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What's Happening in the World Economy: – Bloomberg

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Hello. Today we look at how the spreading delta variant risks snarling global supply chains, the week ahead in global economics and concerns over just how much fiscal room the U.S. really has. 

Supply Chain Strain

After weathering earlier pandemic waves better than other regions, the fast-spreading delta variant has thrown into turmoil factories and ports in countries that were once among the most successful containing the virus.

The snarls in Asia — where the United Nations estimates around 42% of global exports are sourced — risk twisting their way through global supply chains just as shipments would usually ramp up for the Christmas holiday shopping season.

The flare-ups worsen an already tortured year for exporters, with shipping costs sky-high due to a shortage of containers and as raw materials such as semiconductors become pricier and difficult to source.

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In China, the world’s third-busiest container port was partly shut recently, while in Southeast Asia — among the worst-hit regions — factory executives have stalled production of electronics, garments and other products.

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At stake is an export boom that shielded trade-driven economies during the pandemic and was expected to fuel a broader rebound. 

 Enda Curran and Michelle Jamrisko

The Week Ahead

In the U.S., investors will be eyeing the latest retail sales data on Tuesday to see if consumer demand remains strong and if the shift in spending to services from goods continued in July. Other reports due include those on business inventories, industrial production, housing starts, and weekly jobless claims.

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Elsewhere, central bankers in New Zealand are predicted to hike interest rates, while their counterparts in Indonesia, Norway, and Namibia are expected to hold.

For a full rundown of the week ahead, click here.

Today’s Must Reads

  • China Slows | China’s economic activity slowed more than expected in July, with fresh virus outbreaks adding new risks to a recovery already hit by floods and faltering global demand.
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  • Avoiding recession | Japan skirted a recession last quarter as a rebound in consumer spending defied virus restrictions, but the increased activity is also fueling the spread of Covid-19.
  • Europe boom | Italy and Spain are set to record the fastest pace of economic expansion this year in more than four decades, a strong rebound that will help the countries overcome last year’s deep recession.
  • Data dependent | A few more strong jobs reports in coming months would mark enough progress in the recovery from the pandemic to allow the U.S. central bank to begin winding down its bond-buying program, Federal Reserve Bank of Minneapolis President Neel Kashkari said.
  • Dollar threat | Niall Ferguson and John Authers look at the lessons to be learned from Richard Nixon’s scrapping of the Bretton Woods monetary order.

Need-to-Know Research

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The U.S.’s low government bond yields exaggerate fiscal space available for deficit spending because Federal Reserve purchases are distorting market prices, the Institute of International Finance said.

In a paper examining ballooning government debt levels and record-low interest rates, the IIF sought to gauge available deficit financing by estimating how much debt governments could sell to markets at low yields. It tapped flow of funds data in order to split out central bank purchases from demand for government bonds.

“The remainder is what markets were willing to finance and that number – for the U.S. – has declined versus the global financial crisis,” the IIF’s Robin Brooks, Jonathan Fortun and Jack Pingle said in an Aug. 12 research note.

On #EconTwitter

Obedience in the labor market and social mobility:

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The fourth annual Bloomberg New Economy Forum will convene the world’s most influential leaders in Singapore on Nov. 16-19 to mobilize behind the effort to build a sustainable and inclusive global economy. Learn more here.

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    Germany is the biggest economy in Europe. What if it shifts left? – CNN

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    London (CNN Business)Angela Merkel is about to bow out as chancellor of Germany after 16 years, marking the start of a new era for Europe’s largest economy.

    The results of Sunday’s election are hard to predict, and the formation of a government could take weeks or months to play out. But when the dust settles, polls indicate that the new chancellor could be the left-leaning Social Democratic Party’s Olaf Scholz, who steered Germany’s economy through the pandemic as finance minister in a coalition with Merkel. Meanwhile, the Greens could more than double their number of seats in parliament.
    Scholz’s SPD and the Greens could partner with the pro-business Free Democratic Party, gaining enough power to shift the country’s economic agenda to the left. Taxation and spending could increase as political leaders double down on digitization and climate policy, while wariness about rising government debt may take a back seat.
    “Greens and liberals in a coalition would bring the freshest innovative forces that we have had in a while in a German government,” said Carsten Brzeski, ING’s global head of macro research.

    Spend more, worry later?

    Global banks say that the eventual outcome of post-election jockeying among the parties is far from certain, while advising investors to prepare for two potential results: a coalition of the SPD, Green Party and the FDP, or a narrow victory for Merkel’s center-right Christian Democratic Union, led by Armin Laschet, which would also likely need to team up with the Greens and FDP.
    The former option would mark a move to the left, but would be less dramatic than an alliance between the SPD, Greens and hard-left Die Linke. This result, which could produce much more ambitious efforts to redistribute wealth and levy taxes, has been downplayed by analysts, and would likely take investors by surprise.
    Whichever combination takes charge will have to manage the ongoing recovery from the coronavirus pandemic. Germany’s economy is on track to grow by 2.9% this year and 4.6% next year after contracting by 4.9% in 2020, according to the latest projections from the Organization for Economic Cooperation and Development.
    Yet recent data indicates momentum could be slipping. The Ifo index, which tracks the country’s business climate, fell for the third month in a row in September, according to data released Friday. Slower growth in China, snarled supply chains and surging gas prices are likely to be taking a toll.
    This pullback could add to pressure on the country’s new leaders to scrap Germany’s notoriously strict fiscal rules so they can keep spending on the domestic economy.
    The country enshrined a so-called “debt brake” in the constitution in 2009, severely limiting public borrowing after the financial crisis with few exceptions. Because of the pandemic, debt rules were suspended until 2023. That allowed German borrowing to jump, with the country’s debt-to-GDP ratio climbing sharply to 70% in 2020.
    Though such a ratio pales in comparison with the United States, where debt is now projected to exceed annual GDP, Germany’s centrist parties have been eager to get the country’s public finances back under control. The Greens, meanwhile, want more permanent easing of debt rules.
    UBS strategists Dean Turner and Maximilian Kunkel think the debt brake — which has become a key tenet of German fiscal conservatism — is likely to remain in place, since overturning it would require a two-thirds majority in parliament.
    Still, they expect Germany’s new leaders will find other ways to increase spending to address the climate crisis, an issue that gained even greater prominence after devastating flooding hit the country in July.
    “The one common area of agreement for all parties is the need to tackle climate change,” Turner and Kunkel wrote in a recent research note. Whatever coalition emerges, they continued, green investment “will rise.”

    Tackling the climate crisis

    Brzeski expects that the incoming governing coalition, no matter its makeup, will create a special investment vehicle to circumvent the debt brake, allowing money to flow to green initiatives.
    With a more liberal coalition government, however, some timelines could be moved up.
    “[The Greens] would likely push for an acceleration of the green transition of the German economy as a pre-condition for entering government,” Goldman Sachs said in a recent note to clients.
    The Green Party has called for a 70% cut in greenhouse gas emissions from 1990 levels by 2030, compared to the current government goal of 65%. It also wants coal plants shuttered by the end of this decade, rather than by 2038, and for new cars to be emissions-free by that point, too.
    This could set up a clash with Germany’s most powerful businesses. In its latest strategy update, Volkswagen (VLKAF) said it wanted 50% of sales to come from electric cars by 2030, rising to almost 100% in 2040.
    How much the state should intervene could generate friction between coalition members.
    “The biggest controversy will be: How do you change people’s behavior?” Brzeski said. “Do you do this by incentives, and by educating people, or do you do this by [increasing] prices and costs?”
    A left-leaning government in Germany could also lead to an increase in taxes for the wealthiest Germans, with the SPD proposing a new wealth tax on the super-rich.
    But banks are emphasizing that it remains hugely unclear how the election will play out — and the more conservative CDU could still prevail, keeping Germany more firmly on its current fiscal and economic path.

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    Province Invests in Wellington County Businesses to Boost Local Economy – Government of Ontario News

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    Province Invests in Wellington County Businesses to Boost Local Economy  Government of Ontario News



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    Powell meets a changed economy: Fewer workers, higher prices – 95.7 News

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    WASHINGTON (AP) — Restaurant and hotel owners struggling to fill jobs. Supply-chain delays forcing up prices for small businesses. Unemployed Americans unable to find work even with job openings at a record high.

    Those and other disruptions to the U.S. economy — consequences of the viral pandemic that erupted 18 months ago — appear likely to endure, a group of business owners and nonprofit executives told Federal Reserve Chair Jerome Powell on Friday.

    The business challenges, described during a “Fed Listens” virtual roundtable, underscore the ways that the COVID-19 outbreak and its delta variant are continuing to transform the U.S. economy. Some participants in the event said their business plans were still evolving. Others complained of sluggish sales and fluctuating fortunes after the pandemic eased this summer and then intensified in the past two months.

    “We are really living in unique times,” Powell said at the end of the discussion. “I’ve never seen these kinds of supply-chain issues, never seen an economy that combines drastic labor shortages with lots of unemployed people. … So, it’s a very fast changing economy. It’s going to be quite different from the one (before).”

    The Fed chair asked Cheetie Kumar, a restaurant owner in Raleigh, North Carolina, why she has had such trouble finding workers. Powell’s question goes to the heart of the Fed’s mandate of maximizing employment, because many people who were working before the pandemic lost jobs and are no longer looking for one. When — or whether — these people resume their job hunts will help determine when the Fed can conclude that the economy has achieved maximum employment.

    Kumar told Powell that many of her former employees have decided to permanently leave the restaurant industry.

    “I think a lot of people wanted to make life changes, and we lost a lot of people to different industries,” she said. “I think half of our folks decided to go back to school.”

    Kumar said her restaurant now pays a minimum of $18 an hour, and she added that higher wages are likely a long-term change for the restaurant industry.

    “We cannot get by and pay people $13 an hour and expect them to stay with us for years and years,” Kumar said. “It’s just not going to happen.”

    Loren Nalewanski, a vice president at Marriott Select Brands, said his company is losing housekeepers to other jobs that have recently raised pay. Even the recent cutoff of a $300-a-week federal unemployment supplement, he said, hasn’t led to an increase in job applicants.

    “People have left the industry and unfortunately they’re finding other things to do,” Nalewanski said. “Other industries that didn’t pay as much perhaps … are (now) paying a lot more.”

    Christopher Rugaber, The Associated Press

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