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The coronavirus is already hurting the world economy. Here's why it could get really scary – CNN

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China has become an indispensable part of global business since the 2003 SARS outbreak. It’s grown into the world’s factory, churning out products such as the iPhone and driving demand for commodities like oil and copper. The country also boasts hundreds of millions of wealthy consumers who spend big on luxury products, tourism and cars. China’s economy accounted for roughly 4% of world GDP in 2003; it now makes up 16% of global output.
SARS sickened 8,098 people and killed 774 before it was contained. The new coronavirus, which originated in the central Chinese city of Wuhan, has already killed more than 700 people and infected over 34,400 across 25 countries and territories. Chinese officials have locked down Wuhan and several other cities, but the virus continues to spread.
SARS didn't sink markets, but coronavirus might
“The outbreak has the potential to cause severe economic and market dislocation. But the scale of the impact will ultimately be determined by how the virus spreads and evolves, which is almost impossible to predict, as well as how governments respond,” said Neil Shearing, group chief economist at Capital Economics.
Compounding the risk is the fact that the world outside China has also changed since 2003.
Globalization has encouraged companies to build supply chains that cut across national borders, making economies much more interconnected. The major central banks have used up much of the ammunition they would typically deploy to fight economic downturns since the 2008 financial crisis, and global debt levels have never been higher. Rising nationalism may make it harder to coordinate a worldwide response, if that’s required.
A resident wears a protective mask while riding a scooter on February 5, 2020, in Wuhan.A resident wears a protective mask while riding a scooter on February 5, 2020, in Wuhan.
The virus is snarling supply chains and disrupting companies.
Car plants across China have been ordered to remain closed following the Lunar New Year holiday, preventing global automakers Volkswagen (VLKAF), Toyota (TM), Daimler (DDAIF), General Motors (GM), Renault (RNLSY), Honda (HMC) and Hyundai (HYMTF) from resuming operations in the world’s largest car market. According to S&P Global Ratings, the outbreak will force carmakers in China to slash production by about 15% in the first quarter. Toyota said on Friday it would keep its factories shut at least until February 17.
Luxury goods makers, which rely on Chinese consumers who spend big at home and while on vacation, have also been hit. British brand Burberry (BBRYF) has closed 24 of its 64 stores in mainland China, and its chief executive warned Friday that the virus is causing a “material negative effect on luxury demand.” Dozens of global airlines have curtailed flights to and from China.
Even more troubling is the threat to global supply chains. Qualcomm (QCOM), the world’s biggest maker of smartphone chips, warned that the outbreak was causing “significant” uncertainty around demand for smartphones, and the supplies needed to produce them. Already, auto parts shortages have forced Hyundai (HYMTF) to close plants in South Korea and caused Fiat Chrysler (FCAU) to make contingency plans to avoid the same result at one of its plants in Europe.
Economists say the current level of disruption is manageable. If the number of new coronavirus cases begins to slow, and China’s factories reopen soon, the result will be a fleeting hit to the Chinese economy in the first quarter and a dent in global growth. If the virus continues to spread, however, the economic damage will increase rapidly.
An employee works on an assembly line at Dongfeng Honda in Wuhan.An employee works on an assembly line at Dongfeng Honda in Wuhan.
Mohamed El-Erian, chief economic adviser to Allianz (ALIZF), told CNN Business that he was most worried about the potential cascading economic effects.
“They first paralyze the region of the virus outbreak,” he said. “Then they gradually spread domestically, undermining internal trade, consumption, production and the movement of people. If the virus is still not contained, the process spreads further, including regionally and internationally by disrupting trade, supply chains and travel.”

Epidemic risk

Economists have a hard time working out the potential costs of epidemics because of their unique characteristics.
Yet diseases can be far more damaging than natural disasters such as hurricanes or a tsunami, or other unpredictable events known as “black swans.” According to a study by the World Bank, a severe pandemic could cause economic losses equal to nearly 5% of global GDP, or more than $3 trillion. Losses from a weaker flu pandemic, such as the 2009 H1N1 virus, can still wipe 0.5% off global GDP.
“A severe pandemic would resemble a global war in its sudden, profound, and widespread impact,” the World Bank assessed in a report on pandemics from 2013. (The Wuhan coronavirus has not been declared a pandemic by the World Health Organization.)
The virus is not the driving factor behind those losses, however. Instead, it’s the way consumers, businesses and governments respond to an outbreak that matters most.
People are more likely to stay home during an outbreak to avoid getting sick, preventing them from traveling, shopping and working. Doing so limits demand for consumer goods and energy. Decisions by companies and governments to close shops and idle factories, meanwhile, curtail production.
“This is continuing to grow in scope and magnitude. It could end being really, really big, and really, really serious. We can’t project that now,” said William Reinsch, a senior adviser at the Center for Strategic and International Studies who spent 15 years as president of the National Foreign Trade Council.
According to Shearing, past epidemics show that China’s economy is likely to take a significant hit in the first quarter. But that will quickly fade from memory if the virus is contained.
“As long as factory closures don’t lead to job losses, by this time next year the level of GDP is unlikely to be very different from what it would have been without the virus,” he said.

What can be done?

China’s government has moved quickly to counter the economic fallout from the coronavirus and the measures taken to contain it.
The People’s Bank of China cut a key interest rate this week and injected huge amounts of cash into markets in order to help take the pressure off banks and borrowers. Officials have also announced new tax breaks and subsidies designed to help consumers.
Yet China is also more vulnerable to a crisis than it was 17 years ago when SARS broke out.
“It has much higher debt, trade tensions with a major trading partner and its growth has been steadily slowing down for a number of years, which gives a weak starting point to face such a crisis,” said Raphie Hayat, a senior economist at Dutch bank ING.
Analysts at Capital Economics expect the government to announce additional measures in the coming days. If the virus keeps spreading, they believe that Beijing will have to abandon its long-running efforts to get its debt under control and pump money directly into the economy.
Chinese President Xi Jinping attends a meeting in Beijing.Chinese President Xi Jinping attends a meeting in Beijing.
Central banks in neighboring countries including Sri Lanka, Malaysia, Thailand and the Philippines have cut interest rates in recent weeks. South Korea and Taiwan could be next.
But the big powers of the financial world are exhausted from a decade fighting anemic growth since the global financial crisis. The European Central Bank introduced negative interest rates in 2014 and hasn’t been able to increase them since, while the Bank of Japan is in a similar position. The US Federal Reserve already cut interest rates three times last year; Chair Jerome Powell has said he’s carefully monitoring the situation.
Meanwhile, debt levels have soared in the United States, Japan and key European countries including Italy, limiting the scope for a big fiscal stimulus if the world economy goes into another tailspin. Global debt, including borrowing by households, governments and companies, has jumped to more than three times the size of the global economy, the highest ratio on record, according to the Institute of International Finance.
Also critical is whether governments are able to coordinate their response to the outbreak, ideally with help from multinational institutions. This is especially true because, according to the World Bank, preparedness for a potential pandemic is low. But coordination may prove difficult in a increasingly fractured world where nationalism is often prized over cooperation.
“It’s quite clear that multinational institutions are under more pressure, and have less teeth on day to day issues than 10 years ago,” Shearing said. “But the optimist in me would like to think that in the face of a global pandemic, global institutions are still in a position to respond.”

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Charting the Global Economy: Job Growth in US Powers Ahead – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The strongest US job growth in five months and firmer-than-expected worker pay assuaged recession concerns, while also helping clear the path for the Federal Reserve to continue large interest-rate hikes.

In Europe and Asia, factory production weakened on lingering supply-chain constraints that are contributing to persistent price pressures. The Bank of England stepped up its inflation fight with the biggest rate increase in more than a quarter century, while also cautioning that the UK is headed for more than a year of recession. 

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

World

Central banks around the world continued raising interest rates this week. Australia, Brazil, India and the UK were among those hiking by 50 basis points, while Romania went for 75 basis points and Madagascar for 90 basis points.

The standoff between the US and China over Taiwan has thrown a spotlight on growing risks to one of the world’s busiest shipping lanes — even a minor disruption could ripple through supply chains. Almost half of the global container fleet and a whopping 88% of the world’s largest ships by tonnage passed through the Taiwan Strait this year, according to data compiled by Bloomberg. 

European factory activity plunged and Asian manufacturing output continued to weaken in July amid lingering supply-chain complications and a slowing global economy. Purchasing managers’ indexes for the euro area’s four largest members all indicated contraction, while China, South Korea and Taiwan took the biggest hit in Asia.

US

Employers added more than double the number of jobs forecast, illustrating rock-solid labor demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.

Household debt increased by 2% to $16.2 trillion in the second quarter, with mortgages, auto loans and credit-card balances all seeing sizable jumps, according to a report by the Federal Reserve Bank of New York.

With almost two openings for every person looking for work, US companies are increasingly tapping high school students for skilled jobs. As a result, apprenticeships are seeing a renaissance after failing to gain a foothold over the past few decades.

Europe

The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession under the weight of soaring inflation. The half-point increase to 1.75% was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed.

German factory orders sank for a fifth month in June as rampant inflation and global supply disruptions continued to weigh on the outlook in Europe’s largest economy.

Germany’s presidential palace in Berlin is no longer lit at night, the city of Hanover is turning off warm water in the showers of its pools and gyms, and municipalities across the country are preparing heating havens to keep people safe from the cold. And that’s just the beginning of a crisis that will ripple across Europe.

Asia

It’s 2025 in Beijing, five years since the start of the pandemic, and Chinese President Xi Jinping’s Covid Zero policy is still an inescapable part of daily life. As omicron sub-variants become ever-more infectious, Xi’s resolve to avert virus fatalities is growing stronger – leading many experts to warn that Covid Zero could continue well beyond 2022.

Major South Korean firms are agreeing to the biggest pay rises in 19 years, according to a government survey, fueling concerns that a wage-price spiral is taking hold in the economy. Salary agreements at companies with 100 workers or more climbed 5.3% in the first half of the year, exceeding every increase since 2003, a labor ministry poll showed.

Emerging Markets

Turkish inflation accelerated again and may be months away from peaking, soaring to levels unseen since 1998 as the central bank sticks with its ultra-loose monetary course.

Brazil’s central bank raised its key interest rate by half a percentage point and left the door open for a smaller boost in September as it shifts its focus to the outlook for inflation more than a year ahead. 

©2022 Bloomberg L.P.

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The economy is growing by one measure, shrinking by another – The Washington Post

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Friday’s blowout jobs report may have quieted claims that the U.S. is in a recession, but it did not end the mystery about the state of the economy or resolve questions about where it is headed.

Government data showing the economy had contracted for the second consecutive quarter — meeting one informal definition of recession — was still fresh, as the Labor Department on Friday said employers had added 528,000 jobs in July. That was more than twice as many as economists expected.

Only eight days separated the two government reports, yet they seemed to describe entirely different realities.

The first showed a weak economy that — coupled with the highest inflation in 40 years — offered consumers nothing but grief. The second reflected a juggernaut that was minting jobs faster than workers could be found to fill them, with an unemployment rate that matched the pre-pandemic low of 3.5 percent.

The factors driving inflation higher each month

“It’s normal for different economic indicators to point in different directions. It’s the magnitude of the discrepancies right now that’s unprecedented,” said Jason Furman, formerly President Barack Obama’s top economic adviser. “It isn’t just that the economy is growing in one measure and shrinking in another. It’s growing incredibly strongly in one measure while shrinking at a pretty decent clip in another.”

In Washington on Friday, President Biden took a victory lap for the job growth while claiming credit for gas prices having declined for more than 50 consecutive days. Yet he also acknowledged the disconnect between the sunny employment report and the inflation headaches that afflict many households.

What causes a recession?

“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel it in their own lives,” the president said, speaking from a White House balcony. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re dealing with rising prices, food and gas, and so much more. I get it.”

The surprisingly robust jobs number seemed to call into question the president’s argument that the economy is undergoing a “transition” from its faster growth rates last year to a slower, more sustainable pace.

No one expects the economy to continue producing half a million new jobs each month. No one thinks it could without inflation remaining at uncomfortable heights.

Almost five months after the Federal Reserve began raising interest rates to cool off the economy and to bring down the highest inflation since the early 1980s, the labor market report showed that the nation’s central bank has more work to do. Average hourly earnings for private sector workers rose by 5.2 percent over the past year, which hints at the sort of wage-price spiral that the Fed is determined to prevent.

Last month, the Fed lifted its benchmark interest rate to a range of 2.25 percent to 2.5 percent, its highest level in almost four years. Yet in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, which acts as a spur to economic growth.

Fed Chair Jerome H. Powell said last month that additional rate increases are likely when policymakers next meet on Sept. 21. The size of the next increase – either half a percentage point or three-quarters of a point – will “depend on the data we get between now and then,” he told reporters.

Soaring dollar could help Fed in fight against inflation

Investors see a 70 percent chance of the larger move, according to CME Group, which tracks purchases of derivatives linked to the central bank’s key rate.

On Wednesday, the government is scheduled to release inflation readings for July, which are expected to show a modest improvement compared to June’s 9.1 percent figure, thanks to falling energy prices.

Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” of its plans is itself a sign that the current environment is murkier than usual.

“A lot of what’s happening in this economy is being driven by the pandemic, and then the pandemic response. And so, we are in a very unusual time, in many ways [it’s] challenging to sort of read through those data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, and a voting member of the Fed’s rate-setting committee, told The Washington Post this week.

Fed’s interest rate hikes may mark start of tough, new economic climate

Almost 22 million Americans lost their jobs between February and April of 2020 in covid’s first months. The unemployment rate hit 14.7 percent, the highest figure recorded by the Labor Department in a series that began in 1948.

With July’s gains, the economy now has recovered all of the lost jobs.

But the workforce has been reshaped. There are more warehouse and logistics workers today and fewer employees working for hotels and airlines.

Employers are reacting differently than they did before the pandemic to indications that the economy may be slowing, according to Gregory Daco, chief economist for EY-Parthenon. Rather than immediately resorting to significant layoffs, they are instead scaling back hiring or engaging in targeted job cuts.

Weekly first-time unemployment claims are up, but only to 260,000 from their 54-year low of 166,000 in March.

Consumers have also acted differently, buying more goods than normal while trapped at home during the pandemic’s initial wave. Retailers that ordered unusual volumes of furniture, electronics and apparel from overseas suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores stuffed with unwanted goods.

On top of the pandemic’s lingering ills, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.

All of these forces combined to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. Yet housing starts have fallen for the past two months and the latest ISM manufacturing reading was the weakest in two years.

“We are in somewhat of a dizzying business cycle. We’re getting economic data that is fluctuating quite rapidly and it’s very hard to get a precise read on where the economy is at any point in time,” Daco said.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at the Rand Corp.

Friday’s Labor Department report tallied up jobs gained in July. The last consumer price index reading covered June. And the gross domestic product reading that started the recession furor described activity that occurred between April and June – and will be revised twice.

“It’s a challenge for an economist, but also for a reader who wants to understand how at risk they are for an economic downturn,” she said.

Labor market and output data have been telling different stories about the economy all year. After six straight months of shrinkage, the economy is roughly $125 billion smaller than it was at the end of 2021, according to inflation-adjusted Commerce Department data.

Yet employers have hired 3.3 million new workers over that same period.

How could more workers be producing fewer goods and services?

One explanation is that workers are less productive today than during the emergency phase of the pandemic, when companies struggled to keep producing their required orders with fewer workers, Furman said.

Indeed, non-farm business productivity in the first quarter fell 7.3 percent, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be made public on Tuesday and are likely to show the largest two-quarter drop in history, he said.

Those figures may overstate the change. During the pandemic, companies may have been able to maintain output with a covid-thinned workforce by exhorting or incentivizing the remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by citing emergency conditions.

“They worked extra hard, but they wouldn’t work extra hard forever,” Furman said.

World Bank warns global economy may suffer 1970s-style ‘stagflation’

Likewise, the labor force participation rate usually rises when employers are adding jobs and the unemployment rate is falling. But since March, it has fallen, according to the Bureau of Labor Statistics.

Some Americans retired instead of risking working during the pandemic. Others — mostly women — who lacked adequate child care, stayed home with young children or other vulnerable relatives.

An April paper by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.”

Participation by Americans in their prime working years, ages 25 to 54, has almost entirely recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the outset of the pandemic. And for younger workers, age 20 to 24, participation is lower now than at the end of last year.

“I don’t think we have a great handle on why other workers are not coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual period.”

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Canadian economy sheds jobs for second straight month – BNN

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Canada’s economy lost 30,600 jobs in July, according to data from Statistics Canada on Friday. This marks the second consecutive month of employment losses for the country.

The data came in weaker than expected. The median estimate among economists tracked by Bloomberg was for a gain of 15,000 jobs last month and an unemployment rate of 5.0 per cent.

The country’s unemployment rate remained steady at a historic low of 4.9 per cent. 

The wholesale and retail trade, health care and social assistance, and educational services sectors collectively saw a loss of 53,000 jobs. The losses were partially offset by the goods-producing sector which gained 23,000 jobs, the labour force survey revealed. 

The decline in jobs was roughly the same in both part-time and full-time work, though employment fell the most among women aged 55 and over. 

The overall participation rate fell 0.2 per cent to 64.7 per cent in July, compared to the 0.4 percentage point drop in June.

The average hourly wages of employees rose 5.2 per cent on a year-over-year basis, matching the pace set in June.

“This is a notoriously noisy survey, especially in the summer months, July and August. The numbers bounce around a lot. I think what’s important here is that the North American economies are slowing,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute and a former chief economic analyst of Statistics Canada, said in an interview Friday morning. 

He also cautioned that Canada’s housing sector is vulnerable to the rising interest rate environment and could lag behind the U.S. 

“There are some pockets of resilience in the economy. The resource sector is one,” Cross said.

The Bank of Canada has attempted to rein in runway inflation with aggressive interest rate hikes. Friday’s jobs data will likely help inform the central bank’s next scheduled interest rate decision in September. 

“While today’s figures muddied the waters further for policymakers, the Bank of Canada will likely focus on the historic low unemployment rate and still strong wage growth to justify another non-standard rate hike at its next meeting,” Andrew Grantham, a senior economist at CIBC Capital Markets, wrote in a note to clients on Friday. 

The Bank of Canada remains committed to reaching its target rate of two per cent inflation. 

“Evidence that the economy is slowing due to weakening demand, rather than supply constraints, will bring a pause in this rate hike cycle following the next hike,” Grantham said. 

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