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US economy may derail Trump 2020 victory – OMFIF

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Former US President Bill Clinton’s campaign strategist, James Carville, famously remarked that when it came to winning elections it was the economy, stupid.

This dictum has led many observers to surmise that the strong US economy makes President Donald Trump’s re-election in 2020 nearly certain. However, between now and November there can be many an economic slip. This would seem to be especially the case at a time when the International Monetary Fund estimates that 90% of the world’s economies are experiencing slowdowns.

This was the lesson that Republican hopeful John McCain learned as the US and global economies collapsed on the eve of the November 2008 presidential election, after having started the year on a seemingly sound footing.

To be sure, if the election were held today, the strong US economy would make Trump a formidable candidate for re-election.

Unemployment is at a 50-year low, the economy is growing at a satisfactory rate, wages are rising and the US stock market is beating record levels on almost a daily basis.

These achievements come at the cost of incurring a large budget deficit and a ballooning public debt that might have mortgaged the country’s economic future, but such matters are unlikely to be of concern to the electorate.

Unfortunately for Trump, today’s US economy will not be the determining factor in the 2020 presidential election. Rather, what will matter is how the US economy and financial markets perform in the months immediately running up to November 2020. In six months, the US economy could be looking decidedly less rosy.

Today, much like in early 2008, serious risks hang over the US and global economies. These include a global credit and asset price bubble of epic proportions, spawned by a decade of ultra-easy money by the world’s main central banks.

Global debt-to-GDP levels today are significantly higher than they were at the start of 2008. US and global equity valuations are stretched, housing bubbles have re-appeared in a number of important economies, and an alarming amount of credit has been extended to non-creditworthy borrowers around the globe at historically low interest rates.

No one can know when the global credit and asset market bubble will burst or what event will cause it to do so. However, with the abrupt change in the global economy over the past year, it would be rash to dismiss the possibility that the global credit bubble could burst well before the election.

The Chinese economy shows clear signs of losing momentum, the German, Italian, and UK economies all appear to be on the cusp of recessions, and the Indian economic growth rate has halved amid increased domestic political strife. Trump has a fragile truce in his trade war with China and is threatening to impose additional import tariffs on an already weak European economy.

The global political landscape is deteriorating. Geopolitical risks in North Korea and Iran have increased and the Middle East is in turmoil once again. Social protests are gaining momentum in countries as disparate as Chile, Colombia, France, Hong Kong, India, Iran and Venezuela.

Past experience, including that in 2008, should be informing us that when credit and asset price bubbles burst, the economic and financial market fallout can be disruptively large. It should also be reminding us as to how interconnected the world’s economic and financial system has become. In the same way as in 2008 the Lehman bankruptcy spilled over from the US to the rest of the global economy, a systemic crisis abroad could very well spill back to American shores.

Trump could be lucky in November; the global credit bubble may burst after his re-election. However, this is far from a certainty. It is equally possible that this time next year, we will look back and ask ourselves how we could have missed so many early warning signs about real trouble ahead in the global economy. These include the recent sovereign debt default in Argentina, the rising private credit defaults in China and Turkey, the WeWork financial fiasco, and the abrupt economic slowdown in China and Germany, the world’s second and third largest economies respectively.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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Economy

Canadian retail sales slide in April, May as COVID-19 shutdown bites

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Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Canadian dollar notches a 6-day high

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The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Toronto Stock Exchange higher at open as energy stocks gain

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Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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