Economy
U.S. consumers have spent more than $1 trillion saved up during the pandemic
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U.S. consumers have made a healthy dent in savings stockpiles accumulated during the pandemic.
And this drawdown presents a challenge for the economy in 2023.
New data from JPMorgan Asset Management published Monday shows estimated “excess savings” from U.S. households now stand at $900 billion, down from a peak of $2.1 trillion in early 2021 and roughly $1.9 trillion at the beginning of last year.
These savings have been drawn down as the personal savings rate has fallen sharply from historic highs seen during the pandemic.
The latest data on personal income and outlays from the BEA, released on December 23, showed the personal savings rate stood at 2.4% in November, down from a record high of 33.6% in March 2020.
Stimulus programs rolled out during the pandemic saw a surge in the household savings rate, which typically floated in a range between 7% and 9% of income in the years before the pandemic.
Households saved more than 10% of their income in each month between March 2020 and May 2021, building a multi-trillion dollar stockpile of savings to run down in the future.
And that future is now.
As has been chronicled over the past two years, these accumulated savings for consumers have powered robust spending, even in the face of 40-year highs in inflation and a softening labor market.
But with no new stimulus programs imminent and the economy showing some signs of feeling the impact of the Federal Reserve’s aggressive rate hikes, the ability for U.S. consumers to power unexpected growth will likely to come to an end.
Writing after last month’s report on personal income, Oren Klachkin and Ryan Sweet at Oxford Economics said that “the historically low [personal savings rate] indicates households deployed more of their dry powder.”
Klachkin added: “We believe this tailwind will fade away next year.”
The exact speed, size, and scope of the economic impact of a slower drawdown in savings, however, remains a bit of a moving target.
In a piece previewing the U.S. economic outlook for 2023 last month, Ian Shepherdson at Pantheon Macroeconomics wrote: “The only reason for hesitating before forecasting a recession is that the private sector is still sitting on some substantial excess cash accumulated during the pandemic.”
Shepherdson noted the drawdown in savings began last spring, as gas prices weighed on consumers nationwide. By June 2022, the average price of gas topped $5 a gallon.
In Shepherdson’s view, it is likely the bottom 40% of earners have run down all excess savings accumulated during the pandemic. This suggest the pace at which consumers spend down their remaining stockpiles will slow, as those on the higher end of the income distribution have more scope to hold off drawing on savings to meet current obligations.
And while “excess savings” will likely remain part of the economic discussion in the new year, Shepherdson sees the most important driver of consumer habits coming back to the fore as the primary influence on spending in 2023: the labor market.
“The bigger problem for consumers next year likely will be the softening of the labor market,” Shepherdson wrote. “The boost to job growth from post-COVID rehiring has slowed over the past year, and can be expected to fade away altogether next year.”
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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