TD Economics answers questions of investor concern
TD Economics – the specialized research arm of the Toronto-Dominion Bank of Canada – answers a series of questions investors have raised about recent current business issues.
How have recent global economic conditions evolved?
Economic growth has generally disappointed while inflation has shown more heat. In the third quarter of 2021, the real gross domestic product (GDP) of the United States would have increased by 2.0% on an annualized basis, 1.4 percentage points lower than expected in September. The main culprits for the failure were worsening global supply constraints, weakening fiscal stimulus and headwinds related to the Covid-19 Delta variant. Fortunately, the economic rebounds are evident for the fourth quarter.
Supply constraints are proving to be more lasting than expected, prompting economists and central banks to revise short-term inflation forecasts in series. Significant relief now seems unlikely before the second half of 2022. This will leave the Consumer Price Index (CPI) at just under 4% on average in the US and Canada, or nearly a point percentage more than we expected in September.
The higher trajectory of inflation in the first half of next year will weigh on real disposable income in North America and around the world. This would normally lead to significant deteriorations in economic growth performance in 2022, but the outlook is strengthened by i) large pools of excess savings which continue to support spending patterns, ii) continued growth in employment opportunities .
Where are we now in the battle against Covid-19?
Globally, Covid-19 cases are on the rise again after several months of decline. The increase is most noticeable in Europe, as emerging markets have seen a marked improvement since the summer peak.
The potential spread of the virus in the coming months could prompt more governments to implement new restrictions. Any new measures adopted are likely to be more targeted and less economically disruptive than those in previous waves, given the increasing use of vaccine passport systems, money orders and other tools.
In summary, an epidemic this winter should have much less impact on economic growth. We could see a slowdown in the growth of high-contact services in regions with high Covid-19 levels, but the impact on national trends will likely be marginal.
How much should we be worried about the Chinese real estate market?
The real estate sector has been an essential source of growth for the Chinese economy. It is estimated that 30% of Chinese GDP is linked to the upstream or downstream effects of the real estate sector, which is higher than any advanced economy before the global financial crisis.
There are now reports of a new regulatory push to investigate the comfortable relationship between lenders and the industry. As authorities seek to curb real estate speculation, this could be another avenue to tighten credit conditions.
It paints a grim picture, but there are reasons not to expect a crisis to erupt. First, the current situation is the product of regulators imposing rules to limit borrowing by real estate developers. On November 10, authorities said they were ready to step in and prevent liquidity problems from worsening, as state media reported that some real estate companies were planning to issue debt in the market. interbank. Public developers have also increased their share of land purchases from local governments, thereby providing support to a key revenue line.
Second, the 20th National Congress of the Chinese Communist Party is scheduled for next year. The political appetite for economic instability will be minimal as the regulatory push on the real estate sector is part of a broader strategy to limit economic inequality.
What if we were wrong and these headwinds turned out to be more persistent?
We estimate global growth could fall 0.6 percentage point below current expectations, which equates to around $ 570 billion (£ 428 billion) of real value added lost. China would suffer the most, potentially losing 1.4 percentage points of growth in 2022. Among advanced economies, euro area growth could fall by 0.8 percentage point, while the United States and Canada could miss 0.7 and 0.6 percentage points respectively. These estimates are more indicative than precise, because it is difficult to estimate the spillover effects on the “confidence” channel.
However, the dominant message is that the Canadian and US economies would be seriously affected, but the forces of recession did not materialize in the modeled results given the starting point of these economies.
Will wage growth continue to accelerate?
The gap between the rate of job openings and hires remains close to an all-time high, but nothing tells the story of strong demand for workers and rising wages better than job rates. record resignation. Employees are clearly finding greener pastures elsewhere.
The gap between openings and hires also implies a skills mismatch. The pandemic has quickly mixed up the bridge on which sectors and regions are developing the fastest, and it will take time for workers to relocate or move to different industries.
Another challenge for employers has been that the growth in labor supply has not kept pace with economic growth, as evidenced by a stalled labor market participation rate.
Frictions in the labor market will not be resolved overnight. The history of the United States foresees a considerable time for inactive people to be encouraged to reinstate. Current higher wages and inflation may speed up the timeline compared to history, but we are also confident that demand will remain healthy. This combination supports a persistence of wage growth in the 4% to 5% range in the coming quarters.
How are the US infrastructure bill and potential social spending bills factored into the outlook?
US fiscal policy has been a major support to the economy throughout the pandemic, totaling more than $ 5 billion, or nearly 25% of nominal GDP over two years. The next budgetary spending initiatives are more modest and spread over a longer period. These include the Infrastructure Investment and Jobs Act (IIJA) and the Build Back Better (BBB) reconciliation bill – currently under negotiation in Congress. As these programs focus more on investments aimed at supporting the economy over the medium term, the recovery in growth is unlikely to materialize quickly.
What are the risks that excess household savings pose to the outlook for consumption and inflation?
Americans built up a surplus savings cushion of $ 2.7 billion during the pandemic, accounting for about 13% of nominal GDP. However, excess savings have now stopped accumulating. The personal savings rate has returned to its pre-pandemic rate in September and is expected to fall below that level in the coming quarters.
It is very uncertain how much of these savings will be spent compared to those saved and invested. Most of the savings are held by higher income households with a greater propensity to save. Our basic assumption was that 5-10% of these reserves would be spent over the next two years. Given the strong data on consumer spending up to October, this assumption likely carries a risk to the upside. The potential for consumers to embark on a greater post-pandemic spending frenzy is the biggest upside risk to growth and inflation.
How do global central banks react to high inflation?
With inflation becoming the main concern of central bankers, a movement is underway to tighten monetary policy. The Federal Reserve has taken a first step by reducing its quantitative easing program and signaled that a cycle of rate hikes is expected to begin next year.
The time for very accommodating monetary policies is over. Central banks around the world are facing economic rebounds and levels of inflation that have not been around for decades. This prompts them to act, making 2022 the year of the tandem to tighten the screws on monetary policy.
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