Economy
US revises down GDP for Q4 to 2.7%
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The United States economy expanded at a 2.7 percent annual rate from October through December 2022, a solid showing despite rising interest rates and elevated inflation, the government said Thursday in a downgrade from its initial estimate.
The government had previously estimated that the economy grew at a 2.9 percent annual rate last quarter.
The US Department of Commerce’s revised estimate of the fourth quarter’s gross domestic product (GDP) — the economy’s total output of goods and services — marked a deceleration from the 3.2 percent growth rate from July through September.
Thursday’s report revised down the government’s estimate of consumer spending growth in the October-December quarter, from a 2.1 percent rate to 1.4 percent. That was the weakest such showing since the first quarter of last year.
Business spending also slowed in the fourth quarter, suggesting that the economy lost momentum at the end of 2022.
More recent data, though, shows that the economy has since rebounded. Consumers boosted retail sales in January by the most in nearly two years, and employers added a surprisingly outsized number of jobs. The unemployment rate reached 3.4 percent, the lowest level since 1969.
Some of the surprisingly strong economic gains in January likely reflected much warmer-than-usual weather. Few economists expect similar outsize gains in hiring or spending in the coming months. Most analysts think growth is slowing to a roughly 2 percent annual rate in the current January-March quarter.
Higher interest rates
“The year as a whole was weak and the economy is sure to have a difficult 2023 as it struggles under the weight of the interest rate increases orchestrated by the Federal Reserve to quell the painfully high inflation,” warned Scott Hoyt, senior director of analytics at ratings agency Moody’s.
And the Federal Reserve is expected to keep raising its benchmark interest rate over the next few months and to keep it at a peak through year’s end to try to defeat still-high inflation. The minutes from its last policy meeting, released Wednesday, showed that all 19 Fed officials favoured raising rates at the next two meetings.
“From the Fed’s perspective, a slowdown in the economy is anticipated and will be welcome news,” said Rubeela Farooqi, chief US economist at High Frequency Economics, a consulting firm. “However, even as growth slows, a focus on lowering elevated inflation means rates will move up further and will remain higher for longer.”
Higher borrowing costs make mortgages, auto loans and credit card borrowing more expensive. Those higher rates could discourage consumers and businesses from spending, hiring and investing and could eventually push the economy into a recession.
The economy’s growth at the end of 2022 reflected mainly a restocking of inventories, which will likely unwind in coming quarters, and a pickup in government spending. Housing investment fell nearly 26 percent; higher borrowing rates have crushed homebuying.
Inflation, measured year over year, has cooled since it reached 9.1 percent in June, having slowed to 6.4 percent in January. Yet on a monthly basis, price gains accelerated from December to January, raising the prospect that the Fed will boost its benchmark rate higher than it has previously signalled.
In Thursday’s GDP report, the government also sharply revised up its estimates of Americans’ incomes in the fourth quarter. After-tax income, adjusted for inflation, jumped 4.8 percent, a much larger gain than the previous 3.3 percent estimate.
The upward revisions reflected higher wages and salaries than were estimated earlier, and state stimulus payments that were intended to offset inflated costs of petrol, food and other necessities. Twenty-one states, including California, Colorado, Florida, New York, Idaho and Pennsylvania, issued one-time payments last year, typically in the form of tax refunds.
The boost in incomes could continue to support consumer spending this year and might have helped drive retail sales up in January. If so, stronger consumer spending could force the Fed to continue raising rates or keep them elevated for longer to cool the economy and quell inflation.
Economy
Federal budget to focus on clean economy, support for low-income Canadians, Freeland says – The Globe and Mail
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The federal government will “invest aggressively” in clean technology, Finance Minister Chrystia Freeland said Monday during a prebudget event in which she outlined the main themes of the economic plan she will deliver next week.
At a time when the U.S. government is spending billions through programs and tax breaks to spur the use of electric vehicles and clean energy, Ms. Freeland said it would “reckless” if Canada failed to also take action.
“Canada right now is really at a crucial crossroads. This is a moment when the great economies of the world have decided to embrace the clean economy,” Ms. Freeland told reporters after delivering a budget-themed speech to the International Brotherhood of Electrical Workers in Oshawa, Ont.
Ms. Freeland, who is also Deputy Prime Minister, said Canada must choose between two options.
“We also can invest aggressively in the clean economy of the 21st century in a smart, focused Canadian way – or we can be left behind,” she said. “Not making those investments is also a choice. And a choice, I believe, would be really irresponsible, really reckless.”
Monday’s speech is the latest in a series of public remarks in which the Finance Minister has provided broad outlines of the March 28 budget. She has previously said that accounting for the recently announced increase in health transfers to the provinces will be a key element. Her comments Monday add to earlier signals that the budget will include measures in response to green technology incentives contained in the Inflation Reduction Act approved last year in Washington.
In addition to those two areas of spending, Ms. Freeland said next week’s federal budget will include a “narrowly focused” boost to social safety net supports for low-income Canadians in response to the higher costs of living.
NDP Leader Jagmeet Singh, who is part of a supply and confidence agreement with the minority Liberal government, has said this should come in the form of an extension of the current six month doubling of the GST credit, a direct payment that is aimed at lower income Canadians.
Ms. Freeland did not provide specifics as to the form this support will take. She also repeated past assurances that the new spending can occur as part of a fiscally responsible budget.
Economists and business groups have cautioned that Canada can’t compete dollar-for-dollar with the billions in subsidies now on offer south of the border. A Congressional Budget Office report estimated that the measures in the Inflation Reduction Act add up to about US$400-billion over 10 years. A Credit Suisse report said the total could be twice as high.
Business Council of Canada CEO Goldy Hyder has said that Canada’s response should be about one-10th of the size of the U.S. package, given that Canada’s population is about one-10th that of the U.S. He also said that Canada’s response could include repurposing previously announced programs for business rather than funding it entirely through new spending.
In her speech, the finance minister also addressed the turmoil in financial markets following the failure of Silicon Valley Bank and this weekend’s merger of UBS and Credit Suisse.
“We have strong institutions, and we have a financial system that has proven its strength time and again,” she said. “Our financial institutions have the capital they need to weather periods of turbulence. A hallmark of our Canadian banks is prudent risk management—and this is also a core principle for those of us who regulate the financial system.”
The minister said the federal government is being vigilant and monitoring the situation closely.
Mr. Singh, the NDP leader, told The Globe last week that his party will be expecting to see cost-of-living support in the budget, including a previously promised expansion of a dental care program for lower-income Canadians.
The Conservative Party is urging the government to deliver a budget that reins in spending and avoids tax increases.
Sri Lanka’s president has said that the International Monetary Fund (IMF) has approved its request for a $2.9bn bailout and the country’s presidency said the programme will enable it to access up to $7bn in overall funding.
The IMF’s board confirmed it has signed off on the loan, which clears the way for the release of funds and kicks off a four-year programme designed to shore up the country’s economy.
The decision will allow an immediate disbursement of about $333m, the IMF said, and will spur financial support from other partners, potentially helping Sri Lanka emerge from its worst financial crisis in decades.
But IMF Managing Director Kristalina Georgieva warned that Colombo must continue pursuing tax reform and greater social safety nets for the poor – and rein in the corruption that has been partly blamed for the crisis.
“I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda,” Sri Lanka’s President Ranil Wickremesinghe said in a statement on Monday.
The country defaulted on its foreign debt in April 2022 as it plunged into its worst economic downturn since independence because of a major shortage of foreign currency reserves.
The Indian Ocean nation of around 22 million people ran out of cash to finance even the most essential imports, leading to widespread social unrest.
Mass protests over economic mismanagement, acute shortages of food, fuel and medicines, and runaway inflation forced President Gotabaya Rajapaksa to flee the country and resign in July.
Rajapaksa was replaced by President Wickremesinghe, who has implemented tough spending cuts and tax hikes in an attempt to secure IMF assistance.
IMF staff had provisionally approved the bailout in September, but the final green light was held up until China, the island’s biggest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year that it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of IMF expectations for the sustainability of the island’s debt.
Wickremesinghe had said after China agreed to restructure its loans that he expected the first tranche of the IMF package would be made available within the month.
Earlier on Monday, Wickremesinghe’s office said he was seeking a 10-year moratorium on Sri Lanka’s foreign debt as the country was out of foreign reserves to service its loans.
Officials involved in the negotiations said the terms of debt restructuring must be finalised and agreed upon by all parties before June, when the IMF is expected to review the bailout programme.
Wickremesinghe’s office said in a statement that the IMF programme will help improve the country’s standing in international capital markets, making it attractive for investors and tourists.
Wickremesinghe told the country’s parliament earlier that there were signs the economy was improving, but there was still insufficient foreign currency for all imports, making the IMF deal crucial so other creditors could also start releasing funds.
Call to tackle corruption
Colombo is also banking on the IMF deal to unfreeze billions of dollars in foreign aid for projects suspended since Sri Lanka defaulted on its loans last year.
The government has already doubled taxes, increased energy tariffs threefold and slashed subsidies in an effort to meet the preconditions of the IMF bailout.
The austerity measures have also led to strikes that halted the health and logistics sectors last week. Wickremesinghe has said he had no alternative but to go with an IMF programme.
Georgieva said Sri Lanka must stick with its controversial tax reforms, manage government expenditure and do away with energy subsidies.
In a statement, she said that “the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor”.
She also urged Colombo to tackle endemic corruption.
“A more comprehensive anti-corruption reform agenda should be guided by the ongoing IMF governance diagnostic mission that conducts an assessment of Sri Lanka’s anti-corruption and governance framework,” she said.
Sri Lanka’s economy shrank by a record 7.8 percent last year as it grappled with its worst foreign exchange shortage since independence from Britain in 1948.
The International Monetary Fund (IMF) said Monday that its executive board has approved a nearly $3 billion US ($4.1 billion Cdn) bailout program for Sri Lanka over four years to help salvage the country’s bankrupt economy.
An IMF statement said about $333 million US ($455 million Cdn) of the funding will be disbursed immediately and the approval will also open up financial support from other institutions.
“Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities,” the IMF statement quoted managing director Kristalina Georgieva as saying.
“Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.”
The office of Sri Lanka’s president said the IMF approval will unlock financing of up to $7 billion ($9.6 billion Cdn) from the fund and other international multilateral financial institutions.
CBC’s Salimah Shivji gives an inside look at how the political and economic unrest in Sri Lanka is hurting everyday people.
Earlier this month, the last hurdle for the approval was cleared when China joined Sri Lanka’s other creditors in providing debt restructuring assurances.
“From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors,” president Ranil Wickremesinghe said in a statement from his office. “I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda.”
Wickremesinghe said he has made some tough decisions to ensure stability, debt sustainability and to grow an inclusive and internationally attractive economy.
Sri Lanka increased income taxes sharply and removed electricity and fuel subsidies, fulfilling prerequisites of the IMF program. Authorities must now discuss with Sri Lanka’s creditors on how to restructure its debt.
“Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program,” Georgieva said.
“The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome,” she said.
Currency crisis
Sri Lanka announced last year that it is suspending repayment of its foreign debt amid a severe foreign currency crisis, because of a fall in tourism and export revenue due to the COVID-19 pandemic, mega projects funded by Chinese loans that did not generate income and releasing foreign currency reserves to hold the exchange rates for a longer period.
The currency crisis created severe shortages of some foods, fuel, medicine and cooking gas leading to angry street protests that forced then-president Gotabaya Rajapaksa to flee the country and resign.
Since Wickremesinghe took over, he has managed to reduce shortages and ended hours-long daily power cuts. The Central Bank says its reserves have improved and the black market no longer controls the foreign currency trade.
However, Wickremesinghe’ s government is likely to face hostility from trade unions over his plans to privatize state ventures as part of his reform agenda and public resentment may increase if he fails to take action against the Rajapaksa family, who people believe were responsible for the economic crisis.
Wickremesinghe’s critics accuse him of shielding the Rajapaksa family, who still control a majority of lawmakers in Parliament, in return for their support for his presidency.
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