(Bloomberg) — The world economy is showing signs of a rapid downshift as it contends with a series of shocks — some of them self-inflicted by policymakers — increasing the likelihood of another global recession and the danger of major financial disruptions.
“We’re living through a period of elevated risk,” former US Treasury Secretary Lawrence Summers told “Wall Street Week” with David Westin on Bloomberg Television, for whom he is a paid contributor. “In the same way that people became anxious in August of 2007, I think this is a moment when there should be increased anxiety.”
At the heart of the strain: The fallout from the most aggressive hiking of interest rates since the 1980s. Having failed to foresee the surge in inflation to multi-decade highs, the Federal Reserve and most peers are now lifting rates at speed in a bid to restore price stability and their own credibility.
Evidence of the impact — and of the blow to consumers’ purchasing power from soaring prices — is mounting quickly. In the past several days, Nike Inc. reported a surging stockpile of unsold product, FedEx Corp. shocked with a warning on delivery volumes and key chipmaker South Korea saw the first drop in semiconductor output in four years as demand retreats. Apple Inc. is backing off plans to boost output of its new iPhones, Bloomberg reported.
The turn is coming even before the full thrust of monetary tightening is felt. The Fed and many counterparts are pledging to keep going with steep rate hikes as they attempt to rebuild credibility. Quantitative tightening programs, where central banks remove liquidity by shrinking bond portfolios, are also just getting going.
Inflation data showcase the need for, as Fed Vice Chair Lael Brainard put it Friday, “avoiding pulling back prematurely” on tightening. She spoke shortly after the Fed’s preferred measure of prices jumped more than forecast. Earlier, data showed euro-zone inflation has punched into double-digits.
Layered on top of continuing reverberations from the Russian invasion of Ukraine, the spreading economic gloom is sowing fear in financial markets, creating its own worrying dynamic. A rapidly appreciating dollar, supercharged by the Fed, may help cool US inflation, but it drives it up elsewhere by weakening other currencies — pressuring authorities to restrain their own economies.
“The global economy is in the eye of a new storm,” Reserve Bank of India Governor Shaktikanta Das said Friday after lifting rates again.
Prospects for a second global recession so soon after the 2020 downturn triggered by the pandemic were hardly apparent a year ago. But Europe’s Russian-induced energy crisis, and China’s deepening property slump and continued Covid-Zero approach weren’t part of the consensus outlook.
Not all is dark, with US job-market resilience a notable feature. But the plans by Facebook parent Meta Platforms Inc. for the first reduction in headcount ever illustrate how that may still change.
And Britain’s experience in recent days showcases how investors are in a mood to punish policymakers pursuing approaches deemed unsustainable. The Bank of England was forced to intervene in its bond market after the new UK government announced $45 billion of unfunded tax cuts.
What Bloomberg Economics Says…
“Forecasts of a soft landing for the global economy assume something close to perfect policy execution. The events of the last week demonstrate the reality can be very different.”
“The opportunity for further fumbles — after the UK’s fiscal fail and market meltdown — is high. And the cost, if they occur, higher.”
–Tom Orlik, chief economist.
“Markets are concerned about fiscal policies becoming even looser despite inflation, or the dollar, getting excessively strong,” said Cui Li, head of macro research at CCB International Securities Ltd.
Nike’s troubles showed how the dollar’s appreciation is causing issues not just for developing nations that issued debt in the US currency — Sri Lanka, Pakistan and Argentina are among those turning to the IMF for help — but also for American multinational companies.
The athletics-wear giant on Thursday downgraded its outlook, citing foreign-exchange effects and higher freight costs, which are a symptom of supply-chain delays and port congestion. That’s besides the need to embrace price markdowns given unsold stock. North American inventories climbed 65% in the three months through August.
Housing markets are also turning, walloped by surging mortgage rates. The US in the past week saw the first decline in home prices in a decade.
“The question is how low growth will go, and for how long it will stay down,” said S&P Global Chief Economist Paul Gruenwald.
Perhaps the biggest X-factor is the potential for financial turmoil as the dollar, which has appreciated almost 14% this year as measured by the Bloomberg Dollar Spot Index, exerts pressure across markets.
Combine that with rapid increases in borrowing costs, and it spells the potential for trouble. Summers, the ex-Treasury chief, said “You can never be certain about what the consequences of that will be.”
That has echoes of the summer of 2007, when the impact of the collapsing US housing market first began showing up in the financial system, with the closure of a number of funds and sudden liquidity shortfalls among banks. Things eventually morphed the following year into the worst financial crisis since the Great Depression.
Rising anxiety across global markets can be seen in the Bank of America Merrill Lynch GFSI Market Risk indicator, a measure of future price swings implied by options trading on equities, interest rates, currencies and commodities.
The gauge has jumped to the highest since March 2020, when markets were in full-blown pandemic panic.
Given the need to address inflation, diminished fiscal space in the wake of record spending on the pandemic, and varying priorities across major economies, the potential for joint action to address challenges may be in question.
“The incoherent macro policies within countries and absence of policy coordination across countries are both problematic,” said Cui Li at CCB.
It all makes for a potentially tension-filled gathering of global finance chiefs next week for the annual International Monetary Fund and World Bank Oct. 10-16 in Washington.
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
