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Currency Wars: The Maple Syrup Edition [Chart]

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Currency Wars: The Maple Syrup Edition [Chart]

Currency Wars: The Maple Syrup Edition [Chart]

Loonie plunges to 6-year lows, BoC concerned about “financial stability risks”

The Chart of the Week is a weekly feature in Visual Capitalist on Fridays.

Global monetary policy these days is a fast moving stream. It’s far easier to paddle along with the current and simply hope that there are no waterfalls or sharp rocks further down the way.

That’s why two days ago, the Bank of Canada decided to cut its overnight rate for the second time in the last six months. Rates now stand at 0.5%, and the the last time they were this low was during an emergency one-year stretch at the tail end of the Great Recession.

The Canadian dollar reacted as expected. The currency had gotten thoroughly crushed in trading since the beginning of the year, and the hammering didn’t stop after the rate announcement. It accelerated, putting the Canadian dollar at six-year lows in terms of dollars and pounds. It’s now down -10.2% to the US dollar and -10.4% to the pound sterling year-to-date. Somehow the loonie even managed to lose ground (-0.72%) to the euro, which is currently in the middle of a historic crisis.

All is Fair in Love and War

Even though it is knowingly participating in an ongoing currency war, Canada doesn’t really have a reputation for being a particularly aggressive nation. Heck, Prime Minister Stephen Harper has even been compared to “Jesus” for his saintly efforts in pushing through draconian terror legislation.

So why the rate cuts and competitive devaluation? The problem is that it is a “Prisoner’s Dilemma” from a global macro perspective: when every other country is either creating money out of thin air, cutting rates, using monetary stimulus, or borrowing extra debt, it makes it extremely difficult to go against the grain. Imagine playing the board game Monopoly in which other players amend the rules so they can take money straight from the bank. If you don’t follow suit, you’re going to lose.

It’s not that countries like Canada want to be in a currency war of competitive devaluation. These rate decisions always seem like a good idea in isolation because the situation always forces the central bank’s hand. We don’t blame the Bank of Canada for the decision itself – it is simply the inevitable result of loose and ineffective monetary policy worldwide that is spiraling out of control.

The gamble of this vicious cycle has been that global growth would resume and the status quo could be pieced back together. Instead, Canada finds itself in the middle of a technical recession with two consecutive quarters of negative growth, crashing commodity prices, an iffy recovery for the United States, and the eurozone held together by a thread.

Against that backdrop, there’s only one thing to do: cut rates again!

“Financial Stability Risks”

There are some interesting side effects that bubble to the top during all of this rate-cutting business. Forget the effects worldwide – to see the results of this policy, one only needs to look domestically within Canada. Even despite the Canadian economy treading water as of late, there are two concerning metrics that have been peaking.

Firstly, the Canadian housing market is the most overvalued in the world. Even last month, it continued to set records on the back of Chinese buying, with Vancouver closing 29.1% more sales in June than the 10-year average. In Toronto, luxury market sales have sailed 56% over the first six months of the year. This is what happens when the cost of money is zero.

Second, household debt for Canadians has reached an alarming 163.3% of disposable income. Since 2007, it is estimated that only Greece has grown its household debt more than Canada. Further, a recent report by BMO says that Canadian households carry an average of $92,699 in debt, and pay $1,165 each month to service it. In the poll, respondents said that if interest rates were raised two percentage points, that 64% of them would feel “stressed” servicing their debt. One quarter of respondents would feel “very stressed” if that happened. A two percent increase at the time of the poll would have brought the benchmark interest rate to 2.75%, which is basically the lowest it ever bottomed at in the ’80s and ’90s.

Stephen Poloz, the Governor of the Bank of Canada, is aware of these concerns. “Financial stability risks remain elevated,” Governor Stephen Poloz told reporters on the day of the rate cuts. “Of particular note are the vulnerabilities associated with household debt and rising housing prices. And we must acknowledge that today’s action could exacerbate these vulnerabilities.”

Paddle away, Mr. Poloz. Let’s hope there’s no rocky spots downstream that could capsize the boat.

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3D Map: The U.S. Cities With the Highest Economic Output

The total U.S. GDP stands at a whopping $21 trillion, but which metro areas contribute to the most in terms of economic output?

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US Cities by Economic Output

3D Map: The U.S. Cities With the Highest Economic Output

At over $21 trillion, the U.S. holds the title of the world’s largest economy—accounting for almost a quarter of the global GDP total. However, the fact is that a few select cities are responsible for a large share of the country’s total economic output.

This unique 3D map from HowMuch puts into perspective the city corridors which contribute the most to the American economy at large.

Top 10 Metros by Economic Output

The visualization pulls the latest data from the U.S. Bureau of Economic Analysis (BEA, 2018), and ranks the top 10 metro area economies in the country.

One thing is immediately clear—the New York metro area dwarfs all other metro area by a large margin. This cluster, which includes Newark and Jersey City, is bigger than the metro areas surrounding Los Angeles and Chicago combined.

RankMetro AreaState codesGDP (2018)
#1New York-Newark-Jersey CityNY-NJ-PA $1.77T
#2Los Angeles-Long Beach-AnaheimCA$1.05T
#3Chicago-Naperville-ElginIL-IN-WI$0.69T
#4San Francisco-Oakland-BerkeleyCA$0.55T
#5Washington-Arlington-AlexandriaDC-VA-MD-WV$0.54T
#6Dallas-Fort Worth-ArlingtonTX$0.51T
#7Houston-The Woodlands-Sugar LandTX$0.48T
#8Boston-Cambridge-NewtonMA-NH$0.46T
#9Philadelphia-Camden-Wilmington PA-NJ-DE-MD$0.44T
#10Atlanta-Sandy Springs-AlpharettaGA$0.40T
Total GDP$6.90T

Coming in fourth place is San Francisco on the West Coast, with $549 billion in total economic output each year. Meanwhile in the South, the Dallas metroplex brings in $478 billion, placing it sixth in the ranks.

It’s worth noting that using individual metro areas is one way to view things, but geographers also think of urban life in broader terms as well. Given the proximity of cities in the Northeast, places like Boston, NYC, and Washington, D.C. are sometimes grouped into a single megaregion. When viewed this way, the corridor is actually the world’s largest in economic terms.

U.S. States: Sum of Its Parts

Zooming out beyond just these massive cities demonstrates the combined might of the U.S. in another unique way. Tallying all the urban and rural areas, every state economy can be compared to the size of entire countries.

US States and Country Comparison by GDP 2018

According to the American Enterprise Institute, the state of California brings in a GDP that rivals the United Kingdom in its entirety.

By this same measure, Texas competes with Canada in terms of pure economic output, despite a total land area that’s 15 times less that of the Great White North.

With COVID-19 continuing to impact parts of the global economy disproportionately, how will these kinds of economic comparisons hold up in the future?

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Shapes of Recovery: When Will the Global Economy Bounce Back?

Economic recovery from COVID-19 could come in four shapes—L, U, W, and V. What do they mean, and what do global CEOs see as the most likely?

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The Shape of Economic Recovery, According to CEOs

Is the glass half full, or half empty?

Whenever the economy is put through the ringer, levels of optimism and pessimism about its potential recovery can vary greatly. The current state mid-pandemic is no exception.

This graphic first details the various shapes that economic recovery can take, and what they mean. We then dive into which of the four scenarios are perceived the most likely to occur, based on predictions made by CEOs from around the world.

The ABCs of Economic Recovery

Economic recovery comes in four distinct shapes—L, U, W, and V. Here’s what each of these are characterized by, and how long they typically last.

  • L-shape
    This scenario exhibits a sharp decline in the economy, followed by a slow recovery period. It’s often punctuated by persistent unemployment, taking several years to recoup back to previous levels.
  • U-shape
    Also referred to as the “Nike Swoosh” recovery, in this scenario the economy stagnates for a few quarters and up to two years, before experiencing a relatively healthy rise back to its previous peak.
  • W-shape
    This scenario offers a tempting promise of recovery, dips back into a sharp decline, and then finally enters the full recovery period of up to two years. This is also known as a “double-dip recession“, similar to what was seen in the early 1980s.
  • V-shape
    In this best-case scenario, the sharp decline in the economy is quickly and immediately followed by a rapid recovery back to its previous peak in less than a year, bolstered especially by economic measures and strong consumer spending.

Another scenario not covered here is the Z-shape, defined by a boom after pent-up demand. However, it doesn’t quite make the cut for the present pandemic situation, as it’s considered even more optimistic than a V-shaped recovery.

Depending on who you ask, the sentiments about a post-pandemic recovery differ greatly. So which of these potential scenarios are we really dealing with?

How CEOs Think The Economy Could Recover

The think tank The Conference Board surveyed over 600 CEOs worldwide, to uncover how they feel about the likelihood of each recovery shape playing out in the near future.

The average CEO felt that economic recovery will follow a U-shaped trajectory (42%), eventually exhibiting a slow recovery coming out of Q3 of 2020—a moderately optimistic view.

However, geography seems to play a part in these CEO estimates of how rapidly things might revert back to “normal”. Over half of European CEOs (55%) project a U-shaped recovery, which is significantly higher than the global average. This could be because recent COVID-19 hotspots have mostly shifted to other areas outside of the continent, such as the U.S., India, and Brazil.

Here’s how responses vary by region:

RegionL-shapeU-shapeW-shapeV-shape
Global (N=606)32%42%16%11%
U.S. (N=103)26%42%23%9%
Europe (N=110)29%55%12%4%
China (N=122)25%43%11%21%
Japan (N=95)49%26%23%1%
Gulf Region (N=16)57%26%17%-

In the U.S. and Japan, 23% of CEOs expect a second contraction to occur, meaning that economic activity could undergo a W-shape recovery. Both countries have experienced quite the hit, but there are stark differences in their resultant unemployment rates—15% at its peak in the U.S., but a mere 2.6% in Japan.

In China, 21% of CEOs—or one in five—anticipate a quick, V-shaped recovery. This is the most optimistic outlook of any region, and with good reason. Although economic growth contracted by 6.8% in the first quarter, China has bounced back to a 3.2% growth rate in the second quarter.

Finally, Gulf Region CEOs feel the most pessimistic about potential economic recovery. In the face of an oil shock, 57% predict the economy will see an L-shaped recovery that could result in depression-style stagnation in years to come.

The Economic Recovery, According to Risk Analysts

At the end of the day, CEO opinions are all over the map on the potential shape of the economic recovery—and this variance likely stems from geography, cultural biases, and of course the status of their own individual countries and industries.

Despite this, portions of all cohorts saw some possibility of an extended and drawn-out recovery. Earlier in the year, risk analysts surveyed by the World Economic Forum had similar thoughts, projecting a prolonged recession as the top risk of the post-COVID fallout.

It remains to be seen whether this will ultimately indeed be the trajectory we’re in store for.

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