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The Global Economy: Heading Toward a Dark Winter? – Council on Foreign Relations

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The global economy is poised for a difficult period. The largest economies in Europe are shutting down for a second time. The benefits of the U.S. stimulus are starting to fade. Asia should be in a better place, given its health statistics—but its recovery to date has relied in part on the rest of the world’s demand and thus it isn’t fully insulated from renewed global weakness.

Europe: More Stimulus Needed

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Both the United States and Europe reported strong recoveries in the third quarter. The euro area grew a bit faster than the U.S. economy in the third quarter, but that is misleading since the strong rebound in the third quarter stemmed from a bigger fall in the second quarter. Output in the euro area remained a little more than 4 percent below its prepandemic level, while output in the United States is down by around 3.5 percent. 

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It is already clear that Europe is set for a weak fourth quarter. European Central Bank (ECB) President Christine Lagarde was diplomatic: “The euro area economic recovery is losing momentum more rapidly than expected.” Even if the current round of lockdowns is somewhat less disruptive than in the spring, it will set the recovery back—or rather, the resurgence of the virus has set the recovery back, since, even absent formal restrictions, households tend to take steps to limit the risk of transmission. 

The ECB almost certainly will need to provide more support for Europe’s recovery at its meeting in December—and Europe’s fiscal stance will need to be recalibrated. 

Europe should get credit for its aggressive fiscal response to the COVID-19 shock. But now it seems too optimistic to expect that effective containment of the virus will allow for a natural rebound in activity that will generate a rise in revenues and bring down fiscal deficits in 2020. Absent a quick public health breakthrough, more fiscal support likely will be needed in 2021, something that the ECB recognizes.

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United States: A Weak Recovery Looms Without More Policy Action

The apparent strength of the U.S. recovery in the third quarter is also deceptive. The economy—as a chart of estimated monthly gross domestic product (GDP) shows—was already losing momentum in August and September. The reported increase in the average level of activity in the third quarter relative to the second quarter is largely because it was much better in May and June than in March and especially April.

It isn’t hard to figure out why. The fiscal support that Congress provided in the spring supported household incomes, and it provided the foundation for a strong rise in the consumption of goods even as demand for many services remained subdued. This has not been a typical downturn: most downturns are led by a fall in investment and investment goods, but this downturn has been driven by a fall in demand for services. The large increase in U.S. demand for durable household goods has not been enough to drive a strong recovery in U.S. industrial production, since U.S. industry is more geared toward the production of large capital goods for businesses—such as aircraft—than household goods.   The trade deficit has soared on the back of increased demand for consumption goods and still weak exports.

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The lack of recent momentum, combined with the failure to agree on a preelection stimulus package, portends a weak U.S. recovery at best. The uptick in COVID-19 cases poses further downside risks. Even in the best-case scenario, where an effective vaccine is approved in the near future, it will take time for a large portion of the population to be vaccinated. There is no real doubt that the U.S. economy needs more fiscal support. The chairman of the Federal Reserve, Jerome Powell, has been admirably clear on this point.  

Asia: Drawing on the Rest of the World for Demand

Asia should be the engine of the global recovery. The virus originated in China, which is now one of the few countries globally where reported output is more or less back to its prepandemic trend. South Korea and Taiwan have exceptionally good health records, and their economies are up year-over-year. Under normal circumstances, China’s strong recovery would be pulling in imports, including manufactured imports. (Its output is up by close to 5 percent year-over-year, while output of many of its trade partners is down by roughly the same percentage.) China’s outperformance, in turn, would normally reduce its trade surplus.

But these are not normal times. China has benefited from the shift in global demand away from services and toward the medical kits, home appliances, and laptops it produces in great quantities. But it has not done much in terms of policy to support its own consumption. As a result, the recovery in industrial production has outpaced the recovery in consumption, and China’s trade surplus is setting records. But there is a downside here: China’s own recovery remains vulnerable to falloff in global demand, as it has not been entirely homegrown.

Emerging Economies: Not Yet Turning the Corner

Finally, if China is set aside, the world’s emerging economies are not doing well. Most of them have provided a smaller fiscal stimulus than most advanced economies, and most emerging markets are now running substantial trade surpluses, which means their savings are helping to finance the fiscal deficits of advanced economies.  African countries have injected smaller amounts of fiscal stimulus than they did back in 2008, according to the International Monetary Fund, since they entered the COVID-19 shock with depleted coffers after the big fall in commodity prices in 2014–15. Low interest rates in advanced economies have not translated into low borrowing costs everywhere. That is why the Group of Thirty is calling for a substantial mobilization of international support to help poor countries finance pandemic-related shocks. It could be done without large new budget outlays in the advanced economies, and it would help the entire global economy recover from a once-in-a-generation crisis.

Editor’s Note: The author has been advising the team supporting Democratic presidential candidate Joe Biden. He was also a project director for the Group of Thirty report on a COVID-19 recovery.

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Feds' fall economic statement shortchanges climate – Corporate Knights Magazine

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Canadians are going to have to wait until the next Liberal budget to get a full sense of the government’s commitment to a green recovery, though Ottawa has unveiled some key parts of the plan this fall.

Finance Minister Chrystia Freeland made a down payment on clean-energy stimulus in her fall economic statement on November 30, but the $6.64-billion package of new measures over 10 years was far smaller than some clean-energy advocates had called for.

Corporate Knights calculates that the funding announced for a climate-focused recovery plan represents only 20% of the federal investment needed to meet the government’s own commitment to reduce greenhouse gas emissions.

In the government’s first major financial update since the COVID-19 pandemic shut down the economy last March, Freeland maintained a focus on support programs for individuals and businesses.

She promised a future budget with a more robust stimulus plan worth up to $100 billion over three years. It’s uncertain how much of that will be allocated to climate-change mitigation, given competition from other post-pandemic priorities such as a national daycare program to boost women’s participation in the workforce.

The federal green recovery plan, to date, falls well short of the commitments made by more ambitious national governments, including that promised by U.S. President-elect Joe Biden, who has pledged a US$2-trillion green recovery plan, subject to Congressional approval.

Numerous groups have urged the Liberal government to match the efforts of countries in Europe and East Asia that have announced major green stimulus plans, even as some of those nations remain in the grip of the pandemic.

As part of a green recovery plan endorsed by 50 business leaders, Corporate Knights proposed a 10-year, $108-billion program that would be front loaded to ensure that Canada can re-start the economy on a greener footing that it argues will be essential to tapping into global growth markets.

In a series of virtual roundtables hosted by Corporate Knights and the Embassy of Germany in Canada this fall, speakers pointed to opportunities in areas such as deep retrofits for buildings, the emerging hydrogen economy, and potential markets for non-combustible products from the oil sands that would trap carbon rather than emitting it into the atmosphere.

Corporate Knights publisher Toby Heaps described the Liberal plan as “meek,” saying, “I think the government’s response to the pandemic shows us what an emergency response looks like, and one cannot help but notice how different that looks from their response to the climate emergency.”

In a report this fall, another group, the Task Force for a Resilient Recovery, urged the federal government to adopt a five-year, $55.4-billion plan that would allocate $27.4 billion to deep retrofits of buildings.

As of the fall update, the Liberal government has allocated $12.6 billion over 10 years to climate-related action, including $6 billion already allocated to the Canada Infrastructure Bank. That figure will climb when Freeland unleashes her stimulus budget, likely next spring. The budget, she said in her speech, “will advance our progress on climate action and promote a clean economy.”

In the mini-budget released November 30, the minister allocated $6.64 billion in three key areas, though some of that money will be spent over 10 years: $2.6 billion over seven years for home retrofits; $150 million to install electric-vehicle charging stations; and $3.9 billion to plant two billion trees, preserve wetlands and boost sustainable agriculture.

The building-retrofit plan consists of $5,000 grants, which the government hopes will be used to improve the energy efficiency – and lower carbon emissions – of 700,000 homes. Freeland said the government will also fashion a plan for low-interest loans to support more expensive, deeper retrofits.

The grants alone will be insufficient to provide enough incentive for homeowners and landlords to make the deep retrofits needed to dramatically reduce greenhouse gas emissions from buildings, which account for 17% of the country’s total, said Ralph Torrie, co-author of a Corporate Knights white paper called Building Back Better with a Green Renovation Wave.

“At a time when the urgent need is to stimulate the business and logistical innovations for implementing mass, deep retrofits, we get instead $5,000 grants for households to go it alone,” Torrie said. “This will create lost opportunities by triggering halfway measures and upgrades that fall short of what is required for an effective emergency response to climate change.”

The fall economic statement is only part of the government’s plan, with other measures either recently announced or due to be released by the end of December.

Environment Minister Jonathan Wilkinson will soon be releasing an updated climate plan, while Natural Resources Minister Seamus O’Regan will release federal strategies on hydrogen and small modular reactors.

On the hydrogen market, the federal government lags several competitors who have already announced major strategies to be suppliers of “green” hydrogen, an emissions-free source that is derived from renewable power. Australia is fast-tracking a $36-billion hydrogen plan, while Germany and France are moving full steam ahead with plans to develop industrial uses for the clean-burning fuel.

Corporate Knights has proposed that Ottawa spend $1 billion on research and development efforts over the next five years and another $8 billion over the decade to deploy hydrogen technology across the Canadian economy.

Corporate Knights also recommended that the feds provide $1.4 billion in funding over five years to help the industry commercialize lightweight carbon-fibre production as part of a “bitumen beyond combustion” strategy, but the November 30 statement lacked any sign of a plan for shifting Canadian oil and gas economics.

How does Fall Economic Statement stack up against Corporate Knights’ Building Back Better Green Recovery Plan?

  Federal Contribution 2021-2030    
CK BBB FES BBB % shortfall
Building Back Better Homes 14656 2600 82
Building Back Better Workplaces 6000 2000 67
Greening the Grid 6700 2500 63
Building Back Better EV Uptake 11949 1650 86
Building Back Better Active Mobility 2000
Building Forest Natural Capital 16000 3791 76
Building Agriculture Natural Capital 6000 98 98
Natural Resources and EV Innovation 40500
Building Back Better Industry 4800
Sum for all programs (2021-30) 108605 12639 TBD

Sources: Fall Economic Statement 2020 

Building Back Better with a Bold Green Recovery Synthesis Report

Earlier this fall, the Build Back Better Together roundtable heard compelling evidence that economic recovery strategies that aim to return to business as usual will reignite the growth in greenhouse gas emissions, as happened after the 2008/09 recession.

If governments want to ensure that they can fund the green recovery to avert the worst impacts of the climate crisis, they’ll have to collaborate with private-sector financial institutions, another roundtable session heard.

While there is growing focus on the importance of harnessing capital markets to address climate change, government action remains critical, said Sean Kidney, CEO of the London-based Climate Bonds Initiative, an international non-governmental organization working to mobilize debt markets for climate solutions.

“It is not possible for private markets to do this. That is a total fallacy,” Kidney said. “This is not something that is going to be solved by the private market. This is something that is going to be solved by close collaboration between public and private markets.”

In her fall statement, Freeland announced support for a Sustainable Finance Action Council, which will begin work in the new year with the goal of “developing a well-functioning sustainable finance market in Canada.” Pension funds and other investors have been urging corporations in Canada to provide greater clarity around climate-change-related risks and opportunities, and experts are urging governments to show leadership.

However, Canada still lags some of its peers in terms of financial commitment to a green recovery that will fund the transition to a net-zero economy.

The government estimated that its $100-billion stimulus package would be equivalent to 3 to 4% per cent of gross domestic product, but it is unclear how that figure was calculated. Spread over three years, the spending would represent more like 2% of GDP, and only a portion of that will go to green projects.

Many of Canada’s trading peers, including Germany, France and the EU, have already earmarked 30% or more of post-pandemic stimulus for climate action.

In partnering with Corporate Knights on the Building Back Better Together virtual roundtable series this fall, German Ambassador Sabine Sparwasser said her government is committed to a strategy that focuses stimulus spending on building back better.

“We’re not going to get out of the current crisis just by giving people social benefits,” Sparwasser said during one session. “We need to invest in new technology in order to address the other crisis that is out there and is even bigger: climate change.”

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.
With the support of the Embassy of the Federal Republic of Germany in Canada.

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Euro zone economy to gain momentum in 2021 on vaccine hopes: Reuters poll – The Journal Pioneer

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By Richa Rebello and Manjul Paul

BENGALURU (Reuters) – The euro zone economy will contract again this quarter as renewed lockdown measures stifle activity, according to a Reuters poll which showed the bloc’s GDP would then return to pre-crisis levels within two years.

Hopes for a coronavirus vaccine and additional support from the European Central Bank this month meant quarterly growth forecasts for next year were upgraded in the poll conducted from Nov. 26-Dec. 2.

“We now assume vaccines will be rolled out in the euro zone next year and most restrictions on economic activity are lifted during Q2. As a result, GDP increases by around 5% next year, regaining its pre-COVID level in early 2022,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“There are still big risks to this forecast. There could yet be a third wave of the virus, vaccine distribution could run into political or logistical problems, and governments could be slower to ease restrictions. On the other hand, the vaccines could be more effective or easier to roll out than anticipated”.

Nearly 80% of respondents, or 36 of 45, who replied to an extra question said the economy would return to pre-crisis levels within two years.

That was a major turnaround in expectations from August when more than 70% of economists said it would take two or more years to reach that level.

The wider poll showed after contracting 2.6% this quarter, the economy would grow 1.1% in the first quarter of 2021 compared with 0.8% in the last poll. It was then predicted to expand 2.0% and 1.8% in Q2 and Q3, better than median predictions of 1.8%, 1.2% in November.

On an annual basis, the economy was expected to shrink 7.4% this year, and grow 5.0% in 2021 largely unchanged from the last poll. For 2022, the growth forecast was upgraded to 3.5% from 3.1%. (Graphic: Reuters Poll: Euro zone economy and ECB monetary policy outlook, https://fingfx.thomsonreuters.com/gfx/polling/xlbvgzaxjpq/Reuters%20Poll%20-%20ECB%20and%20EZ%20outlook%20-%20December%202020.PNG)

That pick-up in growth will not filter through to inflation which was expected to remain far below the European Central Bank’s target of just below 2%, averaging 0.3% in 2020. 0.9% in 2021 and 1.3% in 2022.

Having remained in negative territory for the fourth straight month in November, inflation is likely to be a point of focus when the ECB’s Governing Council meets next week.

The ECB has launched a strategic review after years of inflation undershooting its target and nearly 80% of respondents to an extra question, or 33 of 43 economists, said the ECB would change its inflation target.

While a smaller section of poll participants commented on what the target would be, most said the ECB would allow more leeway around 2% or adopt an average inflation targeting framework, similar to the Federal Reserve’s recent policy.

“We are probably going to see something which looks a little bit similar to the Fed in the sense that this will be more of a symmetrical target. By changing to a symmetrical target, you build in a little more tolerance for higher inflation in the future,” said Elwin de Groot, head of macro strategy at Rabobank.

“This cements the idea rates will stay very low in the coming years… but the past ten years suggest these very relaxed policy settings are not sufficient to really create more growth and inflation. What you really need is a combination of monetary and fiscal policy.”

The ECB was expected to top up its pandemic-related bond purchases by 500 billion euros, at its Dec. 10 meeting, extending the programme by six months until December 2021, a Nov. 18 poll found. It was also predicted to change the terms of its targeted long-term loans to financial institutions.

(Reporting by Richa Rebello and Manjul Paul; Polling by Tushar Goenka and Hari Kishan; Editing by Jonathan Cable and Toby Chopra)

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Euro zone economy to gain momentum in 2021 on vaccine hopes: Reuters poll – The Journal Pioneer

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By Richa Rebello and Manjul Paul

BENGALURU (Reuters) – The euro zone economy will contract again this quarter as renewed lockdown measures stifle activity, according to a Reuters poll which showed the bloc’s GDP would then return to pre-crisis levels within two years.

Hopes for a coronavirus vaccine and additional support from the European Central Bank this month meant quarterly growth forecasts for next year were upgraded in the poll conducted from Nov. 26-Dec. 2.

“We now assume vaccines will be rolled out in the euro zone next year and most restrictions on economic activity are lifted during Q2. As a result, GDP increases by around 5% next year, regaining its pre-COVID level in early 2022,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“There are still big risks to this forecast. There could yet be a third wave of the virus, vaccine distribution could run into political or logistical problems, and governments could be slower to ease restrictions. On the other hand, the vaccines could be more effective or easier to roll out than anticipated”.

Nearly 80% of respondents, or 36 of 45, who replied to an extra question said the economy would return to pre-crisis levels within two years.

That was a major turnaround in expectations from August when more than 70% of economists said it would take two or more years to reach that level.

The wider poll showed after contracting 2.6% this quarter, the economy would grow 1.1% in the first quarter of 2021 compared with 0.8% in the last poll. It was then predicted to expand 2.0% and 1.8% in Q2 and Q3, better than median predictions of 1.8%, 1.2% in November.

On an annual basis, the economy was expected to shrink 7.4% this year, and grow 5.0% in 2021 largely unchanged from the last poll. For 2022, the growth forecast was upgraded to 3.5% from 3.1%. (Graphic: Reuters Poll: Euro zone economy and ECB monetary policy outlook, https://fingfx.thomsonreuters.com/gfx/polling/xlbvgzaxjpq/Reuters%20Poll%20-%20ECB%20and%20EZ%20outlook%20-%20December%202020.PNG)

That pick-up in growth will not filter through to inflation which was expected to remain far below the European Central Bank’s target of just below 2%, averaging 0.3% in 2020. 0.9% in 2021 and 1.3% in 2022.

Having remained in negative territory for the fourth straight month in November, inflation is likely to be a point of focus when the ECB’s Governing Council meets next week.

The ECB has launched a strategic review after years of inflation undershooting its target and nearly 80% of respondents to an extra question, or 33 of 43 economists, said the ECB would change its inflation target.

While a smaller section of poll participants commented on what the target would be, most said the ECB would allow more leeway around 2% or adopt an average inflation targeting framework, similar to the Federal Reserve’s recent policy.

“We are probably going to see something which looks a little bit similar to the Fed in the sense that this will be more of a symmetrical target. By changing to a symmetrical target, you build in a little more tolerance for higher inflation in the future,” said Elwin de Groot, head of macro strategy at Rabobank.

“This cements the idea rates will stay very low in the coming years… but the past ten years suggest these very relaxed policy settings are not sufficient to really create more growth and inflation. What you really need is a combination of monetary and fiscal policy.”

The ECB was expected to top up its pandemic-related bond purchases by 500 billion euros, at its Dec. 10 meeting, extending the programme by six months until December 2021, a Nov. 18 poll found. It was also predicted to change the terms of its targeted long-term loans to financial institutions.

(Reporting by Richa Rebello and Manjul Paul; Polling by Tushar Goenka and Hari Kishan; Editing by Jonathan Cable and Toby Chopra)

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