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What the pandemic could mean for the economy in 2022 – NPR

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The country’s economic health is largely being defined by the coronavirus pandemic. The omicron variant is now changing expectations for the economy in 2022.



ARI SHAPIRO, HOST:

It’s the economy, stupid is the phrase that Democratic political strategist James Carville coined, which helped Arkansas Governor Bill Clinton win the presidency in 1992. Well, today the economy is still a make-or-break issue for politicians and presidents. And in 2021, the country’s economic health is largely being defined by the coronavirus pandemic. So as the year wraps up, we’re going to look at what the pandemic could mean for the economy and for President Biden in the months ahead. NPR White House correspondent Asma Khalid and business correspondent David Gura are here to be our guides. Welcome to you, both.

DAVID GURA, BYLINE: Hey, Ari.

ASMA KHALID, BYLINE: Thanks for having us.

SHAPIRO: David, let’s start with you. How much does this omicron variant change expectations for what the economy will look like in 2022?

GURA: Well, there is some significant uncertainty about what the spread of omicron will mean for the economic recovery, which is still very fragile, Ari. There are pockets of the country that are seeing significant effects – Broadway shows canceled along with big games, the NHL has taken a pause for a few days. But, you know, something we’ve heard from the Federal Reserve Chairman Jerome Powell from the get-go, from the very beginning of the pandemic, is the virus is in the driver’s seat. It may sound basic, but it is a crucial point. COVID-19 has been and continues to be to a large extent what is determining the path and the pace of the recovery. A reporter asked Powell about omicron and what the fallout could be after the last Fed meeting, and this is what Powell said.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: That will depend, you know, on how much it suppresses demand as opposed to suppressing supply. It is not clear how big the effects would be on either inflation or growth or hiring.

GURA: So the main point Powell is making there, Ari, is a lot is still unclear. Even though we can’t predict where this is going, if recent history is a guide, the economic impact of the latest variant should be less than previous waves. First one, of course, was catastrophic, shut down most of the economy. The delta variant was bad, but less disruptive. And expectations are omicron will have less of an impact to the overall economy.

SHAPIRO: Obviously, the pandemic has impaired the economy, but, Asma, when you look at the numbers, a lot of previous presidents might have been jealous of Biden. I mean, the U.S. has the fastest year-to-date decline in unemployment on record. The housing market is rising. Wages are rising. The Dow and the S&P both hit record highs this year. But Biden is not really taking a victory lap on the economy. Why not?

KHALID: Ari, in a word, inflation. You know, it has been a major shock to Americans this year. Folks see it every time they walk into a grocery store. They look at prices, and they’re in shock. And the country just really hasn’t seen this level of inflation in decades. Polls show inflation is a major reason that the president has a low overall approval rating, and this was not always the case. You know, back in the summer, I traveled to a key swing county in Pennsylvania to speak with voters. And people at the time, they were frustrated with rising prices, but they weren’t yet blaming Democrats. I would say as the months have dragged on and Democrats kept telling people that the situation would get better – and it didn’t – people did start to blame the president. And, you know, there are, I will say, some objectively good metrics in the economy, as you pointed out, and I often hear the president try to point that out. Here he is in a speech before Thanksgiving.

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PRESIDENT JOE BIDEN: We’re experiencing the strongest economic recovery in the world. Even after accounting for inflation, our economy is bigger, and our families have more money in their pockets than they did before the pandemic. And America is the only major economy in the world that can say that.

KHALID: The thing is, Ari, that reality, that message is just not resonating. Inflation, frankly, seems like it is much more tangible, more so than any other metric in the economy.

GURA: I’ll jump in here to say, you know, I think the Fed gets that. The Federal Reserve has this two-part mission. It’s what’s known as the Fed’s dual mandate, and one part of that is doing all it can to get the economy to maximum employment. The other part is helping to achieve price stability. The Fed wants inflation or the prices of goods and services to be limited to rise around 2% each year, which is a healthy rate for the economy. You know, right now, they’re rising at more than three times that rate. We’re at levels we haven’t seen in about four decades.

The main tool that the Fed uses to fight inflation, Ari, is raising interest rates, and it said that in 2022, it could raise them as many as three times. Of course, that’s going to raise the cost of borrowing for companies and consumers, which introduces another layer of uncertainty. And I’ll add, you know, the stock market has been riding this crest of low interest rates for years now, Ari. Another big question is how this will affect everyone’s retirement portfolios when the Fed starts to raise rates.

SHAPIRO: And it’s not just inflation. The job market has some challenges too, right?

GURA: Absolutely. I mean, the unemployment rate has come down, but there were still millions of jobs that haven’t been filled, workers who haven’t come back. We’re in the middle of this massive transition – a reckoning really – for workers. We’ve seen the balance of power shift. Now they have an edge. They’re demanding higher wages. They’re getting higher wages. Workers are quitting their jobs. Some of them are confident they’ll land better ones, but others are just still dealing with the effects of the pandemic – worries about getting sick, difficulties finding child care. We’ve seen return-to-office dates pushed back and pushed back again. You know, the economy has recovered about four-fifths of the jobs lost during the pandemic, but that leaves almost 2.5 million jobs that have not come back. And a huge unanswered question is will they come back? The message from the Fed chair has been, the economy just isn’t going to look the same as it did before all this started, Ari.

SHAPIRO: Asma, President Biden and the Democrats are going to point to two big legislative accomplishments from the last year – the American Rescue Plan and the infrastructure bill. Politically and economically, what do you think those two packages are going to mean for the year ahead?

KHALID: Gosh, Ari, I think that’s a tricky question to answer. You know, Republicans have been eager to blame President Biden’s spending plans for leading to inflation. In fact, they have been arguing that the president, the White House should altogether abandon this so-called Build Back Better legislation because they argue it would lead to greater inflation. That’s certainly something we’ve also heard from West Virginia Senator Joe Manchin in terms of his opposition to that piece of legislation. I’m sure as many of your longtime listeners know, this is the massive social welfare bill that Democrats had hoped to get through Congress before Christmas. But just this past week, Senator Manchin of West Virginia said that he could not support this piece of legislation.

And really, you know, what does this mean moving forward? I don’t know. At this point politically, I will say, the White House seems optimistic that it could potentially cobble together some alternative version of this bill, maybe pieces of it, and put something together after the new year. From an economic perspective, I will say that when news came out that Senator Manchin was effectively killing this version of the president’s agenda, Goldman Sachs lowered its growth expectations for 2022.

SHAPIRO: That’s NPR White House correspondent Asma Khalid and business correspondent David Gura. Thank you both.

GURA: Thank you.

KHALID: Happy to do it.

(SOUNDBITE OF MUSIC)

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Canadian dollar falls to 2-week low on wave of risk aversion

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The Canadian dollar weakened on Monday to its lowest level in more than two weeks against its U.S. counterpart as investors dumped riskier assets on fears of a Russian attack on Ukraine.

The loonie was trading 0.5% lower at 1.2650 to the greenback, or 79.05 U.S. cents, after touching its weakest level since Jan. 7 at 1.2701.

“While risk-off price action has been abundant today due to geopolitical factors, it took the nosedive in U.S. equity markets to trigger a fresh wave of risk aversion in markets,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.

Wall Street plunged in a broad-based sell-off as the geopolitical risk added to investor worries about aggressive policy tightening by the Federal Reserve.

Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to moves in risk appetite.

U.S. crude prices settled 2.2% lower at $83.31 a barrel, while the safe-haven U.S. dollar gained ground against a basket of major currencies.

Speculators had turned bullish on the Canadian dollar for the first time since November, data from the U.S. Commodity Futures Trading Commission showed on Friday.

The shift in positioning comes ahead of a potential interest rate hike by the Bank of Canada at a policy announcement on Wednesday. Money markets see about a 65% chance of a hike but expectations have dipped from 70% on Friday.

Investors are coming to the view that expected multiple interest rate hikes this year by the Bank of Canada will bring price pressures under control, albeit at a cost of slower economic growth.

Canadian government bond yields were lower across the curve. The 10-year eased 3.1 basis points to 1.761%, extending its pullback from the highest level in nearly three years last Wednesday at 1.905%.

 

(Reporting by Fergal Smith; Editing by Mark Heinrich and Nick Zieminski)

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Investors are feeling too giddy about the economy – CNN

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Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own.

The pandemic continues to call the shots for the economy. Each wave of the virus has done significant damage, with Omicron now hitting the economy hard. December retail sales slumped as households pulled back on spending, including travel, dining out at restaurants and attending Broadway shows. The airlines continue to struggle with flight cancellations as pilots and other personnel get sick. Unemployment insurance claims are on the rise again, as small businesses, unable to stay open, reduce staff.

At Moody’s Analytics, we have revised down our forecast for real GDP growth in the first quarter from about 5% annualized to less than 2%. And GDP could easily decline further if Omicron infections don’t subside substantially in the next few weeks.
Despite the sobering pandemic news, global investors are upbeat, even giddy. Asset prices are surging. Stock prices rose nearly 30% last year and national home values were up by almost 20%. Reflecting these price gains and the increase in household savings, the value of all assets (excluding crypto) owned by US households increased by a stunning $22 trillion in 2021. This translates into a 16.8% gain, the strongest on record and more than double the average annual increase.
To be sure, asset prices should be high given record low interest rates. Low interest rates increase the present value of future corporate profits, rents and other income.
But prices appear stretched well beyond what can be explained by low rates. According to my own estimate, the ratio of the value of assets owned by households to GDP rose to 7.5 times at the end of last year. Prior to the pandemic, this multiple was close to 6 times. Other tried-and-true measures of asset price valuations, such as stock price multiples, corporate bond credit spreads and commercial real estate capitalization rates are also well outside historical bounds.
Now markets appear to be bordering on speculative, with more investors purchasing assets with the intent of selling quickly for a profit. So-called meme stocks, SPACs and the wave of initial public offerings, particularly of high-flying technology companies, are such signs in the stock market. In the housing market, it is the recent spike in the share of home sales by investors. Investor purchases have almost doubled over the past year, and suddenly account for one-fourth of home sales. Meanwhile, sales to individual buyers are actually down a bit.
And the crypto markets appear to be almost completely dominated by speculators. They’ve been mesmerized by the exponential increase in prices and believe there will be other investors to buy their crypto at a much higher price than they paid. It’s the greater fool theory at work — prices go up because people are able to sell their crypto to a greater fool. That is, of course, until there are no greater fools left.
Asset prices are thus highly vulnerable to a selloff, and the catalyst may well be the pending shifts in monetary policy. If things hold together as anticipated, the Federal Reserve will wind down its quantitative easing by this spring and begin to lift the federal funds rate off the zero lower bound soon thereafter. Interest rates are headed higher — it is only a question of how high and how fast. It is hard to fathom how asset valuations can remain as lofty as they are, even with only a modest increase in rates.
If asset markets sold off today, the decline in prices is unlikely to be deep and persistent enough to undermine the economic recovery. The resulting negative wealth effects — the impact of changes in wealth on consumer spending — would likely be modest, since the runup of wealth during the pandemic doesn’t appear to have had much — if any — impact on household saving and spending. Rising wealth in times past has made households more confident, leading to less saving and more spending. It is difficult to disentangle things, but this has not happened during the pandemic.
Moreover, households have not overly borrowed to finance their asset purchases. While margin debt, which is used to finance stock purchases, and mortgage debt have recently begun to increase quickly, it is still premature to send off red flares.
Having said this, this sanguine perspective will not hold much longer if asset prices continue to climb, and leverage continues to build at the pace of the past year. The economy has become prone to asset bubbles. There was the dot-com stock market bubble in 2000 and the housing bubble of the mid-2000s. When these bubbles ultimately deflated, they did significant damage to the economy. It is premature to think that we are in the next asset bubble, but it is not premature to worry that one is forming.

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Europe's Economy Exposed as U.S. Seeks Joint Front Versus Russia – Financial Post

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The European Union has a lot more to lose than the U.S. from conflict with Russia, one reason why the western allies are having difficulty agreeing on a tough stance in the standoff over Ukraine.

Russia ranks as the EU’s fifth-biggest trade partner — as well as its top energy supplier — while for the U.S. it barely makes the top 30. There’s a similar gap for investment, with Russia drawing in money from Europe’s household names including Ikea, Royal Dutch Shell Plc and Volkswagen AG.

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With inflation surging and consumers squeezed by a surge in energy prices, EU officials are moving carefully on the prospect of sanctions. They want Russia to feel more pain than Europe from measures aimed at preventing an invasion of Ukraine. They’re worried a war could choke off natural gas supplies in the middle of winter when they’re needed most.

All those issues may feature in a call between U.S. President Joe Biden and his European counterparts scheduled for Monday in a bid to strike a unified position.

Adding to Europe’s reluctance is a sense that for penalties imposed on Russia in the past, especially after the 2014 invasion of Crimea, it was the EU economies and not the U.S. that paid the price. As U.S. President Joe Biden warns that Russia’s military may move shortly, EU leaders such as France’s Emmanuel Macron are playing for time. Russia maintains it has no plans to invade Ukraine.

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“Sanctions have the best effect if they are efficient,” German Foreign Affairs Minister Annalena Baerbock said last week. “It’s about sanction which really have an effect, not against oneself, but rather against Russia.”

By contrast, Russia is “well prepared” to weather any sanctions after taking steps to insulate itself from measures the U.S. might impose, said Viktor Szabo, fund manager at Aberdeen Asset Management in London. 

“It will be difficult to inflict such a pain that would be felt,” Szabo said. “It wouldn’t push Russia to the edge.”

What Bloomberg Economics Says…

“Europe stands alone when it comes to how much more consumers will have to pay for natural gas. Our in-house model of the eurozone economy points to a hit from higher energy prices of as much as 1% of GDP, with the impact lasting well into this year.” 

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–Jamie Rush, chief European economist. Click for the INSIGHT.

Energy is the biggest friction point. The U.S. is a net energy exporter, but the EU relies on imports, and Russia is its No. 1 supplier of both oil and natural gas. 

JPMorgan Chase & Co. economists on Friday warned a surge in the price of oil to $150 a barrel would hammer growth and spur inflation.  

Gas is a particularly sensitive matter now, with Russia holding back supplies for the past few months. Prices have tripled, boosting the cost of electricity across the continent. It’s the main reason Europe is suffering a bigger energy shock than the U.S.

Escalation with Russia over Ukraine could make it worse. EU officials are caught in a bind, since domestic gas production is in decline while Russia has built facilities to supply more. 

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Russia’s gas exporter Gazprom PJSC and partners including Shell have spent 9.5 billion euros ($10.8 billion) completing the Nord Stream 2 pipeline and want to open it. Military action in Ukraine would put that on the chopping board — and any future deals to boost Russian supply to the region. That would exacerbate the energy shortage in the EU.

“Were sanctions to be placed on Russia’s energy exports or were Russia to use gas exports as a tool for leverage, European natural gas prices would probably soar,” said Capital Economics analyst William Jackson.  “We think they would far exceed the peak reached last year.”

Sanctions against Russia would also benefit U.S. exporters who are seeking to ship more liquefied natural gas into Europe.

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Possible Sanctions

ING Bank Eurasia’s Chief Economist Dmitry Dolgin says the U.S. and its allies could hit Russia with:

Sanctions on non-military technologies, or blocking access to foreign financing for companiesA ban on Western funds buying state-issued debt, costing Russia $10 billion a yearA retroactive ban on foreign participation in local state debts, costing $60 billionHalting access to the Swift payment system, which would make it much more difficult for Russia to collect payments on $535 billion of exports a year

Europe’s businesses have more at stake because they’ve invested more in Russia than their U.S. counterparts — and the gap has widened in recent years. Russia is also one of the biggest exporters of aluminum, nickel, steel and fertilizers.

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Ikea, Volkswagen and the brewer Carlsberg A/S operate in Russia. Italy’s UniCredit SpA has been eyeing an acquisition there that would make it the biggest foreign bank in the country — overtaking Societe Generale and Austria’s Raiffeisen.

Europe also has been stung hard by past sanctions aimed at Russia. After Russia annexed Crimea in 2014, the U.S. and EU agreed on a sanctions regime. 

Three years later, a study by the Kiel Institute for the World Economy found that while Russia suffered the biggest trade losses, Germany wasn’t all that far behind. Other EU economies got hit too. The U.S. actually came out ahead. A similar pattern followed sanctions on Iran.

Politicians in the U.S. and Europe boast about the economic pain they’re capable of inflicting on Russia. They’ve kept quiet about the “inconvenient truth” that there’ll be consequences at home too, according to Tom Keatinge, head of the Centre for Financial Crime and Security Studies at the Royal United Services Institute in London.

“Sanctions issued by Western countries rarely include the need to accept any meaningful self-harm,” Keatinge wrote last month. “The impact on the economies of the issuers — particularly in the EU — may be significant.”

Bloomberg Economics research …

How Putin Could Embolden ECB’s Hawks What the Energy Crunch Means for IndustryHow Putin Could Embolden ECB’s Hawks 

©2022 Bloomberg L.P.

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