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New Zealand Economy Shrinks The Most Since Great Depression

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(Bloomberg) — New Zealand suffered its worst economic slump since the Great Depression in the second quarter as a strict nationwide lockdown to combat the coronavirus brought the country to a standstill.

Gross domestic product plunged 12.2% from the first quarter, Statistics New Zealand said Thursday in Wellington. That’s the biggest three-month contraction since quarterly records began in 1977. Economists forecast a 12.5% decline. From a year earlier, the economy shrank 12.4%, the most recorded in comparable official data dating back to 1955.

New Zealand is going through a sharper but shorter economic shock than it experienced during the depression, when GDP fell 5.3% in 1931 and a further 7.1% in 1932, according to academic research. Nor is the Covid slump as bad as initially feared. The South Pacific nation initially succeeded in eliminating community spread of the virus, allowing it to emerge early from lockdown, and indicators suggest growth surged in the third quarter as consumers went on a spending spree.

However, the real pain may still lie ahead. The border remains closed to foreigners, crippling the tourism industry, and the end of the government’s wage subsidy is expected to see unemployment rise.

“The lockdown-induced contraction in the second quarter is only the first round of this economic shock,” said Miles Workman, senior economist at ANZ Bank in Wellington. “We’re yet to really feel the full impact of the closed border and the sharp global contraction. Fiscal and monetary policy still has its work cut out.”

The New Zealand dollar moved lower after the release. It bought 67.21 U.S. cents at noon in Wellington, down 0.2%.

Today’s report confirms the first recession — defined as two consecutive quarters of economic decline — since 2010. GDP fell a revised 1.4% in the first quarter of the year, the statistics agency said.

The data are unlikely to dent Prime Minister Jacinda Ardern’s chances of winning a second term in the Oct. 17 election. Ardern is riding high in the polls after her deft handling of the pandemic.

Elimination Strategy

The government’s pursuit of an elimination strategy saw it impose one of the strictest lockdowns in the world but allowed a quicker resumption of economic activity once the virus was contained. New Zealand has recorded 1,451 confirmed cases of Covid-19 and just 25 deaths.

The nation’s seven-week lockdown began in the final week of March and ended in May. While a fresh community outbreak in mid-August required a second lockdown in largest city Auckland, the country has fared better than many of its peers who still don’t have the virus under control.

U.K. GDP plummeted 20.4% in the second quarter from the first and 21.7% from a year earlier. In the U.S., the economy shrank 9.5% in the quarter, a drop that equals an annualized pace of 32.9%, its sharpest downturn since at least the 1940s.

Australia’s economy shrank less — 7% in the quarter and 6.3% in the year — but it is not expected to enjoy the same bounce back in activity in the third quarter that New Zealand is experiencing.

The government has pledged NZ$62 billion ($42 billion) of fiscal support to help revive domestic demand and protect jobs, while the central bank has slashed interest rates and embarked on quantitative easing to drive down borrowing costs. Reserve Bank policy makers are considering taking interest rates negative to further nurse the economy through the downturn.

The second-quarter contraction was driven by service industries, particularly hospitality and accommodation as international travel stopped, the statistics agency said.

Other Details:

Manufacturing output fell 13% from the first quarter and construction slumped 26%Household consumption fell 12%, led by durable goods and travel spendingExports fell 16%, led by a decline in tourist spendingImports slumped 25%GDP per capita declined 12.6%

(Updates with economist’s comment in fifth paragraph)

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ADRIAN WHITE: Underground economy is thriving – Cape Breton Post

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There is no doubt that COVID-19 has changed the way businesses function in Cape Breton. The pandemic has forced many entrepreneurs to reshape operating strategies for financial survival.  

Think of the new safety protocols for restaurants to protect staff and customers from virus transmission. Think sporting events playing out before near-empty stadiums and instead focused heavily on revenues generated from media broadcast of the event.  

There are just too many changes to business practices to list here in this column including the growth of digitization in our economy but I wanted to single out a few examples to illustrate some telling impacts. 

One major impact comes from folks not feeling safe to travel outside the province or eat out in restaurants due to the pandemic. Instead, they are using some of those cash savings to fund home improvement projects right here in the Cape Breton economy. That is a good thing for our community and our workers and it supports the “Shop Local-Buy Local” mantra being promoted by the local business community. 

Demand in the home improvement sector has soared and is so strong that it has led to a shortage of building materials, a rapid rise in material costs and a shortage of skilled labour to take on those home improvement projects.  

Many new contractors have entered the home improvement business in 2020 and many anxious homeowners are in hot pursuit of their services. Sometimes these contractors show up when expected to do a job and sometimes not. This has been a long-standing problem with small contractors in Cape Breton.  

Some contractors present an official written quote including HST for the project leaving a paper trail to follow while other contractors are quite prepared to take cash from the customer thereby avoiding HST. Cash leaves little trail for CRA to follow when it comes to reporting taxable income. 

This practice leads me to shed some light on the underground economy and its impact on our well-being as a province. Statistics Canada defines the underground economy as “consisting of market-based activities, whether legal or illegal, that escape measurement because of their hidden, illegal or informal nature.”  

I use the construction industry as an easy-to-understand example but you can imagine other opportunities for tax avoidance including buying illegal cigarettes, street sold cannabis, cash tips, paying cash for services, Airbnb cash rentals, or offshore bank accounts not being reported to CRA. 

In Nova Scotia, according to Statistics Canada, the underground economy was estimated to be $1.28 billion in 2018. That is near 3 per cent of provincial GDP. This is revenue that escapes government taxation. Nova Scotia’s underground economy as a share of GDP is higher than the national average which is troubling. Taxes on $1.28 billion would go a long way to offset the forecasted 2020 Nova Scotia budget deficit of $853 million due to the pandemic. 

Some of the underground economy is driven by the fact Nova Scotia has the second-highest personal income tax rates in the country. It remains one of three remaining provinces in the country that still practices “bracket creep” on your personal income tax deduction by not adjusting it to CPI on your annual income tax return.  

The higher the taxes the more incentive it provides for individuals and companies to embrace tax avoidance. Alberta has one of the lowest personal income tax rates in Canada and no provincial sales tax. It abandoned “bracket creep” on its residents decades ago. It also has one of the lowest underground economy as a share of GDP rates in the country running at 1.8 percent of provincial GDP.  

British Columbia has the highest ratio at 3.7 percent of GDP. In Canada, the underground economy was valued at a whopping $61 billion in 2018 amounting to 2.7 per cent of national GDP.  

I can only imagine with the increased demand for home improvement projects in Canada due to the pandemic that underground economic activity will likely increase 50 per cent rising close to $90 billion for 2020. 

In Nova Scotia, residential construction accounts for over 25 percent of the estimated underground economy GDP.  The next six largest contributors to the underground economy amount to about 50 per cent of Nova Scotia’s underground economy. They are retail trade, accommodation/food services, finance/insurance/real estate, manufacturing, professional/technical services and health care/social assistance.   

If we want to grow the Nova Scotia economy and thereby increase tax revenues to pay for the services we all expect, we are going to have to rethink the tax burden on individuals and businesses to bring balance and fairness to the tax environment. It is one of the reasons we struggle to recruit doctors to Cape Breton. Above-average taxes in Nova Scotia hinder economic expansion. High taxes will continue to drive the underground economy and tax avoidance until we address them. 

Adrian White is CEO of NNF Inc, Business Consultants. He resides Sydney & Baddeck and can be contacted at awhite889@gmail.com.

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Why the Best G.D.P. Report Ever Won’t Mean the Economy Has Healed – The New York Times

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The United States almost certainly just experienced its fastest three months of economic growth on record. That doesn’t mean the economy is strong.

The Commerce Department on Thursday will release its preliminary estimate of economic growth for the third quarter. Economists surveyed by FactSet expect it to show that gross domestic product — the broadest measure of goods and services produced in the United States — grew about 7 percent from the second quarter, or 30 percent on an annualized basis (more about that in a bit).

If those forecasts are even close to correct, it would represent the fastest growth since reliable records began after World War II. Until now, the best quarter was a 3.9 percent gain (16.7 percent annualized) in 1950.

This G.D.P. report will be particularly closely watched, arriving as the last major piece of economic data before Election Day next Tuesday.

But it doesn’t make sense to think about Thursday’s report in isolation. The third quarter’s record-setting growth is effectively an echo of the second quarter’s equally unprecedented contraction, when business shutdowns and stay-at-home orders led gross domestic product to fall by 9 percent. Strong growth was inevitable as the economy began to reopen.

While the economy has revived considerably since last spring, it is far short of its level before the pandemic. And progress is slowing.

“Employment has come back to some extent, but the unemployment rate is still high, wage and salary income is still low,” said Ben Herzon, executive director of IHS Markit, a forecasting firm. “Demand is still being depressed by the pandemic.”

In superlative-laden Facebook ads purchased days before the report, President Trump and his supporters have already begun to promote it as evidence of a strong rebound. The truth is more complicated. Here is how economists are thinking about the report, and why the numbers could be misleading.

If G.D.P. fell by 9 percent in the second quarter, and rose by about 7 percent in the third quarter, it might sound as if the economy is almost back to where it started.

It isn’t. The big drop in output in the second quarter means that third-quarter growth is being measured against a smaller base. A simple illustration of the same phenomenon: If you have $100 and lose half, you have $50. If you then manage to increase your money by half, that will bring your holdings to $75, not all the way back to $100.

To really evaluate the recovery, it makes sense to focus less on quarter-to-quarter changes and instead look at how the economy compares to the fourth quarter of last year, before the pandemic began. If economists’ forecasts are correct, G.D.P. will be 3 to 4 percent lower in the third quarter than at the end of last year. By comparison, G.D.P. shrank 4 percent over the entire year and a half of the Great Recession a decade ago.

In other words: Even after the record-setting rebound in the third quarter, the economy is still in a hole as large as the worst point of many past recessions.

Here is where things get really confusing: Third-quarter growth will look historically strong, even though all three months that made up the quarter were relatively weak.

That seeming paradox is the result of how the government reports G.D.P. statistics.

Quarterly G.D.P. figures represent the average amount of economic output over a three-month period. In normal times, output changes only gradually — growing or shrinking only 2 or 3 percent per year — so the change from the first month of a quarter to the last is small.

Last spring, however, changes that would ordinarily take years played out in a matter of weeks. Monthly estimates from IHS Markit show that G.D.P. fell more than 5 percent in March and more than 10 percent in April, before rising roughly 5 percent in May and 6 percent in June.

Quarterly averages obscure those big swings, however. G.D.P. fell 1.3 percent in the first quarter (when two relatively normal months were followed by the big drop in March) and 9 percent in the second (when output plunged in the first month of the quarter then rose in the next two).

The big rebound in May and June meant that the third quarter effectively had a head start. In fact, even if there had been zero growth in July, August or September, and the economy had stayed exactly the same size as at the end of the second quarter, that would still represent 5.4 percent quarterly growth — the strongest gain on record.

Recovering Lost Ground

Monthly and quarterly U.S. gross domestic product in 2020




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Change in

AVERAGE from

previous

quarter

Very little forecasted

month-to-month

change within Q3

QUARTERLY

AVERAGE

–9.0%

+7.5%

THIRD

Quarter

(forecast)

First

Quarter

SECOND

Quarter

$15

trillion

$10

$5

Jan.

Feb.

Mar.

April

May

June

July

Aug.

Sept.

Very little forecasted

month-to-month

change within Q3

Change in AVERAGE from

previous quarter

–9.0%

+7.5%

QUARTERLY AVERAGE

First Quarter

SECOND Quarter

THIRD Quarter

(forecast)

$15 trillion

$10

$5

Jan.

Feb.

March

April

May

June

July

Aug.

Sept.


Note: Monthly G.D.P. estimates are shown as seasonally adjusted annual rates, adjusted for inflation.

Source: IHS Markit

By Ella Koeze

Of course, the economy did experience some growth during the third quarter. IHS Markit estimates that G.D.P. grew about 1.5 percent in July and less than 1 percent in August and September. But those are much weaker gains than the quarterly G.D.P. figures might seem to suggest.

“Statistics that we’re used to using for small and slow movements are basically broken when it comes to looking at large and rapid movements,” said Justin Wolfers, a University of Michigan economist who occasionally contributes to The New York Times. “Typically a recession plays out over many quarters. This one played out over many weeks. So looking at the data through the lens of quarterly data misses all the action.”

Gross domestic product in the United States is usually reported at an annual rate, meaning how much output would grow or shrink if that rate of change were sustained for a full year. That convention makes it easier to compare data collected over different time periods. But during periods of rapid change, annual rates can be confusing.

In the second quarter, for example, G.D.P. fell at an annual rate of 31.4 percent. That makes it sound as if the economy shrank by nearly one-third, when in fact it shrank by a bit less than a tenth.

To avoid confusion, in the coverage of Thursday’s report, The Times plans to emphasize simple, nonannual percentage changes from both the second quarter and the fourth quarter of last year, before the pandemic began. (We gave a more detailed explanation of this decision before the second-quarter report in July.)

When the pandemic first hit last spring, many economists and policymakers hoped that by shutting down nonessential businesses and encouraging people to stay home, the United States could quickly bring the virus under control, then reopen with minimal lasting economic damage. That would allow for a “V-shaped” recession and recovery — a steep drop, followed by an equally steep rebound.

Relative to that expectation, the U.S. response has been a failure. The economy bounced back in May and June, but only partway. Most forecasters don’t expect G.D.P. to return to its pre-pandemic level until late next year at the earliest.

Compared with forecasts from April and May, however, the economic rebound has beaten expectations. The nonpartisan Congressional Budget Office, for example, released a forecast in late April showing a steeper second-quarter decline and a weaker third-quarter rebound than ended up happening. The office also expected the unemployment rate to stay above 10 percent through the end of this year; instead, the rate fell below that benchmark in August, and fell further to 7.9 percent in September.

The bad news is that progress has slowed sharply since that spring rebound. Many economists have recently revised downward their forecasts for the end of the year, in part because Congress did not provide more stimulus money before the election.

“The recovery has been faster than expected, but it is bending off pretty sharply,” Mr. Herzon said. “We got a sharp recovery, but there appears to have been a limit to that recovery.”

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US consumer confidence eased in October as economy views dim – BNN

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Consumer confidence unexpectedly pulled back in October as Americans became more concerned about prospects for employment, incomes and the economy.

The Conference Board’s index decreased to 100.9 from a downwardly revised 101.3 reading in September, according to a report Tuesday. The reading fell below the median estimate of 102 in Bloomberg’s survey of economists.

The gauge of expectations slipped 4.5 points to 98.4, while a measure of sentiment about current conditions rose to a seven-month high of 104.6.

Economists project the expansion in the world’s largest economy to moderate after a projected record annualized increase in the third quarter. The reading, which shows sentiment remains well below pre-pandemic levels, comes a week before the presidential election and underscores the impact of the virus and lack of new stimulus.

“There is little to suggest that consumers foresee the economy gaining momentum in the final months of 2020, especially with COVID-19 cases on the rise and unemployment still high,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement.

The decline in expectations was mainly driven by a dimmer short-term outlook for jobs. The share of respondents who said that they expect fewer jobs in the next six months rose to 20.2 per cent from 16.1 per cent, the report showed. Larger percentages also said that they expect business conditions to worsen and less income.

Respondents indicated they were more less likely to make big purchases, including cars and appliances, in the coming months. The share planning to buy a home increased slightly to a three-month high of 6.6 per cent.

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