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Making the poor poorer is a false economy



When former US Treasury secretary Larry Summers likened the UK to a “submerging market” last week, I thought he was laying it on a bit thick. But in a busy food bank in south London on Friday, “submerging” felt like the right word.

A queue of people stretched across the car park of a church to collect a parcel of free food and a hot meal. Once, the visitors here would have been mostly single men. But last week, there were toddlers running around and mums jiggling babies on their hips. “We’ve had people recently saying ‘can I have food that I don’t have to put in the fridge because I’ve turned the fridge off?’” says Kate Lott, project manager at the Living Well Bromley food bank. Others ask for food they don’t have to cook because they have turned the gas off, she says.

The number of visits to this food bank has climbed from 530 adults with 183 dependants in August last year to 843 adults with 372 dependants this August. About 1,000 people came for hot meals in September, nearly double the number from a year ago. Many of these new visitors have never used a food bank before. According to Tamara Cooper, a volunteer, many are working people who can’t pay the rising cost of food and energy. She understands: she sometimes sits with the lights off to save money on her prepayment meter.

Kwasi Kwarteng, the UK’s new chancellor, U-turned on Monday on his decision to cut the 45p rate of tax for the rich. But he still has a fiscal hole to fill. One option under discussion is to cut welfare spending by not lifting benefits in line with inflation. According to the Resolution Foundation think-tank, uprating working-age benefits by earnings rather than inflation next year would cost a typical low-income working family with two children more than £500 a year and save the Treasury £5bn.

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The UK does spend a lot on benefits for non-pensioners: the bill came to about 4.6 per cent of GDP in 2019/20, up from about 3 per cent in the 1970s. But spending has already been cut from about 5.7 per cent during the decade of austerity that followed the financial crisis. There comes a point where making the poor poorer becomes a false economy — and I think we have reached it.

Families who become homeless have to be put up in expensive bed and breakfasts. People who become mentally or physically unwell add to the healthcare bill and drop out of the workforce. More than 640,000 or so working-age people have already left the labour market since the start of the pandemic. In a survey of the leaders of NHS trusts last week, 72 per cent said they had seen an increase in people presenting with mental health problems due to stress, debt and poverty. More than a quarter of trust leaders said they had set up food banks for their own staff.

The better way to get tough on welfare spending would be to get tough on the causes of welfare spending. Roughly three-quarters of working-age benefits are spent in one of three ways: income top-ups for workers with low earnings; housing benefit to help people pay the rent; and disability, sickness and incapacity benefits for people who are unwell.

In other words, the size of the welfare bill is the consequence of Britain’s deep-rooted problems with low pay, high housing costs and poor health. The dysfunctional housing market, in particular, stands out. The UK spends less on unemployment benefits than most other OECD countries, but more than any other OECD country on housing benefits-in-kind.

These problems are not insurmountable. They require better community-based and preventive health services, more building of social housing, and higher business investment in workforce skills and productivity.

The alternative is to cut benefit spending again and leave it to people to try to help each other through. But this is an economic shock that is reverberating far up the income ladder. People who are usually comfortably enough off to donate to others are now worried about their own energy bills and mortgage payments.

The Living Well Bromley food bank has a shipping container in the car park which is usually full of donations. Now it is half empty. Two other local food banks in the area have warned they might have to close. Still, people give what they can. And Lott says it’s the people who have the least who give the most. “People will come in and say, ‘can I give you three pounds? I used to be a guest and I want to help.”

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Inflation and interest rates to slow Alberta economic growth: ATB



The oil and gas sector will continue to help Alberta’s economy outperform the rest of the country, according to ATB Financial, but there will still be some pain for Albertans in the year ahead.

The Crown corporation’s 2023 economic forecast, released Wednesday, suggests the province’s real GDP will fall from five to 2.8 per cent but will continue to outpace Canada as a whole, which could see a recession in the new year.

“We’re just trying to stress that there is this sort of push-pull, positive-negative,” said Rob Roach, deputy chief economist at ATB Financial. “It is way better to be in Alberta right now with this overall growth, but it doesn’t mean everything’s going great for everybody.”

Alberta has benefited from high oil prices over the course of 2021, resulting in higher revenues and pushing the province to an expected $12.3-billion surplus.

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Oil companies were producing a record 3.88 million barrels of oil a day in September. With the Trans Mountain Pipeline expansion expected to be completed in the third quarter of 2023, an additional 690,000 barrels of exporting capacity will be brought online.

Roach said he expects a 20 per cent jump in oil and gas extraction capital spending next year and another five per cent in 2024. But that will likely be the last major capital investment in Alberta’s sector for the foreseeable future.

“It hits that wall after next year,” he said. “Without more pipelines, you just can’t keep expanding production.”

He says there is cautious optimism for the city, bolstered by the current energy market along with diversification of the local economy, specifically with record growth in tech. Still, there is a long way to go for economic balance between energy and other sectors.

“It does take time to add up to something,” said Roach. “It won’t come up to the point where it can rival oil and gas, maybe never. That’s a big, big tall order. But in terms of economic growth, economic activity, it has been positive and there’s no reason why it won’t continue.”

Consumers facing higher costs for rent, groceries and utilities are still in for a tough year, said Roach.

Inflation has cooled since its highs of 8.1 per cent year-over-year this summer, down to 6.9 per cent nationally in October, but there are still a number of global factors that will continue to have an effect.

The war in Ukraine remains a wild card in how it affects global energy prices, supply chains and other commodities such as grain.

Supply chains are improving, but there are still challenges, particularly if COVID-related restrictions cause further interruptions. China has already seen disruptions in a number of sectors, especially those that rely on computer chips.

While gas prices have fallen off from their summer highs, they are still contributing to rising costs at grocery stores and other retail, especially as diesel remains about 60 cents per litre higher than gasoline.

Real estate is also expected to remain strong in Alberta in 2023, bolstered by the migration of 60,000 people to the province in 2022 from other countries.

A home for sale and sold sign are seen in this file photo.
A home for sale and sold sign are seen in this file photo. Gavin Young/Postmedia

The price of housing has come off its record-setting pace from 2021 and early 2022, but Re/Max is predicting a seven per cent increase in the price of single-family homes in Calgary in its 2023 Canadian Housing Market Outlook, released Tuesday. Only Muskoka, Ont., and Halifax are forecasted to have a higher increase in the price of a home at eight per cent, while Canada as a whole is looking at a 3.3 per cent decrease in home prices.

In Calgary, the average home sold for $658,277 between Jan. 1 and Oct. 31, up 13 per cent from $585,025 over the same period in 2021.

The Bank of Canada has been attempting to slow inflation, raising its benchmark interest rate from 0.25 per cent in March to 3.75 per cent in October. Roach said he expects rates to go up another 25 to 50 basis points next week. The strategy has had the desired effect of lowering prices in most other real estate markets, but Calgary remains an outlier.

He expects the bank to stop increasing rates next year, but it will be 2024 before a decrease is likely.

“It’s unlikely that they’ll stop at four,” said Roach.

“We think there’s still enough inflation that they’ll have to get into that 4.25 range. It’ll be all year those interest rates will be high, though, even if they stop raising them.”

Twitter: @JoshAldrich03

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India may become the third largest economy by 2030, overtaking Japan and Germany – CNBC



In this article

Beautiful and colorful aerial view of Mumbai skyline during twilight seen from Currey Road, on February 16, 2022 in Mumbai, India.
Pratik Chorge | Hindustan Times | Getty Images

India is set to overtake Japan and Germany to become the world’s third-largest economy, according to S&P Global and Morgan Stanley.

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S&P’s forecast is based on the projection that India’s annual nominal gross domestic product growth will average 6.3% through 2030. Similarly, Morgan Stanley estimates that India’s GDP is likely to more than double from current levels by 2031.

“India has the conditions in place for an economic boom fueled by offshoring, investment in manufacturing, the energy transition, and the country’s advanced digital infrastructure,” Morgan Stanley analysts led by Ridham Desai and Girish Acchipalia wrote in the report.

“These drivers will make [India] the world’s third-largest economy and stock market before the end of the decade.”

India posted a year-on-year growth of 6.3% for the July to September quarter, fractionally higher than a Reuters poll forecast of 6.2%. Prior to this, India recorded an expansion of 13.5% for the April to June compared to a year ago, buoyed by robust domestic demand in the country’s service sector.

The country posted a record 20.1% year-on-year growth in the three months to June 2021, according to Refinitiv data.

“These drivers will make [India] the world’s third-largest economy and stock market before the end of the decade.”
Morgan Stanley

S&P’s projection hinges on the continuation of India’s trade and financial liberalization, labor market reform, as well as investment in India’s infrastructure and human capital.

“This is a reasonable expectation from India, which has a lot to ‘catch up’ in terms of economic growth and per capita income,” Dhiraj Nim, an economist from Australia and New Zealand Banking Group Research, told CNBC.

Some of the reforms cited have already been set in motion, said Nim, highlighting the government’s commitment to set aside more capital expenditure in the country’s annual expenditure books. 

Becoming a more export-driven hub

There’s a clear focus by India’s government to become a hub for foreign investors as well as a manufacturing powerhouse, and their main vehicle for doing so is through the Production Linked Incentive Scheme to boost manufacturing and exports, according to S&P analysts.

The so-called PLIS, which was introduced in 2020, offers incentives to both domestic and foreign investors in the form of tax rebates and license clearances, among other stimulus.

“It is very likely that the government is banking on PLIS as a tool to make the Indian economy more export-driven and more inter-linked in global supply chains,” S&P analysts wrote.

Workers processing metal parts at a cookstove manufacturing plant of GHG Reduction Technologies Pvt in Nashik, Maharashtra, India, on Sunday, Nov. 13, 2022.
Dhiraj Singh | Bloomberg | Getty Images

By the same token, Morgan Stanley estimates that Indian manufacturing’s share of GDP will “rise from 15.6% of GDP currently to 21% by 2031” — which implies that manufacturing revenue could increase three times from the current $447 billion to around $1,490 billion, according to the bank.

“Multinationals are more optimistic than ever about investing in India … and the government is encouraging investment by both building infrastructure and supplying land for factories,” Morgan Stanley said.

“India’s advantages [include] abundant low-cost labor, the low cost of manufacturing, openness to investment, business-friendly policies and a young demographic with a strong penchant for consumption,” said Sumedha Dasgupta, a senior analyst from the Economist Intelligence Unit.

These factors make make India an attractive choice for setting up manufacturing hubs until the end of the decade, she said.

Risk factors

Salient sticking points that could challenge Morgan Stanley’s forecast include a prolonged global recession, since India is a highly trade-dependent economy with nearly 20% of its output exported.

Other risk factors cited by the U.S. investment bank include supply of skilled labor, adverse geopolitical events and policy errors which may arise from voting in a “weaker government.”

A global slowdown may dampen India’s export businesses outlook, India’s finance ministry said last Thursday.

Even though India’s GDP on aggregate is already above pre-Covid levels, forward looking growth is going to be “much weaker” compared to previous quarters, said Sonal Varma, chief economist at Nomura.

“Real GDP is now 8% above pre-Covid levels in growth rate terms … but in terms of the forward looking view, there are headwinds from the global side financial conditions,” Varma told CNBC’s Squawk Box on Thursday, warning that there will be a cyclical slowdown ahead.

Similarly, Nim also said that more priority could be given to human capital investment via education and health.

“This is especially important for a post-pandemic economy where greater disruptions to the informal sector have meant widened economic and wealth inequalities,” he said, adding that falling labor force participation rate, especially among women, was concerning.

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Brazil's economy grows less than expected in third quarter, but still reaches record level – Reuters



BRASILIA, Dec 1 (Reuters) – Brazil’s economic growth slowed more than expected in the third quarter as higher interest rates affected household spending, underscoring challenges facing President-elect Luiz Inacio Lula da Silva next year.

Gross domestic product rose 0.4% in the three months to September, government statistics agency IBGE said on Thursday, below the 0.7% growth forecast by economists polled by Reuters.

Brazil’s central bank have raised borrowing costs to a nearly six-year high to battle double-digit inflation this year, which has begun to weigh on domestic demand.

Economists warn that if Lula unleashes a surge of new government spending, the central bank may not cut rates as expected.

“The balance of risks for 2023 are to the downside, due mostly to politics and the deterioration of the fiscal picture, which could keep interest rates high for even longer,” wrote economist Andres Abadia of Pantheon Macroeconomics in a note.

Household consumption rose just 1%, down from 2.1% in the second quarter, while fixed investments gained 2.8% and a burst of election-year spending lifted government expenditures 1.3%.

On the production side, farm output fell 0.9% in the quarter due to a delayed sugar cane harvest, while industrial output advanced 0.8% and the dominant services sector rose 1.1%.

This was the fifth consecutive quarter of expansion, putting activity in Latin America’s largest economy 4.5% above its pre-pandemic level in the fourth quarter of 2019.

“The clear message from today’s figures is that the economy is losing momentum,” said William Jackson, chief emerging markets economist at Capital Economics, predicting an even weaker fourth quarter due to a worsening global outlook and high interest rates.

“We’re sticking to our view that while the economy will grow by 3% this year, it will expand by little more than 1% in 2023,” he wrote in a note to clients.

The government of outgoing President Jair Bolsonaro forecasts GDP to rise by 2.7% this year and 2.1% in 2023.

President-elect Lula, who will be sworn in on Jan. 1, is pushing to exclude a major welfare programme from Brazil’s constitutional spending cap, opening space for more public expenditures to meet his campaign promises.

As Lula has still not proposed alternative fiscal rules to keep a lid on public debt, his push for more spending has created doubts about monetary policy and pushed up Brazil’s yield curve, implying higher financing costs for the government’s hefty interest bill.

The central bank paused its tightening cycle in September after 12 consecutive hikes that raised the benchmark interest rate to 13.75% from a record-low 2% in March 2021.

Central bank chief Roberto Campos Neto has said that fiscal uncertainty could force policymakers to take a more restrictive approach.

Brazil’s GDP expanded by 3.6% from the third quarter of 2021, IBGE reported on Thursday, slightly below the 3.7% rise forecast by economists polled by Reuters.

IBGE also revised down second-quarter growth to 1% from the prior quarter, compared to 1.2% reported previously, while revising upward first-quarter growth to 1.3% from 1.1% previously.

Reporting by Marcela Ayres; Editing by Steven Grattan, Brad Haynes and Arun Koyyur

Our Standards: The Thomson Reuters Trust Principles.

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