As images from the conflict in Ukraine attest, war can completely change the rules of economics.
Suddenly people who only a month ago were worried about keeping their jobs and paying their mortgages are on the move, some to the Polish border to escape shattered homes, some to risk their lives in battle.
By definition it is the unexpected that perturbs the world economy and the markets that are one of its real-time barometers.
As Canadian inflation hits new highs and the world’s most powerful central bank makes its first attempt to restrain an explosion of rising prices, even a continent away, Russia’s invasion of Ukraine has triggered an unpredictable alteration in what we thought were the conventions of global economics.
Tragic human toll
“The human toll is tragic, the financial and economic implications for the global economy and the U.S. economy are highly uncertain,” is how Jerome Powell, chair of the U.S. Federal Reserve, began his address Wednesday as he announced the central bank would raise interest rates by one quarter of a percentage point.
That is the same increase announced by Tiff Macklem at the Bank of Canada two weeks ago. Of course Macklem’s small rate hike was too late to stop Wednesday’s rise in Canadian inflation which hit a 30-year high of 5.7 per cent.
As Powell said in his speech, most of the recent surge in inflation cannot be blamed on Russian President Vladimir Putin. The exception is gas price hikes caused by the war, which have already aggravated the latest Canadian rise.
But while its full effect has yet to show up in the statistics, Putin’s war is already pushing North American consumer prices higher than if the war had never happened.
Asked directly about the impact of sanctions on the U.S. dollar and its place as the default currency for world trade, Powell explicitly refused to address the question other than offering general support for sanctions and to say they were the remit of politicians. He said central bankers had only been technical advisors.
Watching for war’s ‘spillovers’
But Powell made it clear that the Russian invasion of Ukraine, and the world’s response, held both actual and potential implications for the U.S. economy and for its monetary policy.
“In addition to the effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy through trade and other channels,” said Powell.
There are increasing signs that the new European war has been the catalyst for a series of shifts in the global economy, of which even higher than expected inflation is only a single result.
A firefighter works in Kharkiv, Ukraine on Wednesday trying to keep flames from spreading. (Oleksandr Lapshyn/Reuters)
“The volatility in financial markets, particularly if sustained, could also affect credit conditions and affect the real economy,” said Powell.
The Federal Reserve chair said that while the central bank had to be aware of those potential challenges, his principle goal remained fighting domestic inflation with a stream of interest rate hikes over this year and next that is expected to take rates to 2.8 per cent by the end of 2023.
But with Europe facing its biggest war since the 1940s, there are plenty of unknowns.
“While we have pretty sophisticated economic models, none of them are going to give us the understanding of how prolonged or what the magnitude of the shock in Eastern Europe is going to be,” said Frances Donald, global chief economist and strategist at Manulife Investment Management.
Contracting economies
So far analysts at Reuters and Bloomberg say the economies of Ukraine and Russia will be the worst affected by the war, though any figures can only be estimates.
An International Monetary Fund report released Monday said the Ukraine economy would contract 10 per cent in 2022 which is more than 13 per cent below what it was expected to achieve had there been no invasion, although in a worst case the decline could be more like 35 per cent.
In the case of Russia, the impact of sanctions including the collapse of the ruble and the country’s stock market could lead to a GDP decline of about 9 per cent in 2022 according to Bloomberg Economics although other estimates range from a decline of 15 per cent to a drop of 7 per cent.
WATCH | Russian shells hit Kyiv apartment buildings:
New Russian bombardment hits Kyiv, striking 2 apartment blocks
22 hours ago
Duration 6:54
Shrapnel from an artillery shell slammed into a 12-storey apartment building in central Kyiv, obliterating the top floor, according to a statement and images released by the Kyiv emergencies agency. The neighbouring building was also damaged. 6:54
Exactly how that will affect the rest of the world is even less clear. Despite its enormous military and a population of nearly 150 million people, recent IMF figures indicate Russia’s pre-war economy was already smaller than that of Canada or South Korea.
Denmark has forecast a slowdown in GDP from 3.1 to 2.1 per cent that the central bank attributes to Putin’s war as fuel costs feed into inflation. German car companies have already been affected by the loss of steel from Ukraine.
So long as it is moderate, Powell indicated that a slowdown in the global economy would not necessarily be a bad thing as the U.S. faced an overheated job market where there are “1.7 job openings for every unemployed person,” he said.
With such a hot economy Powell told reporters that the central bank had no expectations of a recession. But as he said, that does not rule out further financial shocks.
Complicated linkages
A falling out with China could create a worse disruption but this week Chinese Foreign Minister Wang Yi is reported to have told his Spanish counterpart China was anxious to avoid further damage to the global economy.
The global economy is linked in complicated ways that may not be obvious at first. For example, a default on Russian bonds in 1998 resulted in a meltdown of Long Term Capital Management, an aggressive hedge fund that some say could have caused a collapse in U.S. markets if it had been forced to sell off its assets to cover losses.
At the time, the Federal Reserve under Alan Greenspan slashed interest rates to prop up markets in what then became an all-purpose contrivance for fixing problems, and which may have helped contribute to the low, low rates we have today.
Now, with interest rates already near zero and inflation soaring to near eight per cent, that is a tool Powell would have trouble using again.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.
The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.
Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.
Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.
Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.
In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.
This report by The Canadian Press was first published Nov. 5, 2024.
