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Powell warns of severe, ongoing risks to the economy hours before Trump ends stimulus negotiations until after election – The Washington Post

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Federal Reserve Chair Jerome H. Powell warned Tuesday of ongoing risks to the economy and the consequences of insufficient support from policymakers, offering a sharp reminder that the economic recovery remains fragile, hours before President Trump said he was calling off stimulus relief negotiations until after the November election.

Speaking at the annual meeting of the National Association for Business Economics, Powell emphasized that a rise in coronavirus cases could weigh on economic activity. Public health officials have warned about an uptick of cases during the flu season this winter.

Powell compared the pandemic’s initial shock to “a case of a natural disaster hitting a healthy economy.” But he cautioned that if the pace of the recovery persistently slows down, the markings of a more typical economic downturn could bubble to the surface “as weakness feeds on weakness,” according to his speech.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said. “Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”

By some measures, the economy is recovering faster than expected. The unemployment rate dropped to 7.9 percent last month, and Fed officials have upgraded their estimates for how low the unemployment rate could fall over the next few years.

But those gains have not been equally shared, and the coronavirus recession is the most unequal in modern U.S. history. Low-wage, minority workers, Black women, Black men and mothers of school-age children are taking the longest time to find new jobs after the steep job losses in the spring, a Post analysis showed.

On Tuesday afternoon, Trump abruptly tweeted that he had instructed Treasury Secretary Steven Mnuchin to stop negotiating with House Speaker Nancy Pelosi on another relief package.

“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hard-working Americans and Small Business,” Trump tweeted.

In a statement after Trump’s tweets, Pelosi responded by saying that the White House was “rejecting the urgent warnings of Fed Chairman Powell today.”

In a question-and-answer session following his speech, Powell said now is not the time to worry about growing the federal debt. Instead, he said the priority should be to get relief to those who still need it.

“The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods,” Powell said.

Fed leaders say that the central bank’s effort to prop up the markets have helped stave off a deeper financial crisis. However, that has mostly helped those at the top who hold investments and retirement savings. Plus, the Fed’s asset purchases and interest rate reductions are more broad-based tools, which can’t target industries lagging behind in the economy.

Meanwhile, Fed’s lending programs to midsize businesses and local governments have been widely criticized for being too onerous and having limited reach. At the same time, many struggling companies can’t afford to go into more debt through a loan administered by the Fed. These companies could benefit from a direct grant, as was given out by the Paycheck Protection Program.

As more time passes, people with jobs in service industries — including restaurants, entertainment or travel — risk being permanently detached from the labor force, Powell said. Women who are more likely to bear child-care responsibilities are being forced into tough decisions about whether to stay in their jobs. And Powell noted that businesses that are forced to file for bankruptcy could hamper the broader recovery.

“That is a lot of the urgency we’ve been feeling — to do what we can as quickly as we can, so we can avoid those problems,” Powell said. “It’s now when we need to be working on that problem. Once you’re permanently laid off, it’s just more difficult. The data are really clear. It’s just more difficult to get back into the workforce.”

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Japan raises view on demand, but says economy in severe situation – SaltWire Network

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By Daniel Leussink

TOKYO (Reuters) – Japan’s government upgraded its view on consumption in a monthly report in October on stronger demand for electronics and higher travel spending, but cautioned broader economic conditions remained severe due to the coronavirus pandemic.

Authorities maintained their assessment that the world’s third-largest economy was showing signs of picking up from the fallout of COVID-19, which included a hit to Japan’s exports from a slump in global demand.

“The Japanese economy remains in a severe situation due to the novel coronavirus, but it is showing signs of picking up,” the government said in its October economic report.

The economy suffered its worst postwar contraction in the second quarter and analysts expect any rebound to be modest.

The government already has announced $2.2 trillion in economic stimulus in response to the virus crisis, and analysts polled by Reuters said it should compile a third extra budget for the current fiscal year.

The government said the impact from policy measures at home and improvement in economic activity overseas supported hopes for a continued rebound in the economy.

But it also flagged the risk that coronavirus infections could further weigh on domestic and overseas economies.

While many countries eased coronavirus restrictions earlier this year, some have had to resume curbs as they face a second wave of infections.

Japan’s government upgraded its view on private consumption for the first time in seven months due to more robust domestic demand for household electronics and higher nationwide hotel occupancy rates, especially in Hokkaido in northern Japan.

“It’s very encouraging that consumption is picking up,” Economy Minister Yasutoshi Nishimura said at a news conference after the cabinet approved the report.

“While capital spending, exports, production and employment are improving, it of course can’t be said (economic conditions) have completely recovered so the overall assessment was left unchanged,” he said.

The government stuck to its assessment that exports are picking up, according to the report.

But it downgraded its view on imports for the first time in seven months due to relatively weak shipments from the United States and the Asian region, a Cabinet Office official said.

The government’s assessment of the remaining components in the report remained unchanged.

(Reporting by Daniel Leussink; Editing by Ana Nicolaci da Costa and Kim Coghill)

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Japan raises view on demand, but says economy in severe situation – The Journal Pioneer

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By Daniel Leussink

TOKYO (Reuters) – Japan’s government upgraded its view on consumption in a monthly report in October on stronger demand for electronics and higher travel spending, but cautioned broader economic conditions remained severe due to the coronavirus pandemic.

Authorities maintained their assessment that the world’s third-largest economy was showing signs of picking up from the fallout of COVID-19, which included a hit to Japan’s exports from a slump in global demand.

“The Japanese economy remains in a severe situation due to the novel coronavirus, but it is showing signs of picking up,” the government said in its October economic report.

The economy suffered its worst postwar contraction in the second quarter and analysts expect any rebound to be modest.

The government already has announced $2.2 trillion in economic stimulus in response to the virus crisis, and analysts polled by Reuters said it should compile a third extra budget for the current fiscal year.

The government said the impact from policy measures at home and improvement in economic activity overseas supported hopes for a continued rebound in the economy.

But it also flagged the risk that coronavirus infections could further weigh on domestic and overseas economies.

While many countries eased coronavirus restrictions earlier this year, some have had to resume curbs as they face a second wave of infections.

Japan’s government upgraded its view on private consumption for the first time in seven months due to more robust domestic demand for household electronics and higher nationwide hotel occupancy rates, especially in Hokkaido in northern Japan.

“It’s very encouraging that consumption is picking up,” Economy Minister Yasutoshi Nishimura said at a news conference after the cabinet approved the report.

“While capital spending, exports, production and employment are improving, it of course can’t be said (economic conditions) have completely recovered so the overall assessment was left unchanged,” he said.

The government stuck to its assessment that exports are picking up, according to the report.

But it downgraded its view on imports for the first time in seven months due to relatively weak shipments from the United States and the Asian region, a Cabinet Office official said.

The government’s assessment of the remaining components in the report remained unchanged.

(Reporting by Daniel Leussink; Editing by Ana Nicolaci da Costa and Kim Coghill)

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Four ways to rescue the economy from the pandemic – The Conversation US

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In many western countries, COVID-19 infection rates are rising again. For some like the UK, France and Spain, it appears that the second wave of the pandemic is already here. The science also tells us that we may see a further upsurge in 2021. We do not know how effective early vaccines will be, and the rollout of vaccination programmes will be gradual.

A major issue for governments is the extent to which they have the fiscal firepower to protect jobs and economic activity. In the UK, the government’s spring and summer measures to protect businesses and jobs were expected to add £192 billion to the budget deficit, increasing the debt-to-GDP ratio from 85.4% in 2019 to 106.4% by March 2021.

These are the highest levels of debt since the early 1960s, and record budget deficit levels for peacetime. And yet the second wave of COVID-19 is going to strain the fiscal response much further. Chancellor Rishi Sunak’s newly revamped job support scheme and other measures to help businesses suffering under the latest restrictions will cost further billions.

To get a possible sense of where this might be heading, the Institute for Fiscal Studies in June modelled for a scenario in which there was a second wave of COVID-19 in the fourth quarter of 2020 and targeted regional lockdowns in the first half of 2021. It predicted that this would produce a budget deficit of over 20% of GDP this year – equivalent to second world war levels – and a debt-to-GDP ratio of nearly 120% by 2024-25.

If this is the kind of situation that many countries are now facing, what options are open to governments, and what key indicators should they focus on?

1. Growth first, sound money second

Governments must prioritise resuming economic growth from 2021 onwards. Put simply, this will require them to go easy on raising taxes or cutting spending quickly to stabilise the debt-to-GDP level. The fiscal correction which would be required to stabilise public finances will be less if a faster recovery can be engineered.

Governments must focus on public investments, particularly those aimed at boosting research and development spending and productivity growth. Many observers have recommended that governments put money into greening the economy. Not only will this stimulate growth in sectors for the future, it will also help address the climate crisis.

2. Build confidence

There needs to be a clear strategy to restore economic confidence, which is inextricably linked to people’s confidence in how the pandemic and its economic fallout is being managed. Even before the second wave took hold, it was clear that the economic recovery was slowing during the summer in many advanced economies.

The OECD reported in September that Google data on people’s shopping and recreational activity (as a proxy for what they are consuming from social businesses) had not returned to pre-pandemic levels. Order books in most advanced economies (except China) did not fully recover either.

Retail is still a hard sell (unless you’re Amazon).
EPA

It’s clear that consumer and business confidence cannot fully bounce back until uncertainty on the duration of the pandemic begins to subside. This is one reason why a number of economists have urged countries like the UK, where the economic hit has been worse, to focus on protecting employment. The furlough scheme in the UK should probably have been extended into this second wave, and the chancellor’s latest expansion of the job support scheme looks like a partial U-turn.

3. Test and trace still vital

Linked to this need to reduce uncertainty, there is no trade-off between health and the economy. Countries which have done better at keeping infection rates low have also done well at reducing the economic slump.

Some of that success with infections may have been good fortune, or early action in closing travel down quickly in early 2020. But countries such as Finland and Germany also had a strong capacity for testing and tracing and very quickly built it up further. Even at this stage, countries like the UK need to look at whether test and trace can be quickly improved, even at the cost of increased investment.

4. More targeted support

As the recovery begins to strengthen during 2021, a key conundrum for policymakers will be whether to prioritise stimulating aggregate demand in the economy, such as using tax cuts, or more targeted support measures for particular sectors or parts of the workforce.

It has recently been said that the recovery after a second wave might be more W-shaped as a whole, but K-shaped for individual sectors. In other words, while sectors like online retail and technology/software are booming, others like conventional retail, travel and hospitality will take a long time to recover.

Business support may need to switch to a more sectoral approach. The UK has done a little here with the “eat out to help out” scheme and now small monthly grants for firms in sectors like hospitality and leisure.

Hotel concierge talking to a taxi driver
Sectors like hospitality need more help than others.
EPA

Similarly, governments will have to focus their support on those in the labour market for whom the “scarring effects” of unemployment will be most serious. For instance, the crisis will particularly affect the job prospects of young people whose transition from education to work is being disrupted. At the recovery stage, support will therefore need to be switched to job creation – for example, by lowering employer national insurance contributions for employers creating new jobs.

We are entering a pivotal period in our fight against COVID-19. While there is no denying the challenges ahead, we are also better prepared and more knowledgeable than in March. Policymakers must use this to their advantage and craft an economic response which is comprehensive and nimble in equal measure.

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