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Peru's new president must appease markets to rescue economy – FRANCE 24



Issued on: 20/07/2021 – 23:02

Lima (AFP)

Peru’s newly-elected president, leftist trade unionist Pedro Castillo, faces an uphill battle building the market confidence he needs to address a deep economic crisis in a country battered by the coronavirus epidemic, analysts say.

Voting last month for their fifth president in three years, Peruvians chose between two economic extremes — rural school teacher Castillo vowing to improve the plight of the poor, and right-wing rival Keiko Fujimori, backed by city-dwellers and investors.

After more than six weeks of suspense as a jury reviewed claims of electoral fraud filed by Fujimori, political outsider Castillo was proclaimed president-elect late Monday — a U-turn on a quarter century of neo-liberal government.

On Tuesday morning, the sol fell to 3.964 against the US dollar. The Lima stock exchange has yet to recover from the 7.7-percent drop registered the day after the June 6 vote.

Castillo’s focus now, said economist Hugo Nopo of the GRADE research center in Lima, must be to “build bridges with the markets, which are wary of what he might do.”

He added: “Clear signals must be given that the objective management of the economy will be professional, that solid experts will be brought on board.”

Because Peru cannot afford a capital flight.

The country has been in recession since the second quarter of last year after coronavirus lockdown shuttered businesses and crippled the all-important tourism sector.

Peru is now the country in the world with the highest Covid-19 mortality rate, and the pandemic has exacerbated deep societal inequalities.

The economy contracted more than 11 percent in 2020, two million people lost their jobs and poverty now affects almost a third of Peruvians.

– ‘Tranquility’ –

In an early sign he will not immediately set out to rock the boat, Castillo announced on June 26 that he would keep Julio Velarde as Peru’s central bank president “to give tranquility” and to “open the doors to big investment.”

Velarde has headed the bank for 15 years and is considered a prudent and stable manager of monetary policy.

As chief economic advisor, Castillo appointed former World Bank economist Pedro Francke, seen as a moderating influence on his boss.

On the campaign trial, Castillo had said Peru’s mining and hydrocarbon riches — a mainstay of the economy — “must be nationalized,” while promising to boost public spending and to curb imports that threaten domestic industry.

Such schemes caused free-market defender Fujimori to portray Castillo as a communist who would turn Peru into a new Venezuela or North Korea.


But Castillo appears to have moderated his plans, and Francke told AFP last month their economic program was “nothing” like” that of Venezuela.

“We will not expropriate, we will not nationalize, we will not impose generalized price controls, we will not make any exchange control that prevents you from buying and selling dollars or taking dollars out of the country,” Francke said.

“The autonomy of the Central Reserve Bank will be maintained, it is important in Peru that we have had low inflation,” he added, though there was a need for “higher taxes on big companies and mines.”

– ‘Leftist path’ –

Risk consultancy Eurasia in a recent notice to clients noted a Castillo presidency would mark “a major shift from the economic policy framework that has been in place for decades.

“Moreover, without prior experience in public office, a five-year government plan, or a strong team by his side, Castillo’s economic policy will probably be quite erratic and could become more radical as his term advances.”

Others point out Castillo will not have free rein and will face challenges to his program in a fragmented congress where his Peru Libre (Free Peru) party holds 37 of the 130 seats.

But if he fails to deliver, this too, could have consequences.

“He will have to see how many promises he can deliver on because .. with the expectations of the population (raised) during the campaign, he could have a big problem,” said Nopo.

There is also the risk that “clashes between Castillo and Congress weaken political stability,” said a recent assessment by Fitch Solutions.

Added Eurasia: “Threats to social and government stability will be significant, with the consequent risks of protests and impeachment efforts against Castillo.”

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Student Loan Cancellation Won’t Stimulate The Economy, According To New Research – Forbes



Student loan cancellation won’t stimulate the economy, according to new research.

Here’s what you need to know.

Student Loans

Supporters of student loan cancellation say student loan cancellation is a perfect financial stimulus: cancel $50,000 of student loans, and student loan borrowers will have more money to spend on local businesses. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have been vocal supporters of student loan cancellation as a means of financial stimulus. However, according to new research from the Committee for a Reponsible Budget, both total student loan cancellation and partial student loan cancellation will have a minimal effect on the economy. Here’s what they found:

  • Total student loan cancellation: only $0.08 to $0.23 of economic activity for every dollar of student loans cancelled.
  • Partial student loan cancellation: $0.02 to $0.27 of economic activity for every dollar of student loans cancelled.
  • Student loan cancellation of $10,000: results in an economic multiplier of only 0.13x.
  • Student loan cancellation of $50,000: results in an economic multiplier of 0.10x.

This means that if you cancel all student loans, then only 8% to 23% of the amount of student loan debt cancelled would stimulate the economy. If you cancel some student loans, then only 2% to 27% of the amount of student loan debt cancelled would stimulate the economy.

3 Reasons student loan cancellation doesn’t stimulate the economy:

  1. Due to income-driven repayment plans, student loan cancellation has minimal impact on impact cash flow;
  2. Student loan cancellation is poorly targeted to those less likely to spend; and
  3. The current state of the macroeconomy given supply and demand constraints

Here are the details.

Student loan cancellation and stimulus

Here’s how much partial student loan cancellation would impact the economy, according to research:

Student loan cancellation: $10,000

  • completely eliminate student loans for 15 million borrowers
  • partially cancel student loans for 28 million would cost $210 to $280 billion.
  • would reduce annual student loan payments by $18 billion per year (after temporary student loan forbearance ends)
  • even after three years, the savings would be $54 billion, which is about 20% – 25% of the amount of student loans cancelled

Student loan cancellation: $50,000

  • completely eliminate student loans for 36 million borrowers
  • partially cancel student loans for 7 million would cost more than $950 billion.
  • would reduce annual student loan payments by $55 billion per year (after temporary student loan forbearance ends)
  • even after three years, the savings would be $165 billion, which is about 17% of the amount of student loans cancelled

Why student loan cancellation doesn’t really impact cash flow

According to the research, student loan cancellation doesn’t really impact cash flow. Here’s why:

  • $50,000 of student loan cancellation doesn’t mean that a student loan borrower now has $50,000 to spend in the economy.
  • Instead, a student loan borrower would save their student loan payment each month, which could range based on their student loan balance, but could be several hundred dollars (not $50,000).
  • Here’s a surprising statistic: nearly 50% of all student loan dollars are connected to non-repaying borrowers either in school, student loan delinquency, student loan forbearance (separate from the current temporary student loan forbearance ddue to the Covid-19 pandemic), student loan deferment or student loan default.
  • And among those student loan borrowers in student loan repayment, approximately 40% of the dollars come from income-driven repayment plans. Unless their student loan debt is completely or mostly cancelled, these student loan borrowers would continue to make student loan payments each month based on their income.
  • Almost 90% student loan borrowers in an income-driven repayment plan have student loan balances above $10,000, while approximately 40% have student loan balances over $50,000.

Biden has supported financial stimulus, but hasn’t cancelled student loan debt

President Joe Biden has been a proponent of stimulus to help Americans in the response to the Covid-19 pandemic. Through measures such as stimulus checks and enhanced unemployment benefits, Biden has championed providing direct checks to those most in need. The researchers found that “fiscal stimulus is most effective when it goes to those most likely to spend, such as individuals with low incomes or those who recently experienced a loss in income.” However, they argue that student debt cancellation does the exact opposite by distributing money mainly to those most likely to save and least likely to spend. How does student loan cancellation compare to stimulus checks and enhanced unemployment benefits? The researchers estimate savings from a student loan borrower having lower debt repayment will only be about 50% as effective at boosting demand as expanded unemployment benefits and 20% less effective than stimulus checks. “Given high levels of savings, massive stimulus in the pipeline, pent-up demand, supply constraints, inflation pressures, and expectations of a strong economic recovery, additional cash injected into the economy will have few places to go. To the extent that it leads to new spending – as opposed to saving – it is likely to result in additional inflation pressures (especially in the near term).”

As Biden and Congress debate the future of student loan cancellation, the good news is that Biden has cancelled $3 billion of student loans. It’s likely that Biden will continue to pursue targeted student loan cancellation, but there is no guarantee that there will be any wide-scale student loan cancellation. Therefore, make sure you have a clear strategy for student loan repayment. Here are some popular options:

Student Loans: More Reading

Is this a game changer for student loan cancellation?

Are you read to pay student loans again? Elizabeth Warren says your student loan servicer isn’t ready

Biden has now cancelled $40 billion of student loans this way

Biden may extend the student loan relief beyond September 30, 2021, even if unemployment benefits and the eviction moratorium end

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The rapid growth the U.S. economy has seen is about to hit a wall – CNBC



A National Park Service worker replaces a flag at the Washington Monument which reopened today following a six month closure due to COVID-19 safety measures, in Washington U.S., July 14, 2021.
Kevin Lemarque | Reuter

The U.S. economy is expected to post another roaring growth spurt in the second quarter, before a slow and steady dose of reality starts to sink in.

Gross domestic product is projected to accelerate 9.2% for the April-to-June period, according to a FactSet survey. The Commerce Department will release its first estimate for second-quarter GDP on Thursday.

In a pre-pandemic world, that would have put annualized growth at its fastest level since the second quarter of 1983. However, the current circumstances and the outsized policy response they generated make this merely the third straight quarter of GDP that sits well above the post-Great Recession trend.

Things are about to change, however.

The economy is creeping back toward normal, the open checkbook from Congress is about to get tighter, and millions of sidelined American workers will be returning to their jobs. That means a gradual reversion to the mean for an economy more used to growing closer to 2% than the much stronger levels it has turned in during the reopening.

“Growth has peaked, the economy will slow a bit in the second half of this year, then much more noticeably in the first half of 2022 as fiscal support fades,” said Mark Zandi, chief economist at Moody’s Analytics. “The contours of growth are going to be shaped largely by fiscal policy over the next 18 months. The tailwind just blows less strongly, and may stop altogether by this time next year.”

It’s been a long road getting here, but the economy has gotten very close to its pre-pandemic self.

In fact, according to a running gauge that Jefferies keeps, overall output is at 98.6% of its “normal” level before Covid-19 turned everything upside down. The firm uses a slew of indicators to measure then versus now, and finds that while some areas such as employment and air travel are lagging, retail and housing have helped push overall activity to just below the 2019 level, at 98.6%.

“When I look holistically at household income dynamics and balance sheets, I see a very, very positive situation, very healthy fundamentals, and it’s hard to be pessimistic on the outlook,” said Aneta Markowska, chief financial economist at Jefferies.

Indeed, household net worth totaled $136.9 trillion at the end of the first quarter, a 16% increase from its 2019 level, according to the Federal Reserve. At the same time, household debt payments compared with disposable personal income fell to 8.2%, a record low going back to 1980.

But much of that net worth has been driven by increases in financial assets such as stocks, and personal income has swelled due to government stimulus payments that are slowing and eventually will stop.

Demographics holding back growth

Keeping up such a rapid pace of growth will be difficult in an economy that has long been held back by an aging population and lackluster productivity. Those issues will be exacerbated by dwindling policy support as well as an ongoing battle against Covid-19 and its variants, though few economists expect widespread lockdowns and the plunge in activity that happened in early to mid-2020.

“What we see is an economy growing robustly above trend albeit at a slower pace through 2023,” said Joseph Brusuelas, chief economist at consulting firm RSM. “Absent any productivity-enhancing policy support, we eventually will move back to trend because there’s not much we can do about the demographic headwinds, which will eventually drag growth back to the long-term trend.”

But there also are shorter-term headwinds that should temper those gaudy growth numbers.

An aggressive spurt of inflation brought on by supply constraints and huge demand related to the economic reopening will hit output. While many economists, including those at the Federal Reserve, are willing to write off the inflation as temporary with soaring used auto and truck prices contributing a large component, officials including Treasury Secretary Janet Yellen warned that the price increases are likely to continue for at least several months.

Gasoline prices at a Royal Dutch Shell Plc gas station in San Francisco, California, U.S., on Wednesday, July 7, 2021.
David Paul Morris | Bloomberg | Getty Images

Inflation combined with fading fiscal support also then will serve as a growth limit.

“The economy is facing supply constraints with residential investment likely a drag and the change in inventories remaining negative,” Bank of America U.S. economist Alexander Lin said in a note. “Looking ahead, this is likely the peak, with growth cooling in the coming quarters.”

Capital Economics forecasts a below-consensus 8% GDP figure for the second quarter, then a drop to 3.5% in the following period.

“With surging prices squeezing real incomes we suspect the pace of monthly growth will remain lackluster, setting the stage for a sharp slowdown in consumption and GDP growth in the third quarter,” wrote Paul Ashworth, chief North American economist at Capital Economics.

The pandemic is another wild card.

Cases of the delta variant are spiking in a handful of states, and health officials worry that the U.S. could face a surge like the one hitting some European and Asian countries. Few if any economists expect another wave of lockdowns or similar constraints in the U.S., but pressure from abroad could hit domestic growth.

“Export platforms like Vietnam are being locked down now,” Brusuelas said. “Vietnam is becoming a more important cog in the global supply chain, so we are watching that closely.

Brusuelas added that the negotiations over the debt ceiling also could shake up things in the U.S. Yellen said Friday that extraordinary measures the U.S. may need to take to continue paying its debts could hit troubles as soon as October.

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Restarting a sustainable, export-oriented economy – Business in Vancouver



Clean, sustainable products and services will be key to B.C.’s economic recovery | Chung Chow

This column was originally published in BIV Magazine‘s Trade issue.

As B.C. looks to restart its economy, the demand for our province’s clean and sustainable products and services is surging across a variety of sectors, demonstrating the key role that trade will play in our economic recovery.

Exports increased 24% year-to-date for April – that’s up $3 billion over the same time last year. It’s a big boost for the provincial economy, with a majority of our exports being commodities in great demand. Our stringent environmental standards in wood exports, burgeoning clean tech sector and high standards in labour protections mean that when other markets buy from us, they’re also contributing to a cleaner and more socially responsible global economy.

B.C. was committed to international trade long before the pandemic. It creates new opportunities for businesses, and more importantly, it creates good jobs and prosperity for people in B.C. When businesses export, they are more resilient. Access to more markets means they have a more diverse customer base and aren’t as impacted by fluctuations in their local economies.

We have a program perfectly designed to help small businesses get their goods and services to new markets. It’s called Export Navigator. This program offers businesses free expert guidance on exporting. Businesses get connected with an expert advisor who will help “navigate” them through the export process. It’s hugely beneficial, helping businesses reach new customers for the first time and making the process a lot easier along the way.

We continue to support B.C. businesses in other ways as well. For example, we developed a series of grant programs to meet their unique needs, making over half a billion dollars available in direct supports. The Launch Online program helps businesses improve their online presence to attract and keep customers and meet demand as online shopping hit new heights during the pandemic. The Supply Chain and Value-Added Manufacturing grant helps B.C.-based manufacturers in the aerospace, shipbuilding, food processing and forestry sectors recover and grow, supporting them to seek efficiencies to continually keep goods flowing into the marketplace.

From natural resources and agrifoods to manufactured goods and high-tech goods and services, B.C. has a lot to offer to the world. We are a responsible, low-carbon producer of natural resources and manufactured goods, and we are working hard to make sustainability a larger part of B.C.’s brand and our global competitive advantage. Our priority is to help B.C.-based businesses start up, scale up, access global markets and succeed in the highly competitive world marketplace. The more we export, the more new dollars we bring into B.C. and generate revenue that supports government investments in health care, education and critical infrastructure.

We stand behind the high-quality goods that B.C. has to offer to the world. Globally, companies large and small are increasingly applying environmental, social and governance filters to their investment decisions. We are committed to growing our economy in a sustainable way, and are working on a new trade diversification strategy that will provide us with the opportunity to develop an updated, forward-looking and ambitious approach that aligns closely with these principles, while ensuring that our exporting businesses are maximizing the opportunities afforded to them through Canada’s existing free trade agreements. Our recently announced Mass Timber Demonstration Program is an example of how we are advancing technologies that can showcase to the world the possibilities of building with a more sustainable and environmentally friendly product from B.C.

The pandemic leaves behind many lessons and creates a once-in-a-generation opportunity for B.C. to redefine itself. We know the pandemic is not impacting everyone equally, with women and visible minorities being disproportionately impacted. This is why we are committed to continuing to grow strong, robust industries that can provide good jobs for all of B.C.’s diverse populations.

Growth in trade will be a big part of our economic recovery, and as we transition through our restart plan, we will continue to engage with businesses, industry and key stakeholders to ensure we’re supporting their efforts to expand globally.

Our goal is to diversify our trade sectors to include not just our natural resources, but clean tech, high tech, agritech and advanced manufacturing. We need to support our exporters and encourage new exporters to expand our opportunities in global markets and strengthen our resilience.

We’re committed to invest in people and in businesses to restore economic growth and we are confident that the entrepreneurial spirit of B.C.’s business community will rise to the challenge as we work together to build a better future with meaningful jobs and a strong, sustainable economy for all. 

Ravi Kahlon is B.C.’s minister of jobs, economic recovery and innovation. George Chow is the province’s minister of state for trade.

This column was originally published in the July 2021 issue of BIV Magazine. The digital magazine can be read in full here.

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