Nobel Prize-winning economist Paul Krugman speaks at the Challenges of Job-Rich and Inclusive Growth … [+] – Session 2: Public debt, public investment, and growth talk at George Washington University in Washington,DC on October 8, 2014 at the start of the annual IMF/World Bank meetings. AFP PHOTO/Nicholas KAMM (Photo credit should read NICHOLAS KAMM/AFP via Getty Images)
AFP via Getty Images
As several countries and some U.S. states tiptoe into “reopening the economy” ― as the popular expression goes ― epidemiologists have looked on, some with trepidation, others with dismay.
Governments are faced with a punishing Sophie’s Choice: Do you risk the safety and possibility of sacrificing more lives or do you sacrifice the health of the economy? Reopen the economy too soon and you risk triggering a new wave of infections and possible deaths. Keep the economy shut for too long in hopes of squashing transmission and you infect the economy with its own variety of serious illness.
The economy, like a person, can get sick. What we don’t know is just how long and how severe it will suffer.
McKinsey sought to answer this question in a report outlining numerous recovery scenarios, as Andrew Ross Sorkin covered in DealBook back in early April, “McKinsey has laid out nine recovery scenarios with a letter spaghetti of V’s, U’s, L’s, W’s and other unidentifiable squiggles.”
The public has since (what else is there to do?) become well-versed with these Spaghettio Squiggles of graphs. For a while, there seemed to be bubbling hope for a quick-and-easy V-shaped recovery, where we bounce right back. The enduring lockdown has, unfortunately, been our wet blanket, dimming that hope with every passing day.
Reflecting the hope that recedes in the minds of many, Sorkin writes: “A ‘V-shaped’ recovery looks unlikely, according to most economists. The number crunchers at Berenberg think that it will take two years just to make up the ground lost after a steep plunge in the first half of 2020. A recent Deutsche Bank analysis looking ‘beyond the abyss’ reckons that, compared with pre-virus trend growth, the U.S. and European economies will be $2 trillion smaller by year end, and still $1 trillion smaller at the end of 2021.”
As a child of the Great Recession, the V-shaped recovery was never on my mind. The threat of its much more ominous L-shaped sibling loomed much larger, a scenario where the economy wouldn’t recover, but would suffer long-lasting symptoms, forever maimed by the unexpected external shock of a pandemic that appeared to sideswipe the world.
Will We Recover From The Unemployment Spike?
The meteoric rise in unemployment has been a big cause for concern. In the United States, unemployment is teetering today around 15%. Some even speculate that it could be hovering closer to 20%, levels dangerously comparable to those of the Great Depression.
But even the Great Recession of 2008 wasn’t so long ago that the lingering psychological effects of joblessness make many ask can we come back from this and if so, when?
Just today, reports by economists cited in the New York Times estimate that “42 percent of recent layoffs will result in permanent job loss.”
But I am of a different opinion. In his newsletter in mid May, Paul Krugman looked at indexed employment growth in recoveries. The emerging graph showed two types of recoveries.
“What you see is that before 1990 we tended to have ‘morning in America’ recoveries, in which jobs came soaring back. Since then, however, we’ve had extended ‘jobless recoveries,’ in which G.D.P. is growing but it takes a long time for the jobs to come back…[F]ast recoveries followed recessions caused by high interest rates, imposed by the Federal Reserve to curb inflation; once the Fed relented, the economy easily sprang back. Later recessions have been caused, instead, by private-sector overreach: the commercial real estate bubble of the 1980s, the tech bubble of the 1990s. These were much harder to cure…
“Covid-19 is, in some ways, like the spike in interest rates that generated the 1981-1982 recession. It’s something imposed on the economy from outside, as it were, rather than the result of private-sector excess, so you’d expect fast recovery once the outside shock recedes.”
The takeaway according to Krugman, an argument I agree with, is we will see a recovery. We won’t be branded this time around with a dreaded ‘L’. Or at least there’s a good chance we won’t…if we put the right policies in place.
But, of course, there is no guarantee. With the stunning lack of leadership in setting an effective response strategy, most notably in the United States, it leaves an uncomfortable amount of room for the recovery to still go astray.
“One can’t exclude the possibility of a ‘black swan of black swans’: structural damage to the economy, caused by a yearlong spread of the virus until a vaccine is widely available, combined with the lack of policy response to prevent widescale bankruptcies, unemployment, and a financial crisis,” according to McKinsey’s report.
An effective strategy is critical for recovery, but what?
A Strategy For Reopening
And this is where we bring back the epidemiologists as the protagonists of the story. The storyline dominating the headlines to date has been pitting economists against epidemiologists, as if the only strategies available to us are either to reopen the economy in its entirety or stay inside indefinitely.
But the countries that have kickstarted a reopening strategy, countries like Australia, Germany, and Denmark, have played somewhere in the middle. They didn’t swing the door wide open, they left the door ajar, allowing schools and small children to first wiggle their way through, leaving the door ever so slightly open for the next wave of small businesses.
Phased reopenings are in large part made possible by the measures put in place to prevent ― and if needed mitigate ― future outbreaks: consistent measures of rate of transmission, capacity limitations on office and retail spaces, enforced usage of masks in some cases, temperature checks, etc. The measures are by no means perfect, but cumulatively effective.
Figuring out how we’re going to make it from here until we have a vaccine is an overwhelming prospect. But figuring out how to make marginal improvements to make it from here to tomorrow is all we might need.
There is a classic writing adage from E.L. Doctorow: “Writing is like driving at night in the fog. You can only see as far as your headlights, but you can make the whole trip that way.”
So too, I would argue, with an effective strategy to reopen the economy. We may never know enough to develop a strategy which we know will work. We’ll likely stay in the dark until the vaccine arrives. But that doesn’t mean we have to remain idle for the foreseeable future.
That seems to be the bet some governments are making. Time will be the only arbiter to decide if they are right.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
