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)
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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 – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
