Economy

The coronavirus economic 'disaster' scenario: Stagflation – CNN

Published

5 years ago

March 10, 2020

The market is pricing in a 100% chance of another rate cut at the Fed’s next meeting on March 18, with a majority of investors expecting a three-quarters of a percentage point cut to a range of just 0.25% to 0.5%.

But what if the Fed has to simultaneously fight concerns about a recession and rising inflation pressures?

But the threat of stagflation — the term used to describe an economic slowdown coupled with rising prices — is real.

For those unfamiliar with the term, stagflation was a major problem for the US economy in the 1970s, when there was an oil shock and surging prices for gas. The Fed chose to fight the inflation aspect more aggressively, raising interest rates as high as 20% by 1981.

“Stagflation would be a disaster. People are dismissing it as an old threat from the ’70s that won’t happen again, but you could see it come back,” said Nancy Davis, chief investment officer of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL).

Supply shock could lead to higher prices

Davis told CNN Business that she’s worried about an eventual spike in consumer prices from supply chain disruptions in China due to the coronavirus outbreak.

While wage growth remains relatively sluggish, at just 3% annually according to the latest jobs report, US companies may need to eventually raise wages to attract more workers, she added — particularly in retail, food and other services sectors where employees may be afraid that they are more likely to contract the coronavirus.

“If you are an employee at Walmart and you decide you’re going to stay home due to coronavirus worries, there could be pressure to raise wages,” Davis said.

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This likely won’t stop the Fed, and other central banks around the world, from slashing rates further, which may compound the problem.

“During a bond market crisis caused by inflation, global central banks will be completely impotent,” Michael Pento, president and founder of Pento Portfolio Strategies, said in a report.

He added that this could “produce a period of intense stagflation globally such as never before seen.”

So what’s the solution for stagflation?

Davis suggests the Fed dust off its old playbook and tweak a 2011 policy called Operation Twist, when the Fed bought longer-term Treasuries and sold shorter-term securities in an attempt to lower long-term rates. Bond prices and yields move in opposite directions.

The Fed could now do a reverse Operation Twist to stabilize the yield curve, Davis said — the difference between long-term rates and short-term rates. A gap this narrow — as it is now — often suggests a looming economic downturn.

The yield curve even briefly inverted this year, meaning that short-term rates were higher than long-term bond yields. That is especially worrisome because it shows just how nervous investors are about getting their principal back on longer-term loans.

The Fed might have to cut interest rates all the way to zero

One solution could be for the Fed to buy short-term bonds and sell 10-year Treasuries to push longer-term yields higher, Davis said.

“Cutting interest rates isn’t enough. A healthy market should have a wider yield curve,” Davis said. “The easiest thing for the Fed to do is move the 10-year yield higher, and it can do that without using up all its other policy bullets.”

Slow growth is still a bigger threat than inflation

Still, other experts think that such a move is too drastic.

“Inflation is not going to be the issue. There is a demand shock too. Rising recession risks are what investors need to be aware of,” said Jeff Schulze, investment strategist with ClearBridge Investments.

Schulze thinks that the huge drop in oil prices is not just about OPEC price wars and supplies. Oil prices are plunging due to fears about a slowdown in consumer spending, particularly in travel.

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Companies may also be unwilling to hike prices — even if they are feeling pressure to do so — because it looks bad during a health crisis.

“Inflation pressures still seem very limited. There is a lack of pricing power. Firms will be reluctant to raise prices right now,” said Nathan Sheets, chief economist at PGIM Fixed Income and a former under secretary of the Treasury for international affairs during the Obama administration.

With the coronavirus outbreak seeming to stabilize in China, more factories could soon reopen, he said, alleviating long-term pricing pressure on American businesses due to temporary supply shortages.

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

Published

2 days ago

September 10, 2024

Anne Joseph

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.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

Published

2 days ago

September 10, 2024

Anne Joseph

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.

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Economy

Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

Published

2 days ago

September 10, 2024

Anne Joseph

HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

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