The U.S. economy likely grew at a blistering pace as the country emerged from the darkest days of the coronavirus pandemic. The question now is what happens next, especially as the delta variant continues to spread.
On Thursday morning, the Commerce Department is expected to report that gross domestic product grew around 8% in the period between April and June from a year earlier as the rollout of vaccines spurred a surge in economic activity.
That would potentially be the second-fastest quarterly growth since 1983, after a 33.4% annualized surge in the July-September period of last year, when the pandemic led to intense volatility in the economy.
“Consumer spending was very strong in the second quarter,” says Jay Bryson, the chief economist at Wells Fargo. “In general, you’re looking at very, very strong growth.”
But GDP data is backward looking, and many analysts expect growth to have marked a peak. For the second half of the year, the pace of growth will inevitably slow down, even as it is likely to remain strong.
The question is how much the economy could slow. Here are four factors that could determine the path forward:
The delta variant and the here-we-go-again impact
The pandemic is clearly not over yet. The highly transmissible delta variant of the coronavirus is fueling a surge in cases around the U.S., and multiple municipalities have reinstated indoor mask mandates, including Los Angeles County and St. Louis.
The Centers for Disease Control and Prevention this week revised its guidance to recommend that some fully vaccinated people wear masks indoors if they live in areas with substantial or high transmission.
Although few people expect the type of economic impact we saw when the pandemic started last year, it remains a real concern, given that only about half of the U.S. population is fully vaccinated.
Some small-business owners and their employees are worried about a repeat of last year, when many were forced to shut down their stores.
Ethnie Grazette, who works at Duman Home in Brooklyn, N.Y., says the spread of the virus could upend what has been a few very good months for the shop, which sells bedding and towels.
“These last few months have been pretty good,” Grazette says, smiling. “I got a lot of customers coming in. They’re spending money. It’s good for me and the people to get out.”
“I’m worried about what might happen,” she adds, however, remembering the anxiety and uncertainty during the first part of the pandemic. “If this new variant makes us shut down again, it’s going to put a lot of strain on the economy
High inflation: temporary or here to stay?
Another risk is inflation. Data this month showed consumer prices surged 5.4% in June from a year earlier, the highest increase in nearly 13 years.
On Wednesday, after the Federal Reserve’s two-day meeting, Chair Jerome Powell again maintained that these increases are a result of pandemic disruptions to the economy and will be short-lived or “transitory.”
Others are not so sure. Some economists worry that inflation could prove harder to reverse if Americans and businesses start to expect that prices will be high — and act accordingly.
Stores could raise prices, and consumers could stop buying certain things, for example.
Even if it proves temporary, high inflation is already weighing on businesses and their customers.
“Just because it is transitory — that is, caused by some dislocation of the pandemic — that does not mean it is not disruptive and extremely impactful to certain segments of the economy,” says Constance Hunter, the chief economist at KPMG.
The big debate over workers in America
Perhaps no issue has split opinions more sharply than why some Americans have remained reluctant to return to work, hindering some sectors like leisure and hospitality.
Republicans have consistently blamed the enhanced unemployment benefits passed during the pandemic. They say the benefits are a disincentive to work, and about half of states — almost all led by Republican governors — are ending the benefits early.
The data so far has been inconclusive, and analysts cite a number of reasons that some Americans have stayed on the sidelines, including health concerns, difficulty finding child care and, yes, the financial cushion provided by expanded benefits.
Ralph Elia owns KC Arts in Brooklyn, and he says it has gotten harder for him to find workers.
“I feel like small business has been in competition to get employees with the benefits,” Elia says. “I agreed with it in the beginning. We really needed it. But at some point, they should have slowed it down or cut it off. Because we need to hire people. People need to get out and work.”
Chips and the supply chain chaos
It’s a problem that has bedeviled industries from carmakers to homebuilders since last year: A surge in demand from people cooped up at home has led to shortages of key materials, such as chips used in all kinds of electronics and cars, as suppliers struggle to keep up.
Though some of the supply chain constraints are starting to ease — in the lumber sector, for example — there’s no certainty of when global trade will approach normality.
So far the impact has been manageable overall, though much depends on how long the shortages of key materials last.
“If there will be any drag on growth in the second quarter, it could be from inventory,” says Bryson, of Wells Fargo. “[There are] lots of supply constraints, businesses can’t produce as much and so, because of that, they may have been selling out of their inventory, and that could be a mild headwind to growth.”
Opinion: Tokenization, not crypto, is the future for Canada's digital economy – The Globe and Mail
Mark Wiseman is a Canadian investment manager and business executive serving as a senior adviser to Lazard Ltd., Boston Consulting Group and Hillhouse Capital, and the chair of Alberta Investment Management Corp.
The dual threats of inflation and further financial downturns are real and require immediate action from policy makers – and they arise at a time when a litany of disruptive global events have darkened the economic outlook.
In order to be effective, both monetary and fiscal policy must be surgical, centralized, based on data and implemented with accountability. We must also be cautious when the likes of Conservative leadership candidate Pierre Poilievre advocate to “opt out” of inflation and create economic value with bitcoin or other cryptocurrencies. The political appeal of such voices ignores both economic reality and the larger opportunity in this digital space: tokenization.
Having been an investor for more than two decades, including many years spent managing the pension investments of millions of Canadians, I care about the principle of intrinsic value: pricing assets based on their underlying attributes and, in turn, generating a reasonable risk-adjusted return from those assets.
Unlike traditional investment alternatives, cryptocurrencies have been – and are – extremely volatile, with their value tied to speculative activity as opposed to intrinsic worth.
While one can envision how central-bank digital currencies or stablecoins could change our financial system and create significant efficiency value down the road, the real benefit that exists today is in the blockchain and distributed-ledger technology behind cryptocurrencies.
Tokenization is a tool created by such technology and has the potential to immediately create and redistribute value for everyday Canadians. It allows owners of assets with intrinsic value – ranging from real estate, to securities, to commodities, to fine art (or the digital equivalent) – to tokenize their assets into a form that is usable on a blockchain application. In practical terms, it enables asset owners to sell fractional ownership of their asset akin to a publicly traded company issuing equity, but in a much more accessible way.
Tokenization leverages smart contract functionality (the same technology that supports many cryptocurrencies) that has the potential to unlock immense value and liquidity for many investors, big and small. This is the aspect of the blockchain and distributed ledgers that our political leaders and regulators should be focused on.
The tool is incredibly attractive because it can provide investors with easier ways to purchase, hold and trade assets that have real underlying value, including digital assets such as the NBA’s incredibly successful TopShot – a platform that allows fans to trade collectible NFTs of past plays (think of them as digital trading cards).
Cryptocurrencies, which have no clear intrinsic value, are an impressive demonstration of the power of blockchain. But like the early BlackBerry products, it turns out that the software that underlies many cryptocurrencies, such as bitcoin, is far more valuable than the initial application.
Tokenizing and selling part ownership of one’s assets can improve liquidity and increase the transparency of the value of their assets, allowing them to borrow against them more easily. Valuing an artwork is notoriously difficult, but if a sculpture is tokenized and a liquid market in those tokens develops, price discovery for the object as a whole becomes far easier. After the tokenization of a skyscraper, a token holder would be able to secure financing against their tokenized portion of the building, as opposed to having to mortgage the entire structure to gain funding.
Were Canada to become a leader in tokenization, retail investors would be able to access assets beyond the public equities and bonds to which they are now mostly limited. Institutional investors – many of whom have already begun to significantly increase their investments in private companies, real estate, infrastructure and other alternative investments – are desperate to find havens for their capital, particularly given the recent fluctuations in equity markets.
Tokenization would allow them to invest in assets that would otherwise be unavailable, creating potential value for both buyers and sellers. With fewer barriers to selling fractional ownership of large infrastructure projects, this class of investor can drastically expand the type of large projects into which they can invest.
Undoubtedly, regulation will be an important consideration. Publicly traded companies have a significant amount of disclosure regulations they must adhere to, which may cause many asset owners to shy away from listing their assets on public exchanges. Regulation will have to ensure adequate information is available about the underlying asset, so that investors purchasing tokens can understand what they’re buying, without being overly burdensome to the point that it dissuades asset owners from participating.
If we want to lead as a country in the blockchain and distributed-ledger technology sector, it is tokenization toward which we should be focusing our efforts – not on the misguided idea that bitcoin can solve the inflationary pressures brought about by an excess of demand over supply in the economy.
In fact, the support for cryptocurrencies by such voices as Mr. Poilievre, driven by criticism of our central bank, shows exactly why we need such independent institutions. Politicians are kept at arm’s length from them for good reason – just look at what happened to the Turkish economy when President Recep Tayyip Erdogan ignored and eroded the authority of the country’s central bank in favour of a misguided, politicized monetary strategy.
Instead of political theatre on the steps of a venerable institution, Mr. Poilievre and other cryptocurrency supporters ought to be more responsible and advocate to make Canada the leader in tokenization. That requires investing in the necessary training, technology and governance structures for this revolutionary technology, and building a system of laws and regulations to support it.
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Sri Lanka's Shattered Economy Awaits New Finance Head, Rate Hike – BNN
(Bloomberg) — Authorities in Sri Lanka this week are expected to name a new finance minister and raise interest rates as they struggle to stabilize an economy spiraling into chaos by a lack of dollars and surging inflation.
Prime Minister Ranil Wickremesinghe, appointed last week, is expected to soon choose a finance minister, who will help lead talks with the International Monetary Fund over badly needed aid.
Click here for the latest on developments in Sri Lanka
Meanwhile, the Central Bank of Sri Lanka is expected to raise its benchmark standing lending rate by 75 basis points on Thursday from 14.5%, the median in a Bloomberg survey shows as of Tuesday, as it tries to battle Asia’s fastest inflation.
The decisions come as the South Asian country barrels toward its first official default, with the 30-day grace period for missed interest payments on dollar bonds ending Wednesday.
Read more: Sri Lanka Stumbles Toward Its First Default on Foreign Debt
The prime minister on Monday warned that the country was down to its last day of gasoline supplies, as it doesn’t have the dollars to pay for shipments aboard tankers anchored just offshore. He also said it would need to print money to pay government salaries, a move that will certainly worsen inflation already running near 30%.
What Bloomberg Economics Says…
“Facing a cratering currency and the risk of hyperinflation, the Central Bank of Sri Lanka is sure to hike rates further — crushing growth. But we think the worst of the inflation storm will pass fairly quickly. The prospect of consumer price gains cooling into 2023 should allow the central bank to limit its remaining rate increases to 400 basis points.”
— Ankur Shukla, Economist
For the full note, click here
Sri Lanka is suffering a shortage of food, medicine and energy while its currency has been in a free fall, fueling protests and violence that pushed Prime Minister Mahinda Rajapaksa to resign last week. His brother Gotabaya, the president, appointed long-time opponent Wickremesinghe in a bid to calm the situation and restore order. Central bank Governor Nandalal Weerasinghe had earlier threatened to resign if political stability wasn’t established.
The country’s monetary authority has raised interest rates by 850 basis points so far this year. Meanwhile, the currency has lost more than 40% against the dollar since the end of February, while its foreign exchange reserves dipped 4.7% in April to $1.8 billion. Officials, however, warned earlier this month that the country has about $50 million in usable reserves.
©2022 Bloomberg L.P.
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