Wednesday, 19 October 2016

Bank of Canada: more dovish than ever

In Washington and in London, there is mounting criticism of central banks' dogged adherence to ultra-low interest rate policies.  More and more experts are arguing that low rate policies are setting the world up for more serious problems down the road, while doing nothing to alleviate the problems we are facing now.  It even looks as though the Brexiteers, anxious to deflect blame for the chaos they have unleashed, will use criticism of his low rate policy to turf Mark Carney out of the Bank of England and re-exert government control over monetary policy.

And then there's Ottawa.  This morning the Bank of Canada, as expected, left interest rates unchanged -- but as Governor Stephen Poloz made very clear, an immediate rate cut was certainly discussed, and remains on the table as long as the economy continues to struggle.  The Bank has yet again slashed its GDP growth forecast for the year, which is now a mere 1.1 percent -- and this despite the evidence that the third quarter of the year saw very strong growth, largely reflecting a bounce back from the Q2 slowdown resulting from the Fort McMurray wildfires.

Looking further ahead, the Bank sees GDP growing about 2 percent in both 2017 and 2018, which is slightly above its latest assessment of the economy's long-term potential growth rate. The Bank now expects the economy to reach its full potential output by mid-2018, rather than during 2017 as it previously forecast.  This seemingly pushes any thought of rate hikes back to at least 24 months from now.

The newly-announced changes in mortgage rules are expected to shave about 0.3 percent from GDP by the end of 2018, which the Bank surely sees as a worthwhile cost for limiting the risks posed to the financial system by out-of-control household borrowing. The Bank sees a rather greater impact -- 0.6 percentage points by 2018 -- from a weaker export outlook. Interestingly, it now attributes at least part of this slower outlook to "lost export capacity".  That's the old Bruce Springsteen refrain I've quoted here many times before: "these jobs are going, boys, and they ain't coming back".

So no rate cut today, but maybe one sometime in the future if things don't perk up?  Well, maybe, but it's hard to find many experts who really think that further monetary easing will make a whole lot of difference, especially if "lost export capacity" is taken into account.  We did see one positive indicator for the economy this week -- manufacturing output rose 1.2 percent in volume terms in August, well above expectations. This is further evidence that the Q3 GDP report will be a strong one, but it's evident from today's downbeat comments that the Bank of Canada does not expect that kind of performance to be repeated.

Monday, 17 October 2016

The myth of the "sharing" economy

I don't always have a lot of time for Toronto Star columnist Heather Mallick, and I've said as much in this blog a few times -- to the point where Ms Mallick has blocked me from following her on Twitter!  However, when she can stay clear of the hyper-paranoid form of feminism that's become her trademark, she has a lot of important things to say.  Take, for example, today's column on the so-called "sharing economy"  -- Uber, Airbnb and their ilk.  Ms Mallick doesn't like this, and neither do I.

Let's start with the name, "sharing economy", which seems to have been deliberately chosen to conceal what's really going on and to make it as innocuous-sounding as possible.  Here's a promise (albeit an empty one, since you're never likely to meet me): if I offer to share something of mine with you, I won't ask you for payment.  If I expect to be paid I'm not sharing any more -- I'm selling, and at that point I become a small business.  And that's what all the Uber drivers and Airbnb landlords are.

Ms Mallick has correctly discerned that Uber et al are facilitating transactions between two groups of individuals in the economy.  These aren't her terms, but let's dub them "moneygrubbers" and "cheapskates".  (Hey, I didn't say I was neutral about this).  The moneygrubbers want to raise a little extra cash from something they already own, whether it's the family car or the extra bedroom in the attic.  The cheapskates want to pay less for something than they already do, and damn the consequences.  Technology allows companies like Uber or Airbnb to bring these groups together, and of course to scoop a little cash out of each transaction too, while leaving all of the risks with the actual buyer and seller.

Ms Mallick worries that these trends are part of a general deterioration in the overall quality of life. I'm not sure about that: to take Toronto as an example, I'm sure any survey would find Uber users are far more content with their rides than those who take taxis, although that probably says more about the Toronto taxi industry than it does about anything else.

What Ms Mallick is missing, or at least not making explicit, is that these "sharing" services establish themselves by circumventing or simply ignoring existing regulations.  Once established, they respond to any criticism by pointing to their popularity and demanding that the regulatory regime be amended to their benefit.

Cities all across North America have had their taxi regulations in effect rewritten by Uber's lawyers.  The amendments are never in favour of consumers.  In Toronto. for example, a long-standing requirement that drivers offering rides must be able to communicate in English went by the wayside, as did a requirement to fit vehicles with winter tires in the cold months. Is anyone seriously suggesting that the citizenry are better off thanks to these changes?  Now Airbnb states that it is "begging" city regulators to come up with a new set of rules for its business:  I'm betting that its lawyers just happen to have a draft of such rules ready to go, just in case anyone asks.

It would be naive to suggest that none of the businesses that these companies are disintermediating was in need of a shake-up. Toronto's taxi industry has been a shabby joke for decades.  However, the consequence of the arrival of Uber is that cabbies who have been trying to live within the rules for years are being put out of business by an army of unregulated interlopers, to nobody's long-term benefit. Meanwhile, over at Airbnb there's mounting evidence that "investors" are buying properties in Toronto with the explicit aim of setting up unregulated hotels, and reducing the supply of affordable rental accommodation as they do so.

It's unlikely in the extreme that Heather Mallick will ever read this, but anyway, well said!

Saturday, 15 October 2016

That's the whole point!

In its monthly press release on housing market activity, the Canadian Real Estate Association (CREA) reported a small increase in activity across the country.  However, it warned that the recent measures announced by the Federal government to tighten mortgage eligibility rules might put a crimp on things: "For first time buyers, the stress test for those who need mortgage default insurance will cause them to rethink how much home they can afford to buy", says CREA President Cliff Iverson.

Yeah, well, Mr Iverson, that's not an unexpected and unwelcome side-effect of the Federal measures. It's the whole point of the exercise. With the household debt/income ratio rising ever higher -- at over 167%, it's higher than the comparable US ratio was just before the financial crisis -- and with the Bank of Canada unable to act because of the fragility of the entire economy, Finance Minister Bill Morneau saw little choice but to act.

Iverson goes on to say, "The federal government will no doubt want to monitor the effect of new regulations on the many varied housing markets across Canada and on the economy,  particularly given the uncertain outlook for other private sector engines of economic growth."  Good that he sees the big picture, but when he portrays housing as an engine of economic growth, what exactly is he looking at?

column stacked chart&8211;Chart1, from July 2015 to July 2016
Investment in new housing construction, by type of dwelling

This graph, taken from Statistics Canada, certainly does not suggest there is much of a secular upward trend in investment in residential construction.  Like the rest of the private sector, and not only in Canada, the household construction industry has been bafflingly reluctant to take advantage of rock-bottom financing costs.

As a realtor, Iverson may be thinking something else: that the secondary buying and selling activity in homes is itself a producer of growth. Considering that the market is being driven entirely by a borrowing binge that is seriously crimping the disposable incomes of many Canadians, this seems a dubious proposition at best.  Iverson is undoubtedly right when he says that the government will "want to monitor" the impact of the measures (which take effect this coming Monday, October 17), but if he thinks that Minister Morneau will backtrack at the first sign of a correction, he's destined to be disappointed.

Tuesday, 11 October 2016

Algorithms aren't stupid

Last week's "flash crash" of Sterling, which took the currency to multi-decade lows (and saw the pound trading below parity with the Euro at some airport exchange booths) was quickly blamed on a "fat finger" mistake by a trader, algorithmic trading mayhem at a quiet time in the global trading day, and so on.  Any or all of that may well be true, but the fact that the currency is having one bad day after another once again this week points unmistakably to the underlying cause:  fears over the economic impact of Brexit, which have been heightened dramatically by last week's ill-judged speech by PM Theresa May.

Trading algorithms, and the people who create and use them, aren't stupid.  They're designed to allow firms to react much more quickly to market movements than human traders ever could.  (See Flash Boys by Michael Lewis for an entertaining review of how this kind of trading works, albeit in a different context).  Algorithmic trading may have exaggerated the move in the Pound last week, but it didn't set the direction of travel, which was indisputably the result of the market's rapidly deteriorating view of the prospects for the UK economy.

Expect more of the same, especially if there is any truth to rumours that Theresa May would like to see the back of Mark Carney at the Bank of England at the earliest possible date.

Friday, 7 October 2016

Canada employment data: impossible to analyze

I should probably stop even looking at the Canadian employment data when they come out each month, because the numbers are so astoundingly erratic that they make my brain hurt.  Let's take a look at the September numbers, which were released this morning.

First the headlines: total employment in the economy rose by 67,000 in the month, way above the market's expectations.  Using the usual 10-to-1 US-Canada comparison, this would be equivalent to a 670,000 rise in US non-farm payrolls, whereas we know that the actual gain in US employment for the month was less than a quarter of that.  Canada's unemployment rate, remarkably enough, was unchanged at 7.0 percent, because according to StatsCan's survey, labour force participation rose sharply.  That's usually considered to be a positive sign -- people don't start looking for work if they know there's no work to be had -- but once you look behind the headline numbers, the picture looks a lot less rosy.

For one thing, most of the employment gain was in part-time rather than full-time work.  That has, in fact, been the case throughout the past year.  Although the number of persons employed has risen by 0.8 percent in the past twelve months, aggregate hours worked are only 0.2 percent higher.  That's consistent with the generally sluggish GDP growth that has been evident throughout the period.

The service sector accounted for most of the job gains in September (about 55,000).  The modest rise in employment in the goods producing sector is further evidence that the hoped-for rebalancing of the economy, in response to the weak exchange rate, is proceeding at a glacial pace.

And one more thing: if StatsCan is to be believed, fully 50,000 of the jobs created last month fell into the category of self-employment.  Given that the number of self-employed in Canada is around 2.8 million, that's a remarkable gain for a single month.  If experience tells us anything here, it's that a large percentage of the newly self-employed will wind up back in regular paid employment within a month or two.  This self-employment series is perhaps the most volatile number in a notoriously erratic data set.

The best takeaway from today's numbers is almost certainly not the headline job gain, which will surely not be sustained.  Rather, it's the year-on-year change in employment and in hours worked.  Those numbers show that, with Federal spending initiatives just starting to kick in, the economy is growing, but very slowly.

Tuesday, 4 October 2016

May: "it's March"

UK Prime Minister Theresa May's announcement that she intends to trigger Article 50 of the Lisbon Treaty by March 2017 signals the end of the "phoney war" period that followed the Brexit referendum in late June.  Now things might really start to get ugly.

For the past few months it's been possible to imagine that the worst potential consequences of the Brexit vote might be avoided.  Ministers talked confidently about retaining the UK's access to the EU's free market, including the all-important "passport" that allows UK-based financial institutions to operate freely in the EU.  This was, of course, the basis on which the Leave supporters campaigned all along.  The economy has held up well in the wake of the vote, prompting some of the more excitable Leave supporters to declare that there's really nothing to worry about.

All of that is changed in the wake of May's announcement.  It is now clear that the Government has largely abandoned hope of retaining free access to EU markets, since Brussels has emphasized that the price of such access is continued free movement of workers between the EU and the UK.  This would, of course, completely nullify the Leave campaign's pledge to "regain control of Britain's borders" -- i.e. to reduce immigration.

The fact that May is explicitly making this a higher priority than trade access shows conclusively that, despite all the rhetoric about the unaccountable EU bureaucracy and unacceptable interference by European courts, the result back on June 23 was almost entirely about immigration. The campaign may not have started out that way, but the Leave side was quite happy to appeal to the baser instincts of the electorate once it became clear that the purely economic arguments could not be won.

The loss of tariff-free access to the EU market will have severe consequences for the UK economy -- and if the financial services "passport" is also at risk, the effects could be devastating.  Companies planning to sell goods throughout the EU will no longer have any reason to locate in the UK -- and those already in the UK may seek compensation for the higher cost of doing business, as Nissan has already indicated it will. Remarkably, Chancellor of the Exchequer Philip Hammond has indicated he will look favourably on Nissan's request, which seems to guarantee a flood of similar demands in the coming months.  The inevitable drying-up of business investment will damage the UK economy for decades to come.

Then there are the political consequences of a "hard Brexit".  May seemed to go out of her way to antagonize Scotland and Northern Ireland this week, making it clear that those jurisdictions would have no say in the process, even though both voted to remain in the EU.  As Scottish First Minister Nicola Sturgeon quickly remarked, this was an odd approach for someone who wants to keep the UK together to have taken. Another Scottish independence referendum seems inevitable, with a different result from the first vote looking very likely.  As for Northern Ireland, people on both sides of the border are adamant that they want to avoid a return to the border controls of the past.  However, if the UK really wants full control of its borders and of immigration, it is hard to see how the land border between Northern Ireland and the Republic can remain open.

There have been surprisingly few signs of "buyers' remorse" among Leave voters over the past few months.  That will change slowly but inexorably over the next couple of years, as the real costs of the electorate's stunningly unwise decision become ever more apparent.

Monday, 3 October 2016

Calming Canada's housing market

Canadian Finance Minister Bill Morneau has announced new measures to ensure that the inexorable rise in housing prices does not lead to a crisis at some time in the future. Morneau's Tory predecessor, the late Jim Flaherty, attempted something similar at the peak of the global financial crisis, and is widely credited with ensuring that Canada was spared the the worst effects of that meltdown.

Foreign buying of Canadian properties is widely seen as one of the major causes of rising house prices, especially in Vancouver and Toronto. During the summer, the government of British Columbia imposed a 15 percent tax on foreign purchases, and the early signs are that the market has cooled somewhat in response.  Despite self-serving protests from Toronto realtors, it seems very likely that Ontario will have to follow BC's lead in the near future.

In the meantime, Morneau has also taken aim at foreign buyers.  Canadians are allowed to sell their principal residence without incurring capital gains tax.  It appears that foreign buyers of Canadian property have been taking advantage of that exemption when they sell up, even though they may never actually have lived in the home at all.  From now on, a property owner will only be eligible for the exemption if he or she was resident in Canada at the time of purchasing the property.

This change should have two beneficial effects.  First, it should produce at least some revenue for the Federal Treasury, though the amount is unlikely to be significant, at least in the short term.  Second, it should immediately reduce the incentive for foreign buyers to invest in Canadian real estate, which should in turn relieve some of the upward pressure on prices in cities such as Vancouver and Toronto.

Morneau's other major change will affect domestic buyers seeking mortgage financing.  At present, borrowers seeking insurance for high-ratio mortgages (which mostly means first-time buyers with low down payments) are subjected to a stress test to see if they could continue to service the debt if interest rates were to rise.  After mid-October, this test will be applied to all borrowers applying for mortgage insurance.  This change will reduce the amount that banks can lend to a large swath of borrowers, which should in turn reduce pressure on house prices (and, as important, on bank balance sheets).

This change is likely to have more impact in the short term than the crackdown on foreign buyers, a fact that Morneau has recognized by delaying its introduction by two weeks so that deals already in the pipeline can proceed.  The inexorable rise in the household debt/disposable income ratio has been raising alarms from Ottawa to the OECD to the IMF for many months.  With no end in sight to the Bank of Canada's low rate policy, Morneau has evidently decided that he cannot simply allow household debts to pile up ever higher, since that simply ensures an even bigger crisis when rates finally do start to rise.

Much of the commentary on today's measures is of the "too little, too late" variety. Possibly so, but at least Morneau is trying, so let's be more positive and say "better late than never".