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Economic Indicators

Pandemic pushes Spanish workers out of the shadows

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© Reuters. A waitress pours beer in a restaurant in Playa del Ingles, Maspalomas on the island of Gran Canaria, Spain, May 3, 2022. REUTERS/Borja Suarez

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By Belén Carreño and Gavin Jones

MADRID/ROME (Reuters) – For decades, a cash-filled envelope – or “sobre” – was how hundreds of thousands of Spaniards working without legal contracts in tourism, agriculture or construction collected their salaries.

COVID-19, however, may finally be putting paid to the “sobre”, economic data and workers’ experiences suggest – accelerating a six-year-long crackdown in Spain on the shadow economy and providing a welcome boost to the country’s public finances.

The Spanish economy was the hardest hit in the euro area by the pandemic, shrinking 11% in 2020 amid tough lockdowns. Two years later, it has still not returned to its pre-virus level.

But something unexpected has also happened: overall tax receipts and the number of people in official employment are now actually higher than at the point COVID-19 struck.

The reason, according to labour experts, trade unionists, employers and workers interviewed by Reuters, is that one unforeseen side effect of the pandemic has been to flush many Spaniards out of the shadow economy and into regular employment.

Chief causes have been the declining use of cash as a result of pandemic-era hygiene measures, together with increased demand for contracts by workers who saw that going under the radar also meant missing out on furlough payments during lockdowns.

While some of those factors apply to other countries, the makeup of Spain’s economy and other local factors mean the impact has been particularly tangible there.

“In the catering sector, there is a Before and After the pandemic,” said Gonzalo Fuentes, catering sector representative at CCOO, Spain’s largest trade union of a sector which in 2019 accounted for 12.4% of Spain’s official economy.

“Workers realised being underground doesn’t pay off, even though by paying no taxes or social charges they were earning more.”

DASHING TO THE OLIVE GROVE

While measuring shadow economies is due to their very nature difficult, estimates showed that even before the pandemic Spain’s drive to curb hidden activity had seen it pull away from euro zone peers Italy, Greece and Cyprus where shadow economic activity remains significant.

Spanish authorities pre-pandemic ramped up labour inspections in tourism and agriculture, even using algorithms to detect tax fraud.

“Employers have changed. Everyone now gives you a contract,” said one 55-year-old who would only be identified as “A.R.” because he has worked undeclared for 30 years as a waiter to supplement his main income in the public sector.

“I remember being at a wedding just before the pandemic and before the service started, the inspectors arrived and started to identify all the waiters. A group of them ran off through the olive groves,” he told Reuters.

At the same time as labour practices were changing, COVID-19 highlighted the lack of protection for informal workers and brought about a shift in consumer behaviour as hygiene protocols encouraged a switch from cash to credit card payments, a key factor in reducing tax fraud.

“This is very important for tax control because they are traceable transactions,” the director of Spain’s Tax Agency, Jesus Gascon, told lawmakers on a parliamentary committee.

Moreover that shift was coupled with a ban in July 2021 on paying more than 1,000 euros ($1,054.00) in cash as part of government measures to crack down on the shadow economy.

“Paying by bank transfer has totally changed the entire mindset in the agriculture sector,” said Vicente Jimenez, responsible for the agriculture branch at the CCOO union. “This is a journey of no return. A journey into the 21st century.”

Combined, these two trends have had sizeable impacts.

The number of workers making social security contributions exceeded 20 million for the first time ever in April 2022, compared to slightly below 19 million before the pandemic.

Taxation receipts hit in gross terms 275 billion euros in 2021, compared to 248 billion in the previous year and 266 billion for 2019 before the virus struck.

That extra boost for state coffers has been one factor allowing Spain to cut its budget deficit in 2021 to 6.9% of GDP, from 11% the previous year, above the government’s own expectations.

“The underground economy, which was one of the weaknesses of the Spanish tax system, is finally being brought out into the open,” Economy Minister Nadia Calviño told an April 29 news conference presenting Spain’s economic outlook.

ITALY IN THE DARK

Data gathered by University of Linz economist Friedrich Schneider, an expert on shadow economies whose work in the area has been published by the International Monetary Fund, suggest Spain is moving away from its main Mediterranean peer, Italy.

According to his calculations seen exclusively by Reuters, Spain’s shadow economy briefly grew in 2020 to 17.39% of total economic activity before seeing a sharp fall in 2021 that will see it hit 15.8% of activity this year. That is well below Italy, Greece or Cyprus where hidden activity accounts for at least 20% of overall economic activity, according to Friedrich, and lower than the European average which he forecasts at 17.29% this year.

Italy’s efforts to tackle its hidden economy have stalled, according to Schneider’s data, stuck at around 20% of the Italian economy since 2020.

Schneider stresses the 2022 data are still only projections and observes that the size of a country’s shadow economy is also influenced by local factors.

In federalised countries such as Spain where many taxes are managed locally, the propensity to pay taxes is greater, says Schneider – something that is reflected in the low figures for the shadow economy in Austria or Germany.

Another factor determining the size of an informal economy is which activities count there as legal: Schneider noted that in the Netherlands, for example, the fact that prostitution or soft drug use are partly legal or tolerated means such activities can be included in the formal, taxable economy.

Like Spain, Italy has also benefited from the transition from cash use to bank cards.

Italy’s own data show it made steady progress in cracking down on tax dodgers between 2014 and 2019, its most recent data available. Further reducing tax evasion is one of the goals in Italy’s post-pandemic Recovery Plan agreed with the European Commission in return for more than 200 billion euros of EU funds. Official data show that some 18.5% of taxes in Italy were evaded in 2019.

“We have done a lot to curb evasion but there is still a lot to be done,” said Alessandro Santoro, an economics professor who advises the Italian government, saying decisive progress could be made by expanding the finance ministry’s databases and easing privacy protection legislation.

Back in Spain, one area of the shadow economy remains deep-rooted: the employment of undocumented workers whose livelihoods are often too precarious for them to challenge unscrupulous employers.

J.C., a 27-year-old Colombian, entered Spain three years ago and has moved from bar work to a job in a factory – but never securing the contract he needs to become a legal resident.

“(My employer) told me not this year … He saves a lot of money by keeping me irregular. Maybe next year.”

($1 = 0.9488 euros)

Economic Indicators

JPMorgan cuts U.S. GDP estimates for 2022 and 2023

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© Reuters. FILE PHOTO: Stacked containers are shown as ships unload their cargo at the Port of Los Angeles in Los Angeles, California, U.S. November 22, 2021. REUTERS/Mike Blake

(Reuters) – JPMorgan (NYSE:JPM) on Wednesday cut its expectation for U.S. real gross domestic product for the second half of 2022 and for 2023.

The firm’s economic and policy research department cut its second half view to 2.4% from 3% and cut its first half 2023 target to 1.5% from 2.1% and for the second half of 2023 it cut its view to 1% from 1.4%.

It said there may be enough of a growth slowdown to lead to a gradual increase in the unemployment rate later next year, helping to relieve some wage pressures that have been building.

“In short, we forecast a soft landing, but are well aware that this outcome has rarely (if ever) occurred,” according to the research led by economist Michael Feroli.

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Economic Indicators

Canada inflation creeps higher in April, economists warn more pinch to come

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© Reuters. FILE PHOTO: Tourists shop for souvenirs in Gastown as the pace of cruise ships arriving in Canadian ports picks up, two years after the industry was shuttered due to the COVID-19 pandemic, in Vancouver, British Columbia, Canada May 13, 2022. REUTERS/Jenn

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By Julie Gordon

OTTAWA (Reuters) – Canada’s annual inflation rate rose faster than expected in April, official data showed on Wednesday, and analysts warned soaring used-car and gasoline prices could stoke the trend, raising pressure on the central bank to tighten policy quickly.

The headline annual inflation rate hit 6.8% in April, Statistics Canada data showed, slightly ahead of analyst forecasts that it would stay flat at 6.7%, instead edging closer to the 6.9% hit in January 1991. It was the 13th consecutive month above the Bank of Canada’s 1-3% control range.

Food and shelter prices surged at rates not seen since the early 1980s, while gasoline price gains slowed slightly from March. Excluding food and energy, inflation was up a still-hefty 4.6%.

“Inflation is spreading much more broadly, and at clear risk of getting firmly entrenched,” said Doug Porter, chief economist at BMO Economics. “Barring a deep dive in oil prices in coming weeks and months, we expect that the worst is yet to come.”

Graphic: Canadian inflation and interest rates – https://graphics.reuters.com/CANADA-ECONOMY/INFLATION/lgpdwekqdvo/chart.png

Porter, in a note, said May inflation could exceed 7%, the highest in nearly 40 years, citing record high gasoline prices in the month and changes to how Statistics Canada tracks the impact of used car prices.

Statscan will reshuffle its baskets with its May release and start using more accurate methods to track used-car prices, which have skyrocketed due to supply chain disruptions which, along with geopolitical conflict, are driving rapid price acceleration globally. This has forced central banks to tighten monetary policy more quickly than they had planned to.

“They have to make sure that it doesn’t morph into an inflationary spiral,” said Jimmy Jean, chief economist at Desjardins Group, of the Bank of Canada’s inflation challenge.

“So the way they’re going to be communicating the next steps will be critical here,” he added.

Last week, Bank of Canada deputy governor Toni Gravelle acknowledged the 1% policy rate was “too stimulative” and reiterated that rates, which were dropped to support the economy during the pandemic, need to be higher.

The central bank is widely expected to make a second 50-basis-point increase on June 1 and money markets are betting the policy rate will be around 3% by year-end.

But Canada’s high debt-to-income level and overheated property market mean the Bank will need to tighten with caution.

“It’s kind of a fine line,” said Darcy Briggs, a portfolio manager at Franklin Templeton Canada. “The trick is to try to get inflation down without creating a lot of havoc. But that’s easier said than done.”

The Canadian dollar was trading down about 0.2% at 1.2835 to the greenback, or 77.90 U.S. cents.

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Economic Indicators

Russian economic growth slows to 3.5% y/y in Q1 – Rosstat

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© Reuters. FILE PHOTO: A general view of city skyline and skyscrapers under construction during sunset as the spread of the coronavirus disease (COVID-19) continues in Moscow, Russia May 16, 2020. REUTERS/Maxim Shemetov

(Reuters) – The Russian economy expanded by 3.5% year-on-year in the first quarter of 2022 after growing 5% in the previous quarter, data from federal statistics service Rosstat showed on Wednesday.

The first quarter is expected to have been the last with sound growth before the Russian economy took a hit from sweeping sanctions for Moscow’s decision to send tens of thousands of troops into Ukraine on Feb. 24.

The economy ministry said this week it expected gross domestic product (GDP) to contract by 7.8% in 2022.

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