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What Olaf Scholz means for the world economy – BBC News

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Olaf Scholz

EPA

It is an important moment for Europe. A new German chancellor. And what happens in the German economy affects us all.

It also happens to be the elevation of an incumbent finance minister to the most powerful position in European politics.

I did the last lengthy English-language interview with Olaf Scholz, when he was visiting London in summer to seal a deal on global multinational taxation, before he became favourite for the German chancellorship.

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He was almost tearful with joy at the G7 agreement, on a topic he had suggested years before. The agreement “will really change the world”, he told me, of a move impossible a year before with President Trump.

A political rival once likened his grin to that of the Smurf cartoon characters. He retorted that they are “small, crafty and always win”.

Signature policies

There are three signature economic policies he has been associated with that are of ongoing significance.

For one, he told me of his pride that the short-time working schemes, whose use was promoted in Germany by his ministry in the aftermath of the global financial crisis, were now being used around Europe, including the UK, in the guise of the furlough scheme.

“It was right that we gave very strong fiscal answers to fight against the pandemic,” he told me.

“We supported the health of our people with the money we spent, but also the economy and many jobs.

“Short-term allowances, Kurzarbeit – the method which I used when I was the minister of labour in Germany 10 years ago with the last crisis – are now something that is used, not just in Germany, but all over the EU and many other countries of the world. And this shows that it is right to do something against a crisis like this.”

He was also responsible for the Agenda 2010 reforms of the last centre-left Chancellor Gerhard Schröder. Those reforms saw significant reductions in labour costs in Germany, the establishment of low-paid “mini jobs” and also a rapid rise in German export competitiveness, as well as the revival of its economy.

The inability of southern Europe to compete helped lead to the profound eurozone crisis. The view in Germany, that the rest of Europe had to go through the same “internal devaluation” before Germany would sign off on bailouts of bankrupt eurozone nations, prolonged that crisis.

Amid that fearful moment, he also signed off on the “debt brake” policy that meant in normal times, Germany would not invest. It has been suspended during the Covid pandemic for obvious reasons.

The brake will return under the coalition agreement just struck with the Greens and Liberals, but not before a splurge in investment spending. The challenge is how to square ongoing spending plans with no tax rises and controls on borrowing.

Germany’s long history of state-backed investment lending institutions such as KfW will help bridge this gap. But this will be a source of tension in this untested three-party coalition.

But lessons have been learnt from the eurozone crisis. Mr Scholz now backs non “mini-jobs”, but a €12 minimum wage. As finance minister, he helped Brussels sign off its own centralised capacity to borrow money to help growth and deal with crises.

Climate club

Chancellor Scholz is very focused on climate change, in the home of the European automotive industry. His concept is massive investment to further green Germany’s industrial base. And internationally, the establishment of a “climate club” of like-minded nations to manage frictions over trade.

“Success in fighting against climate change will only be feasible if we include all the nations and if everyone understands why it’s good for himself and for his people. We are now discussing the question of co-operation,” he told me.

How German industry deals with, for example, the EU-proposed border tax on carbon emissions will be a crunch point on the path to net-zero.

All this comes at a time when inflation has spiked up to 6% in the famously inflation-averse nation. And German industry has been hit for six by the supply chain constraints on microchips and other parts in the post pandemic rebound.

Pre-Omicron, most forecasts suggest the German economy will avoid the feared “bottleneck recession”, but the situation is definitely more challenging than at the time of the election in September.

And then there is Brexit and fears over a trade war. Will the famous German carmakers force a new chancellor to fold over Article 16 to protect their exports to the UK? It is not a priority in the Bundeskanzleramt, the washing-machine-like version of the White House in Berlin.

There will be continuity with the policies of the Merkel administration. When I asked about frictions with the UK, Olaf Scholz was diplomatic but pointed.

“I’m always optimistic and happy that we got a deal in the end on the relationship between the European Union and the UK, and I hope that everyone will follow the deal and that everything will be exactly to what we have just written down,” he told me.

“And if this is the case, I think we can be assured that we will have good trade relations also in the future, which would be good for the people of the UK as well as for the European Union.”

So some reason for optimism, as long as the deal is followed. For now, Chancellor Scholz has his own economic challenges closer to home.

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U.S. economic growth for last quarter revised up slightly to healthy 3.4% annual rate

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The U.S. economy grew at a solid 3.4 per cent annual pace from October through December, the government said Thursday in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2 per cent rate last quarter.

The Commerce Department’s revised measure of the nation’s gross domestic product – the total output of goods and services – confirmed that the economy decelerated from its sizzling 4.9 per cent rate of expansion in the July-September quarter.

But last quarter’s growth was still a solid performance, coming in the face of higher interest rates and powered by growing consumer spending, exports and business investment in buildings and software. It marked the sixth straight quarter in which the economy has grown at an annual rate above 2 per cent.

For all of 2023, the U.S. economy – the world’s biggest – grew 2.5 per cent, up from 1.9 per cent in 2022. In the current January-March quarter, the economy is believed to be growing at a slower but still decent 2.1 per cent annual rate, according to a forecasting model issued by the Federal Reserve Bank of Atlanta.

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Thursday’s GDP report also suggested that inflation pressures were continuing to ease. The Federal Reserve’s favoured measure of prices – called the personal consumption expenditures price index – rose at a 1.8 per cent annual rate in the fourth quarter. That was down from 2.6 per cent in the third quarter, and it was the smallest rise since 2020, when COVID-19 triggered a recession and sent prices falling.

Stripping out volatile food and energy prices, so-called core inflation amounted to 2 per cent from October through December, unchanged from the third quarter.

The economy’s resilience over the past two years has repeatedly defied predictions that the ever-higher borrowing rates the Fed engineered to fight inflation would lead to waves of layoffs and probably a recession. Beginning in March 2022, the Fed jacked up its benchmark rate 11 times, to a 23-year high, making borrowing much more expensive for businesses and households.

Yet the economy has kept growing, and employers have kept hiring – at a robust average of 251,000 added jobs a month last year and 265,000 a month from December through February.

At the same time, inflation has steadily cooled: After peaking at 9.1 per cent in June 2022, it has dropped to 3.2 per cent, though it remains above the Fed’s 2 per cent target. The combination of sturdy growth and easing inflation has raised hopes that the Fed can manage to achieve a “soft landing” by fully conquering inflation without triggering a recession.

Thursday’s report was the Commerce Department’s third and final estimate of fourth-quarter GDP growth. It will release its first estimate of January-March growth on April 25.

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Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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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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