This dictum has led many observers to surmise that the currently strong U.S. economy makes President Trump a shoo-in for re-election in 2020. But what these observers overlook is that between now and November 2020 there can be many an economic slip between cup and lip. This would seem to be especially the case at a time when the IMF estimates that 90 percent of the world’s economies are now already experiencing slowdowns.
To be sure, if the election were held today, the strong U.S. economy would make Trump a formidable candidate for reelection.
U.S. unemployment is now at a fifty-year low, the economy is growing at a satisfactory rate, wages are rising, and the U.S. stock market is beating record levels on an almost daily basis. While these achievements might have been made at the cost of incurring a large budget deficit and a ballooning public debt that might have mortgaged our economic future, such matters all too likely will be of little concern to the electorate.
Unfortunately for Trump, it is not today’s U.S. economy that is going to be the determining factor in the 2020 election. Rather, it is how the U.S. economy and financial markets perform in the months immediately running up to November 2020. In this context, it would seem that there are all too many reasons to think that in six months’ time the U.S. economy could be looking decidedly less rosy than it does today.
Today, all too reminiscent of the start of 2008, a dark cloud hangs over the U.S. and global economies. That cloud is a global credit and asset price bubble of epic proportions that has been spawned by a decade of ultra-easy money by the world’s main central banks.
One indication of this bubble is the fact that global debt to GDP levels today are significantly higher than they were at the start of 2008. Other indications are that U.S. and global equity valuations appear to be stretched, housing bubbles have re-appeared in a number of important economies and an alarming amount of credit has been extended to non-creditworthy borrowers around the globe at historically low interest rates.
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Nobody can know when the global credit and asset market bubble will burst or what event will cause it to burst. But with the abrupt change in the global economy over the past year, it would be rash to dismiss totally out of hand the possibility that the global credit bubble could burst well before the November election.
This especially seems to be the case at a time when the Chinese economy shows clear signs of losing momentum, the German, Italian, and U.K. economies all appear to be on the cusp of recessions and the Indian economic growth rate has halved in the context of increased domestic political strife. It also seems to be the case at a time when President Trump has a fragile truce in his trade war with China and at a time when he is threatening to impose additional import tariffs on an already weak European economy.
Further heightening the risk that the global credit bubble might burst before November 2020 is a deteriorating global political landscape. It is not only the fact that geopolitical risks in North Korea and Iran have increased or that the Middle East is once again in turmoil. It is rather that social protests seem to be gaining momentum in countries as disparate as Chile, Colombia, France, Hong Kong, India, Iran and Venezuela. Worse yet, there is every indication that this social unrest is spreading from one country to another.
Past experience, including that in 2008, should inform us that when credit and asset price bubbles burst, the economic and financial market fallout could be disruptively large. The 2008 experience should also remind us as to how interconnected the world’s economic and financial system has become. This has to raise the possibility that much in the same way as in 2008 the Lehman bankruptcy spilled over from the United States to the rest of the global economy, a systemic crisis abroad in 2020 could very well spill back to our shores.
Trump could very well be lucky in 2020 and have the global credit bubble burst after his reelection. But this is far from a certainty. It would seem to be equally possible that this time next year we will look back and ask ourselves how we could have missed so many early economic warning signs about real trouble ahead in the global economy. These signs might include the recent sovereign debt default in Argentina, the rising private credit defaults in China and Turkey, the We Work financial fiasco and the abrupt economic slowdown in China and Germany, the world’s second and third largest economies, respectively.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
