Digital Payments Can Reduce the “Informal Economy” and Boost GDP, New A.T. Kearney Report Shows
More than 23 percent of the world’s economy operates out of sight of governments, leaving more than US$10.7 trillion of economic activity unreported annually, according to a new study commissioned by Visa and conducted by A.T. Kearney with support from Professor Friedrich Schneider at the Johannes Kepler University of Linz, Austria.
The Digital Payments and the Global Informal Economy report, a first-of-its-kind study, measures the size of the informal economy across 60 countries over a 10-year period, and explores the role of digital payments in reducing the informal economy and boosting GDP and tax revenue in these countries.
The global informal economy – legal, income-generating activities conducted off-the-books and outside of government purview – is substantial, exceeding US$10.7 trillion in value of economic activity, or 23 percent of global GDP. This in effect means governments around the world are unable to track nearly a quarter of GDP, resulting in both significant revenue leakage and major implications for a range of policy-making and investment decisions.
The study finds a strong inverse relationship between digital payments and the informal economy. In fact, increasing digital payments by 10 percent across all markets studied for five consecutive years can shrink the informal economy from 23 percent of the world’s economy down to 19 percent, the study finds. Consequently, governments that rely less on cash and more on digital payments, such as through cards and mobile payments, are more successful in reducing the informal economy.
When the informal economy shrinks, GDP increases due to a portion of previously unreported GDP shifting into the formal economy. The study finds that if all 60 markets studied increased digital payments by 10 percent each year for five consecutive years, this could collectively add US$1.5 trillion to global GDP by 2021.
Informal transactions can range from straightforward activities like buying a cup of coffee at a farmers’ market to complex scenarios like workers making clothing in a textile factory. The informal economy touches every sector, from agriculture and construction to education and professional services, to a varying degree. A dominant trait is reliance on unreported cash-only transactions.
Around the world, the informal economy has negative impacts on governments, businesses, and individuals. The informal economy limits governments’ abilities to provide services, damages business competition, fosters unfair labor practices, and leaves workers vulnerable in an unregulated environment with a limited safety net.
“The informal economy is one of the most pervasive challenges in modern society, yet one of the hardest to measure or understand,” said Daniela Chikova, Partner at A.T. Kearney.
Many governments around the world recognize the challenges posed by the informal economy, and are increasingly embracing digital payments as a way to reduce informal transactions. Since 2014, more than 65 percent of government policies aiming to reduce the size of the informal economy involved measures related to digital payments, compared to only 33 percent in 2007, the study finds. At the same time, the study finds a significant reduction in the number of measures utilizing law enforcement as a means to impact the ongoing presence of the informal economy.
“While informality remains a sizable challenge, shifting transactions from cash to digital payments holds great promise for individuals, businesses, and governments,” said Ellen Richey, Visa’s vice chairman and chief risk officer. “Digitizing payments can bring an array of benefits, including greater inclusion and stronger economic growth.”
The study explores a number of policy strategies that have the potential to impact the size of the informal economy, GDP and tax income. These include:
1. Encouraging government adoption of digital payments;
2. Incentivizing digital payments usage by offering value-added tax (VAT) rebates;
3. Subsidizing funds that support the development and expansion of acceptance infrastructure; and
4. Accelerating the use and acceptance of contactless payments.
A.T. Kearney, a leading global management consulting firm, sized the global informal economy across 60 markets that account for 94 percent of global economic output. The study uses the MIMIC (multiple indicators, multiple causes) methodology, a well-respected model that makes it possible to examine relationships between outcomes that are not directly observable—the informal economy, in this case—and observable input factors, such as unemployment and GDP. Professor Friedrich Schneider (Johannes Kepler University of Linz, Austria), a foremost expert in the field, implemented the model to calculate the study’s results. In this case, the MIMIC model used 10 years of data for the decade starting in 2007 and more than 30 variables to calculate the size of the informal economy, including economic indicators such as nominal and real GDP, unemployment, and taxation levels, along with socioeconomic indicators and indicators related to payment behaviors, such as the use of cash. Among the 60 markets in the study, there is variation with respect to the activities deemed legal and illegal by domestic laws (for example, gambling, tobacco sales, or the production of certain agricultural goods). Because the informal economy is comprised of legal income-generating activities, the study uses a consistent definition of legality across all markets, excluding universally illegal activities, such as human trafficking and the production and trade of illicit drugs and banned weapons.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg LONDON (Reuters) – The Bank of England might need to cut interest rates below...
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month...
Dollar extends decline as risk appetite favors equities
By Stephen Culp NEW YORK (Reuters) – The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite...
Bitcoin hits $1 trillion market cap, soars to another record high
By Gertrude Chavez-Dreyfuss and Tom Wilson NEW YORK/LONDON (Reuters) – Bitcoin touched a market capitalization of $1 trillion as it...
Shares rise as cyclical stocks provide support; yields climb
By Saqib Iqbal Ahmed NEW YORK (Reuters) – A gauge of global equity markets snapped a 3-day losing streak to...
Battling Covid collateral damage, Renault says 2021 will be volatile
By Gilles Guillaume PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19...
Portable Oxygen Concentrators Market to Register 7.8% CAGR Through 2026; Sales to Surge as Oxygen Therapy Becomes Crucial in Covid-19 Treatments
Portable oxygen concentrator manufacturers are largely concerned with the maintenance of inventories throughout the coronavirus crisis, with optimization of supply...
Cancer Supportive Care Products Market to Reach US$ 32 Bn by 2030; Sales Limited by Complications for Cancer Patients Through Covid-19 Infections
The cancer supportive care products market is anticipated to reach a valuation of US$ 32 billion by 2030. The industry is expected...
Bronchoscopes Sales to Rise 1.5x Between 2018 and 2028; Potential Covid-19 Diagnostic Applications to Generate Lucrative Growth Opportunities
Bronchoscope manufacturers remain focused on development initiatives to improve product functionality and accuracy for higher adoption amid healthcare facilities. The bronchoscopes...
US$ 1.1 Bn Hypoparathyroidism Treatment Market Still in Infancy
Mushrooming incidences of thyroid cancer have amplified the number of thoracic surgeries, thus stimulating growth of hypoparathyroidism treatment market. Future...