The US economy will continue to grow during the first part of the year, driven mostly by sectors that have benefited from the reallocation of resources due to the pandemic. If the incoming Biden administration does not impose greater restrictions on the U.S. economy, there will also be some recovery in areas that saw the greatest losses during 2020. The Federal Reserve’s easy monetary policy will continue, and for the time being this will fuel increased economic activity.
I usually base my yearly forecasts on indicators relevant to the business environment. Such factors (which are also used to calculate the various indices of economic freedom) include tax and regulatory policies, trade, rule of law, and monetary policy. But analyzing what will happen with the economy in 2021 will depend on factors that go beyond economic policy. The two key factors are the continued impact of the Covid-19 pandemic and the change in the U.S. administration and the composition of Congress.
The Democratic sweep of the Georgia Senate races opens the door for the adoption of several of the Biden administration’s most anti-free-economy proposals. Biden will be pressured to fulfill his promise to reverse Trump tax cuts, especially the corporate tax rate. The narrow victory will give a huge boost to the current “Washington consensus” that government spending accompanied by an easy monetary policy and increased borrowing is an elixir that can’t fail. Increased regulations will also be part of the Biden economic policy mix. Increase in taxation, however, might be delayed since, despite higher growth rates, the economy will be still very weak compared to pre-pandemic days.
Nothing in the Biden agenda is different from what many European countries have been implementing in recent years. The higher level of government spending relative to GDP, more stringent environmental regulations, higher taxes, and “quantitative easing” have not led to higher growth rates in Europe. On average, the large economies of Europe saw a bigger decline in their GDP than the US did. They will also likely recover at a slower pace than the US. The new U.K. lockdowns and the spike in Covid-19 cases in Germany should revise European growth forecasts downward. Nevertheless, in the U.S. the 2021 economy, given the 2020 decline, will likely grow at over 4%, partly in new directions and partly catching up. The potential for a rebound is there, especially if the vaccines prove effective and state and local governments begin to lift restrictions.
Photo by: STRF/STAR MAX/IPx 2021 1/2/21 Atmosphere at Wall Street in New York City. The Stock Market … [+] closed at all time highs in 2020, and continued to rise in January 2021
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The U.S. stock market shows a good deal of optimism, as if the easy-money party can go on forever. But stocks also reflect changes in the real economy. For instance, the stock price of Tractor Supply Company
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(almost doubling since March 2020) reflects the general move away from large cities and the increased construction in rural areas. New investments by people working from home and by the companies that serve them, from entertainment to communication, are also reflected in rising stock prices. Such companies include Microsoft
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. Part of this dynamic and reallocation of resources will continue at least for the first half of 2021. Some of the new consumer and investment patterns caused by reactions to the pandemic will be here to stay, but it too early to evaluate whether it will lead to higher or lower productivity in the future.
Regarding monetary policy, rare is the analyst that does not expect a more expansionary trend. More voices are cautioning about the return of inflation, but I think we will have to wait until 2022 to see inflation pressures that are strong enough (over 3% per year in consumer price index) to lead to a change of the current mindset that monetary authorities can save us from any trouble.
Despite the increase in the trade deficit, we will see a gradual return to the pre-Trump consensus. Not that the prospects for freer trade were rosy before Trump – any proposal that leads to greater liberalization with Europe is likely to face opposition there. It seems that it will be easier to get the United States back into the Trans-Pacific Partnership Agreement than to achieve a big breakthrough with Europe.
Among Western countries, none comes close to the importance the United States in evaluating what will happen with the world economy. Globally, however, China is almost as relevant. Unfortunately, more capitalism has not lead to a freer political system in China. We saw another corroboration of this on January 6, when fifty three pro-democracy activists were detained in Hong Kong. In my piece last year about the 2020 economy, I wrote that leading publications around the world were publishing articles with titles such as “2019 was a horrible year for Xi Jinping’s China” (Le Monde). The scene has changed now and the Chinese economy is forecast to grow over 8% next year, remaining a magnet for those who want to do business and pursue profits at all costs.
In March of 2020, when it was clear that the pandemic was spreading around the world, I stated that, in the long term, the biggest danger for the free society and economy would be to see the Chinese model of a mix of communism and markets emerge victorious. If we trust the numbers, China has won. Even if they undercounted their Covid-19 deaths by a factor of 10, they would have, together with Japan, the lowest Covid-19 deaths per million. The Chinese economy is the only one in the top ten which grew last year. The power of the Chinese Communist Party can’t be measured by government spending. It can rule its mega-State without the need of becoming a Deep State.
What are the implications of a victory of the China model for the US and the world economy? It is logical to conclude that the world of business, at least big business, will continue to work with the conviction that working with governments both here and abroad is not only consistent, but necessary for profit maximization. This alliance of large corporations and big government is what many of us call the “crony capitalist” model. Some Western countries might be able to resist the pressure, but most of the countries that have China as their main trading partner have a very weak rule of law and prevalent corruption. In those countries Chinese corporations working side by side with the Chinese government will likely dictate the terms of the most relevant business transactions.
John Maynard Keynes, (1883 – 1946), (centre), to overcome stagnation, Keynes advocated government … [+] spending financed by increases in the money supply with less concern for the long term. (Photo by Hulton Archive/Getty Images)
Getty Images
During economic crises it is normal to hear those responsible for economic policy say, “We are all Keynesians now.” Looking at the record highs of the stock markets during a time of dramatic political division, it almost seems that “we are all super-Keynesians now.” Although like other analysts I believe we are in an “almost-everything” bubble, when it comes to the real economy I will have to leave my pessimistic thoughts for 2022.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
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.
