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Gov. Tiff Macklem walks outside Bank of Canada building in Ottawa.
Are Canada & US headed toward soft landing?
Canada's annual inflation rate dropped more than expected to only 2.8% in June, the lowest figure since April 2021. That's good news, right? Well, it depends.
On the one hand, Canadian inflation is now within the 2-3% range that economists consider healthy, and it remains the lowest rate of all G-7 countries. This means the Bank of Canada might soon move to cut interest rates despite hiking them last month to 5%, the highest level in 22 years. Even if it doesn't, the Canadian economy looks on track for a "soft landing" — economist-speak for avoiding the recession that rate hikes can trigger.
On the other, core inflation — excluding volatile food and energy prices — remains "sticky" (economist-speak for prices that just keep rising whatever the central bank does). This is also happening south of the border in the US, where inflation has receded but things like rent or dining out are getting a lot more expensive.
While Canada's central bank and the US Federal Reserve are often in sync, earlier this year the Bank of Canada famously went off-script by being the first to hit pause on rate hikes. So don't be surprised if Canada goes a step further by slashing rates soon once core inflation is brought under control.
The US, meanwhile, saw 3% year-over-year inflation in June, and economists now predict that Americans may avoid a recession. The US Federal Reserve – likely eyeing Canada’s results – held rates in June but looks likely to raise rates this month from 5% to 5.25%. We’ll be watching to see whether that’s the last Fed hike … and the prospects for a soft landing in the US.Hard Numbers: US inflation cools down, Russian oil prices heat up, global hunger grows, Pakistan gets relief
3: Annual inflation in the US continues to fall, coming in at just 3% in June, the lowest rate in more than two years. Still, core inflation — which sets aside volatile costs for energy and food — is still at 4.8%, far above the Fed’s target of 2%.
60.32 The price for a barrel of Russian oil hit $60.32on Wednesday, cracking the $60 price cap that the G7 has tried to impose on Moscow since December. A major factor in the price bump was last month’s decision by the OPEC+ group of oil producers to cut production in order to raise global prices.
783 million: As many as 783 million people — nearly 10% percent of the global population — faced hunger last year, according to the UN. That number rose by more than 120 million since the last study in 2019. Conflict, climate fluctuations, and pandemic-related economic hardships were to blame.
3 billion: Pakistan on Wednesday won approval for a long-awaited $3 billion bailout from the IMF, while also getting a check for $1 billion from the UAE. This came just a day after the Saudis put $2 billion in the Pakistani Central Bank. Pakistan is mired in one of its worst financial crises in recent memory and has neared default several times already this year.A trader works on the trading floor at the New York Stock Exchange.
How’s the US economy doing right now?
If you’re a Republican, you probably think this is the worst economy in American history. If you’re a Democrat, chances are you at least rate it better than when Donald Trump was president.
But the truth is that even if your views weren’t colored by your partisan preferences, there’s enough conflicting data out there to confuse even the best, most apolitical economists.
Thankfully, I’m neither apolitical (I am nonpartisan) nor an economist (political scientists FTW), so if you ask me, I’d say the US economy is … pretty good.
Let’s start with inflation. Unless you’ve been living under a rock, you’ve surely noticed that everything seems to cost a fortune these days. Low and stable for decades, inflation surged in 2021-22 to levels not seen in 40 years thanks largely to the COVID-19 pandemic, which disrupted global supply chains and prompted the government to cushion the fall in incomes with extraordinary stimulus. China’s zero-Covid lockdowns and Russia’s invasion of Ukraine then pushed inflation even higher.
The good news is that inflation has already slowed noticeably, courtesy of the Federal Reserve’s most aggressive tightening cycle in decades. Annual headline inflation is down 4.2 percentage points after declining for 10 consecutive months since peaking at 9.1% last June. Annualized monthly data over the past 3 and 6 months shows even larger declines.
Core inflation – the less noisy measure preferred by economists and policymakers – has proven a bit stickier owing to wild, pandemic-induced swings in the prices of things like used cars and housing. But “supercore” and core services inflation – two measures that strip those components out – have been slowing. All in all, most price measures currently put underlying inflation around 4%.
The bad news is that inflation is still higher than anyone would like it to be, even if it’s at a level that we once found bearable and other countries consider normal. And because inflation has a way of becoming self-sustaining, there are reasons to fear it may prove hard to bring all the way down to the Fed’s target of 2% without causing big job losses.
Which brings us to the labor market. Despite interest rates rising by 5 percentage points in just over a year, unemployment is the lowest it’s been since 1969. Job growth has beat expectations in 11 of the past 12 months, prime-age labor force participation just hit a 15-year high, and people who were out of the labor market before (think older people, people with disabilities and criminal records, parents of young children) are now being pulled into it.
The labor market is so tight that the share of prime-age workers currently employed is higher than it was pre-pandemic, and the total number of people employed is higher than economists expected would be by now before the pandemic began. That includes a record-high share of prime-age women employed and a record-low Black unemployment rate.
It’s not just that everyone who wants a job can get one. Today, for every 10 people who want a job, there are 16 vacancies waiting to be filled. That means for the first time in a long time, American workers have options – including the option to demand a raise or to quit for better pay. Indeed, wages have grown significantly (even though – critically – they haven’t kept up with inflation), and the number of people voluntarily switching jobs remains high by historical standards.
Recent months have seen some softening in labor demand as Fed hikes have begun to hit the economy’s most rate-sensitive sectors, with slowing job growth, a slight uptick in unemployment claims, and more moderate wage growth. If it continues, this could eventually feed into lower spending. For now, though, layoffs show no sign of picking up, and the labor market remains remarkably robust.
What about that recession we’ve been promised?Politicians, economists, and investors have been predicting an imminent recession for more than a year now. The Fed’s rate hikes have to throttle economic activity eventually, the thinking goes, as the tighter financial conditions needed to get inflation down depress credit, spending, and hiring. If you are old enough to remember the 1980s, the story sounds familiar.
Yet despite the highest interest rates in 16 years and a recent spate of banking turmoil, the economy is growing, employers keep hiring more workers to meet Americans’ still-strong demand for goods and services, and recession calls keep getting pushed back.
Sure, there are important pockets of weakness in the economy, such as commercial real estate and high-profile industries like tech, finance, and media. But most of the economy is still chugging along. Corporate profits are near all-time highs, and while consumer spending, retail sales, and industrial production have all slowed somewhat, they remain strong.
Combined with evidence of cooling inflation and healthy but slowing wage growth, this resilience makes me hopeful that the US economy can achieve a “soft landing” – a Goldilocks scenario in which inflation comes down to an acceptable rate (say, under 3%) without a large increase in unemployment or a major recession.
Of course, it’s possible the Fed’s hikes are just taking longer than expected to work their way through the system and will cause a recession down the road. It’s also possible that we haven’t seen the last of the banking stress (plausible), that the US will default on its debt (very unlikely but at least some level of crisis seems necessary to avoid it), or that the Fed will raise rates too much (always a risk).
Any of these could push the US into recession, and indeed, most analysts still expect one to begin sometime in the next year. Then again, they’ve been wrong before. Barring any policy own goals or unexpected external shocks, a soft landing remains a distinct possibility.
So what’s with all the doom and gloom? By some measures, Americans think economic conditions are about as bad as they were during the heights of the Great Recession – when millions of workers had just been thrown out of work, unemployment was in the double digits, and households had lost more than $10 trillion worth of wealth.
This disconnect between reality and perception is quite striking, but it’s not mysterious. To understand it, there are two things you need to know.
First, inflation is much more salient than unemployment. While unemployment imposes severe costs on a small group of people, inflation affects everyone. Bad news also gets more coverage – and sticks more with people – than good news. The corollary is that as far as perceptions go, a strong labor market can’t possibly cancel out the rising cost of living. That’s why only one in five Americans say their financial situation has improved since last year. To the rest, hearing that jobs are plentiful is little consolation when they’re already employed but can’t afford groceries.
Second, partisanship plays a much larger role in shaping public opinion than it did in the past. It used to be that feelings about the economy were determined by the actual state of the economy. But this relationship broke sometime in the last two decades, no doubt thanks to the rise in polarization and the echo chambers created both by social media and by our increasingly politicized news media.
These days, Americans’ feelings about the economy are determined almost exclusively by the president’s politics, independent of the actual state of the economy. The partisan gap in economic perceptions under President Joe Biden and former President Trump has been more than double that under former presidents Barack Obama and George W. Bush. That means virtually half of the country is always bound to be sour on the economy, no matter how good it may be.
Rightly or wrongly, most Americans are feeling down about the economy, and no amount of explainers are about to change that. While for now consumers are still spending like it’s the roaring twenties, there’s always the risk that we’ll eventually talk ourselves into a recession. Perception may not be reality, but when it comes to politics and economics, it’s pretty damn close.
Fed chair Jerome Powell leaves after a news conference in Washington, DC.
The Fed's last rate hike of 2023?
On Wednesday, the US Federal Reserve will announce whether it'll further raise interest rates to tamp down inflation, which has eased in recent months yet remained at 5% in March, well above the 2% level that economists like. It's likely that the Fed will go for another 0.25 percentage point hike — taking interest rates to between 5% and 5.25%, the highest level in 16 years.
But that's not what economists and investors will most pay attention to.
They will surely obsess over every word that Fed Chair Jay Powell says in his speech after the rate decision is announced — looking for any signal that it’ll be the last hike of 2023. Yet, don't be surprised if Powell keeps his cards close to his chest amid stubbornly high inflation, fears of a looming US recession, and financial sector jitters after the collapse of First Republic Bank.
"Our base case is that the Fed will pause there and hold that rate through to at least the end of the year," says Eurasia Group analyst Robert Kahn. "But it'll be interesting to see how the Fed handles it. They're not going to want to give any kind of assurances."
Russian reservists recruited during a partial mobilization of troops attend a ceremony before departing to the Russia-Ukraine conflict zone, in the Rostov region, Russia October 31, 2022.
What We're Watching: Russian draft goes online, abortion pill ruling, US inflation slows, Taiwan gets new presidential candidate, Biden bets big on EVs
Russia’s digital draft
If you’re a young male citizen of Russia, it just got harder for you to hide from the war in Ukraine. The State Duma, Russia’s parliament, approved legislation on Tuesday that allows the government to send a military summons online instead of serving the papers in person. The upper house swiftly passed it into law on Wednesday.
“The summons is considered received from the moment it is placed in the personal account of a person liable for military service,” explains the chairman of the Duma’s defense committee, though the Kremlin insists no large-scale draft is imminent. If the person summoned fails to report for service within 20 days of the date listed on the summons, the state can suspend his driver’s license, deny him the right to travel abroad, and make it impossible for him to get a loan.
The database that provides names of potential draftees is assembled from medical, educational, and residential records, as well as insurance and tax data. Thousands of young Russians have already fled their country. Many more may soon try to join them.
Abortion pill stays on the market, but access rolled back
As the battle over abortion medication continues in the US, a federal appeals court has ruled that mifepristone – a drug approved by the Food and Drug Administration in 2000 – can remain on the market until the full case can be heard, likely by the Supreme Court.
Still, the court – made up of three appellate judges all appointed by Republican presidents – ruled that mifepristone cannot be sent by mail and rolled back a 2016 rule allowing it to be used up to 10-weeks gestation, dropping it back to seven weeks. It also rolled back other measures enforced by the Biden administration to enhance access after the gutting of Roe v. Wade.
This decision comes after a Trump-appointed, pro-life judge in Texas recently ordered a temporary stay on approval of mifepristone. Less than an hour later, another federal judge in Spokane, Washington, ruled that the drug must remain available in 17 Democratic-run states plus Washington, DC.
Importantly, the appeals court appeared to back the government's view that taking an approved drug off the market that accounts for more than half of all abortions nationwide would have “significant public consequences.”
As expected, abortion rights are shaping up to be one of the biggest political issues in the country. In Florida, Republicans are trying to fight a recently passed law banning abortion at six weeks, pushing for an outright ban.
US inflation cools — smartphones FTW
Good news for American households as US inflation fell to its lowest level in nearly two years in March. Prices grew at an annual clip of 5%, according to the latest figures released Wednesday. That’s down from 6% in February, marking the ninth consecutive month of falling inflation.
The highlights? Well, if you want to do some shopping in the US, now’s the time to cop a new smartphone, which will cost you 24% less than a year ago. And that summer road trip is on – gas prices are down more than 17%. At the same time, we remain “yolked,” as it were, to the Great Egg Crisis of 2023 — prices are up more than 30% despite easing a bit since February.
More broadly, that headline figure of 5% is still more than twice the pre-pandemic norm, and core inflation — which excludes volatile prices for fuel and food — is running at a toasty 5.6%.
That’ll keep the US Fed in the hot seat as it meets again in early May. Will they raise interest rates once more in a bid to finish off inflation? Or will they stand pat, worried about tipping the economy into a recession?
Will this man become Taiwan's next president?
Taiwan's ruling Democratic Progressive Party on Wednesday nominated VP William Lai as its candidate in the January 2024 presidential election.
Lai is widely viewed as a stand-in for term-limited President Tsai Ing-wen, reelected by a landslide in 2020. That means a tough line on China, which has made Tsai a darling in the West and reviled by Beijing. Lai used to support Taiwanese independence openly but has since moderated his position to align with the DPP's: We don’t need to formally break with the mainland because we’re already de-facto independent.
It's unclear who Lai will face, since the opposition Kuomintang Party — which, officially, is not pro-China but favors closer ties with China than the DPP — has yet to pick its candidate. (Terry Gou, the billionaire founder of Foxconn, the Taiwanese company that makes iPhones in China for Apple, is mulling another run.)
The vote will be Taiwan's most closely watched presidential election since 1996, when the self-ruled island ended decades of authoritarian rule. China responded to the democratic vibes by flexing its then-weak military muscles … until the US made it back off. This time, though, expect major Chinese fireworks if Beijing's candidate doesn't come out on top.
Biden’s ambitious new EV proposal
The Biden administration has proposed a new measure that would sharply accelerate the American auto industry’s transition to electric vehicles, and not everyone is happy about it.
The draft marks a big shift from Washington’s current carrots-based approach to boosting EV production to one that relies more on sticks. It would require carmakers to derive 60% of their sales revenue from electric vehicles by 2030, or face penalties. Currently, under a 2021 plan, the target is closer to 50% and manufacturers are allowed to opt in only if they want to. Under that plan, a range of subsidies and tax breaks aimed to incentivize consumers and manufacturers to ditch dirty fuel guzzlers.
Carmakers are already pushing back, saying that changes to assembly lines and supply chains will be expensive and take years to implement. But the Biden administration says the necessary funds were included in the Inflation Reduction Act, which earmarked $31 billion in subsidies for EV’s and tax credits for EV manufacturers.
Expect this to become a heated political issue in the coming months. Texas, despite being a leading investor in EV networks, has sued the federal government over the current EV standards, arguing that they are an overreach that violates states’ rights.
North Korean leader Kim Jong Un with his daughter Kim Ju Ae at a banquet in Pyongyang, North Korea.
Hard Numbers: North Korea bans a name, US inflation stays warm, aid trucks cross into Syria, Ukrainians freeze sperm
0: The number of North Korean girls who are allowed to have the same name as Supreme Leader Kim Jong Un’s daughter Kim Ju-Ae is now, reportedly, zero. Young Ju Ae, who is thought to be around 11 years old, has recently been in the spotlight inspecting weapons with her dad and appearing on postage stamps.
6.4: Annual inflation in the US fell by just a tenth of a point in January, to 6.4%, disappointing expectations that price growth would ease further in the world’s largest economy.
10: A fleet of 10 UN humanitarian aid trucks crossed from Turkey into Syria on Tuesday via the Syrian side’s Bab al-Salam border post. This is the first time since 2020 that the Syrian government has opened the checkpoint to allow aid trucks into this part of the country, parts of which are held by opposition forces.
100: Since the Russian invasion, a clinic in Kyiv has frozen the sperm of about 100 Ukrainian soldiers. “It’s not scary to die,” one man told the AP, “but it’s scary when you don’t leave anyone behind.”
A man counts Lebanese pound banknotes at an exchange shop in Beirut, Lebanon.
Hard Numbers: Lebanon devalues lira even more, Adani calls off share sale, Fed slows hiking pace, radioactive capsule found in Oz, Philippines opens more bases to US
90: Lebanon has devalued its currency by — wait for it — 90% as a condition for securing an IMF bailout for what remains of the country's battered economy. Although the central bank says this is a first step toward unifying the multiple exchange rates the Lebanese people use for different transactions, the new official value of the lira is still far above the black market rate that most people actually pay.
2.5 billion: India's Adani Group abandoned a $2.5 billion share sale, citing continuing volatility in the wake of a US short-seller's report that alleged stock manipulation and tax fraud. The allegations wiped billions in value from the company, making founder Gautam Adani no longer Asia's richest man.
25: The US Federal Reserve raised interest rates by 25 basis points to 4.75%, the smallest hike since it started hiking rates to fight inflation in March 2022. The Fed is still trying to thread the needle: cooling the economy to bring down inflation without triggering a recession that brings down everything else.
0.24: Be careful when you're transporting hazardous materials, mate. Australian authorities finally found that 0.24-inch diameter radioactive capsule that went missing last month after falling off a truck. Mining giant Rio Tinto apologized for losing the device, which contained a tiny amount of Cesium-137 that can cause radiation sickness.
4: The Philippines granted the US military access to four additional bases as both sides look to ward off China’s aggressive moves on Taiwan and the disputed South China Sea. This is bold move for Manila under President Ferdinand Marcos Jr., who has been trying to get along with Beijing without being as pro-China as his predecessor, Rodrigo Duterte, who wanted to kick out visiting US forces and tear up mutual defense pacts to please Xi Jinping.Hordes of shoppers throng the Macy's Herald Square flagship store in New York on Black Friday.
Exclusive polling data: Is inflation turning Americans into Grinches?
We’re excited to unveil a new exclusive polling partnership with the survey firm Maru Public Opinion. First up: How much are Americans reaching for their wallets this holiday season?
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'Tis the season for gingerbread, gelt, and glee. But after a year of unwinding from pandemic-related supply chain issues amid four-decade-high inflation and a war in Ukraine, just how festive are we feeling with our pocketbooks?
After all, much of the developed world is hip-deep in inflation, which is making prices soar for everything from bread to meat to gas. The IMF says that global inflation will hit a whopping 8.8% this year.
In the US, the Federal Reserve has been tackling inflation head-on by hiking interest rates at the quickest pace since the early Reagan years, with another bump expected next week. But making it harder to borrow money — combined with higher prices across the board — means that many Americans will think twice about splurging over the holidays.
“This was the first year that I can remember not participating in Black Friday or Cyber Monday in years!” says Patrick Howard, a father of two from Willis, Texas. “The price increases on just about all products have been really discouraging,” And he’s far from alone.
US consumer spending this holiday season will be considerably lower than last year, according to an exclusive new GZERO/Maru Public Opinion poll. Some 27% of Americans surveyed said they plan to spend less this year — with nearly half of them blaming inflation.
The average American intends to spend $252.60 less this year on holiday shopping compared to 2021. But not everyone’s cutting back: In fact, the poll shows that those tightening their belts tend to be middle-aged, with lower incomes, and especially women.
“If retailers are looking for an audience intent on spending more this holiday season, they’ll be best to target the younger Americans, particularly those with higher income, who will likely be leading those who are lining up to pay,” says John Wright, executive VP of Maru Public Opinion. “But this will not likely come in the form of significant foot traffic as two-thirds of Americans say their preference will be an online click-and-deliver experience this year.”
Still, there’s a lot left to play for. Even after Cyber Monday, most US consumers still have 71.9% of their gift-giving budgets in their pockets.
“The average American shopper still has a significant portion of their gift-giving list to get through, so even on the heels of Black Friday and Cyber Monday, all will be looking for bargains given this economic climate,” Wright adds.
As we slide into 2023, economists will be looking closely at December holiday spending to help measure the health of the US economy. Much of what they’ll see depends on whether and how Americans spend the bulk of that remaining budget.
GZERO & Maru Group are teaming up to bring you exclusive insights on American views related to the political economy. We will tell you more about this exciting new partnership next week. Stay tuned.