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Tax cuts won't save the economy from recession if no one is leaving their homes – CNN

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But there’s little reason to think that traditional economic stimulus will solve what is first and foremost a health crisis.
And while it makes sense for Washington to craft a stimulus package, it would be unwise to consider it a cure-all for what ails the economy and financial markets. The extent of the economic pain will largely be dictated by the trajectory of the coronavirus.
“If the virus spreads to a worst-case scenario, where major chunks of the economy are shutting down, stimulus will have very limited impact. People will be too panicked to go out,” said Brian Gardner, director of Washington research at Keefe, Bruyette & Woods.
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That doesn’t mean Washington should sit on its hands. Economists said a carefully crafted, quickly enacted stimulus package could cushion the blow from the coronavirus.
A downturn is likely in the cards, period, says David Kelly, chief global strategist at JPMorgan Funds.
“There can be enough fiscal stimulus to shorten the recession, but not avert it,” Kelly said. “I just don’t think the money can get there in time.”

White Houses changes its tune on stimulus

Trump’s push for “dramatic” economic stimulus lifted the mood on Wall Street. The S&P 500 spiked 5% Tuesday, its best day since late 2018. Yet the broad market index remains deeply in the red for the year, reflecting serious fears that the coronavirus pandemic will spark a recession.
The idea for a major stimulus package is a recent one. Only last week, Larry Kudlow, Trump’s top economic adviser, pooh-poohed it.
“The story I’m trying to tell is a story of timely and targeted micro forms of assistance, not gargantuan across the board throw money at the problem, which has never worked in the past,” Kudlow told reporters then. “Cause we think we will get out of this within months.”
Yet the mayhem in markets has forced an about-face from the White House. Trump is now pushing Congress for a “dramatic” economic stimulus package.

80% chance of a recession?

Larry Summers thinks that reversal makes sense. The former US Treasury secretary told Bloomberg News there is an 80% chance of a US recession and called for a bold response from Washington.
“The risks are very much on the side of underdoing it,” Summers said.
The pressure is now on Trump to convince a deeply divided Congress to act quickly.
“If they pass something fast, it’s big and it restores confidence, we could get through this without actually having a recession,” said Mark Zandi, chief economist at Moody’s Analytics.
The goal of the stimulus package wouldn’t necessarily be to get people to fly or get on cruise ships. Instead, the aim would be to boost sentiment among households, especially ones living paycheck-to-paycheck.
“Once confidence goes, the economy goes with it,” Zandi said.

Payroll tax cut is a blunt instrument

Yet there are doubts about the wisdom of a payroll tax cut, Trump’s preferred stimulus weapon.
“A payroll tax cut won’t do you any good if you don’t have a job,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. “You have to address the underlying problem: quite a few communities are afraid to consume.”
Another issue is that some people might not even notice a boost to their pay.
“It’s a stealth tax cut. That’s what we learned in the [2008 financial] crisis. It didn’t have the juice in terms of sentiment,” said Zandi.
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And even those Americans who do notice it still might not be willing to venture into crowded restaurants or shopping malls.
“The effect cold be dampened by social distancing as the outbreak spreads,” Lewis Alexander, chief US economist at Nomura, wrote in a Tuesday note to clients.
Alexander added that there would likely be “negative payback” once the payroll tax cut expired. In other words, it could eventually hurt spending if consumers hold back on purchases when the tax returns.
During his lunch with Senate Republicans Tuesday, Trump floated the idea of a permanent payroll tax cut, several sources told CNN.

‘Politicians are in panic mode’

Rather than a payroll tax cut, Alexander said the most effective approach would target individuals affected the health crisis.
For instance, Zandi said Washington should cut checks directly to Americans whose incomes are disrupted by the virus. He said testing and other medical expenses linked to the coronavirus should be paid for by the federal government.
And given that elderly Americans are most at risk from coronavirus, Zandi said the federal government should increase the size of Social Security checks.
“That would have a huge impact on confidence. These are the people who will be hurt most by the virus. They are scared,” he said.
Unfortunately, a targeted response requires time and consideration, and “Washington just isn’t good at that, politicians are in panic mode,” said KBW’s Gardner. “That rush mentality may mean Washington can pass a package, but not the right one.”
Of course, there’s an even faster way Trump could boost the economy, one that doesn’t even require Congress: The president could ease pressure on overseas economies and multinational companies by immediately lifting tariffs on China and other countries around the world.
Such relief would amount to a $70 billion tax cut to businesses and households, Zandi said. “That’s the first thing I would do,” he added.
Still, some fear Washington is moving too late and too slowly to keep the longest economic expansion in US history alive.
“This is a worldwide supply and demand shock. It would take a miracle to avoid recession,” DiMartino Booth said.

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Australia central bank sees glimmer of hope as economy restarts after pandemic shutdown – The Guardian

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By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually re-opens during what is likely to be the worst quarter since the Great Depression.

The Reserve Bank of Australia (RBA) left rates at 0.25% at its monthly policy meeting in a widely expected decision, and said the “accommodative approach will be maintained as long as it is required.”

In a short post-meeting statement Governor Philip Lowe said the RBA was prepared to scale up government bond purchases if needed to ensure three-year yields held around 25 basis points.

Australia’s A$2 trillion ($1.4 trillion) economy is experiencing its biggest contraction since the 1930s in the current quarter but “it is possible that the depth of the downturn will be less than earlier expected,” Lowe added.

A significant decline in new infections, earlier-than-expected easing of restrictions and signs that hours worked stabilised in early May auger well for a recovery.

“There has also been a pick-up in some forms of consumer spending,” Lowe added.

States and territories across Australia have been easing social distancing regulations at differing paces in recent weeks, slowly ending a partial lockdown ordered in March, having largely contained the COVID-19 pandemic.

Australia, which has about 7,200 coronavirus cases, has not reported a death from the disease for more than a week.

The country’s success in containing the virus has sent the Aussie dollar soaring to five-month highs. Yet, that is leaning against monetary stimulus and won’t be welcome by the RBA.

The central bank made no mention of the exchange rate in the statement.

Highlighting the depth of the pandemic-driven global economic downturn and the fallout on Australia, many economists expect interest rates to remain at record lows for at least two more years.

Some are even predicting negative interest rates, though Lowe has ruled it out.

“While we have also become more optimistic about the outlook for the economy in recent weeks, we still expect the unemployment rate to jump to nearly 9% by Q3,” said Capital Economics analyst Marcel Thieliant.

He expects the central bank to announce an expansion of its government bond buying programme at its August policy meeting.

“And we only expect the unemployment rate to fall below 7% by 2022. That would leave it far above the RBA’s estimate of the natural rate of 4.5%, underlining that the RBA will miss its full employment mandate for years to come.”

Q1 GDP MAY DODGE CONTRACTION

Official data out earlier showed Australia boasted a record current account surplus last quarter as firm export prices and a fall in imports provided a timely boost to growth.

Other data out on Tuesday showed government spending also added to growth in the March quarter, while companies reported better sales and profits than many expected.

The figures led analysts to upgrade their forecast for first-quarter gross domestic product due Wednesday with some saying the economy might not have shrunk in the quarter as previously feared.

GDP had been forecast to show output contracted 0.3%, the first fall since early 2011.

“A small positive print cannot be ruled out,” said Su-Lin Ong, chief economist at RBC Capital Markets.

“But the likely collapse in activity in the current quarter and accompanying impact on the labour market…is a sharp and deep shock through the whole economy with likely lasting ramifications.”

(Reporting by Swati Pandey; Editing by Shri Navaratnam)

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Saskatchewan's economy was already shrinking before COVID – Regina Leader-Post

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New data from Statistics Canada suggests Saskatchewan was already in a “mild recession” last year, even before COVID-19 and the latest oil shock began pummelling the province.

Saskatchewan’s gross domestic product (GDP), a measure of total economic output, shrunk from $82.2 billion in 2018 to $81.5 billion 2019 after factoring in inflation. That’s a decrease of 0.8 per cent, the worst number of all the provinces. The only other province to see its economy shrink last year was Alberta, which faced a contraction of 0.6 per cent.

Joel Bruneau, head of the economics department at the University of Saskatchewan, said the new data shows the province wasn’t even managing to tread water before COVID hit.

“We’ve averaged negative growth over four quarters, so I would call it a mild recession,” he said.

The data shows that most of the hit to Saskatchewan in 2019 came from goods-producing industries, rather than the service sector. Industrial production was down, as was mining and quarrying, while the energy sector was basically flat.

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Lockdown or no lockdown, study shows COVID-19's economic destruction followed a similar path either way – National Post

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A group of economists studying how South Korea fought the COVID-19 outbreak without stay-at-home orders found that the country still experienced significant job losses in a pattern similar to that of countries that imposed lockdowns.

The study, from economists at Seoul’s Myongji University, Queen Mary University of London and St. Louis’s Washington University, also suggests that Canada’s slowly reopening economy may not go back entirely to normal as long as the virus is still prevalent.

“At most, half the job losses in the United States and the United Kingdom can be attributed to lockdowns,” the economists argue. Most job losses came from reduced hiring by businesses and a significant amount of non-participation in the labour market, rather than unemployment.

The same types of workers are feeling the effects, whether their country implemented a lockdown or not, the study claims. Less-educated workers, young people, workers in low-wage occupations and the self-employed lost were hardest hit, even when researchers controlled for industry effects that might over-represent these people.

“Lifting of lockdowns may lead to only modest recoveries in employment absent larger reductions in COVID-19 rates,” the paper warns.

The economists looked at labour-market effects in South Korea, where no lockdown was imposed, and compared the economic impact across different areas. One particularly bad local outbreak allowed the researchers to estimate that one additional infection for every thousand people causes a two to three per cent drop in local employment.

“The best way to revive the labour market is to eradicate the virus,” reads the paper by economists Sangmin Aum from the Myongji University in Seoul, Sang Yon Lee from Queen Mary University of London and Yongseok Shin from Washington University in St. Louis.

The study manages to untangle the many different factors in unemployment by concentrating on a localized outbreak in South Korea caused by a notorious event that spiked the transmission rate in the country.

In mid-February, the country had only 30 infections, but “Patient 31” attended a religious gathering in the city of Daegu. Ten days later, the country had more than 3,000 infections almost entirely clustered around Daegu. More than 60 per cent of them were traced back to that single gathering.

South Korea managed to quash the outbreak and maintains one of the lowest death rates in the world, mainly due to widespread testing, a robust contact-tracing regime and comparatively intrusive tracking measures, including monitoring quarantine-breakers with electronic wristbands.


People wearing masks walk at Myeongdong shopping district amid social distancing measures to avoid the spread of COVID-19, in Seoul, South Korea.

Kim Hong-Ji/Reuters

The study is a working paper released for discussion by the National Bureau of Economic Research in the United States before peer review. Although working papers haven’t gone through the rigorous publication process, they are a timely way to compare the results of the COVID-19 outbreak around the world.

Countries that didn’t implement a lockdown have also suffered economic damage from the pandemic due to the disruptions in global travel and trade.

Sweden, which kept most schools, businesses and restaurants open after experiencing its own COVID-19 outbreak, is still expecting its economy to contract by seven per cent this year. Sweden’s exports depend heavily on demand from other countries, many of which went into full lockdowns.

• Email: sxthomson@postmedia.com | Twitter:

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