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What's Happening in the World Economy: Stagflation Threatens to Upend Economy – Bloomberg



Hello. Today we look at the threat of stagflation, this week’s European Central Bank meeting and how some Americans still aren’t receiving their benefits. 

A Concerning Combination

The world economy risks turning stagflationary.

While policy makers once hoped we’d now be seeing decent growth and slowing inflation, obstacles to that outlook are emerging by the day.

The mounting concern now is of a toxic mixture of weak demand and accelerating prices.

Risk one is the delta variant, which, as Enda Curran details, is undermining efforts to rev up factories, offices and schools.

Worrying recent data include the smallest hiring of Americans in seven months, deterioration in Germany’s Ifo index, a crumbling of China’s services sector and a weakening of global manufacturing.

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There goes the demand side, but the new form of the coronavirus is also hurting supply chains, limiting the worldwide provision of key products. That shock, which is building just as Christmas nears, threatens to force up inflation too.

Meanwhile, natural gas prices are witnessing a historic surge, catapulting the cost of the fuel to seasonal highs in most major markets just as winter approaches in the northern hemisphere.

Soarings bills could crimp households’ spending and erode their wages through inflation, a stagflationary combination especially if families and businesses react to rising utility charges by pushing up pay and prices.

  • See more on gas prices here and the brewing aluminum surge here

Price Pressure

Energy inflation is soaring across G-7 economies

Source: Organization for Economic Cooperation and Development

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For policy makers, this environment is a conundrum. To date, most have focused on spurring their economies with stimulus, arguing the inflation surge would prove temporary. Now that view will be tested.

Catherine Mann, recently recruited by the Bank of England from Citigroup, has some words of comfort. She used a speech to Australian businesses today to argue inflation isn’t set to follow a 1970s-style spiral, in part because firms have less pricing power and tight labor markets don’t necessarily ignite wages.

  • Check out Mann’s comments, here

For an overall economic recovery, science will ultimately be the key.

High inoculation rates are allowing advanced-world governments to resist another round of shutdowns, opting instead for targeted measures that include vaccination requirements for public places such as restaurants.

Meanwhile, emerging markets could be worse off: Manufacturing and tourism-led economies like Vietnam and Thailand have already been forced to close factories and turn away visitors. 

That’s why wealthy countries could face mounting pressure to divert vaccines to lower-income regions. A new analysis shows they’ll likely have about 1.2 billion extra doses available by the end of the year.

Simon Kennedy

The Week Ahead

Central Bank Decisions This Week

Note: Mapped data show rate decision schedules for distinct central banks

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The European Central Bank will decide this week if it should dare to dial down emergency stimulus while the pandemic still menaces the euro-zone economy. 

The threat posed by the delta variant of the coronavirus could yet embolden policy makers on Thursday to keep up the “significantly higher” pace of bond purchases they adopted earlier this year. But advanced vaccination rates, a robust rebound and inflation that is already at the fastest in a decade are all reasons to consider a downward shift in gears. 

Elsewhere, at least eight other central banks globally are due to deliver monetary decisions, including Australia and Canada. While most are likely to keep their stance unchanged, Russia and Ukraine could deliver interest-rate increases.

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

Today’s Must Reads

Click on the blue links to read any of the stories in full:

  • Joblessness nightmare | For millions of Americans, the Labor Day weekend brings the end of federally funded emergency unemployment benefits and a lurch into the uncertain economic recovery.
  • Income redistribution | China’s push for “common prosperity” is not just about taxing the rich but also directing resources into rural areas and to those on lower incomes, according to one of the country’s most prominent experts studying wage inequality.
  • UAE trade | The United Arab Emirates plans to deepen its trade ties in fast-growing economies in Asia and Africa, and draw $150 billion in foreign investment from mainly older partners to reposition itself as a global hub for business and finance.
  • U.K. choices | Chancellor Rishi Sunak is facing five crucial fiscal decisions — including whether to deliver the biggest overnight welfare-benefit cut in history and the largest state pension increase in 30 years, according to the Resolution Foundation think tank.
  • German ship demand | Factory orders in Europe’s biggest ecnomy unexpectedly rose in July, driven by a surge in export demand for ships.
  • Taper debate | Australia’s central bankers are set to revisit the question of whether to delay a planned taper of bond purchases as a worsening outbreak of the delta variant dims economic prospects.

Need-to-Know Research

Working Obstacles

Japan lags in employment rates for working-age disabled people

Sources: U.S. Department of Labor (2021), German Federal Statistical Office (2017), U.K. Office of National Statistics (2019), Japan labor ministry (2020), Japan Cabinet Office (2016), Bloomberg

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Paralympics host Japan’s track record for integrating people with disabilities into the workforce lags many of its peers. The proportion of working-age disabled people with a job there is around 19%, based on a Bloomberg calculation, compared with 30% in the U.S. 

To read more, click here.

On #EconTwitter

Disappointment over the U.S. August jobs report is all but certain to push Federal Reserve policy makers to delay considering a move to scale back asset purchases at their Sept. 21-22 meeting.

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Bloomberg New Economy Conversations — China’s Tech Crackdown: Join New Economy Forum Editorial Director Andrew Browne on Sept. 8 as he analyzes the sweeping regulatory crackdown underway in China. The private sector helped power China’s economic rise, but President Xi Jinping seems determined to rein in what he sees as its excesses. Is this transitory or a game-changing shift? Joining Andy are Keyu Jin, Associate Professor of Economics at the London School of Economics & Political Science, and Kevin Rudd, President and Chief Executive Officer of the Asia Society. Register here.

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    Can Industrial Policy Save The American Economy? – Forbes



    As the US continues struggling with Covid-19 and economic recovery, debate is growing about the revival of “industrial policy”—government -led efforts to favor certain industries over others, in contradiction to market fundamentalist approaches.  An important new forum in the Boston Review takes on these issues and is well worth your attention.  For our future prosperity, these issues are more important than just arguing about deficits and taxes. (Disclosure:  I’ve coauthored a piece in the forum.)  

    In the battle over President Biden’s economic proposals, most commentary focuses on whether the price tag of over $3.5 trillion is too large. How much should be paid for?  Which taxes should go up or down?  Senator Joe Manchin (D-WV), the key Democratic vote for Senate passage of the Biden plan recently called it “the largest single spending bill in history with no regard to rising inflation, crippling debt or the inevitability of future crises.”

    But there’s a second debate hidden behind these budget numbers—how and whether government should deliberately foster some industries and withdraw support from others.  Although simple introductory economics textbooks say government intervention is always “second best” to markets, in the real world government is constantly favoring some industries over others.

    So the debate is really about what type of industrial policy we are going to have, not whether it exists.  The Review’s forum centers on an excellent piece by economist Marianna Mazzucato and colleagues—“Industrial Policy’s Comeback.”  They flatly (and correctly) say “market fundamentalism has failed to improve economic and social conditions,” calling for “a mission-oriented approach to the economy that embraces an active role for government in spurring growth and innovation.” 

    Mazzucato is one of our best thinkers on the complex relationships between government and the private sector.  Her 2013 landmark book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths showed how government investment undergirded the tech revolution, with Apple and other firms adapting technology developed and paid for by the government, often through military spending.

    Economists have long known that industrial policy is central to modern economies.  In 2008, Harvard’s Dani Rodrik asked readers to imagine “a set of policy interventions targeted on a loosely-defined set of market imperfections…implemented by bureaucrats…and overseen by politicians” while subject to “rent-seeking by powerful groups and lobbies.”  

    Yikes!  Rodrik says those sound like good reasons that “governments should stay away from industrial policy.”  But he then turns the tables, saying he’s not describing industrial policy.  Rather, those complicated conditions hold for “long-standing areas of government intervention such as education, health, social insurance, and macroeconomic stabilization.” And no one thinks we should stop those policies just because they are complicated and sometimes contentious.

    So complexity, political debate, attempts to capture benefits at the costs of general prosperity, and addressing critical problems possessing lots of uncertainty characterize all modern social and economic policy.  Hence Mazzucato’s emphasis on developing clear “missions” for industrial policy, with government setting overall directions and goals while avoiding “excessively top-down planning by an overbearing state.”

    There’s a lot of deep thinking and clear argument in the Boston Review forum, from a wide range of viewpoints, and I won’t try to summarize it all here.  Read the forum (and buy the new book the Review is publishing on this topic.)

    My contribution to the forum, co-authored with my colleague (and spouse) Teresa Ghilarducci, emphasizes the central role workers and labor unions must play in any successful industrial policy.  We hearken back to the great economist John Kenneth Galbraith, who after World War II focused on how the large firms needed to foster innovation and growth could be kept from purely self-interested behavior.

    Galbraith’s answer was in the title of his 1952 book—American Capitalism:  The Concept of Countervailing Power.  Without government and union countervailing power, “private decisions could and presumably would lead to the unhampered exploitation of the public.”

    Ghilarducci and I argue that successful industrial policy “promotes unionization and shared economic returns,” not just technical innovation where the gains are captured by a narrow slice of wealthy tech and finance owners.  And the politics of industrial policy mean it won’t be enacted without union and popular support.

    So as you follow the twists and turns of Biden’s economic plan, where the cable news and commentary are dominated by spending, taxes, and deficits, spare a thought for what that money will be spent on.  Senator Manchin correctly warns about “the inevitability of future crises,” but those aren’t mainly budgetary issues. They are structural problems that need industrial policy solutions.

    Our economy faces a short and long-term crisis of innovation, climate change, and racial, gender, and economic inequality.  Industrial policy is critical to building a long-term, sustainable, and equitable prosperity.  I commend the Boston Review forum and book to you as a way to understand this critical issue.

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    Germany's next leader could make or break the economy – CNBC



    Supporters of the German Social Democrats (SPD) party, attend at an election campaign rally on August 27, 2021 in Berlin, Germany.
    Maja Hitij | Getty Images News | Getty Images

    With Chancellor Angela Merkel due to leave office after Germany’s upcoming federal election on Sunday, the country’s priorities could change dramatically, particularly as power could soon be shared among newer (and more unpredictable) political forces.

    It’s practically certain that the next government (like the current one) will be a coalition, but what’s far less certain is which parties will create or dominate a governing alliance.

    What form the next coalition takes will undoubtedly have a big impact on Germany’s economy which is Europe’s largest and, arguably, its most important.

    In 2019, almost a quarter of the EU’s gross domestic product (24.7%) was generated by Germany, according to Eurostat, and so how the country is governed — at a time of transition in terms of global trade and consumer trends — matters.

    The election is still wide open with the latest voter poll on Monday showing that while the left-leaning Social Democratic Party remains in the lead and is seen with 25% of the vote, the ruling conservative alliance of the CDU-CSU (the Christian Democratic Union and Christian Social Union) has closed the gap, and currently stands to gain 22% of the vote. The Green Party, meanwhile, trails with 15% of the vote, according to the Insa poll for the Bild newspaper.

    A new coalition will have to be formed after the vote and German economists say certain alliances could have “massive consequences” on the country’s economy.

    ‘Massive consequences’

    Germany’s respected Ifo Institute and newspaper Frankfurter Allgemeine Zeitung surveyed 153 economists at German universities, asking them how different coalition formations could affect Germany’s economic growth, unemployment, public debt, and income inequality.

    For each of these measures, respondents were asked under which coalition the highest and lowest levels could be expected at the end of the next legislative period.

    The survey results, published Tuesday, found that 83% of the German economists polled believed that the lowest economic growth rate would be the product of a so-called “Red/Red/Green” coalition of the SPD, the Left Party (Die Linke) and the Greens.

    Such a coalition of leftist parties “would represent a sea change in policy direction, which would translate into a different economic policy with higher taxes and more government transfers,” Ifo Researcher and Professor Niklas Potrafke noted of the survey results Tuesday, adding “that would also have massive consequences for the real economy.”

    A total of 77% of the economists said they expected that, in addition to delivering the lowest economic growth, a “Red/Red/Green” coalition would lead to the highest unemployment rate and 86% believed they would have the highest national debt. However, 55% of the economists also believe that such a leftist alliance would achieve the greatest net reduction in income inequality.

    The devil you know

    Perhaps unsurprisingly, 44% of the economists believed that a coalition of the ruling CDU-CSU alliance and the pro-business FDP (a “Black/Yellow” coalition) would achieve the highest growth rate for Germany, although this grouping lacks a majority when it comes to current polls.

    A “Black/Yellow” coalition would achieve the lowest unemployment rate, according to 43%, and the lowest public debt ratio, according to 73% of the economists.

    This prosperity could come at a price to many with 70% of economists believing that such a coalition would lead to the highest net income inequality and 56% seeing it as leading to the highest carbon emissions of all the alliances.

    The cokery plant of German industrial conglomerate ThyssenKrupp on Rhine river in Duisburg, western Germany in 2019.
    INA FASSBENDER | AFP | Getty Images

    In joint second place, 18% of the economists believed that the highest economic growth could come out of a coalition of the SPD, Greens, and FDP (widely called a “traffic light” coalition) and 18% felt the same about an alliance of the CDU-CSU, Greens, and FDP (known as a “Jamaica” coalition).

    “Should either a so-called traffic light or a Jamaica coalition be formed, respondents believe the effects on growth, inequality, the public debt ratio, the unemployment rate, and carbon emissions would be more restrained,” Potrafke noted.

    Polls wide open

    Currently, there are a variety of possible coalition options, with most facing stumbling blocks to formation, meaning that there are likely to be protracted negotiations after the election due to policy differences between the parties in areas ranging from economics to climate targets.

    “Coalition formation might take some time,” macro analysts from Teneo Intelligence said in a note Monday.

    “Less than one week ahead of the 26 September federal election, the Social Democrats continue to lead in the polls. However, the Christian alliance appears to have recovered some ground. But even if the SPD wins, this does not necessarily mean that Finance Minister Olaf Scholz will become the next chancellor; CDU/CSU candidate Armin Laschet could still try to outmaneuver Scholz, for instance by trying to form an alternative government with the Greens and the center-right Liberals (the FDP).”

    Journalists and party members watch on a screen from the press centre (L-R) Olaf Scholz, German Finance Minister, Vice-Chancellor and the Social Democrats (SPD) candidate for Chancellor and Armin Laschet, North Rhine-Westphalia’s State Premier and the Christian Democratic Union (CDU) candidate for Chancellor as they attend an election TV debate in Berlin on September 12.
    JOHN MACDOUGALL | AFP | Getty Images

    The CDU-CSU is used to being in power, but that could all change after next Sunday’s vote; both the SPD and Greens’ candidates for chancellor, Olaf Scholz and Annalena Baerbock, have suggested that neither of them has much appetite for a coalition with the CDU-CSU.

    “I think that, after 16 years, many voters would like for the CDU to finally go into opposition again,” Scholz said during the last TV debate between the main contenders for the chancellery on Sunday.

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    Canadian dollar, TSX slide ahead of uncertain election outcome



    Canadian dollar

    The Canadian dollar fell to a one-month low against its U.S. counterpart on Monday and the Toronto stock market posted its biggest decline since January as Canadians headed to the polls and worries about China roiled global financial markets.

    The loonie was trading 0.3% lower at 1.2810 to the greenback, or 78.06 U.S. cents, after touching its weakest intraday level since Aug. 20 at 1.2895.

    Prime Minister Justin Trudeau may cling to power after the dust has settled from Monday’s election, but he is likely to lose his bid for a parliamentary majority.

    Foreign investors have worried that the election could result in a deadlock that hampers Ottawa’s response to the COVID-19 pandemic and further slows the economic recovery from the crisis.

    “No matter the result of the Canadian election, the winner may soon have to face the prospect of a sharp slowdown in China,” said Adam Button, chief currency analyst at ForexLive.

    World stocks skidded and oil, one of Canada‘s major exports, settled 2.3% lower, as troubles at property group China Evergrande sparked concerns about spillover risks to the economy.

    “It’s a very confusing time and that’s impacting the marketplace,” said Irwin Michael, portfolio manager at ABC Funds in Toronto.

    Investors in equities are casting a nervous eye over some of the campaign promises made by Canadian political parties, including Trudeau’s vow to raise corporate taxes on the most profitable banks and insurers.

    The Toronto Stock Exchange’s S&P/TSX composite index ended down 335.82 points, or 1.6%, at 20,154.54, its lowest closing level since July 22.

    Financials, which account for about 30% of the TSX’s valuation, fell 1.8%, while energy was down 2.8%.

    Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year fell 6.6 basis points to 1.216%.


    (Reporting by Fergal Smith; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Sagarika Jaisinghani and Medha Singh in Bengaluru; Editing by Peter Cooney)

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