Friday 26 February 2016

Meanwhile, back in Toronto

It's not just the Federal government that's facing fiscal problems in Canada at the moment. The fall in the price of oil is taking a huge toll on the budgets of all of the producing provinces (Alberta, Saskatchewan and Newfoundland/Labrador). Alberta, the biggest producer and a place where the term "saving for a rainy day" seems to be unknown, has already warned that it faces a shortfall of as much as C$10 billion this year.

Then there's Ontario, which tabled its budget yesterday. Under the free-spending McGuinty and Wynne governments, the province has posted a shocking fiscal record over the past decade, to the point where it is now, by some measures, the most indebted sub-national jurisdiction the the world, owing just shy of $300 billion.  Here's the thing, though: lower oil prices, and the concomitant fall in the exchange rate, are huge pluses for Ontario. As a result, although the latest budget shows yet another deficit ($4.5 billion) for the 2016/17 fiscal year, the Province is aiming to balance the books next year.

To close the gap, Finance Minister Charles Sousa is using some one-off transactions, a few accounting tricks, some hikes in sin taxes, and a modicum of spending restraint.  More of Hydro One will be sold, and Sousa is upping his estimate of the Province's take from the sale, given the aftermarket success of the first tranche.  Wine prices will be increased slightly, as will the price of cigarettes -- a move of dubious value, given that more than half of the smokes in the Province are already contraband, by some estimates.

Then there's the biggest sin of all, as today's world sees it: consuming carbon. Ontario had already announced its intention to join the cap-and-trade scheme previously pioneered by California and Quebec. Yesterday we found out how much this is likely to cost: starting in 2017, gasoline will go up in price by about 4.9 cents a litre, while natural gas will cost the average household about $5 more per month.  One major gas supplier, Union Gas, has already warned that the latter figure is almost certainly too low.

Needless to say, this is the least popular part of the budget. Canadians are all in favour of going green, but not if it actually costs them money.  (In an informal TV poll, 81 percent of motorists opposed the gasoline price hike).  The Finance Minister claims that all of the proceeds of the "proceeds" from cap-and-trade, estimated at $1.9 billion in the first year and steadily rising after that, will be devoted to "green initiatives" -- transit schemes, home insulation grants and such. To make this seem real, the government is setting up a separate fund for this money.  However, opposition parties have been quick to warn that the government will in fact be using the money to pay for initiatives it has already announced.  To the extent that this is true, it means that there will be less "new" money for green spending -- and the cap-and-trade "proceeds" (don't you dare use the word "tax") will in effect be going into general revenues.

Sousa's economic assumptions seem reasonable -- real growth averaging no more than about 2 percent a year for the next four years -- so there's every possibility that the deficit will indeed be eliminated in 2017/18.  However, this will come with a considerable cost for the Province's longer-term fiscal flexibility. The ill-advised sale of much of Hydro One robs Ontario of one of its most reliable revenue sources, in exchange for a relatively small upfront revenue windfall.  Come the next slowdown, whoever holds the Finance portfolio may well rue the day Kathleen Wynne decided to sell it.  

Thursday 25 February 2016

"The budget will balance itself"

During last year's election campaign, that little phrase uttered by Justin Trudeau was widely used in Tory attack ads, in an attempt to paint the Liberal leader as a feckless lightweight.  Like everything else the Tories tried, it didn't work, possibly because it was a remarkably selective edit of what Trudeau actually said. In a TV interview back in February 2014, Trudeau suggested that "the commitment needs to be a commitment to grow the economy, and the budget will balance itself".

Tories may affect not to believe that, but most economists would, and there's fairly recent evidence of it in Canada. Starting in the mid-1990s, the Chretien (Liberal) government finally got serious about Canada's chronic budget deficit and debt problems. Most people recall, or rather think they recall, that the deficit was eliminated through stringent spending cuts, but this is only a small part of the story.  By far the biggest contribution came from soaring revenues, thanks in large measure to the steady growth that the US economy achieved at the time in response to a stimulative stance on the part of the Federal Reserve. The Canadian economy grew, and the budget balanced itself.

This ancient history is worth recounting because we seem to be embarking on another trip down the same road, under the guidance of the Trudeau government.  During the election campaign, the Liberals differentiated themselves from the two competing parties by pledging to run "small" and "temporary" deficits in order to boost the economy.  "Small" was to mean less than C$10 billion a year, and "temporary" meant the budget was to be back in balance by the time of the next election, in 2019.

So much for that. To the surprise of almost no-one, it turned out that the fiscal situation the Liberals inherited was far worse than the Tories had claimed, and with oil prices still low, the situation has only gotten worse in the last few months.  Finance Minister Bill Morneau said this week that revenues this year will be $12 billion lower than anticipated, and that the budget deficit will be $18.4 billion -- even before the Liberals tack on the cost of their election promises. The deficit will fall only slowly after that, and any hope of getting back to a surplus position by 2019 has been abandoned. At best, the Liberals may be able to keep the Federal debt/GDP ratio from increasing, and even that is far from certain. That ratio is currently around 31 percent, as this very comprehensive set of fiscal tables from RBC shows.  

Morneau has made it clear that the Government believes cutting the deficit would throw the economy back into recession, which is almost certainly correct.  The real question is whether the planned new spending will indeed get the economy back on track, generating growth that will start the process of bringing the deficit back down again. If it doesn't work, Canada could embark on another period of massive and seemingly intractable Federal deficits, just as happened from the late 1970s to the mid-1990s.

This excellent article by the CBC's Don Pittis spells out the risks to Morneau's approach.  Pittis points out that the ever-present risk of another financial crisis could easily throw the government's projections off track at any time.  Moreover, the possibility of ever returning to a period of really rapid growth is dwindling, as labour force growth slows with the retirement of the baby boom cohort. Canada's abysmal productivity record rules out any chance of a helping hand from that quarter.

It's a sobering message, but we'll have to wait until budget day in late March to see whether Morneau and Trudeau are listening. This week's deficit announcement is obviously intended to get the bad news out of the way early.  Many media commentators are adding together Morneau's $18.4 billion and the originally-pledged $10 billion stimulus, and concluding that the actual deficit will be close to $30 billion.  The smart political move would be to come in with a number nearer, say, $25 billion, which in current circumstances would be greeted with a sigh of relief.  We shall see.  

Wednesday 24 February 2016

La petite mort

The term "la petite mort", or the little death, refers to a momentary loss of consciousness. These days it is most often used to describe the sensation of orgasm, rather than the fit of the vapours that it used to denote.

I now have a more modern definition to propose: being forced offline. I noticed my hard drive starting to act up at the end of last week. I just about had time to ensure that I had everything backed up before it died altogether.  So I spent several days connected only by my tablet and smartphone, which are no substitute if your primary purpose online is to write stuff.

The guys at the local computer den were unable to rescue very much, so I am now in the middle of the laborious task of loading everything back up.  However, there's lots going on -- the appalling outlook for Canada's Federal finances, tomorrow's Ontario budget, the possibility of Brexit -- so I will be back to normal posting as soon as possible.  

Friday 19 February 2016

Cauliflower ear

Just before Christmas we were at a local supermarket, selecting veggies to accompany the big meal. Any cauliflower, I asked one of the produce guys. He led me to a high shelf with precisely three of the cruciferous globes on it -- at almost $10 (Canadian) each.  We opted for rutabaga.

At our local pub there's now an insert in the menu, in which the owners express their regrets for the fact that they've had to up the price of the Caesar and Greek salads by a buck each, because of the high price of lettuce.

Economists are not supposed to rely on anecdotal evidence, but in this case it's OK, because StatsCan today produced data that show what every Canadian, whether they know anything about the dismal science or not, has been griping about for months: consumer prices are on the rise.  CPI rose 2.0 percent in the year to January, up from 1.6 percent in December.  Rising food prices are a major factor in the increase, along with unexpectedly high retail prices for gasoline. And behind both of those: the slumping exchange rate.

Given our climate,  Canadians are used to eating imported fruit and veg during the winter months. If you want to eat local vegetables at this time of the year, you'd better know a lot of recipes for mushrooms.  Imported produce was always going to be expensive this year: the largest single supplier is California, which has been in the grip of a severe drought for the past four years, though there has been more rain there this winter. But the collapse in the Canadian dollar has made the situation much worse, and of course it affects not only that cauli from Cali, but also the grapes from South Africa, the lemons from Peru and the peppers from Spain.

The man in the street gets this, sort of, but is much more incensed about the high price of gasoline. After all, don't we read every day about the bottom falling out of the oil market, and isn't Canada a major producer of the stuff?  The stock response -- that oil is traded in world markets in US dollars -- cuts little ice, and in any case isn't the whole story. Taxes on retail fuel are high and are largely at flat rates, so the crude price is irrelevant.  And the refineries are certainly taking advantage of the falling price of feedstock to increase their profit margins.

Now, 2 percent is the Bank of Canada's central target for inflation. If the rate were to go higher again next month, people might start to wonder when the Bank would look at raising interest rates to lean against the inflationary trend. That's something it would be most unwilling to consider, give the uncertain outlook for growth. Luckily, anecdotal evidence suggests Governor Stephen Poloz won't face that dilemma, at least not yet. Cauliflower was back down to about $3 a pop last week, and in the city close by us there's a fierce gas price war under way.  Even so, as long as the exchange rate stays near its recent lows, the Bank will have to keep one eye on price trends.

Wednesday 17 February 2016

Bomber raid

Great news today from Bombardier, Canada's transportation equipment giant: Air Canada, the country's largest airline, has placed a firm order for 45 of the company's C-Series passenger jets, with a provisional order for thirty more.

Distressing news today from Bombardier: the company will be reducing its workforce by about 7000, or 10 percent of the total, with more than a third of the job losses in Canada.

Even worse news, at least if you're Prime Minister Justin Trudeau: Bombardier has its hand out for bailout funds from the Federal government, mere weeks after securing a $ 2 billion-plus assistance package from the government of Quebec and its pension fund.  It's hard to overstate what a tricky decision this is for Trudeau and his new Cabinet: let's list some of the ways.

  • The Federal fiscal position is shaky. Former PM Stephen Harper misled voters about the situation before last fall's election. A deficit is certain this year even before the Liberals start to implement their program. Trudeau is already backing away from his pledge to run deficits of no more than $10 billion in each of the next three years.
  • Bombardier is perpetually seeking to attach itself to the public teat. If management is chronically unable to run the company properly, should the Federal government step in yet again?  
  • In addition to the 7000 job losses the company is announcing even as it asks for public help, it continues to outsource production to cheaper locations, notably Mexico. This being the case, how exactly does a bailout serve Canada's economic priorities?
  • Much of Canada will cry favouritism if the Liberals come to the aid of a major Quebec company.  Quebec voted heavily for the Liberals, and so any such decision would be portrayed as payback. At the same time, two of Bombardier's major factories are in Ontario (aircraft assembly in Toronto, streetcars in Thunder Bay); rejecting the company's request would cost votes in that Province, which also supported the Liberals back in October.
  • Can a deal even be put together in a way that protects the taxpayer's interests? There are suggestions that any cash injection should be in return for an equity stake, as was successfully done with GM and Chrysler after the financial crisis. However, Quebec's bailout funds have already made the provincial government a major stakeholder in Bombardier's aerospace division (49.5 percent), and the Quebec pension plan now owns 30 percent of the rail division.  The company's market value has fallen so precipitously that a Federal stake might almost amount to nationalizing the company. This could well violate international trade rules, imperiling some of Bombardier's existing deals.
The Minister of Transport, into whose lap this file has fallen, is a former astronaut, Marc Garneau. At the end of the day it seems likely that he will come forward with a recommendation to help Bombardier, but it may well be for less  money and on much harsher terms than the company has received from governments in the past.

Monday 15 February 2016

The little engine that can't

This past weekend Toronto's spectacularly unsuccessful airport train, UPX, offered free rides, in the hopes of familiarizing people with the service and converting them into paying customers. The weekend certainly taught us a few things, starting with the fact that Torontonians, and Canadians generally, love stuff that they don't have to pay for. Despite blisteringly cold temperatures -- it was supposedly the coldest Valentine's Day since the late 19th century -- about 10,000 people showed up for a free ride on Saturday, which is more than four times the normal daily ridership.

That 10,000 figure is significant for a more important reason, however.  That ridership, spread over the full day, led to wait times of as much as an hour as people lined up to board the trains.  Yet the minimum hourly ridership that's deemed necessary to justify building a subway in Toronto is usually seen as about 15,000.  What this means is that the growing clamor to rescue UPX by making it a part of the regular transit network is completely misguided. The service isn't remotely up to the task, and can't be easily expanded either.

The catalog of errors made in developing UPX is a long one.  First of all, the trains are diesel-powered: who in the world does that any more?  Conversion to electric traction is planned, but not for several years.  Second, they're very short: three cars maximum, and the platforms are built exactly to that length, so there's no scope for yoking trains together to increase capacity.

Third, instead of using the existing platforms at the three stations UPX serves within the city, the decision was taken to raise a portion of those platforms, and to install platform-edge doors.  There's a case to be made for the higher platforms: passengers boarding the existing passenger trains at the same stations have to climb a couple of steps because the platforms are very low.  That would be awkward for people toting luggage to the airport, adding to dwell times and possibly causing delays. However, the platform-edge doors look like little more than an affectation.  At the Union Station terminal, the dedicated UPX platform is far wider than the shockingly narrow strips that thousands of commuters are expected to use every day, so the safety concerns seem to be quite literally misplaced.

Of course, none of these factors explains the dismal ridership statistics. You can put that down to the exorbitant price: C$ 27.50 one way, although frequent travellers get a break on that.  Thanks to the two largely superfluous intermediate stops, the trip isn't especially fast (and belies the "express" designation in the name UPX), and for two people travelling together, a taxi to or from downtown costs no more, and delivers you to exactly where you want to go. By all accounts UPX is a pleasant ride -- especially as you may well have the train almost to yourself -- but it's just not worth the price they're asking.

Hence the suggestion that it be integrated into the existing transit system, ideally at the same fare (about $3 per ride) as the buses and subways.  But that suggestion runs smack into the design flaws listed above. At that price the trains would be full to bursting, which would quickly drive away the air passengers for whom UPX was supposedly designed, yet would -- because the capacity of UPX is so limited -- do very little to ease Toronto's chronic traffic problems.

If not regular transit fares, then, what can be done? -- because it's clear things can't go on like this. Setting fares at the premium levels charged by the existing GO regional commuter services would probably be a good start: those fares are much lower than the existing UPX tariff and would attract more commuters to the service while leaving space for the air passengers.  Longer term, look for UPX to be integrated into the "RER" service that's planned for the next decade or so -- much the same thing, in fact, as will be happening to London's Heathrow Express when the Crossrail project is completed.

Thursday 11 February 2016

Yellen keeps calm and carries on

Fed Chair Janet Yellen's testimony to the two houses of Congress comes at, shall we say, an interesting time.  Commodity prices, especially energy prices, have been in free fall for months; now equity prices seem to be following suit; and there are growing fears about the solidity of the Eurozone banking system, with Deutsche Bank squarely in the bears' sights. And all this is happening at a time when all of the major central banks, the Fed included, have fired off just about every shot in their locker just to keep things from getting completely out of hand.

In the circumstances, Yellen did just about the only thing she could: while admitting that conditions in the global economy are becoming less supportive of the US growth outlook, she accentuated the positive developments in the domestic economy. First among these is, of course, the labour market, which has recently seen the unemployment rate slip to a near 10-year low and wages moving gradually higher after a long period of stagnation.

The barrage of unprecedented monetary measures unleashed after the 2007/08 financial crisis have been kept in place for much longer that anyone foresaw at the time.  That being the case, it's hard to be surprised that businesses are unwilling to make the big investments that might get growth moving again: if the central banks are showing, by their words and actions alike, that the situation is still highly precarious, why stick your neck out?

There's no immediate evidence that Yellen's words of reason are having any influence.  Markets are lower once again, and the fear/greed pendulum remains heavily biased toward the former. All the same, it's worth remembering the old economics adage, usually attributed to Paul Samuelson, that equity markets have predicted 9 of the last 5 recessions. For now, the fundamentals aren't nearly as bad as the markets are trying to price in, but it will take care and skill on the part of central bankers and other policymakers to keep it that way.

Wednesday 10 February 2016

Try this next time

The Jian Ghomeshi assault trial seems likely to fizzle out very soon, with all signs pointing to an acquittal on all charges.  Everyone's a loser here: Ghomeshi's career and reputation are in ruins, the complainants have lost not only the case but also their own credibility, and women everywhere may feel they have to think twice before bringing any similar accusations to the police.

But is that last point really true?  That's certainly the opinion of Heather Mallick, in today's Toronto Star.  Even by her customary standards of paranoid victimhood, this is a remarkably unhinged piece.  If the case is being lost, as it now appears, no rational person is likely to blame it on flaws in the system, or bias against women. Rather, it's beyond doubt that the case against Ghomeshi will fail because all three witnesses lied to the police and to the prosecutors, either by omission or commission.

So here's a thought. If heaven forbid, something awful like this ever happens to you, then (a) don't wait a decade to complain about it and (b) tell the truth. You never know, it just might work.

Saturday 6 February 2016

The Ghomeshi debacle

There are at least a couple of high-profile trials on the go in Ontario right now.  Normally the so-called Tim Bosma case, in which two rich guys are accused of killing a guy more or less for the fun of it, would be dominating the front pages and the airwaves.  However, that grisly case is getting next to no coverage, because the media are fixated on the sexual assault trial of former CBC radio presenter Jian Ghomeshi.  How fixated?  Well, today the Toronto Star devoted its entire local news section to the case, with "Ghomeshi: The First Week" blazoned above a line drawing of the accused sitting in the dock.

There are certain parallels to the ongoing prosecution of Bill Cosby down in Pennsylvania.  The accusers who have come forward over the last year or so are all seeking justice for offences allegedly committed at least a decade ago.  Although there are suggestions that both men have persisted with their bad behaviour, more recent victims have declined to come forward, supposedly out of fear of getting their private lives dragged through the mud. In the Ghomeshi case, only one of the three complainants has been brave enough to allow her real name to be published.

After five days of wall-to-wall coverage, there are several surprises about the Ghomeshi case, the biggest of which is, why on earth did the Crown bring this prosecution? The two plaintiffs/victims who have testified so far have been shockingly poor on the stand.  Both have displayed highly selective memories of the alleged events, and Ghomeshi's formidable (female) counsel has had little trouble in uncovering evidence that the parts they selectively forgot seriously undermined their allegations. Both made strenuous attempts to stay in touch with Ghomeshi after the alleged assaults, a fact which, to judge from the reactions in court, they had not seen fit to mention to the prosecutors.

Another surprise, at least to this non-lawyer, is that Ghomeshi is being tried for sexual assault, because there doesn't seem to have been much sex involved.  Ghomeshi has admitted to being into BDSM sexual practices, but that scarcely seems relevant here.  As far as we can tell from the evidence presented so far,  Ghomeshi started to rough up the women during some fairly tentative necking sessions. If true it's unpleasant and illegal, but you have to wonder if simple assault charges might have been a better option for the Crown to pursue.

The Star's man-hating columnist Heather Mallick is naturally aghast at the way things are going, as you can read in this column from the Star's special section.  Remarkably, Ms Mallick believes that all women are "raised to be nice" and are "people-pleasers", facts which in her mind explain why Ghomeshi's victims didn't run a mile at the first raised fist, but instead tried to prolong the relationship.  Her solution: specialized sexual assault courts, staffed with judges with training in the psychology of sexual assault. How stacking the deck like that could ever be squared with the legal presumption of innocence is something she doesn't go into. Very likely, she doesn't care.

One thing I'll agree with Ms Mallick on, however: if the Ghomeshi trial goes the way that now seems inevitable, it will be exponentially harder in future for any woman to get a fair hearing in similar cases. That's something the prosecutors should have thought very hard about before launching this flimsy and ill-prepared case.

Friday 5 February 2016

A tough job, Governor Poloz.

I hope nobody tried to tell Stephen Poloz that being Governor of the Bank of Canada was an easy gig. Even if you ignore all of the hectoring from the cheap seats, there's no question that it's hard right now to get a clear fix on the state of the economy.

The January employment report, released today, illustrates this very clearly.  The overall change in employment -- a loss of 5700 jobs -- was worse than analysts' expectations, and the national unemployment rate ticked up to 7.2 percent. Unsurprisingly, there was further job weakness in oil-dependent Alberta, which shed 15,000 jobs in the month and has now lost 35,000 in the course of the past year.  The province's unemployment rate has reached 7.4 percent, the first time it has moved above the national rate since December 1988.

More surprising, and much harder to analyze, are the data for the remaining provinces.  For the second month in a row, only Ontario posted any increase in jobs; more on that in a moment.  But what do we make of the fact that there were falls in employment not only in the other oil-dependent provinces -- Newfoundland/Labrador and Saskatchewan -- but also in six non-oil-producing provinces as well.  The detailed data provide few clues.

What should we (and Governor Poloz) make of the last two months' data for Ontario?  The Province added 20,000 jobs in January, almost enough to offset the losses across the rest of Canada.  Interestingly, 10,000 people returned to the Ontario workforce in the course of the month, which may be an indication of increasing optimism on the part of workers.  One possible explanation for the data is the unseasonably warm weather in both December and January, which must have played havoc with StatsCan's seasonal adjustment factors.  However, the weather was also benign in Quebec, but that Province did not show similar trends.

Maybe, then, the improvement in Ontario's job picture vindicates the Bank's expectation that the low Canadian dollar will eventually help rebalance the economy away from its dependence on resource extraction.  It would be nice to think so; but if that's the case, how should the Bank react to the recent bounce in the exchange rate, which has rallied from 68 cents (US) to 73 cents in just a couple of weeks?  Will that be enough to halt or even reverse the signs of improvement in Ontario, and if so, what can or should the Bank do about it?

Tough questions for Gov. Poloz to contemplate. At its January rate-setting meeting, the Bank left its reference rate unchanged at 0.50 percent.  Gov. Poloz's statement at the time seemed to suggest that the Bank is now looking to the Federal Government to do its part to boost the economy, through the "temporary" fiscal stimulus that it promised during last year's election campaign. In principle that seems the right thing to do; however, it's now known that the fiscal situation is much worse than the outgoing government claimed -- there's already a deficit, even before the promised spending gets started. We'll have to wait for the budget, some time in March, to see whether the new Government is spooked into doing too little on the fiscal front, thereby passing the buck back to the Bank of Canada.