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Economy

The Long Ascent: Overcoming the Crisis and Building a More Resilient Economy – International Monetary Fund

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By Kristalina Georgieva, IMF Managing Director
Washington, D.C.

October 6, 2020

As prepared for delivery

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1. Introduction: A World Turned Upside Down

Dear Minouche, thank you for the warm welcome! I am honored to celebrate
with all of you the 125th anniversary of the
London School of Economics. It is a proud moment for the students and
faculty, and for the alumni.

As an alumna of LSE and as Managing Director of the IMF, I know that our
institutions share so many of the same values. I was reminded of that last
year, when I saw a large new sculpture—the globe—on the LSE campus. We are
connected by our global perspective, by caring deeply about the world we
live in and its future.

Mark Wallinger’s sculpture could not symbolize any better what we are
facing today: our world is turned upside down by the pandemic—by the loss of more than a million lives, by the economic impact on
billions of people. In low-income countries, the shocks are so profound
that we face the risk of a “lost generation.”

To confront this crisis, we can take inspiration from a previous generation. William Beveridge, a former LSE
Director, issued his famous report in 1942, which led to the creation of
the UK’s National Health Service. And in 1944, John Maynard Keynes and
Harry Dexter White led the establishment of the Bretton Woods
system—including the IMF and the World Bank.

They forged a better world in the worst possible moment,
in the midst of war. We need the same spirit now for the post-pandemic
world—build one that is more inclusive and more resilient.

That will be the focus of the IMF’s 189 member countries when we meet in
our virtual Annual Meetings next week. It is what I will concentrate on
today.

2. Global Outlook: The Long Ascent

First, let’s look at the economic picture.
Global economic activity took an unprecedented fall in the second quarter
of this year, when about 85 percent of the world economy was in lockdown
for several weeks.

The IMF in June projected a severe global GDP contraction in 2020. The
picture today is less dire. We now estimate that developments in the second
and third quarters were somewhat better than expected, allowing for a small upward revision to our global forecast for 2020. And we
continue to project a partial and uneven recovery in 2021. You will see our updated
forecast next week.

We have reached this point, largely because of extraordinary policy measures that put a floor under the
world economy. Governments have provided around $12 trillion in fiscal support to households and firms.
And unprecedented monetary policy actions have maintained the flow of
credit, helping millions of firms to stay in business.

But some were able to do more than others. For advanced economies, it is whatever it takes. Poorer nations strive for whatever is possible.

This gap in response capacity is one reason why we see differentiated outcomes. Another reason is the effectiveness of measures to contain the pandemic and
restart economic activities. For many advanced economies, including the
United States and the Euro Area, the downturn remains extremely painful,
but it’s less severe than expected. China is experiencing a
faster-than-expected recovery. Others are still hurting badly, and some of
our revisions are on the downside.

Emerging markets and low-income and fragile states
continue to face a precarious situation. They have weaker
health systems. They are highly exposed to the most affected sectors, such
as tourism and commodity exports. And they are highly dependent on external
financing. Abundant liquidity and low interest rates helped many emerging
markets to regain access to borrowing—but not a single country in Sub-Saharan Africa has issued
external debt since March.

So, my key message is this: The global economy is coming back from the depths of the crisis. But this
calamity is far from over. All countries are now facing what I would call “The Long Ascent”—a difficult climb that will be long, uneven, and uncertain. And prone to setbacks.

As we embark on this “ascent,” we are all joined by a single rope—and we are only as strong as the weakest climbers. They will need
help on the way up.

The path ahead is clouded with extraordinary uncertainty.
Faster progress on health measures, such as vaccines and therapies, could
speed up the “ascent”. But it could also get worse, especially if there is
a significant increase in severe outbreaks.

Risks remain high, including from rising bankruptcies and stretched valuations in financial
markets. And many countries have become more vulnerable.
Their debt levels have increased because of their fiscal response to the
crisis and the heavy output and revenue losses. We estimate that global
public debt will reach a record-high of about 100 percent
of GDP in 2020.

There is also now the risk of severe economic scarring
from job losses, bankruptcies, and the disruption of education. Because of
this loss of capacity, we expect global output to remain well below our
pre-pandemic projections over the medium term. For almost all countries,
this will be a setback to the improvement of living standards.

This crisis has also made inequality even worse because of its
disproportionate impact on low-skilled workers, women, and young people.
There are clearly winners and losers—and we risk ending up with a Tale of Two Cities. We need to find a way out.


3. The Path Forward: Confronting the Crisis and Pushing for
Transformations

So, what is the path forward? We see four immediate priorities:

  • First, defend people’s health. Spending on treatment, testing, and contact tracing is an imperative.
    So too is stronger international cooperation to coordinate vaccine
    manufacturing and distribution, especially in the poorest countries.
    Only by defeating the virus everywhere can we secure a full
    economic recovery anywhere.
  • Second, avoid premature withdrawal
    of policy support. Where the pandemic persists, it is critical to
    maintain lifelines across the economy, to firms and workers — such as
    tax deferrals, credit guarantees, cash transfers, and wage subsidies.
    Equally important is continued monetary accommodation and liquidity
    measures to ensure the flow of credit, especially to small and
    medium-sized firms—thus supporting jobs and financial stability.
    Cut the lifelines too soon, and the Long Ascent becomes a
    precipitous fall.
  • Third, flexible and forward-leaning fiscal policy will be critical for the recovery to
    take hold. This crisis has triggered profound structural
    transformations, and governments must play their role in reallocating
    capital and labor to support the transition. This will require both stimuli for job creation, especially in green
    investment, and cushioning the impact on
    workers: from retraining and reskilling, to expanding the scope and
    duration of unemployment insurance. Safeguarding social spending will
    be critical for a just transition to new
    jobs.
  • Fourth, deal with debt—especially in low-income countries. They entered this crisis with
    already high debt levels, and this burden has only become heavier. If
    they are to fight the crisis and maintain vital policy support; if they
    are to prevent the reversal of development gains made over decades,
    they will need more help—and fast. This means access to more grants,
    concessional credit and debt relief, combined with better debt
    management and transparency. In some cases, global coordination to
    restructure sovereign debt will be necessary, with full participation
    of public and private creditors.

In all these areas, our member countries can count on the IMF. We will help them all the way up the mountain. We
will strive to be their ‘sherpa,’ We will help show the way with sound
policy advice. We will provide the training some may need. And above all,
we will be there with financial support and help ease the debt burden for
those who otherwise may not make it.

We have provided financing at unprecedented speed and
scale to 81 countries. We have reached over $280 billion in lending commitments—more than a third of
that approved since March. And we are ready to do more: we still have
substantial resources from our 1 trillion in total lending capacity to put at the service of our members
as they embark on their “ascent.”

Again, this will be a difficult climb. It requires new paths up the mountain. We cannot afford simply to
rebuild the old economy, with its low growth, low productivity, high
inequality, and worsening climate crisis.

That is why we need fundamental reforms to build a more resilient economy—one that is greener, smarter, more
inclusive—more dynamic. This is where we need to direct the massive
investments that will be required for a strong and sustainable recovery.

New IMF research shows that increasing public investment by just 1
percent of GDP across advanced and emerging nations can create up to 33 million new jobs.

We know that, in many cases, well-designed green projects
can generate more employment and deliver higher returns,
compared with conventional fiscal stimulus.

We also know that an accelerated digital transformation is
underway, promising higher productivity and new jobs with higher
wages. We can unlock this potential by retooling tax systems and investing
in education and digital infrastructure. Our goal must be for everyone to
have access to the internet and the skills to succeed in the 21 st century economy.

4. Conclusion: Keep Climbing!

All this can be done—because we know that previous generations had the
courage and resolve to climb the mountains they faced. It is now our turn;
this is our mountain.

As one climber put it: “Every mountain top is within reach if you just keep climbing.”

The same goes for the Long Ascent and the polices needed to move
forward. Joined by a single rope, we can overcome the crisis and achieve a
more prosperous and more resilient world for all.

Thank you very much!

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER:

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson

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Economy

Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Economy

Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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