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Ottawa steps up to prop up economy as Canada struggles with coronavirus crisis

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The federal government is adding $10-billion to the credit it makes available to businesses, and the Bank of Canada has announced an emergency rate cut to buttress the economy as it struggles with the coronavirus crisis and plunging oil prices.

Bank of Canada Governor Stephen Poloz joined Finance Minister Bill Morneau and Superintendent of Financial Institutions Jeremy Rudin at a news conference on Friday to announce the second steps in Ottawa’s response to the economic fallout from COVID-19.

Earlier this week, Ottawa unveiled $1-billion for health research, unemployment insurance measures and help for the provinces.

Mr. Poloz said he’s cutting the key overnight lending rate by 50 basis points to 0.75 per cent, saying the measure is needed not only because of economic fallout from the coronavirus but also the significant drop in oil prices. Crude prices are down nearly 50 per cent so far this year in a price war between producers Russia and Saudi Arabia.

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Mr. Morneau announced that $10-billion in additional credit will be available to Canadian businesses affected by the economic fallout through Ottawa’s Business Development Bank and Export Development Canada.

The federal budget, scheduled for March 30, will be delayed, but Mr. Morneau promised to unveil a “significant stimulus program” next week. Government House Leader Pablo Rodriguez did not give a new date for the budget.

“These are extraordinary times and that means we are ready to take extraordinary measures,” Mr. Morneau said.

He said Prime Minister Justin Trudeau will have a conference call on Monday with leaders of the G-7 about the impact of coronavirus.

Mr. Poloz said the message should be clear that the government is ready to do what it takes to keep the economy sound.

“There are significant measures happening today and next week which I think people should see as a co-ordinated and very powerful package,” he said.

The governor said he is concerned about how consumer and business confidence can weather the economic fallout, and warned that, without confidence, recovery could be prolonged.

“So these actions are meant to buttress that confidence and get us a bridge across the trouble,” he said.

The Bank of Canada also announced it will help improve liquidity for a key part of the loan market by agreeing to buy banker’s acceptances from financial institutions. These are a type of short-term loan commonly used by small and mid-sized businesses.

Bank of Montreal chief economist Douglas Porter said the Friday afternoon announcements indicate “just how unusual these times are.”

He noted the Bank of Canada’s cut in its benchmark overnight rate is the second reduction in a little more than a week. The overnight rate sets the basis for Canadian banks’ prime interest rates.

Mr. Porter said he was a bit surprised by the timing of the rate cut. He thought the central bank might have waited until the next decision from the U.S. Federal Reserve.

“Obviously, urgent times call for urgent measures,” Mr. Porter said.

Mr. Rudin, the federal banking regulator, said the Office of the Superintendent of Financial Institutions (OSFI) will reduce the amount of cash major banks are required to keep in reserve for emergencies, called the domestic stability buffer.

He said the buffer was last set at 2.25 per cent of banks’ risk-weighted assets, and will be reduced to 1 per cent. Mr. Rudin said OSFI calculates this measure will support more than $300-billion of additional lending capacity by the major banks. “We are encouraging these institutions to use this capital … as required,” he said.

Toronto Dominion Bank senior economist Brian DePratto called the $10-billion in additional credit support for businesses and eased reserve requirement for banks a “solid step in the right direction” for Ottawa. He said he expects additional fiscal measures “of at least equal size to support individuals and households” in Mr. Morneau’s announcement next week.

Mr. DePratto said he expects the measures would also help the self-employed and those who don’t work enough hours to qualify for Employment Insurance.

“Social and economic disruptions related to the virus will likely worsen in the coming weeks, but with the right supports in place, including those announced today, the peak economic impact has a good chance of being contained to a relatively short period,” he said. “It will be hard to avoid an economic contraction in the second quarter due to social distancing efforts by businesses and overall activity, but a near-term recession is certainly not a forgone conclusion.”

Mr. Morneau said the government is still looking for the best way to deliver financial help to those who need it the most, whether they are eligible for Employment Insurance or not.

“We need to think about how we can appropriately ensure that we can support people in different situations, and that is the work we are doing right now,” he said.

Conservative MP Pierre Poilievre said Ottawa must avoid creating new bureaucratic structures to deliver the aid, and that new measures must be temporary to avoid fueling a long-term deficit.

NDP MP Peter Julian said the government’s priority should be helping all affected workers, especially those without access to Employment Insurance or who work in precarious conditions.

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U.S. economic growth for last quarter revised up slightly to healthy 3.4% annual rate

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The U.S. economy grew at a solid 3.4 per cent annual pace from October through December, the government said Thursday in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2 per cent rate last quarter.

The Commerce Department’s revised measure of the nation’s gross domestic product – the total output of goods and services – confirmed that the economy decelerated from its sizzling 4.9 per cent rate of expansion in the July-September quarter.

But last quarter’s growth was still a solid performance, coming in the face of higher interest rates and powered by growing consumer spending, exports and business investment in buildings and software. It marked the sixth straight quarter in which the economy has grown at an annual rate above 2 per cent.

For all of 2023, the U.S. economy – the world’s biggest – grew 2.5 per cent, up from 1.9 per cent in 2022. In the current January-March quarter, the economy is believed to be growing at a slower but still decent 2.1 per cent annual rate, according to a forecasting model issued by the Federal Reserve Bank of Atlanta.

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Thursday’s GDP report also suggested that inflation pressures were continuing to ease. The Federal Reserve’s favoured measure of prices – called the personal consumption expenditures price index – rose at a 1.8 per cent annual rate in the fourth quarter. That was down from 2.6 per cent in the third quarter, and it was the smallest rise since 2020, when COVID-19 triggered a recession and sent prices falling.

Stripping out volatile food and energy prices, so-called core inflation amounted to 2 per cent from October through December, unchanged from the third quarter.

The economy’s resilience over the past two years has repeatedly defied predictions that the ever-higher borrowing rates the Fed engineered to fight inflation would lead to waves of layoffs and probably a recession. Beginning in March 2022, the Fed jacked up its benchmark rate 11 times, to a 23-year high, making borrowing much more expensive for businesses and households.

Yet the economy has kept growing, and employers have kept hiring – at a robust average of 251,000 added jobs a month last year and 265,000 a month from December through February.

At the same time, inflation has steadily cooled: After peaking at 9.1 per cent in June 2022, it has dropped to 3.2 per cent, though it remains above the Fed’s 2 per cent target. The combination of sturdy growth and easing inflation has raised hopes that the Fed can manage to achieve a “soft landing” by fully conquering inflation without triggering a recession.

Thursday’s report was the Commerce Department’s third and final estimate of fourth-quarter GDP growth. It will release its first estimate of January-March growth on April 25.

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Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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