This past week brought home the magnitude of the overlapping crises assailing the global economy, intensifying fears of recession, job losses, hunger and a plunge on stock markets.
At the root of this torment is a force so elemental that it has almost ceased to warrant mention — the pandemic. That force is far from spent, confronting policymakers with grave uncertainty. Their policy tools are better suited for more typical downturns, not a rare combination of diminishing economic growth and soaring prices.
Major economies including the United States and France reported their latest data on inflation, revealing that prices on a vast range of goods rose faster in June than anytime in four decades.
Those grim numbers increased the likelihood that central banks would move even more aggressively to raise interest rates as a means of slowing price increases — a course expected to cost jobs, batter financial markets and threaten poor countries with debt crises.
On Friday, China reported that its economy, the world’s second-largest, expanded by a mere 0.4% from April through June compared with the same period last year. That performance — astonishingly anemic by the standards of recent decades — endangered prospects for scores of countries that trade heavily with China, including the United States. It reinforced the realization that the global economy has lost a vital engine.
The specter of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world suffered similar problems: stagflation.
Most of the challenges tearing at the global economy were set in motion by the world’s reaction to the spread of COVID-19 and its attendant economic shock, even as they have been worsened by the latest upheaval — Russia’s disastrous attack on Ukraine, which has diminished the supply of food, fertilizer and energy.
“The pandemic itself disrupted not only the production and transportation of goods, which was the original front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking this past week during a discussion convened by the Brookings Institution in Washington. “Pretty much everything in our lives has been disrupted by the pandemic, and then we layer on to that a war in Ukraine.”
It was the pandemic that prompted governments to impose lockdowns to limit its spread, hindering factories from China to Germany to Mexico. When people confined to home then ordered record volumes of goods — exercise equipment, kitchen appliances, electronics — that overwhelmed the capacity to make and ship them, yielding the Great Supply Chain Disruption.
The resulting scarcity of products pushed prices up. Companies in highly concentrated industries from meat production to shipping exploited their market dominance to rack up record profits.
The pandemic prompted governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit joblessness and bankruptcy. Many economists now argue that they did too much, stimulating spending power to the point of stoking inflation, while the Federal Reserve waited too long to raise interest rates.
Now playing catch-up, central banks like the Fed have moved assertively, lifting rates at a rapid clip to try to snuff out inflation, even while fueling worries that they could set off a recession.
Given the mishmash of conflicting indicators found in the American economy, the severity of any slowdown is difficult to predict. The unemployment rate — 3.6% in June — is at its lowest point in almost half a century.
But anxiety over rising prices and a recent slowing of spending by American consumers have enhanced fears of a downturn. This past week, the International Monetary Fund cited weaker consumer spending in slashing expectations for economic growth this year in the United States, from 2.9% to 2.3%. Avoiding recession will be “increasingly challenging,” the fund warned.
The pandemic is also at the center of the explanation for China’s unnerving economic slowdown, which will probably extend shortages of industrial goods while limiting the appetite for exports around the world, from auto parts made in Thailand to soybeans harvested in Brazil.
China’s zero-COVID policy has been accompanied by Orwellian lockdowns that have constrained business and life in general. The government expresses resolve in maintaining lockdowns, now affecting 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate from Nomura, the Japanese securities firm.
But the endurance of Beijing’s stance — its willingness to continue riding out the economic damage and public anger — constitutes one of the more consequential variables in a world brimming with uncertainty.
Russia’s offensive in Ukraine has amplified the turmoil. International sanctions have restricted sales of Russia’s enormous stocks of oil and natural gas in an effort to pressure the country’s strongman leader, Vladimir Putin, to relent. The resulting hit to the global supply has sent energy prices soaring.
The price of a barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, though recent weeks have seen a reversal on the assumption that weaker economic growth will translate into less demand.
Germany, Europe’s largest economy, relies on Russia for nearly a third of its natural gas. When a major pipeline carrying gas from Russia to Germany cut the supply sharply last month, that heightened fears that Berlin could soon ration energy consumption. That would have a chilling effect on German industry just as it contends with supply chain problems and the loss of exports to China.
If Germany loses complete access to Russian gas — a looming possibility — it would almost certainly descend into a recession, say economists. The same fate threatens the continent.
“For Europe, the risk of a recession is real,” Oxford Economics, a research firm in Britain, declared in a report this past week.
For the European Central Bank — which next gathers on Thursday to much apprehension in markets — the prospect of a downturn further complicates an already wrenching set of decisions.
Ordinarily, a central bank ministering to an economy sliding toward recession lowers interest rates to make credit more available, spurring borrowing, spending, and hiring. But Europe is confronting not only weakening growth but also soaring prices, which customarily calls for lifting rates to snuff out spending.
Raising rates would support the euro, which has surrendered more than 10% of its value against the dollar this year. That has increased the cost of Europe’s imports, another driver of inflation.
Adding to the complexity is that the usual central banking tool kit is not built for this situation. Navigating the balance between protecting jobs and choking off inflation is difficult enough in simpler times. In this case, rising prices are a global phenomenon, one amplified by a war so far impervious to sanctions and diplomacy, combined with the mother of all supply chain tangles.
Neither the Fed nor the European Central Bank has a lever to pull that forces action from Putin. Neither has a way to clear the backlog of container ships clogging ports from the United States to Europe to China.
“Everyone following the economic situation right now, including central banks, we do not have a clear answer on how to deal with this situation,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. “You have a lot of things going on at the same time.”
The most profound danger is bearing down on poor and middle-income countries, especially those grappling with large debt burdens, like Pakistan, Ghana and El Salvador.
As central banks have tightened credit in wealthy nations, they have spurred investors to abandon developing countries, where risks are greater, instead taking refuge in rock-solid assets like U.S. and German government bonds, now paying slightly higher rates of interest.
This exodus of cash has increased borrowing costs for countries from sub-Saharan Africa to South Asia. Their governments face pressure to cut spending as they send debt payments to creditors in New York, London and Beijing — even as poverty increases.
The outflow of funds has pushed down the value of currencies from South Africa to Indonesia to Thailand, forcing households and businesses to pay more for key imports like food and fuel.
The war in Ukraine has intensified all of these perils.
Russia and Ukraine are substantial exporters of grains and fertilizers. From Egypt to Laos, countries that traditionally depend on their supplies for wheat have suffered soaring costs for staples like bread.
Around the globe, the ranks of those considered “acutely food insecure” have more than doubled since the pandemic began, rising to 276 million people from 135 million, the U.N. World Food Program declared this month.
Among the biggest variables that will determine what comes next is the one that started all the trouble — the pandemic.
The return of colder weather in northern countries could bring another wave of contagion, especially given the lopsided distribution of COVID vaccines, which has left much of humanity vulnerable, risking the emergence of new variants.
So long as COVID-19 remains a threat, it will discourage some people from working in offices and dining in nearby restaurants. It will dissuade some from getting on airplanes, sleeping in hotel rooms or sitting in theaters.
Since the world was first seized by the public health catastrophe more than two years ago, it has been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession and a war with no end in sight, that observation retains currency.
“We are still struggling with the pandemic,” said Haugland, the DNB Markets economist. “We cannot afford to just look away from that being a risk factor.”
© 2022 The New York Times Company
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How to Improve your Credit Score in Canada
Improving your credit score is important for many reasons. First, it could help you get a lower interest rate on your loans or mortgages. Second, it could help you qualify for better rates on car loans, cell phone plans, and other types of loans. Third, having a good credit score could increase your chances of being approved for a job or apartment. Finally, keeping your credit score high can help you avoid becoming financially stressed in the future. Here are some of the ways you can improve your credit score in Canada:
Monitor your payment history
Your payment history is the most important factor for your credit score.
To improve your payment history:
- always make your payments on time
- make at least the minimum payment if you can’t pay the full amount that you owe
- contact the lender right away if you think you’ll have trouble paying a bill
- don’t skip a payment even if a bill is in dispute
Use credit wisely
Don’t go over your credit limit. If you have a credit card with a $5,000 limit, try not to go over that limit. Borrowing more than the authorized limit on a credit card can lower your credit score.
Try to use less than 35% of your available credit. It’s better to have a higher credit limit and use less of it each month.
- a credit card with a $5,000 limit and an average borrowing amount of $1,000 equals a credit usage rate of 20%
- a credit card with a $1,000 limit and an average borrowing amount of $500 equals a credit usage rate of 50%
If you use a lot of your available credit, lenders see you as a greater risk. This is true even if you pay your balance in full by the due date.
To figure out the best way to use your available credit, calculate your credit usage rate. You can do this by adding up the credit limits for all your credit products.
- credit cards
- lines of credit
For example, if you have a credit card with a $5,000 limit and a line of credit with a $10,000 limit, your available credit is $15,000.
Once you know how much credit you have available, calculate how much you are using. Try to use less than 35% of your available credit.
For example, if your available credit is $15,000, try not to borrow more than $5,250 at a time, which is 35% of $15,000.
Increase the length of your credit history
The longer you have a credit account open and in use, the better it is for your score. Your credit score may be lower if you have credit accounts that are relatively new.
If you transfer an older account to a new account, the new account is considered new credit.
For example, some credit card offers come with a low introductory interest rate for balance transfers. This means you can transfer your current balance to this new product. The new product is considered new credit.
Consider keeping an older account open even if you don’t need it. Use it from time to time to keep it active. Make sure there is no fee if the account is open but you don’t use it. Check your credit agreement to find out if there is a fee.
Limit your number of credit applications or credit checks
It’s normal and expected that you’ll apply for credit from time to time. When lenders and others ask a credit bureau for your credit report, it’s recorded as an inquiry. Inquiries are also known as credit checks.
If there are too many credit checks in your credit report, lenders may think that you’re:
- urgently seeking credit
- trying to live beyond your means
How to control the number of credit checks
To control the number of credit checks in your report:
- limit the number of times you apply for credit
- get your quotes from different lenders within a two-week period when shopping around for a car or a mortgage. Your inquiries will be combined and treated as a single inquiry for your credit score.
- apply for credit only when you really need it
“Hard hits” versus “soft hits”
“Hard hits” are credit checks that appear in your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.
Examples of hard hits include:
- an application for a credit card
- some rental applications
- some employment applications
“Soft hits” are credit checks that appear in your credit report but only you can see them. These credit checks don’t affect your credit score in any way.
Examples of soft hits include:
- requesting your own credit report
- businesses asking for your credit report to update their records about an existing account you have with them
Use different types of credit
Your score may be lower if you only have one type of credit product, such as a credit card.
It’s better to have a mix of different types of credit, such as:
- a credit card
- a car loan
- a line of credit
A mix of credit products may improve your credit score. Make sure you can pay back any money you borrow. Otherwise, you could end up hurting your score by taking on too much debt.
UK Economy Probably Entered Its Worst Slump Since Lockdown – BNN
(Bloomberg) — The UK economy probably shrank for the first time since the nation was in a coronavirus lockdown at the start of 2021, adding to pressure for action from the contenders vying to take over as prime minister.
Gross domestic product for the second quarter probably shrank 0.2%, according to a survey of economists by Bloomberg News ahead of the official figures due to be published this week.
The drop would mark a pause in the recovery from the pandemic and the start of a more protracted downturn, which the Bank of England expects to last into early 2024. That outlook is roiling the race to replace Boris Johnson as leader of the ruling Conservative Party and prime minister.
Liz Truss and Rishi Sunak, who are competing in the race set to conclude in September, spent the weekend promoting their ideas to help. The central bank last week forecast that inflation will accelerate past a 40-year high to more than 13% this year, weighing heavily on consumer spending power.
Former Prime Minister Gordon Brown and the BOE’s former Chief Economist Charlie Bean this weekend added their voices pushing for an aid package that would help those hardest hit. They say the measures Johnson’s government brought forward earlier this year aren’t enough.
“The main package for households was worth about £15 billion, and there is certainly a case for something of at least that magnitude again,” Bean said in an interview on Times Radio.
Brown called for an emergency budget, warning that almost half of all households will tip into fuel poverty this winter because of a surge in the cost of electricity and natural gas.
“A financial time bomb will explode for families in October as a second round of fuel price rises in six months sends shock waves through every household and pushes millions over the edge,” Brown wrote in the Observer newspaper. He’s scheduled to appear on ITV on Monday.
The remarks and the outlook for rising natural gas prices add to the pressure on Truss and Sunak to explain what they would do to revive the economy.
Truss, the front-runner, has said she’d push through immediate tax cuts to help. Sunak, the former chancellor of the exchequer, says those measures would take too long to implement and wouldn’t help enough of those most in need.
A YouGov poll published on the front page of the latest edition of the Times, which is backing Sunak, suggested that most voters would rather the next prime minister focus on tackling inflation and the looming cost-of-living crisis rather than slashing taxes.
The economic backdrop is deteriorating rapidly as the surge in inflation makes businesses and consumers more cautious about spending.
The GDP report probably will show that the economy shrank 1.2% in June alone, held back in part by bank holidays to mark Queen Elizabeth II’s jubilee.
The BOE warned last week that the UK probably will enter recession in the fourth quarter of this year and keep shrinking for the whole of next year.
Energy prices are the biggest factor weighing on households. Starting in October, utilities will be allowed to charge £4,000 ($4,860) a year for the average power and gas bill, the highest level ever and almost four times the level of a year ago.
The BOE last week said gas futures are now about double the level they were in May, triggering a big increase in the central bank’s outlook for inflation.
Truss spent the weekend drawing attention to her vow for an immediate tax reduction and said that measure could help prevent a recession.
“I do not believe in resigning our great country to managed decline or accepting the inevitability of a recession,” Truss wrote in the Sunday Telegraph. “I would use this to immediately tackle the cost-of-living crisis by cutting taxes, reversing the rise on national insurance and suspending the green levy on energy bills.”
- UK Energy Price Cap Estimate Tops £4,000 for the First Time
- Truss to Speed Up UK Tax Cuts in Leadership Bid, Telegraph Says
- BOE Governor Tips Into Political Storm Over Surging UK Inflation
(Adds YouGov poll in 11th paragraph)
©2022 Bloomberg L.P.
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