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Why America's economy may still need trillions of dollars – CNN



A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

London (CNN Business)News that prices for American consumers are rising at the fastest rate in three decades has spooked investors and economists, piling pressure on President Joe Biden and the Federal Reserve to respond more aggressively.

What’s happening: Biden and his team are now steeling themselves for high inflation to persist into 2022, a problem for Democrats ahead of next November’s midterm elections. Senior Fed official Richard Clarida has indicated that if inflation stays elevated, the central bank could opt to hike interest rates next year.
Inflation is currently “much more than a moderate overshoot” of the Fed’s 2% target, he said earlier this week. “I would certainly not consider a repeat performance a policy success,” he continued.
Larry Summers, an economist who served in both the Obama and Clinton administrations, has been sounding the alarm on inflation for months.
“I think that the policymakers in Washington, unfortunately, have almost every month been behind the curve,” Summers told CNN on Wednesday.
But not everyone thinks the Fed and the Biden administration need to change course dramatically. In fact, former Fed economist Claudia Sahm, a Summers critic, believes that America’s economy still needs trillions of dollars in additional stimulus.
I asked her a few questions about this week’s inflation data and the subsequent debate. Our Q&A has been condensed and lightly edited for clarity.
What’s the big picture takeaway from the latest inflation data, in your view?
Big price increases in October, on top of higher-than-normal inflation since the summer, are unambiguously bad for consumers. But Covid, not inflation, is the problem. The rise and fall of cases throughout the pandemic has created immense disruptions in our economic and everyday lives.
What does a 6.2% annual increase in the Consumer Price Index say about the narrative that inflation is transitory?
The view that inflation would step back down this year was always based on the view that the pandemic would recede. Covid is still here, and as recently as a few months ago, it surged due to the Delta variant. Global supply chains are a mess, largely due to an insufficient global health response. There are no signs that the price increases due to Covid-related factors are spreading into other prices. Transitory means short-lived. As with the pandemic itself, we have been promised that it would get better soon, and it takes longer.
A number of other economists are pointing to rising rents as one example that price increases are broadening. Do you disagree with this assessment?
I disagree. House prices increased more slowly than usual during the pandemic due to eviction moratoriums, mortgage forbearance, and people waiting to move. The faster house price inflation now is basically a “getting back to normal.” That normal is not good, but it is what we had before Covid.
Should the Fed stay the course? Or might it need to move faster?
The Fed decided to reduce the pace of asset purchases by $15 billion in November and December and then reevaluate at their next meeting. The world is changing quickly, and it is appropriate for them to get more data before deciding on the pace after that.
What should the response be in Congress and/or from the Biden administration? What are the implications for Biden’s $1.9 trillion Build Back Better social spending package?
Congress needs to pass the Build Back Better legislation immediately. It is an investment in our children, low-wage workers, education, health care and fighting climate change. A half a year of higher-than-normal inflation is not a reason to squander this opportunity to act.

Two more big companies want to split themselves up

This week could mark the end of an era for more than one iconic conglomerate.
The latest: Japan’s Toshiba outlined plans on Friday to break up into three independent companies, a pitch that involves spinning off its energy and infrastructure business as well as its device and storage business.
The proposal follows a campaign by activist shareholders and a strategic review in the wake of a corporate governance scandal.
Toshiba (TOSBF) said Friday that it saw splitting the company as the best path forward.
“The decision allows each business to significantly increase its focus and facilitate more agile decision-making and leaner cost structures,” it said in a statement.
The move by the 146-year-old conglomerate comes just days after General Electric said it would split into three separate public companies, spinning out its aviation, healthcare and energy businesses.
Step back: What’s driving these storied conglomerates to try to dissemble themselves? One factor is the market, which currently favors streamlined operations over sprawling empires.
Another is the role of more aggressive activist shareholders, who build up stakes and then lobby for companies to make large structural changes.
There’s more: Johnson & Johnson (JNJ) announced Friday that it’s planning to split into two public companies, spinning off its division that sells Band-Aids and Tylenol. Shares are up 4% in premarket trading.
I’m also keeping an eye on Shell (RDSA), which is being lobbied by the hedge fund Third Point to separate its legacy fossil fuel business from its push into renewables. The company has rejected this proposal. But could other shareholders take Third Point’s side?

North American companies are racing to order robots

The companies rushing to meet surging demand for goods while struggling to fill open positions are in a bind. Increasingly, they’re turning to a new solution.
According to the Association for Advancing Automation, or A3, strong sales of robots over the summer brought the total number of orders in North America to 29,000 units so far this year. That’s the highest level on record.
Breaking it down: The number of units sold is up 37% from the same period in 2020 and trumps the previous high set in 2017 by nearly 6%.
“With labor shortages throughout manufacturing, logistics and virtually every industry, companies of all sizes are increasingly turning to robotics and automation to stay productive and competitive,” A3 President Jeff Burnstein said in a statement.
The group said it wasn’t just carmakers placing orders. Nearly two-thirds of sales came from non-automotive industries, including metals and food and consumer goods.
Big picture: A3 advocates for the benefits of automation, arguing it makes workplaces safer and frees up people for more rewarding roles. Even if that’s true in the long run, it could seriously shake up the job market in the immediate term — another way in which the post-pandemic economy could look very different.

Up next

Warby Parker reports results before US markets open.
Also today: The latest data on the number of Americans quitting their jobs, which has been at a record high, posts at 10 a.m. ET.
Coming next week: US President Joe Biden and Chinese President Xi Jinping are expected to hold a virtual summit on Monday, the first such meeting between the leaders of the world’s two largest economies.

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China’s economy looks especially vulnerable to the spread of Omicron – The Economist



JACK MA, THE founder of China’s giant e-commerce platform, Alibaba, started his first web company after a visit to America in 1995. Cao Dewang, the boss of Fuyao Glass, a Chinese company made famous by the documentary “American Factory”, ventured into manufacturing after a trip to the Ford Motor Museum in Michigan. (The museum’s significance struck him only on the plane home, he told an interviewer, so he immediately booked a return flight to make a second visit.)

Travel is vital to innovation. Unfortunately what is true of business is also true of viruses. At some point on its journey around the globe the covid-19 virus re invented itself. The new Omicron variant will further entrench China’s tight restrictions on business travel. Indeed it may cause more disruption to China’s economy than to other GDP heavyweights. That is not because the virus will spread more widely in China. On the contrary. It is because the government will try so hard to stop it from doing so.

Since the end of May, China has recorded 7,728 covid-19 infections. America has recorded 15.2m. And yet China’s curbs on movement and gathering have been tighter, especially near outbreaks (see chart 1). Its policy of “zero tolerance” towards covid-19 also entails limited tolerance for international travel. It requires visitors to endure a quarantine of at least 14 days in an assigned hotel. The number of mainlanders crossing the border has dropped by 99%, according to Wind, a data provider.

These restrictions have stopped previous variants from spreading. But periodic local lockdowns have also depressed consumption, especially of services like catering. And the restrictions on cross-border travel will inflict unseen damage on innovation. Cutting business-travel spending in half is as bad for a country’s productivity as cutting R&D spending by a quarter, according to one study by Mariacristina Piva of the Università Cattolica del Sacro Cuore in Milan and her co-authors.

If the Omicron variant is more infectious than other strains, it will increase the likelihood of covid-19 outbreaks in China, leading to more frequent lockdowns. If the restrictions were as severe as those China briefly imposed in mid-August, when it was fighting an outbreak that began in the city of Nanjing, the toll on growth could be considerable. If imposed for an entire quarter, the curbs could subtract almost $130bn from China’s GDP, according to our calculations based on a model of lockdowns by Goldman Sachs, a bank—equivalent to around 3% of quarterly output.

Omicron is not the only threat to China’s economy. Even before its emergence, most forecasters thought that China’s growth would slow to 4.5-5.5% next year, as a crackdown on private business and a property slowdown bite.

Worse scenarios are imaginable. If China suffers a property slump as bad as the one it endured in 2014-15, GDP growth could fall to 3% in the fourth quarter of 2022, compared with a year earlier, according to Oxford Economics, a consultancy. That would drag growth for the whole year down to 3.8%. If housing investment instead crashed as badly as it did in America or Spain in the second half of the 2000s, growth in China could fall to 1% in the final quarter of 2022 (see chart 2). That would take growth for the year down to 2.1%. Losses would leave “numerous” smaller banks with less capital than the regulatory minimum of 10.5%, the firm says.

Neither of these scenarios is inevitable. Oxford Economics rates the probability of a repeat of 2014-15 as “medium” not high. (China’s inventory of unsold properties, it points out, is lower now than it was seven years ago.) It thinks the chances of a repeat of an American or a Spanish-style disaster are low. Both the scenarios assume that China’s policymakers would respond only by easing monetary policy. But a more forceful reaction seems likely. Although the authorities’ “pain threshold” has increased, meaning they do not intervene as quickly to shore up growth, they still have their limits. “I don’t think the Chinese government is dogmatic. It is quite pragmatic,” says Tao Wang of UBS, a bank.

Thus far, the property sector’s pain has been masked by the strength of other parts of the economy. Exports have contributed about 40% of China’s growth so far this year, points out Ting Lu of Nomura, another bank, as China provided the stay-at-home goods the world craved. If the new variant sends people back into their bunkers, China’s exporters may enjoy a second wind. More likely, export growth will slow, perhaps sharply. Mr Lu thinks exports will be flat, in price-adjusted terms, next year, contributing nothing to China’s growth. The economy will therefore need other sources of help.

The most attractive stimulus options bypass the bloated property sector, which already commands too big a share of China’s GDP. The government could, for example, cut taxes on households, improve the social safety-net and even hand out consumption vouchers. The problem is that consumers may be slow to respond, especially if their homes are losing value. Not even China’s government can force households to spend.

A more reliable option is public investment in decarbonisation and so-called “new” infrastructure, such as charging stations for electric vehicles and 5 G networks. The difficulty, however, is that these sectors are too small to offset a serious downturn in the property market, as Goldman Sachs points out.

The government will thus try to stop the property downturn becoming too serious. Analysts at Citigroup, another bank, expect that China’s policymakers will prevent the level of property investment from falling in 2022. That will allow GDP to expand by 4.7%. To accomplish this, the analysts reckon, China’s central bank will have to cut banks’ reserve requirements by half a percentage point and interest rates by a quarter-point early next year. The central government will need to ease its fiscal stance and allow local governments to issue more “special” bonds, which are repaid through project revenues.

It will also require more direct efforts to “stabilise”, if not “stimulate”, the property market. The government will need to make it easier for homebuyers to obtain mortgages and ease limits on the share of property loans permitted in banks’ loan books. Citi’s economists think the authorities may even show some “temporary forbearance” in enforcing their formidable “three red lines”, the most prominent set of limits on borrowing by property developers, which cap developers’ liabilities relative to their equity, assets and cash.

The one set of curbs China seems quite unwilling to ease are the covid-19 restrictions on international travel. They will probably remain in place until after the Winter Olympics in February and the Communist Party’s national congress later next year. They may remain until China’s population is vaccinated with a more effective jab, perhaps one of the country’s own invention. (The authorities have been unconscionably slow in approving the vaccine developed by BioNTech and Pfizer.) The government may also want to build more hospitals to cope with severe cases. Before covid-19 the country had only 3.6 critical-care beds per 100,000 people. Singapore has three times as many.

Businesspeople in Shanghai have started talking about travel restrictions persisting until 2024. The virus is highly mutable. China’s policy towards it, however, is strikingly invariant.

For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.

This article appeared in the Finance & economics section of the print edition under the headline “Omicronomics”

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What the Omicron variant means for the world economy – The Economist



A LITTLE MORE than a year after the first success of a covid-19 vaccine in a clinical trial, a sense of dread has struck much of the world. The Omicron variant of the coronavirus, first publicly identified on November 24th, may be able to circumvent the defences built up by vaccination or infection with covid-19. The World Health Organisation declared that Omicron poses a “very high” global risk. The boss of Moderna, a vaccine-maker, warned that existing jabs may struggle against the heavily mutated new variant. Faced with the ghastly prospect of yet more lockdowns, closed borders and nervous consumers, investors have reacted by selling shares in airlines and hotel chains. The price of oil has slumped by roughly $10 a barrel, the kind of drop often associated with a looming recession.

As we explain this week it is too early to say whether the 35 mutations on Omicron’s spike protein help make it more infectious or lethal than the dominant Delta strain. As scientists analyse the data in the coming weeks, the epidemiological picture will become clearer. But the threat of a wave of illness spreading from one country to the next is once again hanging over the world economy, amplifying three existing dangers.

The first is that tighter restrictions in the rich world will damage growth. On the news of the variant, countries scrambled to block travellers from southern Africa, where it was first identified. Israel and Japan have closed their borders entirely. Britain has imposed new quarantine requirements. The pandemic abruptly ended a freewheeling era of global travel. Restrictions were being eased this year, but the past week has shown that gates are slammed shut much faster than they are opened.

The spread of Omicron is also likely to intensify limits on free movement at home. Europe was curbing many domestic activities even before the variant arrived, in order to fight surging infections of Delta. Italy is keeping most of the unvaccinated out of indoor restaurants, Portugal requires even those who are vaccinated to have a negative test to enter a bar and Austria is in full lockdown. The long-awaited recovery of the rich world’s huge service industries, from hospitality to conferences, has just been postponed.

A lopsided economy fuels the second danger, that the variant could raise already-high inflation. This risk looms largest in America, where President Joe Biden’s excessive fiscal stimulus has overheated the economy and consumer prices rose by 6.2% in October compared with the previous year, a three-decade high. But inflation is also uncomfortably high elsewhere, at 5.3% globally, according to Bloomberg data.

You might think Omicron would lower inflation, by depressing economic activity. In fact it could do the opposite. Prices are rising in part because consumers are bingeing on goods, bunging up the world’s supply chains for everything from Christmas lights to trainers. The cost of shipping a container from the factories of Asia to America remains extraordinarily high. For overall inflation to recede, consumers need to shift spending back towards services like tourism and eating out. Omicron may delay this. The variant could also trigger more lockdowns in key manufacturing nodes such as Vietnam and Malaysia, aggravating supply glitches. And cautious workers may put off their return to the labour force, pushing up wages.

That may be one reason why Jerome Powell, the chairman of the Federal Reserve, indicated on November 30th that he favours monetary tightening. That stance is right, but brings its own dangers. The spillover effects could hurt emerging economies, which tend to suffer capital outflows and falling exchange rates when the Fed tightens.

Emerging economies have greater reserves and depend less on foreign-currency debt than they did during the Fed’s botched attempt to unwind stimulus during the taper-tantrum of 2013. Yet they must also cope with Omicron at home. Brazil, Mexico and Russia have already raised interest rates, which helps stave off inflation but may reduce growth just as another wave of infections looms. Turkey has done the opposite, cutting rates, and faces a collapsing currency as a result. More emerging economies could confront an unenviable choice.

The final danger is the least well appreciated: a slowdown in China, the world’s second-biggest economy. Not long ago it was a shining example of economic resilience against the pandemic. But today it is grappling with a debt crisis in its vast property industry, ideological campaigns against private businesses, and an unsustainable “zero-covid” policy that keeps the country isolated and submits it to draconian local lockdowns whenever cases emerge. Even as the government considers stimulating the economy, growth has dropped to about 5%. Barring the brief shock when the pandemic began, that is the lowest for about 30 years.

If Omicron turns out to be more transmissible than the earlier Delta variant, it will make China’s strategy more difficult. Since this strain travels more easily, China will have to come down even harder on each outbreak in order to eradicate it, hurting growth and disrupting supply chains. Omicron may also make China’s exit from its zero-covid policy even trickier, because the wave of infections that will inevitably result from letting the virus rip could be larger, straining the economy and the health-care system. That is especially true given China’s low levels of infection-induced immunity and questions over how well its vaccines work.

Vexing variants and worrying weeks

It is not all gloom. The world will not see a re-run of the spring of 2020, with jaw-dropping drops in GDP. People, firms and governments have adapted to the virus, meaning that the link between GDP and restrictions on movement and behaviour is one-third of what it was, says Goldman Sachs. Some vaccine-makers expect fresh data to show that today’s jabs will still prevent the most severe cases of the disease. And, if they must, firms and governments will be able to roll out new vaccines and drugs some months into 2022. Even so Omicron—or, in the future, Pi, Rho or Sigma—threatens to lower growth and raise inflation. The world has just received a rude reminder that the virus’s path to becoming an endemic disease will not be smooth.

This article appeared in the Leaders section of the print edition under the headline “Danger ahead”

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Turkey’s Erdogan replaces finance minister amid economic turmoil –



Nureddin Nebati takes on the role of finance minister after Lutfi Elvan resigns.

Turkish President Recep Tayyip Erdogan has replaced the country’s finance minister after weeks of economic turmoil in which inflation soared as the lira plummeted to record lows.

The currency has lost more than 40 percent of its value against the US dollar this year, making it the worst-performing of all emerging market currencies.

According to a presidential decree issued near midnight on Wednesday, Erdogan accepted the resignation of Lutfi Elvan and appointed his deputy, Nureddin Nebati, as the new finance minister.

Nebati, 57, has a bachelor’s degree in public administration and a master’s degree in social sciences from Istanbul University. He also holds a doctoral degree in political science and public administration from Turkey’s Kocaeli University.

His predecessor had only been in the role since November 2020, when he was appointed after the resignation of Erdogan’s son-in-law, Berat Albayrak.

Elvan’s year-long tenure was marked by numerous crises.

Earlier on Wednesday, the Turkish Central Bank intervened in markets to prop up the nosediving lira, which has lost nearly 30 percent in value against the dollar in just a month.

Under pressure from Erdogan, Turkey’s officially independent central bank lowered its key interest rate in November for the third time in less than two months. It did so despite inflation approaching 20 percent – four times the government’s target.

Erdogan believes that high interest rates cause high inflation – the exact opposite of conventional economic thinking – and has insisted he would keep rates low.

Turkey’s currency hit yet another record low of more than 14 to the dollar before recouping some losses on Wednesday after a central bank move to sell reserves. One dollar bought 13.22 lira as of Wednesday afternoon.

The recovery, however, was short-lived after Erdogan appeared again to defend his “new economic model” against the “malice of interest”.

Since 2019, Erdogan has sacked three central bank governors who opposed his desire for lower interest rates. The president, who has blamed the lira’s troubles on foreigners sabotaging Turkey’s economy and on their supporters in the country, believes lower rates will fight inflation, boost economic growth, power exports and create jobs.

On Tuesday, figures showed Turkey’s economy had grown by 7.4 percent in the third quarter, compared with a year earlier, but some analysts believe the surge could be short-lived due to the high inflation and currency meltdown.

Meanwhile, public discontent appears to be on the rise.

Last week, demonstrators protested economic policies in the largest city of Istanbul and the capital, Ankara, while the main opposition Republican People’s Party plans a rally for early elections on Saturday in the southern city of Mersin.

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