Economy
The global economy is heading for its worst year since the financial crisis, Bank of America says – CNBC
Global economic growth is likely to be the worst this year since the Great Recession as headwinds from the coronavirus and other factors build, according to Bank of America.
Gross domestic product growth worldwide is projected to slow to 2.8% for 2020, which BofA Global Research said would be the first sub-3% reading since the recession and financial crisis ended in mid-2009.
The biggest weight is the coronavirus outbreak, which has slammed economic activity in China as the disease spreads. BofA economists say the U.S-China trade war, political uncertainty and weakness in Japan and some regions of South America also are part of the “large spillover effects” weighing on output.
“Extended disruptions in China should hurt global supply chains. Weak tourist flows will be another headwind for Asia,” BofA economist Aditya Bhave said in a note. “And limited outbreaks, similar to the one in Italy, are possible in many countries, leading to more quarantines and weighing on confidence.”
As part of the slowdown, BofA also sees China growth at 5.2% in 2020, down from 5.9% in 2019. Global GDP not including China is expected to rise just 2.2%, also the lowest since the recession.
The firm’s economists do not yet see the coronavirus turning into a global pandemic, and are not forecasting a recession. Instead, they see it as part of a larger slowdown trend driven by a multitude of factors that could be aggravated by this year’s U.S. presidential election and the possibility of continued effects from the trade tensions with China.
“The upcoming Presidential elections add another layer of complexity, as US trade policy would probably change significantly under a Democratic President,” Bhave wrote. “Business investment is likely to remain tepid until there is greater clarity on the rules of the game.”
Bhave said such “uncertainty shocks” tend to have “lagged, large and long lasting” impacts.
Tighter central bank policy and lingering aftereffects from tepid growth in 2019 also are weighing on growth.
“Last quarter’s soft patch creates unfavorable base effects for 2020 annual growth,” Bhave said. “This is just GDP math. Perhaps more importantly, the weakness in the global economy left little buffer against a major shock. Unfortunately the COVID-19 outbreak is turning out to be that shock.”
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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