental funding from the United States this year, on top of the $3bn in annual aid that the US provides to the country.
Garside noted, “We are yet to see any major cutbacks to other parts of the budget [like healthcare and education], although it is likely that cuts will be made in the aftermath of the conflict.”
Absent a full-scale regional war, Oxford Economics anticipates that Israel’s economy will slow to 1.5 percent growth this year. Subdued growth and elevated deficits will put further pressure on Israel’s debt profile, which will likely raise borrowing costs and soften investor confidence.
Bruised public finances
Fitch expects Israel to permanently increase military spending by 1.5 percent of GDP compared to prewar levels, with unavoidable consequences for the public deficit. Last week’s rating report noted that “debt [will] remain above 70 percent of GDP in the medium-term”.
What’s more, the rating agency warned that “the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts”.
Regional conflict
On Monday, US Secretary of State Antony Blinken said that Netanyahu had accepted a “bridging proposal” designed to reach a ceasefire between Israel and Hamas and diffuse growing tensions with Iran.
The following day, eight Palestinians were killed in an Israeli attack on a crowded market in Deir el-Balah, in central Gaza.
Hamas has yet to agree to the bridging proposal, calling it an attempt by the US to buy time “for Israel to continue its genocide”. Instead, the Palestinian group has urged a return to a previous proposal announced by US President Joe Biden, which has more guarantees that a ceasefire would bring about a permanent end to the war.
Netanyahu has insisted that the war will continue until Hamas is totally destroyed, even if a deal is agreed. Israeli officials, including Defence Minister Yoav Gallant, have rubbished the idea of a total victory against Hamas.
A decades-old shadow war between Israel and Iran surfaced in April, when Tehran launched hundreds of drones and missiles at Israel in response to the killing of two commanders from Iran’s Islamic Revolutionary Guard Corps (IRGC) in Damascus.
Along its Lebanese border, Israel has traded near-daily attacks with Hezbollah since last October. The armed group began firing on Israel as a show of solidarity with Hamas. Both organisations have close ties with Iran.
More recently, the assassinations of Hamas leader Ismail Haniyeh in Tehran and Hezbollah military commander Fuad Shukr in Beirut have sparked fears that the conflict in Gaza could metastasise into a regional conflict.
“The human toll [of a wider war] could be significant. There would also be huge economic costs,” says Omer Moav, an Israeli economics professor at the University of Warwick.
“For Israel, a long war would come with high costs and greater deficits,” he said.
In addition to undermining Israel’s debt profile, Moav said that prolonged fighting would incur “other costs”, like labour shortages and infrastructure damage, as well as the possibility of international sanctions against Israel.
“Israel is currently ignoring the fact that economics may lead to greater [societal] damage than war itself,” said Moav. “The government is not behaving responsibly. Does it want to avoid the costs of war, or does continued conflict serve political interests?”
Economy
DNC speakers claim Biden inherited economy in disarray. Economists say it’s more complicated.
The economy has become a key issue as the 2024 election approaches, with both Democrats and Republicans presenting contrasting views on how the economy has fared under President Joe Biden and former President Donald Trump.
As the 2024 election approaches, the state of the economy has emerged as a pivotal issue, dominating discussions and shaping voter concerns. With both major parties presenting conflicting narratives, the question of whether the U.S. economy has improved under President Joe Biden or was already on the path to recovery under former President Donald Trump is at the forefront of the political debate.
When President Joe Biden assumed office in January 2021, the U.S. was grappling with the aftermath of the COVID-19 pandemic, which had precipitated the most severe economic downturn since the Great Depression. The global pandemic disrupted businesses, shuttered industries, and left millions of Americans unemployed, leading to widespread economic uncertainty.
Democrats, including prominent figures such as Senator Bernie Sanders and former President Barack Obama, have underscored the economic strides made under Biden’s administration. During the Democratic National Convention, Sanders emphasized that when Biden took office, the economy was in a precarious state, reeling from the impact of the pandemic. Obama echoed these sentiments, noting that the economic recovery under Biden has been significant.
The Biden administration’s response to the economic challenges was swift and comprehensive. In March 2021, Biden signed the American Rescue Plan, a $1.9 trillion economic stimulus package aimed at providing direct relief to Americans, supporting businesses, and bolstering the economy. The plan included $1,400 direct payments to individuals, extended unemployment benefits, and an expansion of the child tax credit, measures designed to alleviate the financial strain on millions of households.
In the following year, Biden enacted additional legislation to further stimulate economic growth. The $891 billion Inflation Reduction Act focused on addressing rising prices and fostering long-term economic stability. Additionally, the $280 billion CHIPS and Science Act aimed to strengthen U.S. competitiveness in technology and manufacturing, securing the nation’s position in critical industries.
Under Biden’s leadership, the labor market experienced a rapid recovery. By 2022, the U.S. had regained all the jobs lost during the pandemic, and by January 2023, the unemployment rate had dropped to levels even lower than those seen before the pandemic. This period of job creation has been hailed as one of the administration’s key achievements, contributing to the broader narrative of economic resurgence.
Republicans, however, present a different narrative, asserting that the economic recovery began well before Biden took office. They credit former President Donald Trump with laying the groundwork for the rebound, pointing to the significant economic measures implemented during his administration in response to the pandemic.
The onset of COVID-19 in early 2020 sent shockwaves through the U.S. economy, leading to a sharp decline in economic activity. The unemployment rate soared to nearly 15% in April 2020, the highest level since the Great Depression, and the stock market experienced unprecedented volatility.
In response, Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, a $2.2 trillion stimulus package that provided direct payments to Americans, expanded unemployment benefits, and offered financial assistance to businesses. This was followed by another $900 billion relief package in December 2020. These measures, Republicans argue, were instrumental in stabilizing the economy and setting the stage for the recovery that followed.
By the end of 2020, key economic indicators showed signs of improvement. The unemployment rate had fallen to 6.7%, and the Dow Jones Industrial Average and the S&P 500 had both reached record highs, signaling renewed investor confidence. Republicans contend that these positive trends demonstrated the effectiveness of Trump’s policies and argue that Biden inherited an economy that was already on the path to recovery.
Economists who have examined the recovery acknowledge that both administrations played roles in the economic rebound, but they caution against oversimplified narratives. The pandemic-induced recession, which lasted only two months, was the shortest in U.S. history, but its effects were profound and long-lasting. While the economy had indeed begun to recover under Trump, significant challenges remained when Biden took office, particularly in the labor market and global supply chains.
“The economy at the end of 2020 had recovered substantially, but there were still millions of job losses that the economy hadn’t recovered from,” said Dennis Hoffman, an economist at Arizona State University. He noted that while the initial recovery was swift, the economy remained vulnerable and in need of continued support.
Jesse Rothstein, a professor of public policy and economics at the University of California, Berkeley, described the economic situation at the outset of Biden’s presidency as an “economic crisis,” despite the progress made in the latter half of 2020. Rothstein emphasized that the recovery was far from complete and required additional government intervention to sustain momentum.
The debate over the impact of Biden’s stimulus measures, particularly the American Rescue Plan, on inflation adds another layer of complexity to the economic narrative. While some economists, like Jason Furman, a Harvard University professor and former economic adviser to President Obama, argue that the plan contributed to rising inflation, others attribute the inflationary pressures to global supply chain disruptions and other factors related to the pandemic.
Matias Vernengo, a professor of economics at Bucknell University, dismissed the notion that the stimulus spending was the primary driver of inflation. Instead, he pointed to the imbalance of supply and demand in the post-pandemic economy as the main cause of rising prices. Vernengo also noted that inflation has since moderated, suggesting that it was a temporary shock rather than a lasting problem.
As the 2024 election looms, voters are confronted with divergent economic narratives from both parties. Democrats highlight the progress made under Biden, emphasizing job creation, economic growth, and legislative achievements. Republicans, meanwhile, focus on the recovery that began under Trump, arguing that the economy was already on an upward trajectory before Biden took office.
However, the reality of the U.S. economic recovery is more nuanced. Both administrations implemented critical measures that contributed to the rebound, and both faced significant challenges. While the economy has made substantial progress since the depths of the pandemic-induced recession, the journey to full recovery has been complex, with successes and setbacks along the way.
As voters assess the competing claims, they are tasked with considering the broader context of the recovery, recognizing that the story of the U.S. economy in the years following the pandemic is one of shared responsibility, evolving challenges, and ongoing efforts to build a resilient and inclusive economic future.
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