"Russian roulette with someone else's head"

Think the global banking system has changed for the better since the financial crisis?  This long article will disabuse you of that nonsense!

In the bleak midwinter

Canada's GDP was unchanged in October after a marginal decline in September. The details of the report provide further evidence, if any were still needed, that relying on a weak currency to stimulate the economy is not working.

The fall in GDP in September was largely the result of a decline in resource production, reflecting the steep decline in energy and other commodity prices on world markets.  Surprisingly, and probably unsustainably, the resource sector managed a small rebound in October. Unfortunately, that recovery was fully offset by weakness in other key sectors, including retail, utilities and manufacturing.

It's the last of those that's the most concerning.  The Bank of Canada's low interest rate/low exchange rate approach is predicated on the idea that manufacturing exports can offset the weakness in the resource sector and keep the economy moving ahead, albeit slowly. Even with the US economy, the destination of 70 percent of Canada's exports, expanding steadily, this really isn't happening. As I've stated here several times before, the manufacturing jobs that vanished over the past decade, mainly in response to an overvalued dollar and lunatic energy pricing in the province of Ontario, are gone for good.

The near term outlook for GDP is not encouraging. It's not just that the oil price has continued to fall: remarkably warm weather across the eastern half of North America has led to such a buildup in oil and gas supplies that further cuts in production are unavoidable. And there's little reason to think that the manufacturing sector is set to stage a sudden recovery.  Slow growth or no growth seem to be locked in for many months to come.

What should the policy response be? There is already speculation that Bank of Canada Governor Poloz will have to move ahead with the negative interest rates that he mused about just a week or two ago.  That won't help, but that is no reason to think that it won't happen. Fiscal stimulus would be more effective, and the new Government is committed to providing it, but it turns out that the outgoing Harperites were lying about the state of the country's finances before the election, so there's less room for manoeuvre than PM Trudeau and his Finance Minister were expecting.

The smart move would be for the government to announce a significantly bigger stimulus package than they previously promised. We'll find out early in the new year if they're ready for the right wing obloquy that such a strategy would undoubtedly trigger.

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Best wishes for the Christmas season and a Happy New Year to all readers of the blog!

McGuinty's goat

I was living in the UK for almost the entire time that Dalton McGuinty was Premier of Ontario. He unexpectedly resigned just after I moved back here, which I'm sure is just a coincidence.  Even from afar you could tell that he wasn't doing a good job, but it was only when I got to see him on TV that I realized what a self-righteous, arrogant dolt he was.

A succession of wildly expensive boondoggles made his position untenable, and might have been expected to consign his Liberal Party to a long spell in the wilderness too. The fact that his successor, Kathleen Wynne, managed to win the provincial election is mainly a tribute to the ineptitude of her opponents on both left and right.

McGuinty is now trying to rebuild his reputation. He's published a memoir that, based on the extracts I've seen, is unlikely to trouble the Christmas bestseller lists*. And today the Globe and Mail has given him space for a column in which he purports to explain why going "green and clean" won't come cheap.

He's right about that, at least based on his own record. As the province's Auditor-General reported last week, the McGuinty-led push for green energy saddled Ontarians with $35 billion in unnecessary costs, with much more to come in the next decade. Notice, please: the $35 billion is not the cost of the green energy measures: it's the excess between what they actually cost and what they would have cost if the government had been half-way competent. It is, purely and simply, taxpayers' money down the drain.

McGuinty's self-apologia today is nauseating, but it's also important. Now that the Paris climate accord is in place, controlling the costs of the shift to cleaner energy is paramount. If there are many more Dalton McGuintys out there, voters and taxpayers will quickly rebel, however virtuous the underlying goal may be.

* Think I'm being harsh?  Check this out!

House rules

The Bank of Canada will be keeping interest rates at rock bottom levels for as long as it possibly can -- there's no doubt about that. Unfortunately, there's also no doubt that low interest rates are pushing housing prices, especially in Toronto and Vancouver, to stratospheric levels, setting the stage for big problems when rates finally do rise.  What do to?

This morning, Finance Minister Bill Morneau stepped up to the plate with one small step in the right direction. Effective from early 2016, anyone buying a house valued at more than C$500,000 will have to put down a larger deposit. Right now you only need to put down 5 percent of the purchase price, but in the new year you'll have to put down 5 percent of the first 500K, and 10 percent of anything beyond that.

Those of us old enough to remember when couples would save for years in order to put down 20 percent or more may find these numbers outrageously skimpy, but it's better than nothing. Banks lending at these high ratios (in fact, anything above 80 percent loan-to-value) are already required to insure the mortgage, and by far the biggest insurance provider is government-owned CMHC. So even if Morneau's measure today doesn't actually slow the market, it may at least marginally reduce the burden on CMHC, and thus on the public purse, if and when things actually do blow up.

Bank of Canada Governor Stephen Poloz has been pleading with the government to do something like this, Back in October he said “Even in extreme conditions, when financial stability risks constrain monetary policy from achieving the inflation target over a reasonable time frame, a central bank would want to ensure that all macroprudential options were exhausted before trying to address those risks with monetary policy."  Tightening downpayment rules is just such a macroprudential option.

Should the Bank be leaving the job of reining in the housing market to the government?  Poloz clearly believes that low interest rates remain essential if the economy is to be kept from sliding back into recession, but this view appears to rest on two assumptions that look increasingly erroneous. First, Poloz evidently believes that the weak exchange rate that has resulted in part from low interest rates will boost non-oil exports; there's not much evidence of this. Second, he also seems to believe that a prolonged period of low interest rates will lead banks to increase lending for productive purposes, giving the economy a boost. So far that's not happening either: the banks are mainly lending into the housing sector, leading to the price overvaluation that has everyone from the IMF on down worried about a correction.

There's room for debate about why companies don't want to borrow and banks don't want to lend, at a time when Canada's main trading partner, the US, is moving smartly ahead. It surely must have something to do with the signals emanating from the Bank of Canada itself. If the Bank is so a'feared of the future that it wants to keep rates close to zero, why should businesses and lenders feel any different?

Time will tell if Morneau's baby step today makes any difference: with the Bank of Mom and Dad putting up so many down payments these days, best guess is that it won't.  However, more substantive controls are on the horizon. The main financial regulator in Canada, OSFI, announced today that it plans to tighten reserve requirements for banks' mortgage lending.  Regrettably, it's likely that any new rules won't be in place until 2017, by which time the market may well be even more egregiously overvalued than it is today.

Open mouth, insert foot

Bank of Canada Governor Stephen Poloz just can't help himself, it seems. Delivering what was meant to be an upbeat outlook for the economy yesterday, he blurted out that the Bank is open to the idea of setting its interest rate target below zero. Now, to be fair to Poloz, what he was trying to say was that negative interest rates are an option that's available to the Bank in the event of another financial crisis. As he should have known, however, news services and headline writers rarely hang around to read the small print: his comments quickly sent the exchange rate to fresh 11-year lows, as this article spells out.

If I'd devoted this blog entirely to chronicling Poloz's wacky statements over the past couple of years, I wouldn't have been short of material. Back in January, the Bank surprised the markets with a rate cut, and the Guv opined that the outlook for the economy in the first quarter of the year was "atrocious". It turned out that GDP fell in the quarter by an amount that's well within the margin of error.  A couple of months ago he appeared to say that there was no role for monetary policy to play in keeping house prices under control, even though the IMF, OECD and others were all warning that overinflated housing markets in major Canadian cities were the main risk to the economy and financial system.  And so on, and so on.

It's possible that Poloz is perfectly happy when his musings send the exchange rate lower, even if that isn't his intention at the time.  His career background is not in central banking but in export finance, so presumably he believes that anything that boosts exports must be a fine thing. The problem is, there's almost no evidence that it's actually working. The CAD's exchange rate versus the US dollar has fallen from above parity to less than 74 cents in the past four years, and yet Canada's non-oil exports remain sluggish, even as the US economy continues to move ahead. There's no good reason to think that more of the same will work any better.

The squeals of anguish from savers earning returns below the rate of inflation are growing louder, and plans for winter vacations are being curtailed or cancelled entirely. It's very much out of keeping with the upbeat message that new PM Justin Trudeau is trying to spread.  There's no way the new government can remove the Bank governor without setting off a huge crisis, so unless Finance Minister Bill Morneau has a quiet word with Poloz, asking him to weigh his words more cautiously in future, we'll just have to sit back and wait for the next faux pas. We probably won't have long to wait.

Done deal

There's no longer any reason to doubt that the US Federal Reserve will boost the Fed funds target by 0.25% when it meets at mid-month.  This morning's news that the US economy added 211,000 jobs in November -- almost exactly in line with the 6-month average -- means that the Fed has all the evidence it needs to hike rates for the first time in almost a decade.

With the unemployment rate at a six-year low of 5.0 percent, and wage growth showing signs of accelerating (albeit remaining modest at 2.3 percent year-on-year), the Fed has a lot of work to do before it gets rates back to what we used to think of as "normal" levels.  Even so, Ms Yellen and her colleagues are unlikely to be in any hurry to get the job done. With inflation at the consumer level firmly under control, the Fed can take its time to assess the impact of each move it makes before deciding on what to do next. It would be a surprise if rates were to rise by more than 100 basis points (1 percentage point) over the course of 2016.

Meanwhile, north of the border.... StatsCan reported today that the economy shed almost 36,000 jobs in November, edging the jobless rate back up to 7.1 percent.  This was well above the market consensus of 10,000 jobs lost, which mainly tells you that the people contributing to that consensus weren't paying attention.  StatsCan had clearly flagged the fact that the unexpectedly strong job gain in October was largely the result of election-related hiring that would almost certainly prove temporary. Lo-and-behold, that's exactly what happened, with a loss of 32,500 public administration jobs almost entirely accounting for the overall decline.

Leaving aside the election-related statistical noise, the report was not all bad news. Those public administration jobs that vanished were part of a 72,000 loss in part-time positions in the month.  However, there were reportedly 36,000 full time jobs added in the month, always assuming that you can believe StatsCan's notoriously volatile numbers. Predictably, the worst single performance was seen in Alberta, which lost 15,000 jobs in the month, and where the unemployment rate is now almost equal to the national average.

Needless to say, these numbers will leave the Bank of Canada watching from the sidelines as the Fed makes its first move. Many Bay Street economists are arguing that the coming divergence in the direction of monetary policy between the two countries spells further weakness for the Canadian dollar.  This is not necessarily true: the scenario in which the Fed raises rates gradually for many months, while the BoC stands pat, has been effectively priced into the exchange rate for some time. That's not to say there's any upside for the Canadian dollar, but unless the Fed is unexpectedly aggressive (which can largely be ruled out) or there's a further sharp fall in oil prices (which can't), the exchange rate is likely to wallow near recent levels over the next few months.  Or at least, pretty please, until after my trip down south next month!  

Canada's economy is growing (and shrinking)

A report today from Statistics Canada showed that real GDP grew at a 2.3 percent annualized rate in the third quarter of the year, after a "technical recession" (two tiny declines) in the first two quarters of the year.

A report today from Statistics Canada showed that real GDP fell 0.5 percent month-on-month in September, after three consecutive monthly gains, raising fears that the recovery from the "technical recession" in the first half of the year might be stalling.

Oh dear. Back when I got paid for doing this kind of thing, StatsCan's monthly and quarterly GDP/GNP data were kept separate, partly because the definitions used were somewhat different (the monthly numbers were GDP at factor cost, if you're feeling technical).  Now, as happened today, they're often released at the exact same time, which leads to all sorts of confusion, particularly in the media, where nowadays the "business reporter" might well be doubling up as a basketball columnist or something such.

There's more data in the quarterly report, but to figure out what happens next, it's arguably more useful in this instance to look at the monthly data.  Here's why: if GDP fell by a non-annualized 0.5 percent in September, then the level of GDP at the end of the quarter was lower than the average level for the quarter as a whole. This means that even if the economy started recovering again on October 1, GDP will take some time to get back to the Q3 average.  This immediately makes it unlikely that Q4 as a whole will show very significant growth, even if the three individual months are all in positive territory.

The biggest contributor to the September weakness was, no surprise, extraction and quarrying, including oil. This fell by a vertiginous 5.1 percent non-annualized in the month.  Drilling-related activities fell even faster, and are now down by almost half in just the past twelve months. When the oil price collapse began, there were brave suggestions from producers that they would maintain business as usual, but as the price weakness has extended with no end in sight, that resolve has clearly vanished.

As worrying as the fall in extraction industries is the report that manufacturing output fell 0.6 percent in the month. Coming after three consecutive gains, this may be just a blip in the data. However, it's clear that the weakness in the exchange rate has not had the salutary effect on manufacturing that the Bank of Canada and others have been counting on. As I have said repeatedly in this blog, the problems in this sector are clearly as much structural as cyclical.

What are the short-term prospects?  There is little chance of any improvement in the oil and gas sector as long as world prices remain at current levels, and the recent US decision against the Keystone XL pipeline will weigh on the oil sands in particular. Manufacturing should be supported by the relative strength in the US economy, but there is no real prospect that it can take up all of the slack created by the weakness in oil.

One minor source of optimism for the October data is the recent election. Employment data jumped in the month because of temporary hiring of election workers, which should translate into a small boost in GDP for the month.  However, that will be a purely transitory effect.  It seems likely that Q4 GDP will grow at or below the rate just reported for Q3, which means that the Bank of Canada will be standing pat on rates for many months to come, regardless of what the Fed decides later this month.  

Osborne takes a leaf from Harper's playbook

The UK's Chancellor of the Exchequer, George Osborne, obviously likes giving fiscal updates. Counting the one he delivered on Wednesday, he's now tabled four of them in the past year. As ever, this latest update is a budget in all but name, and is designed to set the UK's public finances on course to reach a surplus by 2020.

Bringing the budget back to surplus has, of course, been Osborne's lodestar ever since the Tories got back into power in 2011. It's remarkable how little progress has been made so far, and the 2020 target date for balancing the books represents considerable slippage from the Tories' early goals -- if things had gone as Osborne initially expected, the deficit would have been eliminated by this year.

In part, this slippage reflects the fact that cutting spending has proved a lot more difficult than Osborne and his boss, David Cameron, imagined it would. Despite howls of protest from all quarters at the supposed severity of the Tories' spending reductions, program spending continued to expand in the early years of the Tories' first mandate -- when they were, it should be recalled, governing in coalition with the Liberal Democrats. As I commented more than once at the time, Osborne was achieving the worst possible outcome, taking political flak and possibly damaging confidence while doing very little to get the budget back in balance.

The return to surplus forecast in this year's update relies on three main elements, the details of which you can read in the linked article. First, projected GDP growth for the forecast period, including the current year, has been revised modestly but significantly higher, resulting in an improvement in the projected revenue stream.  Second, program spending outside the so-called "ring fenced" areas (including health care) will be reduced by an average of 0.8 percent per year in real terms during the forecast period. Third, persistently low interest rates will result in lower debt service charges than previously expected.

That reduction in spending may look modest, but if it actually happens (big IF), and if the economy grows as forecast (ditto), then something quite startling happens. By 2020, the ratio of public spending to GDP, currently around 45 percent, would fall by about 9 percentage points. This would bring it back to levels not seen since the 1930s, well before the Beveridge Report boosted education spending and the establishment of the NHS pushed public health spending sharply higher.

Given this outlook, it's fair to ask if the Tories' apparent deficit fetishism was in fact simply cover for an ideologically-driven plan to shrink the size of the state. There are some obvious parallels here with the fiscal record of the late and unlamented Harper government in Canada. Harper and his finance ministers presided over significant cuts in a wide variety of spending programs over a multi-year period, all the while trumpeting the need to balance the budget, yet only managed to squeeze out a tiny surplus in the last full year of their mandate by selling assets.

This article from Open Democracy suggests Osborne may be plotting to copy another element of the Harper playbook in time for the next election.  If indeed the deficit does shrink as the Chancellor hopes, then in the run-up to voting day he may well have the flexibility to offer the kind of targeted spending and tax moves that Harper's Tories were spraying around just before Canada's recent election. It didn't work in Canada, but given the disarray in the UK's opposition parties right now, who's to say it wouldn't work there?      

Canada's fiscal update

A few posts ago ("A legacy of deficits"), I noted that the Parliamentary Budget Office (PBO) had issued a report indicating that the fiscal surpluses that the Harper Tories had made a big part of their re-election campaign were entirely fictitious. Today, new Finance Minister Bill Morneau has released a fiscal update that confirms this.

The Tories had claimed that the budget for fiscal 2015/16 would show a surplus of $2.3 billion; now, it appears that there will be a deficit of $3 billion. Reflecting a lower medium-term growth outlook, small deficits are expected to continue until 2019/20 -- which means, if nothing changes, that the budget will remain in deficit right through the lifetime of current Parliament.

If the Tories are ashamed of this legacy, and of the lies they told about the fiscal outlook during the election campaign, they're not showing it. The party's new finance critic, Lisa Raitt, has immediately accused the Liberals of putting some of their planned spending into the numbers in order to make them look worse. There may be a small element of truth to this -- the PBO forecast a deficit of $1.2 billion rather than the $ 3 billion in today's update. Like the new Finance Minister, however, the PBO was forecasting a multi-year string of deficits rather than the surpluses promised by the Tories, so the actual size of the shortfalls is arguably not the real issue here.

It remains to be seen whether Morneau will allow the worsened base-case outlook to affect the new government's fiscal plans. The Liberals promised to run small deficits, about $10 billion per year, in an effort to stimulate the economy.  Morneau made it clear today that the general direction remains intact -- "it's just not possible to cut our way to prosperity" --  but we will have to wait for a full budget, early in the new year, to see whether these deficits will be added onto the baseline projections, or scaled back slightly to avoid too much red ink.  As the economics department at TD Bank points out, even if the Liberals add the full $10 billion to the baseline deficit projection, the resulting annual deficits would still amount to only 0.7 percent of GDP -- far lower than in the US, the UK, Japan and most other developed nations.

The anti-deficit rhetoric of the Harper Tories, regardless of their own very poor fiscal record, is likely to return to fever pitch no matter what the Liberals announce at budget time. In truth, however, a better question might be this: is a 0.7 percent deficit enough to make a real difference to the growth outlook, or should the government consider doing more while financing is so cheap?

A Yellen put?

Share prices around the world have been looking a bit shaky in recent weeks, which is perhaps no surprise after a seven-year bull market. Today has seen markets, at least initially, pull back sharply in response to the appalling events in Paris on Friday. Does all of this have any implications for the Fed's policy decision in December?

In the absence of strong global economic fundamentals, there's little room for doubt that the steady rise in stock prices has been largely driven by the abundant cheap money doled out by the major central banks.  The combination of free money and low yields on fixed income assets (two sides of the same coin, of course) has inevitably driven yield-hungry investors towards riskier asset classes, including equities and real estate. It can be no coincidence that as the Fed has begun to signal its resolve to start raising rates, if not in December then soon after, global equity markets have run out of momentum.

If Alan "Three Bubbles" Greenspan were still at the Fed, there would be every reason to think that the Fed would hold off on a rate hike in December. The Greenspan Fed regularly demonstrated that it saw maintaining confidence in equity markets as a key part of its mandate, along with keeping inflation in check and promoting economic expansion. It happened so many times that equity investors even coined a term for it: the Greenspan put. If your equity investments were about to go sideways, fear not: the Fed would be along to bail you out with a rate cut.

Will Janet Yellen do the same?  Although today's early market selloff is not surprising, it's difficult to make a case that the Paris massacres in and of themselves will have a severe effect on the global economic outlook. The market weakness that was evident before last week may be a different matter, but if the Fed focuses, as it should, primarily on the US domestic economy, then the case for some modest tightening remains unanswerable. Look at it this way: if the Fed can't raise rates when unemployment is at a seven-year low and wage gains are at a seven-year high, just when will it ever be able to raise rates?

Mr Good Example

Before Stephen Harper came along, Canada's international reputation was positive, though maybe not quite as positive as Canadians liked to believe. Governments of both parties were quick to stretch the underfunded military gossamer thin in order to contribute to peacekeeping missions around the world, and the country could generally be counted on to pull its weight whenever there was a refugee crisis. Budgets always seemed to be tight, so Canada's deeds always fell short of its words, but at least we were generally on the side of the angels.

That all changed under Stephen Harper, whose contempt for most of his fellow Canadians was matched by his disdain for foreigners -- the man couldn't even bring himself to be friendly to the United States.  The only countries Harper seemed to have time for were Israel and Ukraine, in both cases as much for domestic political reasons as for any point of principle. The aid budget shrank even further and instead of peacekeeping, Harper sent the still-underfunded military into combat zones, deploying ancient fighter jets to the Baltic and, more recently, to Iraq to join the fight against ISIS. As The Economist scathingly put it just before the recent election, Canada under Harper was "Strong, proud and free-loading".

In his speech to his supporters on election night, Justin Trudeau made a point of speaking about this. Directing his remarks to foreign countries that missed the "old Canada", Trudeau announced "We're back!"  He will have a chance to prove it soon enough: in the next few weeks he will be travelling to the G20 summit in Turkey, to a Commonwealth meeting in Malta, and to the climate summit in Paris. This article from today's Toronto Star looks at how he might try to reposition the country on key issues.

The Syrian refugee crisis will be a key issue at the G20 meeting, not least because the host country, Turkey, has taken in more than 2 million refugees, as well as playing a growing military role. Trudeau has already pledged to end Canada's air campaign against ISIS.  This was probably not a welcome decision in Washington, London or Paris, but it is a recognizable return to the policies of his Liberal predecessors -- Jean Chretien famously upset George W Bush by refusing to join the invasion of Iraq.

Trudeau has also pledged to bring 25,000 refugees to Canada by year end, a hugely ambitious goal. Here is where we start to see the old, self-righteous Canada starting to rear its head again: according to the linked article, Trudeau has said he hopes that commitment stands as an example for other nations. Well, which nations would those be? He can't mean Turkey, obviously, or neighbouring Jordan and Lebanon, both buckling under the strain of the refugee influx. He can't mean Sweden, which with a population less than a third of Canada's has been seeing more than 25,000 refugee arrivals per month. He certainly can't mean Germany, the preferred destination of hundreds of thousands of refugess, or France, which has pledged to take far more than Trudeau is proposing.

I'm not trying to put Trudeau down here: any contribution to the crisis is better than none. However, in the overall context, what Trudeau is proposing is not much more than a pinprick.  It's more than a little pompous to set it up as some kind of example to others, many of whom are already doing much more.

Then there's the climate summit. Stephen Harper was famously cavalier about climate change, withdrawing from the Kyoto Protocol and muzzling the country's climate scientists, while enthusiastically boosting the oil sands industry. Trudeau has pledged to change all that, but once again there's a risk that the rhetoric will far outrun the action.

Trudeau's team has been heard to say that Canada will be taking a leadership role at the Paris summit,  but it's hard to imagine countries that have been focused on the issue for years allowing the prodigal son to take a seat at the head of the table. In truth, the main decision that Canada could have taken to look good at the conference, the cancellation of the Keystone XL pipeline, has already been taken in Washington. Recall, too, that Trudeau expressed his "disappointment" at President Obama's decision, though to be fair that statement may have been made for a domestic audience.

Truth to tell, and oil sands aside -- and I acknowledge that's a huge aside -- Canada's environmental record is not all bad. No developed country gets more of its electrical power from renewables, largely thanks to the abundant hydropower resources found from Niagara Falls to Churchill Falls to Quebec's awe-inspiring Baie James. Quebec must be the only major jurisdiction in the world in which electricity is the most economical form of home heating, and it's all produced from renewables. That said, however, this is a vast country, cold in winter and stifling in summer, that will always be a relatively heavy energy consumer. Trudeau will have to weigh his long-term commitment to the environment with the need to avoid short-term damage to the economy.

What it comes down to is that, in energy policy as well as the refugee crisis, Trudeau needs to avoid committing to more than he can safely deliver. Given the budget constraints he faces, there is a risk that Canada will quickly be seen as a country that speaks loudly but carries a small checkbook.  Trudeau's fellow world leaders may be glad to see the back of the lumpen Harper, but they won't want to be preached at by the new guy.

A legacy of deficits -- thanks, Stephen Harper!

Well, who'd have thought that could happen? Two weeks on from the election, Canada's Parliamentary Budget Officer (PBO) has revealed that the baseline fiscal outlook sees small budget deficits in each of the next three years.

Think about that. The Tories castigated Justin Trudeau's Liberals for the "irresponsible" suggestion that a Liberal government would run small deficits for three years in order to invest in infrastructure and boost the economy.  Harper, in contrast, was promising to "keep the economy safe" by balancing the budget. It now turns out, as Harper surely must have known, that the tiny surplus eked out in the most recent fiscal year was only made possible through the one-time sale of a government asset (the GM shares the government acquired during the financial crisis). The underlying budget is in fact in deficit, as it has been through each of the past six years of Tory government.

It's not clear that this will make a huge difference to the first part of the new government's fiscal plans. The PBO's projected deficits are only $2.4 billion a year on average, so even if the Liberals stick to their pledge of keeping annual deficits to $10 billion, there is still some room to maneuver -- just not as much as the Trudeaupians were counting on. However, the PBO's projections largely reflect a less buoyant growth outlook than was previously assumed, which implies that it will be that much more difficult to get the budget back into surplus by the time of the next election, as the government has pledged.

The budget news is part of a difficult backdrop that the inexperienced Trudeau team is already facing, even as the new ministers try to figure out the way to the executive washrooms.  Ineptly-run Bombardier has its hands out for yet more government largesse, President Obama has effectively cancelled the Keystone XL pipeline project (though it's unlikely that Trudeau is too upset about that, his public statements notwithstanding), the pledge to bring in 25,000 Syrian refugees by year end looks by turns unachievable and irresponsible.....and so on. By and large, Canadians are happy to see the back of Harper and like what they're seeing from Trudeau. but it's unlikely that the new government will enjoy much of a honeymoon.

North America's jobful recovery

Employment data for October were released in both the US and Canada this morning.  In both countries, the data were much stronger than analysts had expected. In the US, this is seen as cementing the possibility that the Fed will start hiking rates next month; in Canada, however, the gains may be attributable to a one-off event -- the election -- meaning that there is a real risk of a decline in employment when the November data appear.

The US numbers are unambiguously strong, and should put to rest the fears of a renewed economic slowdown that were voiced after the tepid September employment report.  The economy added 271,000 jobs in the month, almost twice the number reported for September, and well above the market consensus of 150,000. Although the slowdown in global growth seems to be weighing on US exports, and hence on the manufacturing sector, continued strength in final domestic demand is supporting the rest of the economy. Strong job gains were reported in the retail, construction and health care sectors, and the unemployment rate dipped to a seven-year low of 5.0%.

It seems certain that Fed Chair Janet Yellen had some advance knowledge of the data when she remarked earlier this week that a rate hike in December was a "live possibility". The Fed will certainly take note of the fact that the gradual tightening in the labour market is starting to have an impact on wage growth: the average hourly wage is now 2.5% higher than a year ago, the largest year-on-year increase since 2009. The December jobs report will be released before next month's FOMC session: unless it contains a totally unexpected setback for the job market, it seems all but certain that the Fed will finally start to move rates off their rock-bottom levels at the conclusion of that meeting.

In Canada things are less clear -- and the overall unemployment rate, at 7 percent, is still much too high for anyone's liking. The headline employment number of 44,000 jobs added was far above the market consensus of 10,000, but StatsCan was quick to point out that this largely reflected a 32,000 gain in public sector employment, much of it temporary.  (StatsCan has noted similar increases around past elections, but evidently nobody told the analysts as they were preparing their estimates).

If you assume that many of those jobs will disappear in November, and if you further assume that the underlying rate of job creation in Canada is less than 20,000 per month (the extreme volatility in the data make it hard to be precise about that), then the early best guess for the December report would be for no net job gains, or even a small loss.  If this happens we will no doubt see a fresh round of unwarranted handwringing in certain sections of the media, where calm analysis of trends always takes a back seat to the writing of doom-laden headlines.

However the December data come out, it's inevitable that the Bank of Canada will look to delay following any rate moves by the US for as long as it possibly can. A weak exchange rate is one of the Bank's favoured instruments for getting the economy moving again. It's far from certain that this will be enough:  a report from CIBC this week suggested that the weak currency might be a hindrance rater than a help for the small business sector, so beloved of politicians of all stripes. However, the rebalancing of policy implied by the new Liberal government's plans to run small budget deficits may start to set the stage for some reduction in monetary stimulus, possibly in the second half of 2016.

Canada's basic (im)balance

You can call it, I guess, Stephen Harper's parting gift to Justin Trudeau, who will be sworn in as Canada's Prime Minister tomorrow (November 4). A study by economists at BofA/Merrill Lynch  has revealed a sharp deterioration in Canada's so-called basic balance -- or as the headline on the linked article soberly expresses it, "money is flooding out of Canada at the fastest pace in the developed world".

The basic balance is an infrequently-used statistic that combines the trade balance and autonomous capital flows. In looking at what's happening to Canada at the moment, it's very easy to see that the deterioration in both of these components, and hence the sharply negative swing in the basic balance, is directly attributable to the collapse in energy prices.

Canada's monthly trade balance has predictably worsened in the past two years as the global oil price has fallen. In fact, the oil sector in Alberta has been hit even harder than most other oil producers because of the lack of pipelines to get the product to market -- of which, more in a moment. What the Merrill Lynch study indicates is that as the Harper government's all-in bet on the resource sector unravels, capital flows have turned sharply negative too. Both individual and corporate investors are redeploying funds not just out of the energy sector, but out of Canada altogether.

Given all this, it's no surprise that the exchange rate has weakened so sharply in the last couple of years. What's more, it's hard to be confident that the decline in the Canadian dollar is over. There are only the most tentative signs that the lower exchange rate is making non-oil sectors of the economy more competitive. Meanwhile, the outlook for energy just gets worse: TransCanada's request to the US government this week to delay a decision on the Keystone XL pipeline may well be the final death-knell for the project. Other pipeline proposals, to take Alberta tar sands crude either west to the Pacific or east to the Atlantic, face severe opposition.

In short, Harper's ten years in office have left the economy in a bit of a mess, even though Canada avoided the worst effects of the global financial crisis. The incoming finance minister, whoever that may be, is going to have a lot on his or her plate, right from day one.

EDonomics 101

In yesterday's post about Ontario's planned sale of Hydro One, I wondered how Premier Kathleen Wynne had persuaded former banker Ed Clark to support the deal, given that he initially recommended against it. Evidently I wasn't the only one pondering this, because reporters put the question directly to Clark himself. His response can be found at the end of this article from today's Toronto Star. It's worth picking apart, because I get the clear impression that Clark is rationalizing to himself something that he doesn't really believe.

Here's the full quote; exegesis follows.

“Do you believe that infrastructure is an important element of a modern economy and will the economy perform better if we put the money into infrastructure?” said the Bay Street tycoon.

“My personal view is that the rate of return for infrastructure is higher than the rate of return that we’re in a sense getting compensated for when we sell these shares, so the province is making money — it may not be the provincial government is making money.”

• "Do you believe that infrastructure is an important element of a modern economy..."

 Absolutely no problem with that!

•  "...and will the economy perform better if we put the money into infrastructure?" 

Well, that depends on the infrastructure you put the money into. Is the $480 million that Ontario spent to jerry-build a train to the Toronto airport that runs 90 percent empty making the economy perform better?  How about the long-mothballed Mirabel airport north (waaaay north) of Montreal? It's obviously not going to be Ed Clark's decision where the money gets spent, but given the track record of Canadian governments in choosing where to invest, we might well be better off if it was.

• ....said the Bay Street tycoon. 

Oh, please! Clark was the very well compensated CEO of TD Bank but he was never the owner of the company, which is how I normally think of a tycoon. He's always been left-of-centre politically, which is why he's giving his time free of charge to try to help the Wynne government address some of its intractable financial issues.

• "My personal view is that the rate of return for infrastructure is higher than the rate of return that we're in a sense getting compensated for when we sell these shares...."  

That starts very poorly -- you'd hope that there was more than a "personal view" on the relative rates of return on infrastructure and Hydro One -- but of course, whether Ed Clark is right about that depends on what exactly the Province spends the money on, and as I just noted, that's out of Clark's hands.

• "...so the province is making money -- it may not be the provincial government is making money". 

Right; returns on infrastructure investment, unless you capture them directly (through tolls on a new highway, for example), don't tend to accrue as returns to the body making the investment. Instead, as Clark is suggesting in the final phrase, the gains accrue more broadly (and largely non-measurably) in the form of greater overall prosperity.

All in all, you may be thinking, Ed Clark's explanation for his position holds up quite well. In what sense, then, is he (to quote the opening paragraph of this post) rationalizing to himself something he doesn't really believe?  Well, even if the returns on the infrastructure investments are higher than the return the Province currently earns from Hydro One, the fact remains that this is not the cheapest or most cost effective way to finance those investments. Selling a chunk of Hydro One is equivalent to the Province borrowing money at an equity rate of return, at a time when its own borrowing costs in conventional forms (via bond issuance) are much lower than that -- indeed, at an all time low.

That's what the Province's financial accountability officer is saying, in effect, when he says that the Hydro One sale will provide only a short-term boost to the provincial finances. Both the deficit and the debt will rise in the medium term as a result of the sale, unless the provincial government takes further steps -- but of course, if it were prepared to take those steps, it wouldn't be selling off part of Hydro One, would it?  Ed Clark, the highly experienced financier, undoubtedly knows this, and has surely imparted it in private to Premier Wynne, but like a good (if unpaid) team man, he's trying to stand behind the decision that the politicians have made.

A bad deal, still going ahead

When Kathleen Wynne's Liberal Party was running for office in the Ontario provincial election last year, it said nothing about privatizing Hydro One, the publicly-owned electricity distribution network. As soon as her government took office, however, Wynne commissioned former banker Ed Clark to look at ways of "monetizing" key public assets, including Hydro One and the provincial booze monopoly, the LCBO.

It's reported that Clark's initial recommendation was that Hydro One should be retained in full public ownership -- which, as we'll come to in a moment, is the only logical conclusion that can be drawn. However, Wynne needed funds to pay for some of her election promises, including a big program of infratsructure investment, and she somehow managed to persuade Clark to endorse a plan to sell off a majority interest (60 percent) in Hydro One to private investors.

Both of the opposition parties are opposed to the sale; so are large swathes of the media and, it appears, most of the public. Now we learn that the province's new financial accountability officer (a post created by Wynne herself) is warning that the selloff will only improve the province's financial position in the year it banks the proceeds of the sale; after that, the loss of a portion of Hydro One's reliable revenue stream will increase the provincial deficit year after year, obviously adding to the provincial debt.

The media are reporting this as if it's a shock-horror revelation, but in fact it's just simple financial math. Returns on equity are always higher than returns on debt because of the greater risks that the equity holder is taking -- debt is a first charge on cash flow. The discrepancy between the two returns is particularly high at present, when interest rates are so low. What Ms Wynne is proposing to do is to shed a productive asset and the equity returns it generates, rather than use Hydro One's cash flow to support low-interest borrowing to finance her spending plans. It's hard to understand how she persuaded the hard-headed Ed Clark to lend his name to this.

There is, of course, another angle to the story. Ontario is now apparently the single most-indebted sub-national jurisdiction in the world, a dubious encomium which it recently inherited from California. Much of the debt was incurred by Wynne's predecessor as Premier, the unlovable Dalton McGuinty. Wynne is desperate to avoid seeming as fiscally improvident as McGuinty.  No doubt, if she were to propose borrowing to fund her spending plans, the same opposition parties that are castigating her for the Hydro One sale would be even more outraged.

Despite today's report, therefore, there seems little likelihood that the sale will be halted. It's distressing, though, to think of what it says about the state of the provincial fisc. In the past I've compared selling public assets to selling the furniture to buy gin. If the financial accountability officer's report is correct -- which it is -- then even if Ms Wynne sells the furniture in the next few months, she'll be even less able to buy gin in a couple of years time.

Thoughts on Hurricane Patricia

To the relief of millions of Mexicans, Hurricane Patricia turned out to be much less fearsome than had been forecast. There may still be more damage to come, as the remnants of the storm head across the already soaked plains of Texas and up towards the Great Lakes, but for a storm that was briefly being described as the strongest ever recorded, it turned out to be, well, not all that.

Patricia's sudden burst of strength -- it went from a depression to a strong Category 5 hurricane in less than 24 hours -- was clearly due to the powerful El Nino in the Pacific, but that hasn't stopped meteorologists from drawing links to climate change. Maybe the most panicky weather guy of all, and the one most shameless about attributing individual weather events to climate change, is Eric Holthaus over at Slate. Here's what he wrote just before the storm started to weaken.

If I were to cite a one-off event, say the fact that last February was the coldest ever recorded in southern Ontario (you could look it up) to proclaim that climate change was a myth, I'd be quickly and condescendingly put in my place by an army of self-appointed experts, telling me that climate and weather aren't the same thing. Holthaus and others don't seem to be governed by the same rules, but that doesn't save them from withering sarcasm from the internet when their dire predictions turn out to be wrong -- just check out the comment string on the linked article.

Of course, that criticism in turn brings out the acolytes of climate science to silence the dissent. If you care to scroll through the comments on the article, you'll find one skeptic asking why the storm weakened sharply even before hitting land. This prompted one "expert" to respond: "Cooler water near the shore. Next question?",  At this point I was foolish enough to get involved, wondering why nobody had suggested that might happen until after it actually did. This got me into a minor scrap with a guy posting under the charming handle "Fetus Gerulaitis", who challenged my suggestion that climate science is much better at coming up with explanations for what just happened than at providing useful predictions of what will happen.

I'm not a climate scientist and I'm not a climate change denier.  I'm truly agnostic about the whole thing, but tend to think a version of Pascal's Wager is the best way to proceed -- better to be safe than sorry.  However, the fact that I may not be able to cite chapter and verse from peer-reviewed academic papers on the subject doesn't disqualify me from using my logical faculties to express an opinion on it. Let's give it a try, assuming you're still with me.

The most famous proposition in modern climate science is the Hockey Stick graph of global temperatures, most closely associated with Professor Michael Mann. Now of course, in looking back many centuries for climate trends, Mann did not have access to actual temperature records, so he had to use a proxy, and the main one he chose was tree rings. So far, so good, although there seems to be some dispute about whether the size of the rings in bristlecone pines is really a good indicator of temperature changes.

Within the last couple of centuries, actual temperature measurements have become available, so the researcher has the opportunity to splice that data onto the older, tree-ring derived stuff. In doing that, however, you'd surely want to check that for the period for which you have both sets of data, there's some degree of congruence between the two measurements. One of the main criticisms of Mann's work is that on finding that the tree ring data for recent decades did not match the rise in temperatures he discerned from actual measurements, he went ahead and spliced the two series together anyway.    

The other major criticism of Mann's work (and others on similar lines) is that the tree ring data seem to imply no natural variance in temperatures for many centuries, until a sudden upward trend emerges as fossil fuel burning leaps higher after the Industrial Revolution. What about the well-documented Medieval Warm Period and the subsequent Little Ice Age?  Well, guess what -- climate scientists are busying themselves in proving that those things never happened.  All that well-documented evidence of the River Thames freezing over every winter, of Europe-wide crop failures and the rest of it is apparently invalid when compared to studies prepared by academics using unverifiable proxy measurements of their own devising. (Unverifiable because if actual temperature data were available, there'd be no need to use proxy measurements in the first place).

One more thing and I'll stop! Climate change skeptics have been claiming for some time that the most recent data were showing a "pause" in the global warming trend, starting around 1998. Climate scientists, including the aforesaid Dr Mann, have come up with a number of explanations for this, mostly focusing on the theory that the deep oceans were somehow absorbing the extra energy. Needless to say, this possibility was never mooted until it became necessary to come up with an explanation of the pause.

But here's the thing -- the NOAA, usually seen as the go-to source on climate measurement, has gone back and adjusted the supposedly historical data and....there never was a pause at all! As the Church Lady would say, "isn't that conVEENient?'  Well actually, not really. If the new NOAA data are correct, then all of the highly confident theories that Prof Mann and others concocted to explain away the "pause" are wrong, aren't they?

I very much doubt if Fetus Gerulaitis will ever read this, but I'd like to thank him for getting me to think these things through again.  The science isn't settled: it never is.

Who dares, wins

Astonishing! If you had asked anyone in Canada, when the election campaign began more than eleven weeks ago, what was the least likely outcome, the answer would have been "a Liberal majority government". Yet that's what we now have -- and indeed it's a solid majority that will easily last a full term. Stephen Harper has already announced his resignation as Tory leader, and will probably hand over power to incoming PM Justin Trudeau by the end of the week.

In the end it appears that the electorate's desire for change, after ten years of Harper's bludgeoning style of government,  easily outweighed the Tories "trust us and fear everyone else" message. This was always possible and even likely, but when the campaign began, it seemed that the once-socialist NDP would be the beneficiaries -- after all, the Liberals were all but wiped out in the 2011 election. It seemed inevitable that the NDP and the Liberals would split the ABC (anyone but Conservative) vote, possibly allowing Stephen Harper to cling to power as the leader of a minority government.

Where the NDP went wrong was in running the campaign as if the election was theirs to lose. By cautiously promising very little change -- balanced budgets, no major tax hikes -- the NDP effectively drove away much of the electorate for whom change was the main imperative. Trudeau's Liberals were far from bold, but the promise of tax hikes on high income earners and a three-year budget deficit to jump-start the economy at least held out the hope that things might be different.

It's interesting to speculate about whether the Liberal victory on a slightly old-fashioned tax-and-spend platform signifies a shift in Canadian attitudes. Harper's resolutely anti-tax, anti-deficit rhetoric has permeated all levels of government in the past decade, to such a degree that when Trudeau first unveiled his economic programme, it seemed to many like a suicide note. However, coupled with the success of the NDP in the Alberta provincial election earlier in the year, the Liberal win may be evidence that the Canadian electorate is no longer convinced of the benefits of never-ending austerity.

Whether that viewpoint persists will, of course, depend on how good a job the Liberals are able to do once they take office. After a decade out of power, the party is not in a position to call on many MPs with previous ministerial experience -- Trudeau himself is a Cabinet neophyte. Some of the party's elder statesmen -- Jean Chretien, Paul Martin -- may offer advice, but Trudeau will have to be careful about how much he listens to them if he wishes to maintain his image as a bringer of change.

The key post in the government, given the party's tax and deficit pledges, will be the Finance Minister. Setting a credible budget plan for the entire four-year term that resorts to modest deficits for three years but a return to surplus in the final year will be a difficult challenge, especially as it implies a return to a degree of austerity just as the government is gearing itself up for the next election.

Many months ago, Trudeau told a TV interviewer that the best approach to balancing the budget was to get the economy growing faster. That would boost revenues, and then "the budget will balance itself". The Tories tried to use that last phrase, minus the context, to damn Trudeau as too naive to run the economy. The fiscal plan that Trudeau and his new Finance Minister will be putting into place may show us who's right.  

Fiscal fibbing

Stewardship of the economy has been one of the key issues in the Canadian election campaign, now mercifully nearing its end -- we head to the polls on Monday. Liberal leader Justin Trudeau has distanced himself from both the Tories and the NDP by promising to run small deficits for three years in order to jump start the economy. The other parties have jumped all over this, accusing Trudeau (or "Justin" as Harper always calls him) of irresponsibility.

The myth that right-wing parties are better managers of the public purse dies hard: just a couple of nights ago, a Tory-supporting friend of mine, while watching the Blue Jays knock off the Texas Rangers, listed Trudeau's deficit pledge as his key reason for supporting Harper this time. Yet the facts clearly show that over the last two decades, it's the Tories that have run deficits, while the Liberals have run surpluses. Check out this interesting table for the facts.

Let's shorten the time frame just a little. Harper has been PM since 2006, so let's call that nine years, and compare it with the last nine years of Liberal government, under first Jean Chretien (1997-2003) and then Paul Martin (2003-06). All nine Liberal years saw budget surpluses. As for Harper, his government ran surpluses in 2007 and 2008, then deficits each year until the current one, when a small surplus was eked out. Deficits, in other words, two-thirds of the time -- and if you were really mean, you could say that the early surpluses actually reflected Liberal fiscal rectitude, and this year's surplus was only achieved through an asset sale.

Now there's a lot about this comparison that warrants caution. I don't like to compare politicians over time ('Harper has the worst record in creating jobs since the Great Depression", to quote one recent example) because each government can only play the cards it's dealt. We can't know whether Harper would have been as fiscally cautious as the Liberals were from 1995-2005 if he'd been PM then, any more than we can know how Chretien and Martin would have handled the financial crisis after 2008. Harper and his then Finance Minister, Jim Flaherty, were well-advised to put their principles on hold for a while at that time and run deficits to protect the economy from catastrophe. My only point here is that it's downright mendacious for a party whose fiscal record has been less than stellar to be painting his opponents as irresponsible.

The myth of that progressive parties are irresponsible is not just a Canadian one, of course. We just need to look south of the border for evidence. A key reason that Harper was able safely to run deficits in response to the financial crisis was the fiscal rectitude shown by his liberal predecessors for more than a decade. By contrast, Barack Obama's spending in response to the same crisis came after almost a decade of staggeringly poor fiscal management under President George Bush (43).  Interestingly enough, we recently learned that the US budget deficit for this current year will be the lowest since 2007, though that is unlikely to stop the GOP from painting Obama as a spendthrift.    

Turning briefly to the election itself, polls suggest that the Liberals will be the largest party in the Commons, but will fall short of a majority, so there will be a lot of wrangling and maneuvering in the days and weeks ahead. The Liberals' strong showing has surprised many -- including, at least in our riding, the party itself.  To run against a Tory incumbent, the party has fielded a visibly tired 70-year-old with no previous experience at the national level. It's impossible to imagine that they'd have done that if they had had any real thoughts of winning the seat. Given the way this seems to be turning out, you have to wonder how many similar placeholder candidates might actually wind up in the House of Commons by this time next week.

With apologies, another rant about the Bank of Canada

Bank of Canada Governor Stephen Poloz continues to amaze and astound, and not in a good way. Speaking on the fringes of the IMF/IBRD's annual bash in Washington, Poloz delivered some quite remarkable thoughts on the inflated level of household debt in Canada. Everyone, including the IMF, is telling Poloz that the debt is a problem and that he should be doing something about it. Poloz admits it's a problem but declines to do anything about it. 

Poloz is quoted in the linked article as saying that "We knew that easing policy would have implications for financial stability, However, we also knew that those concerns had to remain subordinate to the primary mission of achieving our inflation target and getting our policy back in the zone where the risks are balanced". 

Fine words, those,  that could have been uttered by Alan Greenspan or Ben Bernanke in the years and months before they drove the bus off the cliff back in 2007. Central bankers were supposed to have learned lessons from that, yet the only risks Gov. Poloz seems interested in balancing are the risks surrounding his 2 percent inflation target. If, in the process, the risk of a collapse in the financial system builds up again, well, that's just too bad. He's quite explicit about that:

“Even in extreme conditions, when financial stability risks constrain monetary policy from achieving the inflation target over a reasonable time frame, a central bank would want to ensure that all macroprudential options were exhausted before trying to address those risks with monetary policy,” he said.

Ah, but Gov. Poloz will retort that he is, so, concerned about financial system stability:  “What’s important now is that we finish the job. Ensuring the safety of the global financial system is in all of our interests. We can’t be distracted and lose sight of this objective,” he said.

It appears that Poloz believes that financial stability can be achieved in a world of sustained near-zero interest rates, historic levels of over-borrowing (by governments in the developing world as well as Canadian households) and increasing risk-taking by investors stretching for yield.  Forgive me if I (and, I may say, the IMF, which is becoming increasingly alarmed about the global debt mountain) disagree, very strongly. 

Data daze

Business economists like to tell clients that you shouldn't read too much into one monthly data point, but it's advice that they don't always follow themselves. Case in point: last week the US reported that employment rose by only 142,000 in September, significantly lower than expected. Just one reading, right?  No reason to panic. Yet a large majority of economists quoted by the media immediately said that the report was a clear indication that economic problems abroad, notably the slowdown in China, were starting to weigh on US exports. Market participants, many of whom had been expecting a rate hike in September, promptly priced out any likelihood of a Fed rate hike in this calendar year.

So what do we make of today's Canadian employment data, also for the month of September?  Headline number of jobs created: 12,000 -- moderately positive. However, behind that number there was a reported 62,000 loss of full-time jobs, against a 74,000 gain in part-time employment, so it can be argued that the total labour input into the economy actually fell slightly. In addition, the unemployment rate edged up to 7.1 percent -- moderately negative.  However, with the number of jobs increasing, this was attributable entirely to a rise in number of people seeking work, which is generally taken as a sign of worker confidence.

There are plenty of conclusions we can draw from this report. One is that Canada's labour force survey still seems to suffer from wonky methodology.  I've written here before about the wild gyrations that are reported for full-time versus part-time employment, or paid employment versus self -employment, that StatsCan reports almost every month, only to revise away subsequently. A full-time job loss of 62,000 in one month is surely significant if it's true, but even in the oil patch, there have been few news reports that could be taken as evidence of such severe job-shedding.

Turning to the sectoral breakdown, we find truly bizarre numbers from the educational sector: a 51,000 decline in employment in the month when the kids go back to school. Delving a little into the StatsCan report, it turns out that the actual number of people employed in the sector actually rose in the month, and it was seasonal adjustment that produced the reported decline. Might be time to take another look at the adjustment factors.

These quibbles illustrate very clearly why you shouldn't read too much into the monthly headline data: there's too much going on under the surface for you to draw reliable conclusions.  Not that that will stop anybody from doing so, but is there anything in today's report that helps us to get a handle on how the overall economy is performing? StatsCan is very helpful here, pointing out that employment grew more than 60,000 in the first quarter (when GDP was reported to have fallen), by more than 30,000 in Q2 (when a second straight GDP decline led the media to scream "recession") and by a further 20,000 in Q3, for which we don't yet have full GDP data. What's more, the total employment gain of 161,000 in the year to September was entirely accounted for by full-time employment.

True, Canada needs to create more than 161.000 jobs in a year to absorb the growth in the labour force. Still, it's hard to be outright pessimistic about these numbers, given what's going on elsewhere.  And it's all but impossible to believe that the economy was really in a recession in the first half of this year.  

Canada and the TPP

The Trans Pacific Partnership trade agreement that was reached in Atlanta overnight represents the culmination of five years of negotiation among the twelve participating countries.  Strange to say, the final push to get the stalled negotiations completed was provided by the Canadian election. Fears that the October 19 vote might produce a government in Ottawa that was much less favourably disposed to free trade finally broke the many logjams that had arisen.

Not surprisingly, Prime Minister Stephen Harper is lauding the deal, but with exactly two weeks left until polling day, this may be a risky strategy for him and his party. There can be little doubt that Canada's existing trade deal with the United States and Mexico, the so-called NAFTA treaty, has contributed mightily to the rapid erosion of the country's once-dynamic manufacturing sector that has been seen over the past decade and more. The painfully slow recovery in manufacturing that is now taking place in response to the weakness in the Canadian dollar is clear evidence that the sector has experienced an irreversible structural shift, and not just a cyclical slowdown.

Among the major opposition parties, the NDP has already indicated that it will not be bound by the new deal, while the Liberals seem inclined to read the fine print -- of which there will be a great deal -- before coming to a position. The Tories have promised that the new Parliament will have the final say on whether Canada signs the TPP treaty, but it seems inevitable that claims and counterclaims about its likely impact on the economy will be flying in the last two weeks of the campaign.

It's already known that the deal will make things even harder for the beleaguered auto sector, thanks to a slightly scuzzy side deal between the US and Japan over the content of "Japanese" vehicles sold in North America. Japanese manufacturers (and others) will now be able to include more components from cheaper sources in their vehicles while still claiming preferential tariff treatment. The difference -- a fall from a 60 percent local content requirement under NAFTA (i.e. 60 percent of the value of the vehicle from Canada the US and Mexico) to 45 percent under TPP (i.e. 45 percent from all twelve TPP countries) stands to be very significant for what's left of the auto sector in southern Ontario.

Fears that the Harper government would bargain away Canada's so-called supply management system for dairy products -- a scheme that keeps local farmers in business by ensuring that I pay three times as much for milk here as I would five miles away, across the border -- have largely been neutered. Very limited quotas for imported dairy products will be phased in, but it's much more likely that this will mean we start to see New Zealand cheddar in our stores than that the price of liquid milk will drop.

The full agreement will be published, we are told, in the next few days, at which point affected parties will presumably start to squawk.  One major element of the deal that has not been mentioned at all in the early going is the treatment of investment. NAFTA and the TPP are lazily described as trade deals, but it's very often the treatment of multinational investments that proves most significant (and contentious) in the long run. Expect Canadian nationalists to come out strongly against the deal if it affords foreign companies protection from the actions of Canadian governments and courts. (Come to think of it, expect Canadian nationalists to come out strongly against the deal anyway -- that's what they do.)

Canada's Trade Minister, Ed Fast, confidently asserts that the government "certainly doesn't expect" any job losses from the TPP. Pull the other one, Ed: the whole point of deals like this is to compel inefficient sectors of the participating countries to face competition from abroad, which inevitably means there will be job losses. The hope is always that these will be offset by job gains in other sectors.

Economic theory, relying on a concept known as comparative advantage, asserts that free trade deals always make the participating economies as a whole better off. Thus governments can supposedly redistribute the gains made by one sector to offset the losses incurred by another. Great in theory, but does it ever really happen? And in a huge country like Canada, where so much power is held by provincial governments rather than federally, is it ever really possible? It will be interesting to see how Messrs Harper, Mulcair and Trudeau answer those questions in the next two weeks.    

Canada's economy is growing again (but let's keep it quiet)

The news that Canada's economy had been in a technical recession back in the first half of the year (well, from January to May) was fodder for some large-font headlines and much hand-wringing in the media.  Today we get news that GDP grew in July for a second consecutive month -- and it's not much of a story at all. In fact, the rabidly anti-Harper Toronto Star can't even find room for it on the home page of its website -- you have to click on the separate "Business" section, well down the page, to find it.

Most private sector analysts are revising their growth forecasts for Q3 and for the rest of 2015 sharply higher, and it seems likely that the Bank of Canada will be doing the same when it updates its published forecast in October. This should mean that there is no prospect of any further monetary easing by the Bank, which should reduce the downside for the exchange rate, even if the US Federal Reserve starts raising rates in the next little while.

This is undoubtedly good news for Stephen Harper's Tories, who look likely to emerge as the largest single party in the October 19 election, even though about two-thirds of the electorate (including your humble scribe) heartily wish them gone.  Harper and his cadaverous Finance Minister, Joe Oliver, have been widely scorned for downplaying the recession, but it looks as if they were right. There's every possibility that revisions to the data -- which can take several years to complete -- will eventually show that it never actually happened.  

Anger is an energy

Last year we spent a couple of weeks in the company of a hundred or more wealthy Americans, cruising the rivers of Europe. It was a great trip and they were mostly great travelling companions, but one thing we couldn't help noticing was how angry they were. Angry about immigration, angry about Obamacare, angry about Obama himself. Most of them proudly identified as Republicans.

That anger is plainly fueling the chaotic race for the GOP Presidential nomination,  particularly the rise of Donald Trump. One of Trump's most popular ideas has been his plan to build, at Mexico's expense, a wall along the entire border between the two countries. Now that idea has been, well, trumped by the suggestion that the US also needs a wall to separate itself off from Canada. This article, originally from Bloomberg News, suggests that the notion has the support of 41 percent of US voters, and has almost 50 percent backing in the southern states.

The Canada-US border is, according to the article, almost 9000 kilometres long -- for the benefit of US readers, that's better than 5000 miles. It goes without saying that a wall of that size would make the Great Wall of China look like your backyard fence. So it's not going to happen. Still, the article, much of which is tongue-in-cheek, contains a few snippets that are worth commenting on, to wit:

• Thomas Caldwell, a financial executive in Toronto, is quoted as saying "There's not a horde of Canadians rushing to get in to America, let me tell you". Well, yes and no, Tom. This morning as I was driving around the Niagara region, local radio was reporting delays of up to an hour at the border bridges, of which there are four in a twenty-mile stretch. A lot of my neighbours go to the US every week to stock up on groceries, even with the Canadian dollar at such a low level. Canadians may not want to be Americans, but they sure love to shop like them.

• Another Toronto financial executive -- well, this is Bloomberg -- mocks the 50 percent of southerners who want a wall: "They don't even know where Canada is". Probably some truth in that. A former colleague of mine, a Spaniard, loved to tell the tale of how he went to St Louis to study. One of the questions he was asked most often: how long did it take to drive from Spain to Missouri?  (Yes, I know St Louis isn't in the south, but it's a good story).

• The Donald says he wouldn't build a wall along the 49th parallel: "I love Canada", he says. Might not be mutual, big guy! One of the tallest new towers in Toronto has Trump's name on it. It's been a source of messy litigation because a lot of the buyers of units in the building, which is a hotel/condo thingy, claim they were misled about the income potential. Trump has remained aloof from the fray, noting that basically his only role was to cash a nice fat check for allowing his name to be used.  

• A Tory running for re-election in eastern Ontario asks how anyone could build a wall along the border in his neck of the woods, seeing as it's water -- the St Lawrence Seaway, to be precise. Good question, but we were in that area a few weeks ago and saw just how porous the border is down there. One small island has a very short bridge adorned with the flags of both countries, claimed to be the shortest crossing between the two countries. No fearsome looking border security types in evidence either.

This may all be good knockabout fun, but the wave of anger that even tempts otherwise rational people to latch on to such ideas as border walls is dangerous. As the continuing rise of Donald Trump shows, it's not going away -- and just today it's brought down John Boehner, plainly exhausted by the task of trying to keep the crazies in his own party in check.  Maybe it's us here in Canada that should be thinking about putting up a wall.

Will "shy Tories" decide Canada's election?

Cast your mind back a few months to the UK's general election. On the eve of the vote, opinion polls were pointing to a too-close-to-call outcome between the Tories and Labour. On polling day, however, the Tories trounced both Labour and the Lib Dems, ending up -- against all expectations -- with a solid majority government. Poring over their latest failure, the pollsters settled on the idea that a lot of people who had been polled had been "shy Tories" -- people fully committed to backing David Cameron, but too embarrassed to admit that to a stranger.

Could we see the same thing when Canada votes on October 19? This columnist seems to think it's a possibility, though not an important one.  Opinion polls show the three main parties -- Tories, Liberals and NDP -- each with about 30 percent voter support. Harper's 30 percent , his "base" vote, is certainly very far from being shy. Early in the interminable campaign, a grey-haired gent got international press coverage for screaming abuse at a reporter who had the temerity to ask Prime Minister Harper questions about the ongoing Senate expenses scandal. Among other things he accused her -- and reporters in general -- of being tax evaders.

This kind of anger is a characteristic of Harper's "base", though it's legitimate to ask what they're so angry about. After all, their man has been in office for over a decade, a time in which he has quite deliberately run the country in ways that the remaining 70 percent of the population find abhorrent: strident and blinkered foreign policy, scorn for other levels of government, disregard for the environment, cuts in social programmes. That's what the "base" wanted, and that's what Harper has delivered, so I ask again: what are they so angry about?

Most analysts assume that Harper's real support will never be much more or less than that 30 percent "base". To win the election, or at least to attain a minority government, he needs to shake loose, for one day only, a smattering of wavering souls from the other major parties. Fully 70 percent of Canadian voters are heartily sick of Harper, but at least some of them can be bribed with targeted tax cuts -- a Harper specialty -- or made fretful about terrorist threats.

This ought not to work, but the opposition parties are making it easier for the Tories by shying away from radical proposals. The supposedly socialist NDP has vowed not to run an fiscal deficit, while promising a number of new initiatives that seem sure to be expensive -- a national daycare programme, for example. The Liberals are ready to run deficits to finance infrastructure spending in an effort to jumpstart the economy -- but only small deficits, and only for three years. Ten years of Harperism, echoed at the local level by politicians like former Toronto Mayor Rob Ford, have made the notion of activist government, financed either by a somewhat higher tax burden or through deficits, something almost unmentionable.

Against the odds, then, this election now seem to be taking place on Harper's terms. Given that the other parties aren't promising anything very different, why not stick with good old Stephen and his supposedly firm hand on the tiller, rather than gamble on callow Justin Trudeau or angry Tom Mulcair?  It's not a pitch that's going to win my vote, but there may be enough voters -- "one day" Tories rather than "shy" ones -- to make Harper's party the largest in the House of Commons come October 20.

UPDATE, 24 September: Maybe not so shy after all? This poll shows the Tories pulling ahead of their opponents, with almost enough support to form a majority government. And yet in my own discussions with friends and acquaintances in our riding,  which is currently Tory, I can't find anyone who's enthusiastic about giving Stephen Harper another term, and a whole lot who are horrified at the prospect.    

Fed up? Not just yet

The market view over whether the US Federal Reserve would raise interest rates this month was slow to gel, but eventually there was a near-unanimous consensus that there would be no move. And so it has proved, with only one dissenting voice on the FOMC.

A quick skim through the press release suggests that the Fed is content with the way the domestic economy is performing: activity is expanding "at a moderate pace", the labour market is strengthening and inflation expectations are stable. The key reasons for keeping rates on hold yet again seem to relate to international factors. Growth in US net exports has been slow, reflecting the emergence of slower growth in a number of key markets. The Fed appears to believe that a faltering expansion in the rest of the world will exert downward pressure on both growth and inflation in the US.

Is this the Greenspan Fed redux?  Regardless of what was happening in the domestic economy -- bubbles in the housing market, overvaluation of financial assets -- the Maestro could always find a reason not to lean too hard on the monetary brakes. Looking at the current US situation objectively, it's impossible to justify keeping rates in a 0-25 basis point range any longer, but that's where we are.

The problem Ms Yellen and her colleagues face, of course, is that they and we have never been here before. Nobody has any idea what will happen when the Fed starts to take away the seven years' worth of free money that the markets have been gorging on. None of the central bankers who devised the emergency response to the financial crisis, back in 2007/8, gave much thought to the question of how their bold experiment might be brought to an end when the time came, but it's a racing certainty that none of them thought the experiment would still be going on seven years later.

It's clear that a lot of analysts and market players are terrified of what may happen when the FOMC pulls the trigger -- check out this piece from the CBC website, published before today's announcement. The one thing that seems safe to say is that continually finding reasons not to hike rates is not going to make things any easier when a move finally comes.

Harper's economic record

Our old friend David Olive at the Toronto Star has a piece in today's edition examining Canada's economic record under Stephen Harper.  Economic stability was supposed to be one of the key planks in Harper's re-election campaign, but recent data, including a very mild recessionette in the first half of the year, have seriously damaged the story.  In any case, this being the Star, it's no surprise that Olive finds the Tories wanting in most respects.

Piling Peleon on Ossa, Olive compares Harper's record not just with those of other countries over the past decade, but also with what was achieved under previous Canadian Prime Ministers. The first of these strikes me as much more valid than the second. Broadly speaking, everyone was facing the same problems from 2007 on, so it's legitimate to measure one country against another. It's far less reasonable to draw comparisons between what Harper has done and, for example, what Pierre Trudeau did three decades ago.

Anyway, let's assess Olive's assessment.

• Job creation: Olive admits that Canada's record in this regard is better than the rest of the G7 -- but then tries to knock it down anyway. He argues that you'd expect more jobs to be created in a country that has higher population growth, as Canada does because of its high immigration levels. Why should this be so? If rapid population growth drove employment growth, sub-Saharan Africa would presumably be booming. Olive also notes that Canada's unemployment rate is higher than that in other G7 countries: true, but this is nothing new. Structural unemployment, especially in the Atlantic provinces, has always biased the national jobless rate higher.  

• Fiscal prudence: Olive correctly states that Harper, despite embracing austerity, has in fact presided over seven straight years of budget deficits. There may be a small surplus this year, but only because of fiscal finagling, as Olive outlines. Interestingly, he offers no comparisons with the rest of the G7 here, presumably because he knows that the fiscal performance of most other G7 countries, including the US and the UK, has been so much worse.  Finally, he contrasts Harper's performance with the decade of surpluses rung up by PMs Chretien and Martin. True enough -- but unlike Harper, that was achieved in an era of rapid global economic expansion, not near stagnation. 

• Economic growth: Olive has to admit that Canada's GDP has grown more than that of any other G7 country during the Harper years. He argues that growth was faster under PMs Martin, Chretien, Mulroney and Trudeau -- but then, as noted above, everyone else was posting faster growth back then too.

• Prosperity: Olive notes that growth in real GDP per head in the Harper years has averaged a "barely discernible" 0.4 percent per annum. Once again he offers no comparisons with the rest of the G7, for obvious reasons -- they did even worse -- but instead attempts to blacken Harper by comparing him unfavourably with every PM since the Great Depression!

Olive's sour conclusion is the best that can be said is that Canada under Harper muddled through the post-crisis era better than most other countries. And even for this modest achievement, Olive tries to assign much of the credit elsewhere -- specifically, to former Bank of Canada Governor Mark Carney. Here, Olive may actually be onto something. Unlike much of the rest of the G7, Canada did not have to undertake an emergency bailout of its financial system. Some credit for this indeed goes to Carney, and some to the late Jim Flaherty, who as Harper's Finance Minister took a very hands-on approach to the banks as the crisis unfolded.

Arguably, however, most of the credit for the stability of the financial system should go to Messrs Chretien and Martin. Back in 1998, two pairs of Canada's Big Five banks -- first Royal and BMo, and then TD and CIBC -- announced plans to merge, with the specific aim of becoming bigger players on the world stage. The government of the day disallowed the mergers; one can only speculate how differently things might have turned out post-2007, if those deals have gone ahead. Given Olive's zeal to deprive Harper of any credit for anything at all, I'm surprised he didn't mention that.

"The Russians are coming! The Russians are coming!"

There was an incident during the endless wars that followed the breakup of Yugoslavia that was scary and comical at the same time. The US and its allies, who if memory serves had been bombing the snot out of Serbia for several weeks, managed to finagle a resolution through the UN Security Council, authorizing the deployment of a peacekeeping mission under UN auspices. The mission was, of course, supposed to consist of hastily rebadged NATO armour.  However, the Russians, who had watched aghast as their fellow Slavs were bombarded, quickly painted up a few vehicles of their own and deployed them to an airfield in Serbia.

The head of the NATO mission, a US general, demanded that the British army turf the Russians out. The leader of the British forces, General Sir Mike Jackson, refused an order for probably the only time in his career, saying "I'm not starting World War Three for you"!

Fast forward to the present, and we find the US military getting its BVDs in a knot all over again about Russian military deployments, this time in Syria. The fact is that the Russians have had military personnel in Syria for years: the country is the site of their only naval base on the Mediterranean. Their wish to maintain that slender foothold explains their willingness to support the vicious Assad regime with regular weapons supplies.

Now there are some signs that Russia may be sending ground troops to Syria to fight ISIS directly, something which the US and its allies (including the UK, Australia and Canada) have been highly reluctant to do. On the principle that the enemy of my enemy is my friend, you might think the arrival of Russian boots on the ground would be a welcome development, but it evidently isn't.

Here's the thing. The US and its allies have all kinds of military assets in the Middle East and are merrily bombing away in Syria and Iraq, to little apparent effect but with mounting civilian casualties. But that's OK: those are our guys. But let the Russians turn up with a thousand or so soldiers -- that's the reported number -- and actually take on the ISIS bad guys hand-to-hand, and it's apparently cause for alarm.

Or look at the Ukraine conflict.  There are constant reports about the increased level of Russian aerial activity over the Baltic Sea, and naval manoeuvres in the Black Sea. Both of those bodies of water are on Russia's borders, and the Russia is stepping up its activities there mainly because of the hugely increased presence of NATO aircraft and ships in the region, thousands of kilometers from their home bases.

Vladimir Putin is not someone who's easy to trust, but the West's incessant fear-mongering and denigration of Russia since the collapse of the USSR has given him and his compatriots very little reason to trust us, either.  This doesn't yet feel like the Cold War that loomed over us when I was growing up, but it's an unpleasant and unstable kind of standoff that could surely be improved if the two sides could just start treating each other with a bit of respect.

He didn't, and he won't next time either

The Bank of Canada kept its overnight rate target unchanged at 0.5 percent today, in line with the expectations of most analysts. The statement released by the Bank contains some of the most strangulated prose imaginable -- "the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate" (!) -- but generally offers a balanced view of the near-term outlook.  Inflation is within the target range despite some upward pressure from the weaker exchange rate; household spending is strong and growth in the US economy is providing a lift to exports; slowing growth in China needs to be watched; and the financial system is in good shape.

One word you won't find in the press release is "recession". The media have been using the term ad nauseam ever since Stats Can reported a decline in GDP for the second quarter, even though all indications are that the economy returned to a positive path as long ago as June. That resumption of growth has allowed the Bank to avoid a rate cut that might have been seen as politically-loaded, with the election now a mere six weeks away.

Prime Minister Stephen Harper is no doubt relieved at the Bank's inaction, as his government's supposedly adept stewardship of the economy has been a key plank in what's starting to look like a very shaky re-election platform.  However, it's unlikely that either the media or the opposition parties will stop using the R-word, so today's rate decision is unlikely to provide the Tories with any lasting comfort. All the evidence at this point is that the voting public is keen to see the back of Harper; barring unforeseen events, which can never be ruled out in such a long campaign, the Bank of Canada's next rate decision (on October 19, two days after election day) is likely to be overshadowed by the ongoing formation of a new government. It's a safe bet that the Bank won't want to cut rates then.