Connect with us

Economy

William Watson: My hunch is the economy will bounce back quickly when this ‘Great Compression’ ends – Financial Post

Published

 on


George Santayana meet Milan Kundera. Santayana (1863-1952) was the Spanish-born American philosopher most famous for saying: those who cannot remember the past are condemned to repeat it. Kundera (1929-) is a Czech-born French writer whose best-known work, “The Unbearable Lightness of Being,” holds that individual experience is “light” because it is not repeated. So its capacity to teach is limited. Which thinker, I wonder, is the best guide to the COVID economy?

The economists Robert Hall of Stanford University and Marianna Kudlyak of the San Francisco Federal Reserve Bank have recently discovered a remarkable regularity about the 11 postwar U.S. recessions: however high the unemployment rate rises it pretty much always declines at the rate of 0.85 percentage points per year.

In 2020, that is terrible news. As they write, with the unemployment rate about “nine percentage points above normal … it would take 11 years (nine divided by 0.85) to work off the pandemic’s bulge of unemployment as it currently stands.” (Granted, that was before the rate fell 2.2 points from May to June alone.)

The saving grace is that the current recession is like no other in American — or Canadian — history

We only just completed a long labour market recovery from the crash of 2008 (though we did complete it, with unemployment rates hitting long-term lows). No one wants another 10-year slog back to full employment. As three economists from the C.D. Howe Institute show elsewhere on this page, if the recovery does turn out to be slow, then in terms of accumulated lost output the current downturn will at least rival and may even “blow past” the other big recessions of recent memory (1982 and 1990).

The saving grace is that the current recession is like no other in American — or Canadian — history. (Take that, Santayana!) In fact it’s not so much a recession, with economic activity ebbing for reasons that often seem mysterious, as it is a compression. The Great Compression, you might call it. For reasons everyone understands though not everyone agrees with, the government hammered the economy shut for a couple of months by either literally outlawing many normal economic interactions or at least strongly discouraging them.

Will the recovery from such an unprecedented shutdown follow the pattern of previous recoveries (i.e., slow but inevitable) or will it go more quickly? My hunch is that when the compression does end the economy will bounce back relatively quickly. Hall and Kudlyak at least hold out that possibility, pointing to data showing that the overwhelming majority of today’s unemployed “anticipate being recalled to jobs from which they have been temporarily laid off, within the coming six months.” In the best-case scenario, these workers “return to their existing jobs rapidly without sacrificing their job-specific human capital” or going through the normal try-it-and-quit, try-it-and-quit search for a job that finally fits.

The last few data points from the U.S. are encouraging in this regard, with unemployment claims falling and employment and growth expectations rising faster than forecast.

What could go wrong? A second wave of the virus, obviously — though future lockdowns will be more targeted and therefore less costly economically.

Beyond that, there are three main problems.

First, the lucky among us have been working and earning as usual but spending less, either because things we like to spend on simply haven’t been available or because we fear our jobs are at risk, too. That creates a classic Keynesian problem of underconsumption. But figuring ways to encourage consumption shouldn’t be a problem for our tax policy people. Over the years they’ve devised all sorts of gimmicks to encourage this or that. Egging on ordinary consumption would be a novel challenge for them but one they can overcome. And it doesn’t require building new transportation systems or massive new solar arrays.

Second, we’ve got a structural problem: no one wants to fly, stay at hotels, ride the subway, dine out or go to movies or shows until doing so is safe again. There’s no Keynesian solution for that. The people in the affected industries either have to figure out ways to make it safe or find something else to do, whether for a time or for good. Travel agents, good with phones, could become contact-tracers. Pilots could operate heavy equipment. Chefs, projectionists, actors, salespeople and countless others? Jobs building infrastructure likely won’t help.

Our third big problem is government getting in the way. Relief money phases out too slowly. Infrastructure programs — probably the wrong answer anyway — take too long to come on line (they always do!). “Stimulus packages” get devoured by rent-seekers and the government’s pet projects.

With a leadership vacuum at the top the U.S. seems likely to have a ramshackle, unplanned recovery. But its first shoots are bright green and very promising. My bet is we in Canada take a much more scientific, planned and deliberate approach and, as a result, recovery takes a lot longer — especially if, looking down our noses at southern-state infection rates, we keep the border closed into the fall.

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

Oil prices climb on hopes for economic recovery

Published

 on

CNRL

Oil prices edged higher on Monday as European economic reopenings and rising U.S. demand helped offset weakness earlier in the session due to surging coronavirus cases in Asia and underwhelming Chinese manufacturing data.

Brent crude rose 56 cents, or 0.8%, to $69.27 a barrel by 11:22 a.m. ET (1522 GMT,) and West Texas Intermediate (WTI) crude was up 63 cents, or 1%, at $66.

The British economy reopened on Monday, giving 65 million people a measure of freedom after a four-month COVID-19 lockdown.

With accelerating vaccination rates, France and Spain have relaxed COVID-related restrictions, and Portugal and the Netherlands on Saturday eased travel restrictions as the holiday season approaches.

The promise of economic growth has supported oil prices in recent weeks, although the pace of inflation has kept many investors concerned about the possible rise of interest rates and fall of consumer spending.

“The news is not all negative on the demand front as the U.S. saw air travel jump on Sunday to 1.8 million people, the highest total since March 2020,” said Edward Moya, senior market analyst at OANDA.

United Airlines also announced they will add 400 daily flights to July for European destinations, Moya noted.

Summer travel bookings rose 214% from 2020 levels, the airline said, adding that it planned to fly 80% of its U.S. schedule compared with July 2019.

Worries about the spread of the coronavirus variant first detected in India are also making investors cautious.

Some Indian states said on Sunday they would extend lockdowns to help contain the pandemic, which has killed more than 270,000 people in the country.

Domestic sales of gasoline and diesel by Indian state refiners plunged by a fifth in the first half of May from a month earlier.

Singapore is preparing to close schools this week and Japan has declared a state of emergency in three more prefectures to contain outbreaks.

“The market is seemingly trapped between observing encouraging improvements in demand in the United States and Europe, and the sluggishness in consumption due to the persistence of COVID-19 in Asia,” StoneX analyst Kevin Solomon said.

China’s factories slowed their output growth in April and retail sales significantly missed expectations as officials warned of new problems affecting the recovery in the world’s second-largest economy.

China’s crude oil throughput rose 7.5% in April from the same month a year ago, but remained off the peak seen in the last quarter of 2020.

U.S. retail gasoline prices hit a fresh seven-year high on Monday, as it will take some time for the nation’s largest fuel pipeline’s supply chain to fully catch up after a cyberattack that resulted in a six-day system outage last week and mass panic-buying.

(Reporting by Bozorgmehr Sharafedin in London, additional reporting by Yuka Obayashi in Tokyo; Editing by Marguerita Choy and Barbara Lewis)

Continue Reading

Economy

World Economic Forum cancels 2021 annual meeting in Singapore

Published

 on

The World Economic Forum cancelled its 2021 annual meeting scheduled for Singapore in three months’ time on Monday, saying it was not possible to hold such a large, global event due to the COVID-19 situation.

“Regretfully, the tragic circumstances unfolding across geographies, an uncertain travel outlook, differing speeds of vaccination rollout and the uncertainty around new variants combine to make it impossible to realise a global meeting with business, government and civil society leaders from all over the world at the scale which was planned,” it said in a statement.

WEF had already pushed back its special meeting in Singapore, initially scheduled for mid-May, following the announcement last year it was moving from its usual home in the Swiss alps due to the pandemic situation in Europe.

The city-state has in recent days imposed some of the tightest restrictions since it exited a lockdown last year to combat a spike in local COVID-19 infections.

Acknowledging WEF’s decision to cancel the event, the Singapore trade ministry said on Monday that it “fully appreciates the challenges caused by the ongoing global pandemic, particularly for a large meeting with a broad span of international participants.”

The WEF’s next annual meeting will instead take place in the first half of 2022. Its location and date will be determined based on an assessment of the situation later this summer, it added in a statement.

(Reporting by Michael Shields; Editing by Toby Chopra and Catherine Evans)

Continue Reading

Economy

Wall Street weighed down by inflation jitters

Published

 on

Wall Street’s main indexes slipped on Monday after a sharp recovery late last week, as signs of inflationary pressures building up in the economy kept investors worried about monetary policy tightening.

Shares of Discovery Inc jumped 7% on plans to merge with U.S. telecoms giant AT&T Inc’s media assets, including CNN and HBO. AT&T shares gained 3.8%.

The S&P 500 saw its biggest one-day jump in more than a month on Friday as investors picked up beaten-down stocks following a pullback earlier in the week on concerns around inflation and a sooner-than-expected tightening by the U.S. Federal Reserve.

In a relatively quiet week for economic data, minutes on Wednesday from the Fed’s policy meeting last month could shed more light on the policymakers’ outlook of an economic rebound.

“The conversation around inflation is really the focus of the market and everyone’s trying to get a picture on whether the Fed is right in saying if this is all temporary or is this something they need to take more seriously,” said Greg Swenson, founding partner of Brigg Macadam.

“You’ll continue to see rotation (out of technology stocks) not only because of the outperformance of tech in the last year versus cyclicals, but the only way you can stay long equities and hedge against inflation is own more cyclicals – bank, energy.”

The Russell 1000 value index, which includes energy and bank stocks, continued to outperform on Monday, taking its year-to-date gains to 17.3%, versus its tech-laden growth counterpart’s rise of about 4%.

At 9:44 a.m. ET, the Dow Jones Industrial Average was down 68.67 points, or 0.20%, at 34,313.46, the S&P 500 was down 9.19 points, or 0.22%, at 4,164.66, and the Nasdaq Composite was down 48.45 points, or 0.36%, at 13,381.52.

Four of the 11 major S&P sectors declined, with technology leading losses.

Earnings this week will be scrutinized for clues on whether rising prices had any impact on consumer demand and if retailers could sustain their strong earnings momentum.

Walmart Inc, home improvement chain Home Depot Inc and department store operator Macy’s are set to report on Tuesday, with Target Corp Ralph Lauren and TJX Cos on tap later in the week.

With the earnings season at its tail-end, overall earnings for S&P 500 companies are expected to have climbed 50.6% from a year ago, according to Refinitiv IBES, the strongest pace of growth in 11 years.

ViacomCBS shares gained 3.5% after a report that billionaire George Soros’s investment firm bought stocks as they were being sold off during the meltdown of Archegos Capital Management.

Cryptocurrency-related stocks like Marathon Digital, Riot Blockchain and Coinbase fell between 6% and 9% as bitcoin swung in volatile trading after Tesla boss Elon Musk’s tweets about the carmaker’s bitcoin holdings.

Declining issues outnumbered advancers for a 1.27-to-1 ratio on the NYSE and for a 1.27-to-1 ratio on the Nasdaq.

The S&P index recorded 24 new 52-week highs and no new low, while the Nasdaq recorded 44 new highs and 19 new lows.

 

(Reporting by Medha Singh and Sruthi Shankar in Bengaluru; Editing by Saumyadeb Chakrabarty and Maju Samuel)

Continue Reading

Trending