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- The British economy has embarked on a historic change, involving at least some pain, some opportunities and an uncertain destination.
- The immigration policy changes will have far reaching consequences.
- Business has been served notice that the economy will take a lower priority than ‘getting Brexit done’.
The history books will record 31 January as the day Britain exited the European Union.
But historians should give at least as much status to 19 February – the day the Brexit rubber hit the road.
It’s been a long time coming and businesses can’t say they weren’t warned.
Perhaps they thought, until December’s election, that Brexit wouldn’t happen, or that the interests of the economy would prevail in the end.
But the new plans for a points-based immigration system confirmed their fears – that in the trade-off between ‘getting Brexit done’ and economic performance, the latter will be the loser.
In charge of this policy, Priti Patel continues the approach taken by Theresa May when she was home secretary – setting out policy in bold, stark, uncompromising terms, presumably because that’s what Leave voters expect and understand.
It may yet be that the policy is softened at the margins, as exceptions are made for the care sector, and perhaps a bit more for farming.
But for now, this is immigration policy in high-contrast monochrome.
The war zone
Some form of exception may also have to be found to save Scottish Tory faces. Jackson Carlaw’s party made an election commitment in December to have an immigration policy that works for Scotland’s demographics and economy, and it’s not clear that message has yet reached the Home Office.
Going out to explain the policy and how it will work for Scottish employers seemed to be beyond every rank of Tory contacted by BBC colleagues. It seems they were all too busy on Wednesday.
Forced to comment by Holyrood journalists on Thursday, the Scottish Tory leader fell some way short of enthusiastic support for Ms Patel’s plans, instead suggesting that elements of the SNP government’s approach are worthy of consideration.
Let’s see how that plays when Mr Carlaw’s memo is lobbed into the Whitehall war zone that is, we’re told, Priti Patel’s private office.
Points mean prizes
For Scottish business, there were elements of the Patel proposals to be welcomed, in that they were less bad than the previous draft.
There is a four-fold rise, to 10,000 across Britain, in the visas for farm workers. And the £30,000 threshold for getting a visa has been lowered, on the advice of the UK government’s migration advisory committee.
The vague talk of “an Australian-style points system” which featured in the election campaign, had meant next to nothing.
But it became less vague when points were set out for salary, job offer, qualifications, more for a doctorate, and more still for a science and technology PhD – “the best and the brightest”. Throw in English language skills, and you might get the 70 points for entry into the UK jobs market.
Employers already used to the visa regulations for non-EU migrants find it “notoriously complex and costly”, according to the Federation of Small Businesses in Scotland.
So once applied to every foreigner, including the high proportion of small firms in Scotland that have got used to European recruitment, it’s a daunting prospect.
Activating the ‘inactive’
There’s an exceptionally low level of unemployment across the UK these days – statistics which sit oddly with the lack of growth or confidence to be found in other data.
So the home secretary has pointed to the 20%-plus who are designated “economically inactive”.
If anyone in her private office had explained to her that these people include those who stay at home to care for their children or for elderly parents (including, one imagines, quite a lot of bedrock Tory voters), plus those who are full-time students or suffering from long-term illness, then the briefing hadn’t sunk in.
In other words, the economically inactive are not sitting idly at home, available to be sparked into activity as care home workers through the gently persuasive powers of a Home Office taser. Or even a rise in starting pay.
Call for flexibility
The CBI was more polite than most business groups, arguing that the choice should not be between training up British workers or recruiting from abroad. Instead, it requires a bit of both.
The construction industry pointed out that shutting off access to Europe’s skilled workforce will mean higher pay.
Trade unions don’t like to look anti-foreigner, but they have seemed uncharacteristically quiet about this, public sector Unison being an exception. In the private sector, they won’t be complaining if skill shortages give them pay bargaining leverage.
However, the construction industry’s representative pointed to the further consequence of pay inflation – that government priorities of building more housing and tackling climate change will become more expensive. That goes for the household shopping basket too.
The visa plans’ airy dismissal of migrant workers with ‘low skills’ no longer being allowed in to Britain offered a strange sort of opportunity, at least for the care sector.
Donald Macaskill, who speaks and negotiates on behalf of Scotland’s private care homes, offered up a blistering denunciation of those who think caring for those with dementia have ‘low skills’.
He was visibly angered.
And this was a chance to point out that demographics and labour shortages require us to think very differently about the lower-paid care workers with superhuman levels of patience and devotion to the care of elderly people.
‘A change is gonna come’
It would be hard to overstate the significance of the change that is now under way.
In the past forty-plus years, there have been waves of massive and sometimes painful change in the British economy, including the clear out of heavy industries and mining, and later of the electronics assembly of Silicon Glen.
With each wave of closures, there was a re-orientation of the economy, adjusting to the seamless supply chains and markets of the growing and integrating European market, and ever more dependent for labour on the skills and flexibility that the vast European labour pool offered.
With the labour market plans set out on 19 February 2020, all that is set to change.
The future economy may see British-born workers on higher pay, with more skills and at the cutting edge of automation, breaking free of petty regulations to occupy the sunny uplands of the 21st century global economy.
That’s the theory, but it’s far from guaranteed.
Meanwhile, the only certainty about the transition, wherever it takes us, is that it will take time and it will involve some painful dislocation.
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In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later – The New York Times
For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.
“There is nothing to cut back on,” she said.
Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.
And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.
“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”
Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.
That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.
In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.
“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”
America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.
But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.
The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.
But job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.
“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”
Lower-income people are already hurting. Mr. Brown’s organization has seen more requests for help in recent months, he said, as local families fall behind on their bills. The size of the typical request has gone up, too, from a few hundred dollars to a few thousand. And he has noticed financial pain creeping up the income spectrum.
Mr. Brown’s observations are backed up by government data: About 12 percent of households reported they were struggling to get enough to eat in early July, up from about 10 percent at the beginning of the year, according to the Census Bureau.
Families can’t easily cut back what they spend on rent, gas or electricity as those prices climb, said Brian Greene, chief executive of the Houston Food Bank, which provides food to Mr. Brown’s organization and other charities across the region. So they cut back on food.
“Food insecurity isn’t about food,” Mr. Greene said. “Food insecurity is about income.”
Many poorer families’ incomes held up relatively well early in the pandemic because government aid — expanded unemployment benefits, stimulus checks and other programs — helped offset lost wages when businesses shut down. Then, as the economy reopened, pay soared for restaurant workers, delivery drivers and other low-wage workers.
But pandemic aid programs have ended and wage growth is slowing in many sectors — average hourly earnings in leisure and hospitality, which rose rapidly last year, actually fell in July from a month earlier for rank-and-file workers. Prices have risen so fast that even unusually quick wage growth has failed to keep up.
The gaping divide between the rich and the poor in this inflationary moment is clear in corporate earnings calls. At Boot Barn, a Western wear retailer, sales of men’s Western boots were down in the first quarter, but sales of higher-priced exotic skin boots picked up. At LVMH, which owns luxury brands like Louis Vuitton and Tiffany, American revenues have been growing strongly, while at Walmart, customers are pulling back as they struggle to afford basic necessities, particularly food, which has run up sharply in price.
“This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel,” Walmart said in its July 25 guidance.
It’s not just apparel: Consumers across the economy are buying less milk and fewer eggs, as prices for those products rise significantly, according to an analysis of government figures by Michelle Meyer, chief U.S. economist for Mastercard. Yet they are also going out to eat at restaurants more often.
The fissures are clear in the car market. Demand for new cars, which generally sell to higher-income buyers, has remained strong and prices continue to soar amid supply shortages — putting upward pressure on inflation. But used-car demand is ebbing and prices have begun to depreciate again.
“We see bifurcation in many parts of the economy and the auto market,” Jonathan Smoke, chief economist at Cox Automotive, said in an interview. “The new vehicle buyer has shown much less price sensitivity.”
Housing is another realm where fates have diverged. Home costs have run up sharply since the pandemic and mortgages are now more expensive, making buying unaffordable for many families. Because would-be buyers can’t afford homes, they are renting, keeping apartments for lease in short supply and pushing rents ever higher. Those soaring rents hit lower-income households especially hard: Roughly six in 10 people in the bottom quarter of earners rent their homes.
By contrast, homeowners have both seen their houses rise in value and often enjoy a built-in inflation hedge, since many refinanced their mortgages and locked in low monthly payments when rates were low in 2020 and 2021.
“The haves are really comfortable right now,” said Nicole Bachaud, an economist from Zillow, also noting that “we’re going to see this gap getting wider between people who are homeowners and people who are probably never going to be homeowners.”
Ms. Clarke, the New Canaan retiree, recently got off the wait list for an affordable apartment for herself and her 24-year-old daughter, who has autism and cannot work. Their new unit has just one bedroom, but it is clean and has new appliances, and at about $1,350 a month, she can squeeze it into her budget.
The lease lasts only a year, however, and Ms. Clarke is worried about finding somewhere to live if it isn’t renewed. Even now, she is barely making ends meet: She lost her car keys recently and had to spend nearly $500 replacing them, wiping out nearly all her small rainy-day fund and leaving her one crisis away from financial disaster.
“When you don’t have money, you’re on a fixed income, you’re constantly thinking, ‘Well, maybe I shouldn’t have bought that,’” she said. “There’s no cushion. There really never was.”
More financially secure families also face headwinds, of course, which could eventually prompt them to slow down spending. The cash savings they built up during the pandemic won’t last forever, and rising prices could prompt many households to pull back their spending.
And swooning stock markets could prompt richer families, who tend to have more money invested, to spend less than they otherwise would. Some economists think that the people in this demographic have mostly kept spending recently — despite their falling economic confidence — because they are eager to take vacations that they had put off earlier in the pandemic.
“Where I’m budgeting, it’s to make room for travel,” said Mr. Trevino of Los Angeles. “I feel like I’ve missed out on that a little bit.”
Economists have speculated that richer consumers’ resilience could fade as autumn approaches and they take stock of their finances amid a slowing economy. But for now, the reality that America’s wealthier consumers have yet to sharply pull back in the face of rising prices may be setting up a tough road ahead for the nation’s poorer ones.
“We really, in a way, haven’t noticed the inflation very much,” Mr. Schoenfeld said. “This economy is very unfair.”
Jason Karaian contributed reporting.
Posthaste: Sorry, but the economy isn't over COVID — and won't be for some time – Financial Post
A lot of weird things have been happening in our economy lately. Roaring inflation that took everybody by surprise, a drum-tight labour market and now the prospect of sputtering growth, if not outright contraction.
The explanation for these unexpected and in some cases unprecedented conditions, argue CIBC economists, is that COVID continues to disrupt the functioning of the economy.
Canada, the U.S. and Europe have tried to move on from the pandemic, lifting vaccine mandates and restrictions on activity, thus resulting in an increase in consumer demand.
“But COVID isn’t fading away as a supply constraint, or as a health issue,” CIBC economists Avery Shenfeld and Andrew Grantham wrote in a recent note.
Variants that spread more rapidly have meant that more people have died of COVID in 2022 than the previous year, even though fewer cases were fatal, they said.
And while demand has recovered, supply chains have not, partly because of the war in Ukraine, but also because of COVID.
The lockdowns this year in China are the most obvious example. Omicron restrictions here caused exports to fall even more than during the first 2020 lockdown.
In Canada it is showing up in employee illness. “Flights are cancelled when crew members call in sick, hospitals cut back services because staff members are ill and live entertainment shows are postponed for the same reason,” wrote the economists. Omicron has been associated in Canada with a significant increase in working hours lost to illness.
Long COVID has caused some to actually withdraw from the workforce. The numbers are small in Canada, they said, but the U.K. serves as an example of what could happen if we fail to control future waves of the virus.
In Britain, where public health restrictions have been lighter, 0.6% of the population have been “severely affected” by Long COVID, according to a recent study.
COVID is also impacting capital spending, said the economists. An uncertain outlook due to potential waves of the virus in future may be contributing to businesses’ reluctance to spend, but COVID supply-chain issues have also made getting capital equipment more difficult as well.
“The result is less production capacity in sectors where equipment is on back order, or where COVID uncertainties have forestalled investment,” they said.
The unprecedented COVID recession and recovery is also why there is a mismatch between job availability and hiring in the economy today, argue the economists.
During the pandemic some work was almost completely shut down and stayed dormant for a long period. Now that the economy has reopened, those employers are scrambling to rehire in great numbers, a situation we have not seen before, they said.
“A typical recession doesn’t see air travel drop by 90% and doesn’t see live theatres close outright. A typical recovery doesn’t see the sudden opening we’re experiencing in these same sectors,” they wrote.
Workers who held these jobs, like restaurant staff and baggage handlers, in 2020 had two years to move on, unlike a typical recession that lasts just two or three quarters.
CIBC believes this mismatch will eventually even out, but the impact of COVID on supply chains and missed work could remain.
So what does the future hold?
While traders are already talking about rate cuts after the hiking cycle winds up either at the end of this year or early 2023, CIBC sees the Bank of Canada keeping rates at 3.25% through the whole of 2023.
It also sees GDP growth slowing to 0.9% in the fourth quarter of this year and gaining only 1.5% in 2023.
“Even if a recession is avoided, we’re in for a protracted period of sub-par growth,” said the economists.
The policy of dropping COVID mandates meant to improve the economy may actually be working to extend the economics costs of the virus, they said.
“While helping on the demand side, diminished public health restraints, particularly during surges in case counts, are cutting into the economy’s supply capabilities. Their absence is likely elevating the peak levels for COVID cases, and thereby increasing the costs of worker absenteeism, and perhaps, as we’ve seen in the UK, risking longer term labour market damage due to Long COVID,” they said.
The economists said lockdowns should be behind us, but a push for the use of masks, global vaccination and improvements of indoor air quality would help reduce the economic impact of COVID.
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Check out the latest from Sea Doo maker BRP Inc. This electric surfboard called the Sea-Doo Rise in one of three products that Bombardier Recreational Products announced recently in its first foray into electric vehicles. The EV push also means a return to the award-winning two-wheeled motorcycles that BRP produced in the ’70s and ’80s. The Can-Am Origin and Can-Am Pulse motorcycles, along with the Sea-Doo Rise, will all be electric and will be available to purchase in mid-2024, said BRP. Photo by BRP
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