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Whither Interest Rates in Advanced Economies: Low for Long?

4 days ago

We have previously discussed how, between March 2020, when the financial shock caused by COVID-19 occurred, and the end of August, the stock and corporate debt markets in the United States performed extraordinarily, despite gloomy prospects on the real side of the economy. The decline in technology stock prices in September ended up taking the equivalent of a month from gains starting in April, but prices remain high.On the basis of such a ‘disconnect from reality’ in financial markets, we pointed to the Federal Reserve’s (Fed) interest rate cuts and liquidity flooding, which were done to avoid a dramatic credit crunch, massive bankruptcy waves, and even greater unemployment than what happened. Other central banks of advanced economies—the Eurozone, Japan, the United Kingdom—acted

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China on the way back to rebalancing

September 26, 2020

Otaviano CanutoFirst appeared at CGTN, 25 September 2020China’s economy keeps recovering from the coronavirus pandemic-led crisis through the third quarter of 2020, as revealed by the numbers of August activity. Its GDP grew by 3.2% in the second quarter, after falling by 6.8% in the first quarter, in both cases as compared from a year before. It is now the only major economy expected to exhibit growth this year. Successful containment of the pandemics has allowed it to be first-in-first-out relative to others.One feature in common with other countries, however, has been the unbalanced shape of the economic recovery. The supply side has run ahead of the demand side. Re-opening factories starting in February made possible a steady return of industrial output, which grew 5.6% on an annual

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Dependency and disconnect of U.S. financial markets

September 22, 2020

First appeared at Policy Center for the New SouthU.S. stock and corporate bond markets performed extraordinarily well from the March financial shock caused by covid-19 to the end of last month. Then, three consecutive weeks of decline in the three major stock market indexes have been followed this week by a global slump attributed to fears of new lockdowns. A period of disconnect of financial markets with the underlying real economy has culminated in a revelation of the former’s high dependency to Federal Reserve policies.Disconnect…From the response by the Federal Reserve (Fed) to the March shock – interest rate reduction and creation/expansion of several lines of acquisition of private assets and credit provision – the rise in stock price indices in the U.S. markets led them in August to

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Don’t Expect Miracles From the Multilaterals

September 11, 2020

First appeared at Americas QuarterlyWith Latin America and the Caribbean potentially facing years of difficulties due to the pandemic and related economic crises, attention has shifted to what multilateral institutions like the International Monetary Fund (IMF) might do to help. There’s no doubt they can play a crucial role in preventing another lost decade in the region. But these institutions will also face limitations because of capital constraints and other factors. The need is clearly acute. Latin America and the Caribbean remains the epicenter of the global pandemic, currently accounting for more than 43% of global deaths after a surge in COVID-19 fatalities in Brazil, Mexico and several other countries in the region. And GDP declines in the second quarter of 2020 have revealed how

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Brazil, South Korea: Two Tales of Climbing an Income Ladder

September 4, 2020

First appeared as Policy Brief PB-20/70, Policy Center for the New SouthThe “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies (Gill & Kharas, 2007, 2015) (Canuto, 2019). Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status (Figure 1).Such divergence of economic growth can be related to their distinctive performances of domestic accumulation of technological and organizational capabilities. Their different approaches to global value chains and trade globalization

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Global imbalances, coronavirus, and safe assets

August 10, 2020

Originally posted at the Policy Center for the New SouthThe International Monetary Fund (IMF) released, on August 4, its ninth annual External Sector Report, where current account imbalances and asset-liability stocks of 30 systemically large economies are approached. This time the report went beyond looking the previous year and tried to anticipate what will be some of the impacts of the still on-going COVID-19 crisis.The report shows that the global economy entered the COVID-19 crisis with a configuration of external imbalances that has persisted since 2013, with a corresponding elevation of stocks of foreign assets and liabilities. While the outbreak of COVID-19 has brought a deep contraction to world trade and a substantial realignment of exchange rates, the IMF does not

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The economic recovery from coronavirus may look like a square root

July 21, 2020

There are signs of recovery in various parts of the global economy, starting in May, after the depressive dip imposed by Covid-19. Such signs emerged after the easing of restrictions on mobility established to flatten out the pandemic curves, and also reflected policies of flattening the recession curve (income transfers to part of the population, credit lines to vulnerable companies and others).Besides remaining far from giving back the GDP lost, in all countries, the recovery faces doubts about its strength. There is a similar sequence in each country, but there are differences due to the rhythms of the pandemic and the effectiveness, magnitude, and time length of the policies to flatten out the recession curve. The pace of the pandemic matters not only because of the possibility of

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Brazil’s Economic Crossroads: Which Path Will It Choose?

July 3, 2020

First appeared at Americas QuarterlyAs the pandemic unfolds, Brazil is paying a huge human cost, with the number of victims rising quickly. The scar of COVID-19 will take a long time to heal. And the country will also have to battle on the economic side, where the impact will be deep and long-lasting.Starting from a jump in the already high level of debt in relation to its GDP, coming from both sides of the equation: spending has skyrocketed while a steep decline in its gross domestic product is expected for this year. The trajectory for the country’s economy over the next decade, it is clear, will be lower than what was expected prior to COVID-19.Current projections illustrate Brazil’s coming fiscal crossroads: The country can choose either stagnation and insolvency or a gradual fiscal

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The Impact of Coronavirus on the Global Economy

June 30, 2020

First appeared at the Policy Center for the New SouthCOVID-19 brought the global economy to a sudden stop, causing shocks to supply and demand. Starting in January 2020, country after country suffered outbreaks of the new coronavirus, with each facing epidemiological shocks that led to economic and financial shocks as a consequence.How quickly and to what extent will national economies recover after the pandemic has passed? This will depend on success in containing the coronavirus and on exit strategies, as well as on the effectiveness of policies designed to deal with the negative economic effects of the coronavirus.The impact of coronavirus on the global economy will extend beyond 2020. According to forecasts from the International Monetary Fund and World Bank, GDP per capita at the end

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Higher Debt, Deeper Digitization, and Less Globalization Will be Coronavirus Legacies

June 11, 2020

Three features of the post-pandemic global economy can already be anticipated: the worldwide rise in public and private debt levels, accelerated digitization, and a partial reversal of globalization. The first arises from the public sector’s role as the ultimate insurer against catastrophes, government policies to smooth pandemic curves and the coronavirus recession. These will leave a legacy of massive public-sector debt worldwide (as discussed in a previous post. Lower tax revenues and higher social and health expenditures reflect the choice of trying to avoid widespread destruction of people’s productive and livelihood capacity during the pandemic. On the private-sector side, indebtedness will be the way to survive the sudden stop, if the result is not to be bankruptcy or closure.The

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What shape will the coronavirus recovery be ?

May 12, 2020

First appeared at the Policy Center for the New SouthData recently released on the first-quarter global domestic product (GDP) performance of major economies have showed how significant the impact of COVID-19 has been on economic activity and jobs, with large contractions across the board. The ongoing global recession is poised to be worse than the “great recession” after the 2008-09 global financial crisis, especially from the standpoint of emerging market and developing economies. The depth and speed of the GDP decline will rival that of the Great Depression of the 1930s.But how swiftly will national economies recover once the pandemic has passed? And when will that happen? That will depend on how successful the containment of coronavirus and exit strategies will be, as well as on how

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Channels of transmission of coronavirus to developing economies from abroad

April 29, 2020

In a previous article, we highlighted how developing economies have faced simultaneous shocks from their external environment, as pandemic and recession curves have unfolded abroad (Canuto, 2020a). In addition to financial shocks, there have been declines in remittances, tourism receipts, and commodity prices (Canuto, 2020b). The combination of these shocks with the hardships related to flattening domestic infection curves has configured what we have called a ‘perfect storm’ for developing countries, brought by COVID-19 (Canuto, 2020c).Recent World Bank and United Nations World Tourism Organization reports have given us a view of how serious these shocks have been. We assess here the falls in remittances, tourism receipts, and commodity prices, particularly in oil markets.Remittances,

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More than one coronavirus curve to manage: infection, recession and ext. finance

April 6, 2020

First appeared at thePolicy Center for the New SouthThe global reach of COVID-19 is now clear. In a short time, country after country has suffered outbreaks of the new coronavirus, with each facing a three-fold shock: epidemiologic, economic, and financial. In addition to dealing with their own local coronavirus outbreaks, emerging market and developing countries have faced additional shocks from abroad.Flattening pandemic curves saves livesThe coronavirus crisis is primarily a public health issue, demanding containment policies that inevitably lead to shocks to economic activity. A major reason for containment is the widespread perception that, given the dynamics of infection—and corresponding numbers of people in need of clinical care—local clinical care capacities risk being swamped,

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More than one coronavirus curve to manage: infection, recession and ext. finance

April 6, 2020

First appeared at thePolicy Center for the New SouthThe global reach of COVID-19 is now clear. In a short time, country after country has suffered outbreaks of the new coronavirus, with each facing a three-fold shock: epidemiologic, economic, and financial. In addition to dealing with their own local coronavirus outbreaks, emerging market and developing countries have faced additional shocks from abroad.Flattening pandemic curves saves livesThe coronavirus crisis is primarily a public health issue, demanding containment policies that inevitably lead to shocks to economic activity. A major reason for containment is the widespread perception that, given the dynamics of infection—and corresponding numbers of people in need of clinical care—local clinical care capacities risk being swamped,

Read More »

More than one coronavirus curve to manage: infection, recession and ext. finance

April 6, 2020

First appeared at thePolicy Center for the New SouthThe global reach of COVID-19 is now clear. In a short time, country after country has suffered outbreaks of the new coronavirus, with each facing a three-fold shock: epidemiologic, economic, and financial. In addition to dealing with their own local coronavirus outbreaks, emerging market and developing countries have faced additional shocks from abroad.Flattening pandemic curves saves livesThe coronavirus crisis is primarily a public health issue, demanding containment policies that inevitably lead to shocks to economic activity. A major reason for containment is the widespread perception that, given the dynamics of infection—and corresponding numbers of people in need of clinical care—local clinical care capacities risk being swamped,

Read More »

How Latin America Can Make Fintech a Priority

February 27, 2020

First appeared at Americas Quarterly
New technology has the power to drastically improve the financial landscape for underserved populations throughout Latin America and the Caribbean. But for “fintech’s” potential in the region to be fully realized, national governments will need to adapt regulatory environments to keep up with the times. The good news is that some policymakers are starting to pick up the pace. The bad news is that there is much work left to be done.
A recent IMF working paper (*) points to the region’s numerous deficiencies when it comes to financial access, the depth of financial tools available to customers and the efficiency of financial markets. Despite some variation across countries, low credit-to-GDP ratios, high service fees, heavy reliance on nontraditional

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How Latin America Can Make Fintech a Priority

February 27, 2020

​First appeared at Americas QuarterlyNew technology has the power to drastically improve the financial landscape for underserved populations throughout Latin America and the Caribbean. But for “fintech’s” potential in the region to be fully realized, national governments will need to adapt regulatory environments to keep up with the times. The good news is that some policymakers are starting to pick up the pace. The bad news is that there is much work left to be done.A recent IMF working paper (*) points to the region’s numerous deficiencies when it comes to financial access, the depth of financial tools available to customers and the efficiency of financial markets. Despite some variation across countries, low credit-to-GDP ratios, high service fees, heavy reliance on nontraditional

Read More »

How Latin America Can Make Fintech a Priority

February 27, 2020

First appeared at Americas Quarterly
New technology has the power to drastically improve the financial landscape for underserved populations throughout Latin America and the Caribbean. But for “fintech’s” potential in the region to be fully realized, national governments will need to adapt regulatory environments to keep up with the times. The good news is that some policymakers are starting to pick up the pace. The bad news is that there is much work left to be done.
A recent IMF working paper (*) points to the region’s numerous deficiencies when it comes to financial access, the depth of financial tools available to customers and the efficiency of financial markets. Despite some variation across countries, low credit-to-GDP ratios, high service fees, heavy reliance on nontraditional

Read More »

How Coronavirus Poses New Risks to Latin America’s Sputtering Economies

February 21, 2020

First appeared at Americas Quarterly
The outbreak in China has already affected economic sectors in Latin America. Is there more to come?
China’s economy has come to a sudden stop. Large parts of the country remain in shutdown mode after the end of the Lunar New Year holiday, with national passenger traffic declining by 85% on the Wednesday after the break compared to 2019.
Outside of China, the impact of the slowdown has already been felt, with companies like Apple and Land Rover warning of lower production, as parts for their products simply fail to arrive on time. For Latin America, which counts China as its largest trade partner overall, the risks are also piling up.
There are four main channels through which the shock to China’s economy may be felt in Latin America. Here’s a detailed

Read More »

How Coronavirus Poses New Risks to Latin America’s Sputtering Economies

February 21, 2020

First appeared at Americas Quarterly
The outbreak in China has already affected economic sectors in Latin America. Is there more to come?
China’s economy has come to a sudden stop. Large parts of the country remain in shutdown mode after the end of the Lunar New Year holiday, with national passenger traffic declining by 85% on the Wednesday after the break compared to 2019.
Outside of China, the impact of the slowdown has already been felt, with companies like Apple and Land Rover warning of lower production, as parts for their products simply fail to arrive on time. For Latin America, which counts China as its largest trade partner overall, the risks are also piling up.
There are four main channels through which the shock to China’s economy may be felt in Latin America. Here’s a detailed

Read More »

How Coronavirus Poses New Risks to Latin America’s Sputtering Economies

February 21, 2020

First appeared at Americas QuarterlyThe outbreak in China has already affected economic sectors in Latin America. Is there more to come?China’s economy has come to a sudden stop. Large parts of the country remain in shutdown mode after the end of the Lunar New Year holiday, with national passenger traffic declining by 85% on Wednesday after the break compared to 2019.Outside of China, the impact of the slowdown has already been felt, with companies like Apple and Land Rover warning of lower production, as parts for their products simply fail to arrive on time. For Latin America, which counts China as its largest trade partner overall, the risks are also piling up.There are four main channels through which the shock to China’s economy may be felt in Latin America. Here’s a detailed look at

Read More »

Central Banks and Climate Change: from Black to Green Swans

February 7, 2020

Financial risks, macroeconomic impacts, and mitigation/adaptation policies bring climate change issues to central banks
· There are three possible justifications for the engagement by central banks with climate change issues: financial risks, macroeconomic impacts, and mitigation/adaptation policies.
· Regardless of the extent to which individual central banks incorporate the three prongs of motivations, they can no longer ignore climate change.
· Last month, a BIS book referred to a “green swan” as an adaptation of the concept of a “black swan” used in finance.
Last year, extreme weather events – floods, violent storms, droughts and forest fires – associated with climate change occurred on all inhabited continents on the planet. At least 7 of them with damages estimated at more than US$

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Central Banks and Climate Change: from Black to Green Swans

February 7, 2020

· There are three possible justifications for the engagement by central banks with climate change issues: financial risks, macroeconomic impacts, and mitigation/adaptation policies.· Regardless of the extent to which individual central banks incorporate the three prongs of motivations, they can no longer ignore climate change.· Last month, a BIS book referred to a “green swan” …

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Central Banks and Climate Change: from Black to Green Swans

February 7, 2020

· There are three possible justifications for the engagement by central banks with climate change issues: financial risks, macroeconomic impacts, and mitigation/adaptation policies. · Regardless of the extent to which individual central banks incorporate the three prongs of motivations, they can no longer ignore climate change. · Last month, a BIS book referred to a …

Read More »

Brazil is in dire need of more and better infrastructure investments

January 10, 2020

A recent Ipsos survey found the Brazilian population to be the most dissatisfied with infrastructure services (transportation, energy, water and telecommunications) among the 28 countries covered by the work. Not surprising if we observe the lack of infrastructure investments in Brazil since the 1980s.
According to estimates by the economist Cláudio Frischtak, from Inter B., while Brazil’s Gross Domestic Product (GDP) doubled in real terms between 1990 and 2016, the stock of infrastructure capacity grew by just 27 %. Chart 1 displays the downfall of Brazil’s infrastructure capital stock as a proportion to GDP.


Figures from World Bank report (Raiser et al, 2017) point to infrastructure investments averaging over 5% of GDP between the 1920s and 1980s, a period in which per capita income

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Brazil is in dire need of more and better infrastructure investments

January 10, 2020

A recent Ipsos survey found the Brazilian population to be the most dissatisfied with infrastructure services (transportation, energy, water and telecommunications) among the 28 countries covered by the work. Not surprising if we observe the lack of infrastructure investments in Brazil since the 1980s.According to estimates by the economist Cláudio Frischtak, from Inter B., while Brazil’s Gross Domestic Product (GDP) doubled in real terms between 1990 and 2016, the stock of infrastructure capacity grew by just 27 %. Chart 1 displays the downfall of Brazil’s infrastructure capital stock as a proportion to GDP.​​Figures from World Bank report (Raiser et al, 2017) point to infrastructure investments averaging over 5% of GDP between the 1920s and 1980s, a period in which per capita income grew

Read More »

Brazil is in dire need of more and better infrastructure investments

January 10, 2020

Brazilian prosperity will depend on more and better investment in infrastructure, in a context of fiscal austerity.
A recent Ipsos survey found the Brazilian population to be the most dissatisfied with infrastructure services (transportation, energy, water and telecommunications) among the 28 countries covered by the work. Not surprising if we observe the lack of infrastructure investments in Brazil since the 1980s.
According to estimates by the economist Cláudio Frischtak, from Inter B., while Brazil’s Gross Domestic Product (GDP) doubled in real terms between 1990 and 2016, the stock of infrastructure capacity grew by just 27 %. Chart 1 displays the downfall of Brazil’s infrastructure capital stock as a proportion to GDP.


Figures from World Bank report (Raiser et al, 2017) point to

Read More »

Trump Tariffs Have Hurt U.S. Manufacturing Jobs

January 4, 2020

The hike in tariffs imposed by the United States against its major trading partners since early 2018 has been unprecedented in recent history. President Trump alluded to, among others, the goal of revitalizing jobs in the country’s manufacturing industry by protecting it from unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff – Aaron Flaaen and Justin Pierce – released last December 23, the effect so far has been just the opposite, i.e. a reduction in U.S. manufacturing employment!
Tariff escalation – and retaliation from those affected – from 2018 onwards took place in three stages. In February of that year, surcharges were imposed on imports of washing machines and solar panels, followed in March by others

Read More »

Trump Tariffs Have Hurt U.S. Manufacturing Jobs

January 4, 2020

According to a Fed study, the effects so far of the U.S. tariff escalation have been a fall in U.S. manufacturing jobs
The hike in tariffs imposed by the United States against its major trading partners since early 2018 has been unprecedented in recent history. President Trump alluded to, among others, the goal of revitalizing jobs in the country’s manufacturing industry by protecting it from unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff – Aaron Flaaen and Justin Pierce – released last December 23, the effect so far has been just the opposite, i.e. a reduction in U.S. manufacturing employment!
Tariff escalation – and retaliation from those affected – from 2018 onwards took place in three stages. In February

Read More »

Trump Tariffs Have Hurt U.S. Manufacturing Jobs

January 4, 2020

The hike in tariffs imposed by the United States against its major trading partners since early 2018 has been unprecedented in recent history. President Trump alluded to, among others, the goal of revitalizing jobs in the country’s manufacturing industry by protecting it from unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff – Aaron Flaaen and Justin Pierce – released last December 23, the effect so far has been just the opposite, i.e. a reduction in U.S. manufacturing employment!Tariff escalation – and retaliation from those affected – from 2018 onwards took place in three stages. In February of that year, surcharges were imposed on imports of washing machines and solar panels, followed in March by others

Read More »