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Soaring commodity prices deal stagflation blow to world economy – Financial Post

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Policymakers may have to choose whether accelerating prices or weaker growth pose greater risk

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The world economy is facing a buildup in stagflationary forces as surging energy prices boost inflation and slow the recovery from the pandemic recession.

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Oil’s climbed to more than US$80 a barrel for the first time in three years, natural gas for October delivery traded at the costliest in seven years and the Bloomberg Commodity Spot Index rose to the highest level in a decade.

Food prices are also advancing, driven in part by crop failures in Brazil, with a benchmark UN index up 33 per cent over the past 12 months.

Rising costs for households and companies are hitting confidence while pushing inflation faster than economists had expected only a few months ago. That could put policymakers in the uncomfortable position of having to choose whether accelerating prices or weaker growth poses a greater risk.

The shock has already drawn comparisons with the mix of economic stagnation and oil-driven inflation spikes that dominated the 1970s. While many central bankers dismiss this as hyperbole, the concern is that more enduring price increases will feed into demand for higher pay, tipping the economy into a vicious cycle.

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“We’re seeing all of this inflation,” Supriya Menon, a strategist at Pictet & Cie. told Bloomberg TV. “Ultimately how does that get resolved? Part of the way it could get resolved is through demand destruction.”

Bloomberg Economics calculates that a 20 per cent increase in commodity price implies a transfer worth at least US$550 billion — roughly equivalent to Belgium’s annual output — from commodity consumers to those that produce the most. In dollar terms, the biggest losers may be China, India and Europe. Winners include Russia, Saudi Arabia and Australia.

Their SHOK model also suggests a US$10 increase in oil prices adds about 0.2 percentage point to annual inflation across the US, euro area and the U.K. A greater reliance on oil imports means the drag on growth is likely to be more significant in Britain and the monetary union as higher prices squeeze household real incomes.

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Sharp cuts in production across a range of energy-intensive industries in China are now expected to drag growth lower this year, with economists from Goldman Sachs Group Inc. to Morgan Stanley cutting forecasts.

In the U.K., consumer confidence fell in September at its sharpest pace since coronavirus lockdown rules were tightened almost a year ago as Britons brace for a looming income squeeze.

A sign reading 'Garage Closed For Fuel' outside a BP Plc petrol station in Loughborough, U.K.
A sign reading ‘Garage Closed For Fuel’ outside a BP Plc petrol station in Loughborough, U.K. Photo by Darren Staples/Bloomberg

In addition to a run on petrol stations following a shortage of drivers to deliver fuel, the U.K. along with much of Europe is suffering a surge in electricity and natural gas prices triggered by a post-lockdown demand surge and lower inventories left over from last season. That has undermined already fragile consumer sentiment.

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“There’s a limit to how many price shocks we can continue to describe as ‘one-offs,’” George Buckley at Nomura wrote in a report. “Higher energy prices often lead to lower confidence, particularly at a time when rising virus case numbers could yet scupper the nascent economic recovery.”

The latest bout of commodity-price surge has taken markets by surprise just as major central banks were starting to signal their intention to curtail stimulus.

“Will this renewed spike in energy costs mean central banks accelerate this,” said Jim Reid, global head of fundamental credit strategy at Deutsche Bank AG. “Or will it hit demand enough that it actually slows them down? This is an incredibly delicate and difficult period for central banks.”

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There’s a limit to how many price shocks we can continue to describe as ‘one-offs’

George Buckley, Nomura

Bank of England Governor Andrew Bailey highlighted the conundrum when he drew attention to the limits of monetary policy to deal with some of the factors causing higher consumer prices.

“The shocks that we are seeing are restricting supply in the economy relative to the recovery of demand,” he said Monday in speech. “This is important because monetary policy will not increase the supply of semi-conductor chips, it will not increase the amount of wind (no, really).”

Consumer confidence has also taken a hit in the U.S., where high prices depressed buying conditions for household durables to their worst level since the 1980s.

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For advanced economies, the silver lining is that they’ve generally recovered from the recession better than anticipated a year ago.

Gross domestic product may return to its pre-crisis trajectory in 2022, according to forecasts this month from the Organization for Economic Cooperation and Development, a stronger outcome than it predicted in late 2020.

Many officials also still insist the current spike in prices will fade without the need for action.

European Central Bank President Christine Lagarde said Tuesday that the key challenge for policy makers is that “we do not overreact to transitory supply shocks that have no bearing on the medium term.”

Bloomberg.com

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$2T needed to reach 2050 target of net-zero economy: RBC – BNN

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OTTAWA — A new report says the country will need roughly $2 trillion to put the economy on a path to net-zero emissions in 30 years, including government spending on things like skills training and backstops to prod the necessary investments.

The report from RBC Economics estimates governments, businesses and communities would have to spend at least $60 billion annually to cut emissions by 75 per cent of current levels and reach the 2050 target of net zero.

Money will be needed to build out the electricity system to handle the expected rise in electric vehicles, which will also need some subsidies to get them off assembly lines and onto Canadian roads, the report says.

There will also have to be investment in retrofitting old buildings faster than current federal plans predict, retraining 100,000 workers with new skills for fast-growing green sectors, and skills training programs to add 200,000 more into the labour force by 2030.

The numbers add up to a massive effort to meet the Trudeau Liberals’ short-term and long-term promises on climate change, but one the Royal Bank report estimates is possible if the government eyes a few key areas.

It’s not about ideology, it’s about math. And we’ve done the math and said, OK, here is how we can get those numbers down towards zero, and this is what it is going to cost,” said John Stackhouse, senior vice-president in the office of the CEO at Royal Bank.We think that it’s doable. So let’s focus in a very kind of business-minded way on the key drivers of emissions change.”

Parliament approved legislation last spring that required the country to eliminate as many greenhouse gas emissions as possible, and capture whatever is left to get to net zero by 2050.
The Liberals haven’t outlined the course to the long-term goal, and won’t before a United Nations climate change conference, known as COP26, looming at the end of the month in Glasgow, Scotland.

The government has increased its emissions-reduction targets for 2030 as required by the climate agreement.

Internal government documents suggest the Liberals are acutely aware of the cost to shift the country to net zero and have looked to push banks and other private sector investors to help with funding and financing.

Finance Minister Chrystia Freeland’s officials wrote in a September 2020 briefing note that the country’s financial sector, including banks, will need to play a major role” to create a net-zero economy. The briefing note created ahead of Freeland’s meeting with bank CEOs also noted how their institutions needed to do more tofoster the right conditions to support the acceleration of sustainable investment.”

Unlocking some of the needed spending will require federal politicians to create new platforms to channel private investment into green endeavors that may be akin to the Canada Infrastructure Bank.

The Liberals created the agency in 2017 to use federal dollars as a way to entice funding from private-sector investors, but its efforts and existence have become highly politicized with vows from the NDP and Conservatives to dismantle it if either are elected to govern.

Stackhouse said the country needs organizations similar to the infrastructure bank that can be semi-autonomous in terms of investment selections, but subject to government oversight.

Whatever gets created to spur investment has to survive successive governments through to 2050, and should be depoliticized for a better chance of success, he said.

“This is a 30-year project. There will be different governments during those 30 years. So let’s create entities that can channel both public investment and crowd-in private investment to focus on the key strategic drivers,” Stackhouse said.

But the report also warns of moving too fast, too soon. If there was a sudden and severe decline in oil and gas production, government revenues would fall by about $8 billion annually, which the report says could hamper, not help, the transition.

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Minister of Finance to Release 2021 Ontario Economic Outlook and Fiscal Review on November 4 – Government of Ontario News

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Minister of Finance to Release 2021 Ontario Economic Outlook and Fiscal Review on November 4  Government of Ontario News



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U.S. Federal Reserve survey finds economy facing supply chain, other drags – The Globe and Mail

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Trucks transport cargo containers at the Port of Baltimore in Baltimore, Maryland. Supply bottlenecks and labor shortages have slowed U.S. economic growth and contributed to a sharp rise in prices, the Federal Reserve said Oct. 20, 2021.

BRENDAN SMIALOWSKI/AFP/Getty Images

The U.S. Federal Reserve reports that the economy faced a number of headwinds at the start of this month, ranging from supply chain disruptions and labour shortages to uncertainty about the Delta variant of COVID-19.

In its latest survey of business conditions around the U.S., the Fed said Wednesday that a majority of its 12 regions viewed consumer spending, the main driving force for the economy, as remaining positive despite the various speed bumps.

The report noted wide differences in performance, however. It noted that auto sales suffered because of constrained inventories resulting from problems obtaining critical semi-conductor components. Manufacturing, meanwhile, was growing either moderately or robustly depending on which Fed district was reporting.

“Outlook for near-term economic activity remained positive, overall, but some districts noted increased uncertainty and more cautious optimism than in previous months,” the Fed said in the report on business conditions around the country, known as the beige book.

The report, based on surveys of business contacts by the Fed’s 12 regional banks, will form the basis for discussion when central bank officials next meet on Nov. 2-3.

The Fed is widely expected to announce at that meeting that it will begin to reduce, or taper, its US$120-billion in monthly bond purchases starting either in November or December.

Those purchases have been designed to give the economy an extra boost by holding down long-term interest rates.

A move to trim the purchases is expected to be followed in the second half of next year with the first rate hikes. The Fed’s benchmark interest rate has been at an ultralow zero to 0.25 per cent since the COVID pandemic struck with force in the spring of 2020 but there are growing calls to begin removing its support in the face of rising price pressures this year.

The beige book found “significantly elevated” prices with widespread increases across industry sectors in large part because of supply chain bottlenecks.

Prices for steel, electronic components and shipping costs all “rose markedly” during the survey period, the report said.

Expectations for future price increases varied, the Fed report said, with some business contacts expecting prices to remain high or even increase further, while others expected prices to moderate over the next 12 months.

Fed board member Randall Quarles said in a speech Wednesday that he believes elevated inflation will start to “decline considerably next year from its currently very elevated rate.” That reflects his belief that the factors now disrupting the economy, such as supply bottlenecks, “appear likely to fade over time.”

The beige book report noted that while the demand for labour was high, job gains had been dampened by a low supply of workers, forcing many retail, hospitality and manufacturing companies to cut hours or production because they did not have enough employees.

“Firms reported high turnover as workers left for other jobs or retired,” the Fed report said. “Child-care issues and vaccine mandates were widely cited as contributing to the problem.”

In an effort to deal with the labour shortages, the Fed said many companies were offering more training to prospective workers and also boosting wages.

In addition to higher starting wages and increased pay to retain workers, companies reported offering signing and retention bonuses, flexible work schedules or increased vacation time as other incentives, the Fed survey found.

The Fed’s report was based on interviews conducted by the 12 regional banks on or before Oct. 8.

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