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Shock Waves Hit the Global Economy, Posing Grave Risk to Europe – The New York Times

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The threat to Europe’s industrial might and living standards is particularly acute as policymakers race to decouple the continent from Russia’s power sources.

Russia’s invasion of Ukraine and the continuing effects of the pandemic have hobbled countries around the globe, but the relentless series of crises has hit Europe the hardest, causing the steepest jump in energy prices, some of the highest inflation rates and the biggest risk of recession.

The fallout from the war is menacing the continent with what some fear could become its most challenging economic and financial crisis in decades.

While growth is slowing worldwide, “in Europe it’s altogether more serious because it’s driven by a more fundamental deterioration,” said Neil Shearing, group chief economist at Capital Economics. Real incomes and living standards are falling, he added. “Europe and Britain are just worse off.”

Several countries, including Germany, the region’s largest economy, built up a decades-long dependence on Russian energy. The eightfold increase in natural gas prices since the war began presents a historic threat to Europe’s industrial might, living standards, and social peace and cohesion. Plans for factory closings, rolling blackouts and rationing are being drawn up in case of severe shortages this winter.

The risk of sinking incomes, growing inequality and rising social tensions could lead “not only to a fractured society but a fractured world,” said Ian Goldin, a professor of globalization and development at Oxford University. “We haven’t faced anything like this since the 1970s, and it’s not ending soon.”

Other regions of the world are also being squeezed, although some of the causes — and prospects — differ.

Hannibal Hanschke/EPA, via Shutterstock

Higher interest rates, which are being deployed aggressively to quell inflation, are trimming consumer spending and growth in the United States. Still, the American labor market remains strong, and the economy is moving forward.

China, a powerful engine of global growth and a major market for European exports like cars, machinery and food, is facing its own set of problems. Beijing’s policy of continuing to freeze all activity during Covid-19 outbreaks has repeatedly paralyzed large swaths of the economy and added to worldwide supply chain disruptions. In the last few weeks alone, dozens of cities and more than 300 million people have been under full or partial lockdowns. Extreme heat and drought have hamstrung hydropower generation, forcing additional factory closings and rolling blackouts.

A troubled real estate market has added to the economic instability in China. Hundreds of thousands of people are refusing to pay their mortgages because they have lost confidence that developers will ever deliver their unfinished housing units. Trade with the rest of the world took a hit in August, and overall economic growth, although likely to outrun rates in the United States and Europe, looks as if it will slip to its slowest pace in a decade this year. The prospect has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.

“The global economy is undoubtedly slowing,” said Gregory Daco, chief economist at the global consulting firm EY- Parthenon, but it’s “happening at different speeds.”

In other parts of the world, countries that are able to supply vital materials and goods — particularly energy producers in the Middle East and North Africa — are seeing windfall gains.

And India and Indonesia are growing at unexpectedly fast paces as domestic demand increases and multinational companies look to vary their supply chains. Vietnam, too, is benefiting as manufacturers switch operations to its shores.

Alex Plavevski/EPA, via Shutterstock

Even so, China, the eurozone and the United States together account for roughly two-thirds of the planet’s economic activity, and if those powerhouses all slow down, it will be hard for any country to remain insulated from the fallout.

Poorer people, who spend much more of their total incomes on food and energy, are being hit hardest.

In Europe, anxiety about frigid living rooms, shuttered production lines and head-spinning energy bills this winter ratcheted up this week after Gazprom, Russia’s state-owned energy company, declared it would not resume the flow of natural gas through its Nord Stream 1 pipeline until Europe lifted Ukraine-related sanctions.

Daily average electricity prices in Western Europe have reached record levels, according to Rystad Energy, surging past 600 euros ($599) per megawatt-hour in Germany and €700 in France, with peak-hour rates as high as €1,500.

In the Czech Republic, roughly 70,000 angry protesters, many with links to far-right groups, gathered in Wenceslas Square in Prague this past weekend to demonstrate against soaring energy bills.

The German, French and Finnish governments have already stepped in to save domestic power companies from bankruptcy. Even so, Uniper, which is based in Germany and one of Europe’s largest natural gas buyers and suppliers, said last week that it was losing more than €100 million a day because of the rise in prices.

Jade Gao/Agence France-Presse — Getty Images

The European Commission, which has scheduled an emergency meeting of energy ministers for Friday, is calling for a cap on wholesale gas prices and an overhaul of how electricity is priced. And in recent days, Germany, Sweden, France and Britain all announced sweeping billion-dollar relief programs to ease the strain on households and businesses, along with rationing and conservation plans.

The cost of all these measures would be enormous, at a time when government debt levels are already staggering. The worry about perilously high debt prompted the International Monetary Fund this week to issue a proposal to reform the European Union’s framework for government public spending and deficits.

Still, a pitiless and unyielding reality remains: a lack of energy that countries can afford.

At current prices, there is simply not enough to produce the steel, lumber, microchips, glass, cotton, plastic, chemicals and electricity that go into making the food, home heat, garage doors, tampons, bicycles, baby formula, wine glasses and more that consumers want.

The root of the shortage predates the Ukraine war.

Commodity prices started rising in 2020 as countries began emerging from pandemic restrictions, noted Sven Smit, a senior partner at the consulting firm McKinsey & Company. In the United States alone, consumers were, in effect, buying $1 trillion more goods than expected, based on spending patterns before coronavirus hit.

And the sudden switch in spending on products like new kitchen tiles and cars rather than services like restaurant dining and entertainment added to the problem because more energy and materials are needed to make them.

Martin Divisek/EPA, via Shutterstock

There is a “depleted supply chain,” more than a broken one, Mr. Smit said. “This is a physical crisis rather than a psychological crisis,” which is different from those that most people remember.

In the past, “you got scared of something, you stopped spending, and then you got more comfortable and spending came back,” Mr. Smit said. “That’s not what’s happening right now. To solve this puzzle, we have to restore supply.”

That puzzle is complicated by the need to produce energy that not only is quickly available and affordable, but also won’t aggravate the calamitous climate change already endangering the planet.

Achieving that goal will take years, rather than months.

In the short term, a limit on energy prices could offer struggling households and businesses relief, but economists are concerned that caps blunt the incentive to reduce energy consumption — the chief goal in a world of shortages.

Central banks in the West are expected to keep raising interest rates to make borrowing more expensive and force down inflation. On Thursday, the European Central Bank raised interest rates by three-quarters of a point, matching its biggest increase ever. The U.S. Federal Reserve is likely to do the same when it meets this month. The Bank of England has taken a similar position.

The worry is that the vigorous push to bring down prices will plunge economies into recessions. Higher interest rates alone won’t bring down the price of oil and gas — except by crashing economies so much that demand is severely reduced. Many analysts are already predicting a recession in Germany, Italy and the rest of the eurozone before the end of the year. For poor and emerging countries, higher interest rates mean more debt and less money to spend on the most vulnerable.

“I think we’re living through the biggest development disaster in history, with more people being pushed more quickly into dire poverty than has every happened before,” said Mr. Goldin, the Oxford professor. “It’s a particularly perilous time for the world economy.”

Dia Takacsova for The New York Times

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TSX slumps as oil falls below $80 and economic gloom settles in – CBC News

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Canada’s benchmark stock index dropped heavily on Friday as prospects of a global recession cause investors to sell first and ask questions later.

The S&P/TSX Composite Index was off by more than 520 points or 2.75 per cent to close at 18,480, dragged down by a plunge in the price of oil. That’s the lowest level for the benchmark Canadian stock index since July.

The benchmark price of crude oil in North America lost almost $5 to close at $79.13 a barrel, its lowest price since January. The catalyst for oil’s decline seems to have been central banks signaling this week that they are so committed to reining in inflation that they are willing to create a recession to achieve it.

The U.S. Federal Reserve hiked its benchmark interest rate on Wednesday, and nine other countries around the world followed suit the next day. That will help bring down inflation, but it will likely come at great cost to the economy.

“Clearly what they are saying is they are so determined to bring inflation down that they are going to bring down the economy in the process,” said John Zecher, the founder of Toronto-based money manager J Zechner & Associates. “That’s the way the market is reading it … They aren’t going to stop until the economy turns down.”

Oil price down to lowest since January

A recession would lead to much less demand for energy, which is why oil sold off. About a fifth of the companies on the TSX are in the energy sector, and they were among the biggest losers Friday. Shares in Suncor, Cenovus, MEG Energy and Crescent Point all lost more than eight per cent on the day.

More and more economic indicators are starting to suggest Canada’s economy either already has derailed or is about to. Employment numbers last week showed the economy has lost jobs for three months in a row, and retail sales data on Friday showed that Canadians are putting away their wallets once more.

Stock markets are responding to that gloom, and some analysts think there is a lot more pain to come.

“The lows that we saw recently in the summer months are going to be challenged in the next couple of days to weeks,” said Larry Berman, chief investment officer with Toronto-based money manager QWealth, in an interview.  “The market [isn’t] priced for what the central banks are going to do.”

The Canadian dollar dipped as low as 73.61 cents US, its lowest level in more than two years.

Shares in New York also sold off, with the Dow Jones Industrial Average closing down almost 500 points to 29,590 — its lowest level of the year.

“Over the next couple of weeks, long-term investors may hesitate buying into weakness,” said Edward Moya, an analyst with foreign exchange firm Oanda. “How far we go below the summer lows is anyone’s guess.”

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Powell Says Economy May Be Entering ‘New Normal’ After Pandemic – Yahoo Canada Finance

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(Bloomberg) — Federal Reserve Chair Jerome Powell said the US economy may be entering a “new normal” following disruptions from the Covid-19 pandemic.

“We continue to deal with an exceptionally unusual set of disruptions,” Powell told business and community leaders Friday at a Fed Listens event in Washington. “As policy makers we’re committed to using our tools to help see the economy through what has been a uniquely challenging period.”

In his brief welcoming marks, Powell didn’t discuss the outlook for interest rates or offer more specifics on the economic outlook. All seven of the Board’s governors were present for the panel with Philip Jefferson and Lisa Cook making public comments in their roles as Fed officials for the first time.

Fed officials heard a consistent message that shortages and scarcity were still afflicting businesses along with high labor turnover. Speaking about the small- and medium-sized companies they consult with, Cara Walton, for Harbour Results in Southfield, Michigan, said her clients “can’t find people,” and when they do find them, turnover is high.

US central bankers raised their benchmark lending rate by three quarters of a percentage points this week for a third straight time — the most aggressive pace of tightening seen since the Fed battled inflation back in the 1980s.

Powell and his colleagues are moving rapidly to reduce the highest inflation in nearly 40 years after being slow to spot the threat of broadening price pressures. Critics have slammed them for that error, although inflation has also been worsened by Russia’s invasion of Ukraine, which boosted food and energy prices around the world.

Fed Vice Chair Lael Brainard, speaking later during the event when the panel considered how families are adapting to the post-pandemic economy, noted that price pressures were hitting the most vulnerable particularly hard.

“We have seen high wage growth among the lowest income workers but looking overall, wages haven’t kept up with inflation and inflation is very high,” she said. “If we look at who bares the burden, everybody is affected by high inflation but of course it puts special burdens on lower income families as well as on people with fixed incomes.”

US consumer prices rose 8.3% in the 12 months through August and officials have vowed to cool them even if that means causing harm to the US economy and its workers.

Officials couch this as an effort to slow excess demand and put the labor market back into “balance” — a euphemism that glosses over the fact many people could lose their jobs in the process. The labor market has so far remained strong, with unemployment at 3.7%, but policy makers this week forecast that would rise to around 4.4% next year as they continue to raise interest rates.

Fed Listens events have been held around the US since 2019 as the central bank sought public input on a review of its approach to monetary policy. That overhaul was completed in 2021 but the Fed has kept them going to maintain public engagement at a time when its actions remain front-page news.

In closing, Powell thanked the panelists for sharing their experiences of the post-pandemic economy.

“We get to spend a lot of time with data, here at the Fed. But I personally would say I need to hear narratives, I need to hear stories, about what’s really going on out there for it all to make sense,” he said. “We all learned a lot from you today.”

(Adds comment from closing remark from Powell in final paragraph.)

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.

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Global Economy Headed Into Recession – Forbes

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The global economic outlook is deteriorating due to inflation-fighting efforts by central banks, the war between Russia and Ukraine, and China’s prioritization of political control over economic growth. A global recession is likely, with at least slower economic growth virtually certain.

People who have followed my work for years often say that I’m an optimist, and usually I am. Right now, though, the weight of evidence points to a slowing world economy.

Just as the Federal Reserve has hiked interest rates in the U.S., many central banks around the world are tightening monetary policy. The Council on Foreign Relations publishes a Global Monetary Policy Tracker which, as of August 2022, shows tightening among most of the 54 central banks that they track.

Specifically, the European Central Bank has increased its policy rate and signaled more increases are likely in the coming months. So have the Bank of England and the Bank of Canada. Other tightening countries include Australia, India, and many in Latin America. The only major countries easing monetary policy are Russia and China. The global tightening is likely to slow economic growth around the world and lead to recession in some countries.

The tightening is not a mistake, but in most cases it’s coming too late, which means more economic damage than it had begun earliers.

Europe has the additional challenge of tight energy. Their dependence on Russian energy has increased in the past decade from 25% of total gas demand in 2009 to 32% in 2021.

In recent weeks the European Union announced a plan to cap the price paid for Russian natural gas, and President Putin threatened to further restrict supplies of energy to Europe. Rationing schemes are under discussion, electricity prices have soared, and energy-intensive industries are shutting down some of their European operations. The likely result, barring some quick resolution, will be a full-blown European recession this winter.

China’s economy is weakening, as I’ve detailed recently. President Xi Jinping has prioritized political and ideological control over economic growth, plus pursued a zero-Covid policy that has shut down portions of the economy. Serious western analysts are discussing the possibility of a Chinese invasion of Taiwan, a blockade, or at least much more pressure on Taiwan to accept mainland laws and a puppet leader. The odds of actual shooting are probably low, but the consequences are very high, justifying serious contingency planning.

The Russian and Chinese issues are leading companies around the world to shorten and simplify their supply chains, reshoring in their home countries when possible. This will be costly, effectively reducing global productive capacity. Change will come slowly, and it’s necessary given international tensions, but the changes will reduce economic production around the world..

Commodity prices are usually a good gauge of current sentiments about future global economic growth. As this article is written, oil prices have dropped recently despite the problems with Russian energy deliveries and a drop in OPEC production.

Copper prices have also fallen in recent weeks. Copper is another good indicator of expectations about economic growth.

In the positive side of the ledger, Canada and Mexico, both large export markets for the United States, are less sensitive to these global economic headwinds.

How bad will the global slump be? Probably not as calamitous as the 2008-09 financial crisis, but certainly worse than the minor cycles we’ve seen. And if shooting breaks out over Taiwan, then economic disaster will befall the world for a few years.

Business contingency planning for a global slump should recognize the interest sensitive portion of the risk. Monetary tightening tends to cut construction, first residential and later non-residential, as well as business capital spending and big-ticket consumer spending. Companies selling into those industries will be most vulnerable.

Companies trading with Europe should be worried. Primary concerns would be sales of goods and services to energy-intensive businesses in Europe, as they may have to suspend operations so that homes can be heated in the winter. Discretionary consumer spending will also be reduced. Businesses reliant on materials from European manufacturers should consider possible supply chain problems resulting from the energy crunch.

Businesses selling to China can expect lower growth, perhaps even a decline in some sectors such as building materials. Whereas the monetary policy impacts will be sharp but relatively brief, China’s economic slump will be gradual and long-term, at least so long as Xi Jinping’s policies are in effect.

Organizations doing business with China, Taiwan and maybe even their close neighbors must do contingency planning for conflict. No one particular scenario seems to be hugely more likely than the others, so multiple possibilities should be considered.

Finally, every major change brings opportunities for growth for a few businesses that are creative, far-sighted and bold. Being open to growth opportunities in changing times will pay dividends in the eventual upturn.

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