Wednesday 30 December 2015
"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!
Wednesday 23 December 2015
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.
Best wishes for the Christmas season and a Happy New Year to all readers of the blog!
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.
***************
Best wishes for the Christmas season and a Happy New Year to all readers of the blog!
Monday 14 December 2015
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!
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!
Friday 11 December 2015
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.
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.
Wednesday 9 December 2015
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.
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.
Friday 4 December 2015
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!
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!
Tuesday 1 December 2015
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.
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.
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