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What Xi and Biden forgot to mention on the economy – East Asia Forum

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Author: Tom Westland, ANU

According to the official readout, in their virtual summit this week, US President Joe Biden and Chinese President Xi Jinping discussed ‘managing competition responsibly’. For Biden, the talks were a chance to press Xi on China’s actions in Hong Kong and its assertive posture in the Taiwan Strait, as well as human rights abuses in Xinjiang. Xi, for his part, warned Biden against leading the United States into a new Cold War against China.

US President Joe Biden speaks virtually with Chinese leader Xi Jinping from the White House in Washington, US, 15 November 2021 (Photo: Reuters/Jonathan Ernst).

US President Joe Biden speaks virtually with Chinese leader Xi Jinping from the White House in Washington, US, 15 November 2021 (Photo: Reuters/Jonathan Ernst).

Missing on the agenda was any serious discussion about the problems facing the global economy as it recovers from the deep recession of 2020.

Aside from some worthy breakthroughs, like the agreement to hold bilateral ‘stability’ talks on nuclear issues, it’s not clear what Xi’s and Biden’s responsibly managed competition will look like. If it looks anything like the managed trade that now governs the economic interactions of world’s two largest economies, then ‘competition’ is a wild misnomer. The trade war between the two countries, and the ensuing ‘Phase One’ trade deal, represent the worst kind of anti-competitive policy kludge, designed to protect politically favoured industries in the United States and kicking out Australian and Canadian farmers and gas suppliers who can produce more efficiently than their American counterparts. In economics as in sport, competition is best managed by neutral umpires, not by the participants themselves.

The failure of the two presidents to discuss what they could do to shore up the economic recovery is a big, missed opportunity. There is a desperate need for bolder leadership that tackles the short-term pressures and – just as importantly – the longer-term structural fault lines. The global economy was looking decidedly sickly even before COVID-19 struck. The Brexit referendum in June 2016, and the election of a populist protectionist to the White House later that year, marked the start of an inward turn in the advanced economies. The yield curve for US Treasuries inverted in May 2019, usually a reasonably reliable harbinger of recession. The structural damage to the world economy inflicted by Britain’s exit from the European Union and the tariffs put in place under President Trump has been masked by the much greater immediate destruction wrought by the pandemic, but as the recovery gains pace, it will become increasingly difficult to ignore.

Though the Biden administration has more or less made peace, though on the wrong terms, with Europe — lifting the Trump-era tariffs but imposing quotas on steel and aluminium exports from the bloc —it has stuck with Trump’s belligerent posture towards China. It has maintained tariffs on a broad swathe of Chinese imports and continues to hold back exports of semiconductors in the name of national security – even though the likely long-run effect will just be to stimulate semiconductor manufacturing elsewhere.

The effect of both of these policies is to restrict the supply of consumer goods in the United States. That isn’t the only reason for the US experiencing the highest inflation rate since George Bush Sr was president. Compared to the ‘Great Resignation’ of workers not wanting to return to low-paying jobs and the logistical issues at American ports, though, it is a problem that is easily fixed – at least in theory. The domestic politics of removing the Trump tariffs might be tricky, but Biden could use his power to issue broad exemptions that would render the tariffs a dead letter. Biden will also remember the political fate of the last two one-term Presidents, both of whom presided over economic contractions that stemmed in part from tighter monetary policy in the face of inflationary pressures.

Inflationary pressures, in the United States and elsewhere in the global economy, may be only temporary, and for the most part central bankers are choosing not to overreact by precipitously raising rates and choking off the economic recovery. But the task is made harder by senseless trade restrictions that have not yielded any tangible security or economic benefits to the countries imposing them. Ever since the dismantling of the Corn Laws, economists have known that removing barriers to international trade lowers prices; politicians, though, captured by special interests, often have to be dragged screaming and kicking to recognising it.

Though he touched on it only lightly in the summit, President Xi and his advisers would be well aware of the possible impact on the Chinese economy of policy tightening in the United States and other advanced economies: among other things, a depreciation of the yuan, which would make it harder for Chinese borrowers, like troubled real estate giant Evergrande, to service dollar-denominated debts. Had Trump won last year’s election, he might have gloated at the thought of a hard landing for the Chinese economy: Biden’s team is smart enough to know that a recession in China would knock the wind out of the global economy, too.

The failure of the two presidents to come up with a strategy to drag the world out of the economic doldrums during their summit may be hardly surprising, given the political constraints, but it is a major missed opportunity. Australia, and the world more generally, is best served by managed political and economic cooperation between Chinese and American leaders and intense trade competition between their businesses.

Instead, the small victories of the summit notwithstanding, we seem to be in line for more political competition and trade collusion. The hard heads in Asian capitals should not be fooled by policy illywhackers purveying managed trade solutions in Washington or Beijing.

Tom Westland is Research Director of the Asian Bureau of Economic Research in the Crawford School of Public Policy at The Australian National University.

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Exclusive-Trudeau to limit new spending in fiscal update – source

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Canadian Prime Minister Justin Trudeau‘s government will outline limited new spending in a fiscal update expected later this month, a source said on Thursday, as inflation soars and some business groups and opposition politicians call for restraint.

Fresh investments in the so-called fall fiscal update will be “limited in scope”, a source familiar with the drafting of the document told Reuters.

This fiscal update will be similar to those released following the 2015 and 2019 elections, the source said. Other years when elections were not held, the fiscal update has been more substantial, like a mini-budget.

After COVID-19 supports for businesses and individuals produced the highest deficit since World War Two last year, Trudeau during his campaign pledged C$78 billion ($60.9 billion)in new spending over five years to foster Canada‘s economic rebound.

“This will be an update on where the nation’s finances are right now,” the source said of the document. “We certainly have an ambitious plan that we will continue to move forward on. That’s why you have a budget.”

The government is expected to release its 2022-23 fiscal-year budget during the first part of next year. Inflation is at an 18-year high and is being driven mainly by supply chain problems and energy price gains, but some fear more government spending will make it worse.

This year’s budget included C$101 billion investments over three years.

“There’s a major concern that people have about the level of government spending, and whether or not it is fueling inflation and fueling demand,” said Perrin Beatty, president and CEO of the Canadian Chamber of Commerce.

The prospect of rising interest rates next year, as signaled by the Bank of Canada, will increase the servicing costs on the country’s debt, Beatty said.

‘JUSTIN-FLATION’

Pierre Poilievre, the finance critic for the opposition Conservative Party, blames Trudeau for stoking inflation, which he calls “Justin-flation”, with excessive government spending.

“We’re going to be prudent,” a second source familiar with the government’s plans said.

“The prudent thing is to wait and just see how the next couple of months unfold and you always reserve the option in the winter budget to do more,” said Rebekah Young, director, fiscal and provincial economics at Scotiabank. “It’s harder to roll back than it is to roll out more programs in the winter.”

Already in October, Finance Minister Chrystia Freeland indicated Canada would significantly scale back spending on pandemic support programs now that more than 85% of the eligible population was vaccinated against COVID-19.

Fitch Ratings was the only ratings agency to strip Canada of a triple-A credit rating during the pandemic.

“A combination of strong revenue recovery and fiscal restraint would put the federal debt and broader general government debt each on a faster reduction course,” Kelli Bissett-Tom, Fitch’s director of Americas sovereign ratings, said on Thursday.

In April, Freeland said debt as a percentage of output would progressively decline, providing a fiscal anchor going forward. In the budget, debt was forecast to be 51.2% of gross domestic product this fiscal year, falling to 50.7% the following year.

Revenues were up C$47.0 billion, or 36.5%, in the April-September period, according to the Department of Finance.

There was no immediate comment from the prime minister’s office. The finance ministry declined to comment.

($1 = 1.2811 Canadian dollars)

 

(Reporting by Steve Scherer in Ottawa and Fergal Smith in Toronto,; Editing by Chizu Nomiyama and Alistair Bell)

 

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B.C. economy poised to slow after ‘unsustainable’ 2021 – Business in Vancouver

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B.C. construction workers | Chung Chow, BIV

B.C.’s economy is set to ride the wave of consumer savings and increases in immigration next year despite this fall’s catastrophic flooding.

And while growth is the forecast, economists at the Royal Bank of Canada (TSX:RY) predict economic expansion won’t be hitting the heights 2021’s “unsustainable” 5.6% growth.

Instead, Robert Hogue and Carrie Freestone are forecasting growth to reach 4.2%, according to an outlook published Thursday. That’s slightly lower than the 4.3% growth they project for the national economy.

“B.C. consumers still have a lot of savings fire power to deploy on goods and services purchases. The resumption of immigration will further stimulate consumption and investment,” the pair said in the report, referring to Ottawa’s plans to bring 1.2 million newcomers into the country over the next three years to help stimulate the economy.

The outlook also concludes the wider reopening of the border with the U.S. will spur the tourism sector, while work on major projects such as the Trans Mountain pipeline, the Site C dam, LNG Canada’s facility in Kitimat and the Coastal Gaslink pipeline will also keep the economy moving.

The forecast does not take into account the potential for restrictions brought on by the emergence of the new COVID-19 variant known as Omicron. 

Much uncertainty still remains over the severity of this variant, but the federal government has spent the past week deploying new travel restrictions in an effort to clamp down on its transmission. Cases have already been reported in Canada after Omicron was initially identified in southern Africa.

“To be sure, November’s massive floods pose significant near-term challenges for transportation, agriculture, forest products and many other industries. We expect disruptions to the broader provincial economy to ease fairly quickly as repair work [restores] key transportation corridors – though some communities face a much more difficult recovery,” the RBC report said. 

“In fact, repair work will add to provincial economic growth, whereas the destruction of property and infrastructure will largely go unaccounted for in GDP numbers.”

B.C. Construction Association president Chris Atchison and Brynn Bourke, executive director of the B.C. Building Trades union organization, both told BIV this week the industry is still assessing the full extent of the repair work needed.

Business Council of B.C. CEO Greg D’Avignon said last month that while some parts of the economy will benefit from the rebuild effort, he’s concerned it will come at the cost of government revenue at the same time revenue is being constrained amid a dip in economic activity.

He said the BCBC would be cutting its 2021 forecast for the provincial economy – originally pegged at 5.8% back in August – in the wake of the floods.

Economists at the Bank of Montreal (TSX:BMO) last week downgraded this year’s outlook, dropping it from 5.3% growth to 3.8% growth.

torton@biv.com

@reporton

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How Omicron Could Knock Economic Recovery Off Track – The New York Times

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How Omicron Could Knock Economic Recovery Off Track  The New York Times



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