Elizabeth May is the leader of Canada's Green Party and is currently the party's only MP in Ottawa. She recently announced her engagement to a gent named John Kidder, who happens to be the brother of the Canadian actress Margot Kidder.
Here's a little piece from the Toronto Star about the upcoming nuptials. As you might expect, May is promising that it will be "a low-carbon wedding". That's just as well, because if you read the entire story, you'll find that the happy couple recently jetted from Vancouver to Poland to attend a climate conference. Then they came straight home, right? Well no, actually -- they hopped another jet down to Sicily for a little private time. I'm guessing they're not voyaging home from there by sailing ship or rowboat.
Congratulations to Ms May on her engagement -- but she's going to have to stay awfully close to home for a good long time just to get her carbon footprint down to the level of the ordinary folk she aspires to lead. No exotic honeymoon for you, John and Elizabeth! And maybe cut back on the four far-flung homes the two of you currently divide your time among. It's only fair.
Monday 31 December 2018
Thursday 27 December 2018
Yawn! Not again!
A new survey by Canadian Imperial Bank of Commerce has found that Canadians say their #1 financial priority for 2019 is (drum-roll please)....paying down debt.
This is the ninth year in a row that debt reduction has topped the list, and if you've been reading this blog for a while you'll know that what's actually happened in each of those nine years is that household debt burdens have moved ever higher.
I think the only comment I need make here is, I'll believe it when I see it.
This is the ninth year in a row that debt reduction has topped the list, and if you've been reading this blog for a while you'll know that what's actually happened in each of those nine years is that household debt burdens have moved ever higher.
I think the only comment I need make here is, I'll believe it when I see it.
Monday 24 December 2018
Galbraith--me--Keynes
The great Canadian economist John Kenneth Galbraith once said that economists didn't make forecasts because they thought they could predict the future; they made forecasts because people asked them to. That was certainly the case during my own career: predicting the inherently unknowable was a big part of the job. Still, you have to wonder who asks the economists at Canada's Department to Finance to do this: a long-term economic and fiscal projection.
The introduction notes that projections over several decades are subject to "a fair degree of uncertainty". That's putting it mildly, and it may explain why the updates to these projections are always snuck out just as Santa is loading up the old sleigh. The projections don't get a lot of media attention, although one wire service solemnly reported that the federal budget deficit was now forecast to disappear in 2040, "five years sooner than was projected last year".
There are things you can reasonably forecast for the long term. For any country, the rate of real GDP growth will oscillate around a base level dictated by the growth in the labour force and the rate of productivity gains. The first of those is certainly reasonably predictable, and it's quite reasonable to approximate productivity growth by extrapolating past trends, which is not, by the way, particularly good news for Canada. It's also not a stretch to assume that the inflation-targeting approach in place for the last two decades will be maintained, which can be layered onto the real GDP forecast to come up with a defensible projection for nominal GDP growth.
So far, so good. It's when you get into the fiscal policy forecasts that the trouble starts. Budget making is political. Canada faces a Federal election in 2019 and, assuming that the pattern of elections every four years is maintained, will see a total of six elections by 2040 when, if you recall, the deficit is now projected to fall to zero. That means there are six occasions on which a wrenching change in the direction of fiscal policy might occur, throwing even short term forecasts, let alone long term projections, into disarray.
Just look back a recent history. The Stephen Harper Tory government had been devoted to balanced budgets. Justin Trudeau decided almost on the spur of the moment during the 2015 election campaign to pledge a return to deficit financing for a limited time to boost the economy, a pledge that he believes won him the election.
In office, the Trudeaucrats have abandoned the "limited time" part of that pledge; there is now no timetable for a return to balance. The main opposition leader, a right-wing Tory lightweight named Andrew Scheer, will surely fight the 2019 election on a platform of fiscal responsibility. That got Doug Ford elected in Ontario, so you can't bet against it working at the national level, and if that happens, all current bets are off.
If there's that much uncertainty over the possible impact of an election that's ten months away, how can you even conceive of forecasting the next five elections after that? Now of course, the Department of Finance carefully spells out the assumptions it uses to generate its results, but they're basically all of a "steady as she goes" nature. Given the ever-widening gap between left and right wing policy approaches nowadays, it seems very unlikely that will be the case.
I started with a quote from an eminent three-named economist, so let's finish the same way. John Maynard Keynes once remarked, a propos of long term forecasting, "In the long run we are all dead". And on that cheerful note, let me wish everyone who has stopped by this blog during the past year a happy Christmas and a safe and prosperous new year!
The introduction notes that projections over several decades are subject to "a fair degree of uncertainty". That's putting it mildly, and it may explain why the updates to these projections are always snuck out just as Santa is loading up the old sleigh. The projections don't get a lot of media attention, although one wire service solemnly reported that the federal budget deficit was now forecast to disappear in 2040, "five years sooner than was projected last year".
There are things you can reasonably forecast for the long term. For any country, the rate of real GDP growth will oscillate around a base level dictated by the growth in the labour force and the rate of productivity gains. The first of those is certainly reasonably predictable, and it's quite reasonable to approximate productivity growth by extrapolating past trends, which is not, by the way, particularly good news for Canada. It's also not a stretch to assume that the inflation-targeting approach in place for the last two decades will be maintained, which can be layered onto the real GDP forecast to come up with a defensible projection for nominal GDP growth.
So far, so good. It's when you get into the fiscal policy forecasts that the trouble starts. Budget making is political. Canada faces a Federal election in 2019 and, assuming that the pattern of elections every four years is maintained, will see a total of six elections by 2040 when, if you recall, the deficit is now projected to fall to zero. That means there are six occasions on which a wrenching change in the direction of fiscal policy might occur, throwing even short term forecasts, let alone long term projections, into disarray.
Just look back a recent history. The Stephen Harper Tory government had been devoted to balanced budgets. Justin Trudeau decided almost on the spur of the moment during the 2015 election campaign to pledge a return to deficit financing for a limited time to boost the economy, a pledge that he believes won him the election.
In office, the Trudeaucrats have abandoned the "limited time" part of that pledge; there is now no timetable for a return to balance. The main opposition leader, a right-wing Tory lightweight named Andrew Scheer, will surely fight the 2019 election on a platform of fiscal responsibility. That got Doug Ford elected in Ontario, so you can't bet against it working at the national level, and if that happens, all current bets are off.
If there's that much uncertainty over the possible impact of an election that's ten months away, how can you even conceive of forecasting the next five elections after that? Now of course, the Department of Finance carefully spells out the assumptions it uses to generate its results, but they're basically all of a "steady as she goes" nature. Given the ever-widening gap between left and right wing policy approaches nowadays, it seems very unlikely that will be the case.
I started with a quote from an eminent three-named economist, so let's finish the same way. John Maynard Keynes once remarked, a propos of long term forecasting, "In the long run we are all dead". And on that cheerful note, let me wish everyone who has stopped by this blog during the past year a happy Christmas and a safe and prosperous new year!
Wednesday 19 December 2018
Donald won't like it
As expected, the US Federal Reserve announced a 25 basis point increase in the funds rate target today. Earlier this week, Donald Trump had suggested it was crazy for the Fed even to be thinking about a further rate hike; evidently Trump is starting to worry that the economy is turning sour, taking away one of the key "achievements" he likes to brag about.
It probably wouldn't do any good to point this out to Trump, but let's say it anyway. By calling on the Fed not to hike rates, Trump made it just about impossible for the Fed not to do so. Even if there had been some Fed governors inclined to hold rate stable for now, Trump's intervention effectively ruled that out. The market's reaction if it ever began to suspect that monetary policy was being set from the Oval Office really doesn't bear thinking about.
A lot of market-watchers have been focused less on today's decision, which was basically seen as a done deal, and more on what clues the Fed might offer about its actions in 2019. Not many, it turns out: considering the wild gyrations in the stock market, the collapse of oil prices and the ongoing trade tensions between the US and just about everybody, the statement is remarkably anodyne. Risks to the outlook are generally balanced, so future decisions will be data-dependent. Begging Donald Trump's pardon, there will probably be further tightening in 2019, but the pace is likely to slow down considerably from what we have seen in the last little while.
It probably wouldn't do any good to point this out to Trump, but let's say it anyway. By calling on the Fed not to hike rates, Trump made it just about impossible for the Fed not to do so. Even if there had been some Fed governors inclined to hold rate stable for now, Trump's intervention effectively ruled that out. The market's reaction if it ever began to suspect that monetary policy was being set from the Oval Office really doesn't bear thinking about.
A lot of market-watchers have been focused less on today's decision, which was basically seen as a done deal, and more on what clues the Fed might offer about its actions in 2019. Not many, it turns out: considering the wild gyrations in the stock market, the collapse of oil prices and the ongoing trade tensions between the US and just about everybody, the statement is remarkably anodyne. Risks to the outlook are generally balanced, so future decisions will be data-dependent. Begging Donald Trump's pardon, there will probably be further tightening in 2019, but the pace is likely to slow down considerably from what we have seen in the last little while.
Bank of Canada sidelined
Regardless of where the Federal Reserve goes next, the case for the Bank of Canada to raise rates again any time soon has just about disappeared. Data released this morning by Statistics Canada reveal that the year-on-year increase in headline CPI eased to 1.7 percent in November from 2.4 percent in October. The November figure was the smallest annual increase since January of this year.
The sharp slowing in inflation mainly reflects a reversal in energy prices, which had been largely responsible for headline CPI moving above the Bank's 2 percent target around the middle of the year. Gasoline prices now stand 5.4 percent lower than in November 2017. Anecdotally, it seems very likely that further falls in gasoline prices -- the retail price of a litre of regular grade is now below $1 in my neck of the woods -- will push the headline figure lower still when the December data are reported.
All eight principal sub-components of the index remain in positive territory year-on-year. However, all three of the Bank's preferred core measures are now back below the 2 percent target, with all of them standing at 1.9 percent.
With CPI comfortably in check and wage gains slowing markedly in spite of the tightness of the labour market, the case for the Bank of Canada to raise its target rate any further in the first quarter of 2019 now seems very weak indeed. Of course, the persistence of historically low rates will still leave the Bank fretting over the continuing willingness of Canadian households to take on debt. Even there, however, the Bank may be about to catch a break, with most forecasters looking for the housing market across the country to turn in a weak performance in 2019.
It's remarkable to contemplate the possibility that a policy interest rate of 1.75 percent might mark the peak of this tightening cycle. With increasing doubts surrounding the global growth outlook, however, that may well turn out to be the case.
The sharp slowing in inflation mainly reflects a reversal in energy prices, which had been largely responsible for headline CPI moving above the Bank's 2 percent target around the middle of the year. Gasoline prices now stand 5.4 percent lower than in November 2017. Anecdotally, it seems very likely that further falls in gasoline prices -- the retail price of a litre of regular grade is now below $1 in my neck of the woods -- will push the headline figure lower still when the December data are reported.
All eight principal sub-components of the index remain in positive territory year-on-year. However, all three of the Bank's preferred core measures are now back below the 2 percent target, with all of them standing at 1.9 percent.
With CPI comfortably in check and wage gains slowing markedly in spite of the tightness of the labour market, the case for the Bank of Canada to raise its target rate any further in the first quarter of 2019 now seems very weak indeed. Of course, the persistence of historically low rates will still leave the Bank fretting over the continuing willingness of Canadian households to take on debt. Even there, however, the Bank may be about to catch a break, with most forecasters looking for the housing market across the country to turn in a weak performance in 2019.
It's remarkable to contemplate the possibility that a policy interest rate of 1.75 percent might mark the peak of this tightening cycle. With increasing doubts surrounding the global growth outlook, however, that may well turn out to be the case.
Tuesday 18 December 2018
A modest proposal
With apologies to the inimitable Jonathan Swift......
I've written here before about Western democracies turning into the kind of gerontocracies that Mao Zedong would have envied. The United States is the prime example, with its septuagenarian President. Arrayed against Trump on the Democratic side is an equally un-spry bunch: Bernie Sanders, Hillary Clinton, Joe Biden. Elizabeth Warren, Nancy Pelosi, all of them well past the Biblical three-score-and-ten. Sure, there are some younger folks in the Democratic Party, such as Beto O'Rourke or Alexandra Ocario-Cortes, but come on! We all saw how Hillary basically forced the Democrats to accept her awful candidacy in 2016, and now Pelosi has imposed herself onto a doubt-ridden party as Majority Leader. Chances of someone young and dynamic running against Trump in 2020 already look slim.
Over in the UK things may be even worse, with dead people set to deliver a Brexit that young people don't want. One researcher, using actuarial data, has made a remarkable calculation. If you just take the people who actually voted in 2016 and eliminate those who have died in the last thirty months, the tiny majority for Brexit has just about vanished, because the older people who were the main supporters of that ludicrous decision are moving on to meet their maker. Think about that next time Theresa May or Jacob Rees-Mogg asserts that a second vote would be a betrayal of democracy.
What can be done about this? Well, here we come to my modest proposal which, you will be relieved to learn, has nothing to do with eating babies. We don't allow people under the age of eighteen to vote because we judge they can't be relied on to determine what's in their and their country's interest. Yet we allow people to continue voting right up to the point when they take their last breath, even though they won't have to live with the consequences if they make insane decisions, like Brexit. Should there maybe be an age beyond which citizens are no longer permitted to help in setting public policies which they won't have to pay for and which will far outlive them? No vote before 18, no vote after 80??
I'm not entirely serious about this because I know it's a non-starter, but I'm not entirely unserious either. I've long felt that the obligations of the old to the young far outweigh the obligations of the young to the old. Right now we oldsters are doing a bang-up job of leaving an unholy mess to our descendants. Something needs to be done to rein us in -- anyone have a better idea?
I've written here before about Western democracies turning into the kind of gerontocracies that Mao Zedong would have envied. The United States is the prime example, with its septuagenarian President. Arrayed against Trump on the Democratic side is an equally un-spry bunch: Bernie Sanders, Hillary Clinton, Joe Biden. Elizabeth Warren, Nancy Pelosi, all of them well past the Biblical three-score-and-ten. Sure, there are some younger folks in the Democratic Party, such as Beto O'Rourke or Alexandra Ocario-Cortes, but come on! We all saw how Hillary basically forced the Democrats to accept her awful candidacy in 2016, and now Pelosi has imposed herself onto a doubt-ridden party as Majority Leader. Chances of someone young and dynamic running against Trump in 2020 already look slim.
Over in the UK things may be even worse, with dead people set to deliver a Brexit that young people don't want. One researcher, using actuarial data, has made a remarkable calculation. If you just take the people who actually voted in 2016 and eliminate those who have died in the last thirty months, the tiny majority for Brexit has just about vanished, because the older people who were the main supporters of that ludicrous decision are moving on to meet their maker. Think about that next time Theresa May or Jacob Rees-Mogg asserts that a second vote would be a betrayal of democracy.
What can be done about this? Well, here we come to my modest proposal which, you will be relieved to learn, has nothing to do with eating babies. We don't allow people under the age of eighteen to vote because we judge they can't be relied on to determine what's in their and their country's interest. Yet we allow people to continue voting right up to the point when they take their last breath, even though they won't have to live with the consequences if they make insane decisions, like Brexit. Should there maybe be an age beyond which citizens are no longer permitted to help in setting public policies which they won't have to pay for and which will far outlive them? No vote before 18, no vote after 80??
I'm not entirely serious about this because I know it's a non-starter, but I'm not entirely unserious either. I've long felt that the obligations of the old to the young far outweigh the obligations of the young to the old. Right now we oldsters are doing a bang-up job of leaving an unholy mess to our descendants. Something needs to be done to rein us in -- anyone have a better idea?
Thursday 13 December 2018
Another warning on household debt
The high level of household indebtedness in Canada has been causing alarm in official circles (and on this blog) for several years now. Even as the Bank of Canada has been gently moving interest rates higher, it has continued to identify high household debt as a factor that could limit its ability to move policy toward more neutral settings.
On a national basis, the household debt/income ratio seems to have stopped increasing this year, although at 1.71 (or debt at 171 percent of income, if you prefer) as of mid-2018 it is hardly reassuring. That's a significantly higher figure than was seen in the US before the financial crisis. South of the border the debt burden has been heading lower for the past several years, whereas in Canada it had been steadily rising before appearing to plateau this year.
Now we have a new report from Canada Mortgage and Housing Corporation (CMHC), pointing out significant and worrisome differences in the debt burden between major cities across the country. The lowest ratio, at 1.06, is found in the small city of Saint John, New Brunswick. The highest by far is in Vancouver, at 2.42, followed by Toronto at 2.08. Given that these are respectively the third largest and largest cities in Canada by population, these numbers suggest that a significant number of Canadians are at significant risk of financial difficulties if interest rates continue to rise.
It seems likely that the Bank of Canada will be keeping rates on hold for the next few months, mainly because there are few signs that the apparent tightness in the labour market is leading to wage pressures. The problem for the Bank is that the CMHC data seem to show that, despite actual increases in debt servicing costs and repeated warnings of more to come, Canadians are showing little inclination to start paying down their debts. With the housing markets in both Toronto and Vancouver showing signs of moving higher again, high household debt promises to remain a headache for policymakers well into the future.
On a national basis, the household debt/income ratio seems to have stopped increasing this year, although at 1.71 (or debt at 171 percent of income, if you prefer) as of mid-2018 it is hardly reassuring. That's a significantly higher figure than was seen in the US before the financial crisis. South of the border the debt burden has been heading lower for the past several years, whereas in Canada it had been steadily rising before appearing to plateau this year.
Now we have a new report from Canada Mortgage and Housing Corporation (CMHC), pointing out significant and worrisome differences in the debt burden between major cities across the country. The lowest ratio, at 1.06, is found in the small city of Saint John, New Brunswick. The highest by far is in Vancouver, at 2.42, followed by Toronto at 2.08. Given that these are respectively the third largest and largest cities in Canada by population, these numbers suggest that a significant number of Canadians are at significant risk of financial difficulties if interest rates continue to rise.
It seems likely that the Bank of Canada will be keeping rates on hold for the next few months, mainly because there are few signs that the apparent tightness in the labour market is leading to wage pressures. The problem for the Bank is that the CMHC data seem to show that, despite actual increases in debt servicing costs and repeated warnings of more to come, Canadians are showing little inclination to start paying down their debts. With the housing markets in both Toronto and Vancouver showing signs of moving higher again, high household debt promises to remain a headache for policymakers well into the future.
Friday 7 December 2018
What's going on with wages?
The usual caveats about the volatility in Canada's monthly labour force survey apply, but....the November data, released by StatsCan this morning, are remarkably strong, except in one key respect, which we'll get back to.
Employment across the country reportedly grew by 94,000 in the month, the best figure for any month in more than six years. This pushed the unemployment rate down to 5.6 percent, the lowest figure recorded since StatsCan started publishing this series in 1976. Details of the jobs added in the month look equally positive. Just about all of the gains were in full-time employment, and almost 79,000 of the new jobs were in the private sector. Over the past twelve months employment in the economy has risen by 219,000 or 1.2 percent, with all of the gain represented by full-time positions.
If you want a reason to be skeptical about the data -- and with this series, you should -- consider the fact that StatsCan is reporting that employment rose by 24,000 in the Province of Alberta in November, dropping that Province's unemployment rate by a full percentage point. It's hard to square those numbers with the howls of anguish coming out of Alberta on a daily basis, as oil prices collapse and increased numbers of wells are abandoned. StatsCan's data may be right on the money, but there seems at least the possibility that something -- most likely the seasonal adjustment factors -- is creating a misleading picture.
If the Bank of Canada's policy decisions are data-dependent, as Governor Poloz regularly reminds us, then these figures must surely prompt markets to price in a rate hike early in 2019, right? Not necessarily. The one key weakness in today's numbers is the performance of wages. Year-on-year wage growth was rising smartly in the first half of this year, reaching a worrisome 3.9 percent in May. Since then it has been slipping steadily lower, and in November stood at just 1.5 percent, materially below the rate of CPI inflation.
The sluggishness of wage growth in the face of a strong economy and tight labour market is not just a Canadian phenomenon, and no fully satisfactory explanation has been found. Recent pronouncements by Governor Poloz indicate that the Bank of Canada is not quite as convinced as it once was that the economy is operating at full capacity, and the trend in wage growth over the past half-year seems to support that. If the economy can keep adding jobs without triggering fears of a wage-price spiral, there will be less need for the Bank to keep moving rates higher. No rate hike is likely in January, and unless there are some nasty surprises in the December jobs report, a move in February is probably off the table too.
Employment across the country reportedly grew by 94,000 in the month, the best figure for any month in more than six years. This pushed the unemployment rate down to 5.6 percent, the lowest figure recorded since StatsCan started publishing this series in 1976. Details of the jobs added in the month look equally positive. Just about all of the gains were in full-time employment, and almost 79,000 of the new jobs were in the private sector. Over the past twelve months employment in the economy has risen by 219,000 or 1.2 percent, with all of the gain represented by full-time positions.
If you want a reason to be skeptical about the data -- and with this series, you should -- consider the fact that StatsCan is reporting that employment rose by 24,000 in the Province of Alberta in November, dropping that Province's unemployment rate by a full percentage point. It's hard to square those numbers with the howls of anguish coming out of Alberta on a daily basis, as oil prices collapse and increased numbers of wells are abandoned. StatsCan's data may be right on the money, but there seems at least the possibility that something -- most likely the seasonal adjustment factors -- is creating a misleading picture.
If the Bank of Canada's policy decisions are data-dependent, as Governor Poloz regularly reminds us, then these figures must surely prompt markets to price in a rate hike early in 2019, right? Not necessarily. The one key weakness in today's numbers is the performance of wages. Year-on-year wage growth was rising smartly in the first half of this year, reaching a worrisome 3.9 percent in May. Since then it has been slipping steadily lower, and in November stood at just 1.5 percent, materially below the rate of CPI inflation.
The sluggishness of wage growth in the face of a strong economy and tight labour market is not just a Canadian phenomenon, and no fully satisfactory explanation has been found. Recent pronouncements by Governor Poloz indicate that the Bank of Canada is not quite as convinced as it once was that the economy is operating at full capacity, and the trend in wage growth over the past half-year seems to support that. If the economy can keep adding jobs without triggering fears of a wage-price spiral, there will be less need for the Bank to keep moving rates higher. No rate hike is likely in January, and unless there are some nasty surprises in the December jobs report, a move in February is probably off the table too.
Thursday 6 December 2018
Meet the new boss, same as the old boss
Former Ontario Premier Kathleen Wynne has kept a low profile since leading her Liberal Party to a crushing defeat in the Provincial election last June. She resigned the leadership of the party right after the vote, leaving the rump Liberal caucus -- seven members, not enough to claim official party status -- under the temporary leadership of a nonentity whose name I can't even be bothered to Google. However, Wynne suddenly emerged back into the political spotlight this week, and mostly not in a good way.
Early in the week, Wynne put on her mother-knows-best garb to introduce a bill in the provincial legislature to improve safety on school buses, mainly through the mandatory use of seatbelts. Hard to argue with that, though one might wonder why, if it's such a good idea, Wynne and her predecessor Dalton McGuinty didn't quite get around to it during the fifteen years they were governing the Province.
Without seeming too cynical, it looks very much as if Wynne chose this timing for the bill so as to receive at least a few favourable headlines in the media, because the rest of the week was a lot less kind. The Ford government has been running hearings (kangaroo court might be a better term) on the alleged wasteful spending of the Wynne regime. Wynne herself was called upon to testify about her Fair Hydro scheme, a pre-election goody aimed at appeasing voter anger over soaring energy prices.
The rise in energy prices largely relates to a poorly-designed clean energy plan, devised by McGuinty but enthusiastically continued by Wynne. Wind turbines have sprung up all over the Province, compelling the construction of all kinds of backup facilities because wind is an unreliable power source. Hydro, gas and (whisper it) nuclear capacity already in place can in fact easily supply all the Province's needs, but wind power has "first to the grid" rights. A lot of cheap hydro power is regularly spilled, and a whole lot of surplus power routinely sold at knockdown prices to US utilities.
Wynne's "solution" was to extend the amortization term for fixed power assets in order to borrow money against said assets to keep prices down in the near term. This of course just pushes the burden onto future power customers, but that's not Wynne's problem, at least as she saw it. What was her problem was that the added borrowing would increase the deficit at an awkward time -- so the power utility was instructed to carry out the borrowing, keeping it off the Provincial books.
Wynne gave as good as she got at the hearing, which was made easier by the fact that the Tories have not reversed the Fair Hydro scheme, having no better idea of their own. Still, Wynne was forced to admit that her own civil servants had been aghast at the scheme, but she had carried on with it anyway despite their concerns.
Next came the Provincial Auditor-General's report. The A-G and the Wynne government were perpetually at loggerheads and the report reflects that. It contains a veritable litany of mismanagement, overspending and duplicity. Needless to say the Ford government is making hay with it, and will doubtless use it to justify the spending cuts that are clearly coming when a full budget is tabled in the spring.
It would be gratifying to report that things are different under the new Ford regime, but that's not even remotely true. Ford and his cronies are quickly building a rap sheet of their own. One of the government's first moves was to fire the CEO of the part-privatized Hydro One utility, whom Ford had dubbed the "six-million dollar man" because of his exorbitant salary. It turned out that firing this worthy cost a whole lot more than six mil' -- and this week the cost ballooned way higher. Hydro One had been planning to buy a US utility, Avista, but the deal has been nixed by US regulators because of the demonstrable risk of political interference. That leaves Hydro One facing a drop-dead fee in excess of $100 million, which will presumably be rolled into the rate base and picked up by consumers.
There's more. Ford unilaterally cut the size of Toronto City Council, in the middle of an election campaign, without ever having mentioned such a plan during his own election campaign. He has engineered the appointment of a long-time crony as Ontario Police Commissioner despite the fact that the gent in question never rose above the rank of Superintendent during his active policing career. The Province's chief auditor (not the same as the A-G) has resigned rather than sign off on the Finance Minister's wildly-overstated estimate of the fiscal deficit inherited from his predecessor. And so on.
Comparisons between Ford and Donald Trump become easier to make with each passing day. Ford loves rallies, craves adoration and clearly thinks that his position as Premier means that the rules, whether of politics or of simple common decency, just don't apply to him. He is starting to make noises about ambitions in Federal politics. We're probably safe until after next October's Federal election, but if current Tory leader makes a hash of things, the rest of Canada may have to start bracing itself for the Doug Ford experience.
Early in the week, Wynne put on her mother-knows-best garb to introduce a bill in the provincial legislature to improve safety on school buses, mainly through the mandatory use of seatbelts. Hard to argue with that, though one might wonder why, if it's such a good idea, Wynne and her predecessor Dalton McGuinty didn't quite get around to it during the fifteen years they were governing the Province.
Without seeming too cynical, it looks very much as if Wynne chose this timing for the bill so as to receive at least a few favourable headlines in the media, because the rest of the week was a lot less kind. The Ford government has been running hearings (kangaroo court might be a better term) on the alleged wasteful spending of the Wynne regime. Wynne herself was called upon to testify about her Fair Hydro scheme, a pre-election goody aimed at appeasing voter anger over soaring energy prices.
The rise in energy prices largely relates to a poorly-designed clean energy plan, devised by McGuinty but enthusiastically continued by Wynne. Wind turbines have sprung up all over the Province, compelling the construction of all kinds of backup facilities because wind is an unreliable power source. Hydro, gas and (whisper it) nuclear capacity already in place can in fact easily supply all the Province's needs, but wind power has "first to the grid" rights. A lot of cheap hydro power is regularly spilled, and a whole lot of surplus power routinely sold at knockdown prices to US utilities.
Wynne's "solution" was to extend the amortization term for fixed power assets in order to borrow money against said assets to keep prices down in the near term. This of course just pushes the burden onto future power customers, but that's not Wynne's problem, at least as she saw it. What was her problem was that the added borrowing would increase the deficit at an awkward time -- so the power utility was instructed to carry out the borrowing, keeping it off the Provincial books.
Wynne gave as good as she got at the hearing, which was made easier by the fact that the Tories have not reversed the Fair Hydro scheme, having no better idea of their own. Still, Wynne was forced to admit that her own civil servants had been aghast at the scheme, but she had carried on with it anyway despite their concerns.
Next came the Provincial Auditor-General's report. The A-G and the Wynne government were perpetually at loggerheads and the report reflects that. It contains a veritable litany of mismanagement, overspending and duplicity. Needless to say the Ford government is making hay with it, and will doubtless use it to justify the spending cuts that are clearly coming when a full budget is tabled in the spring.
It would be gratifying to report that things are different under the new Ford regime, but that's not even remotely true. Ford and his cronies are quickly building a rap sheet of their own. One of the government's first moves was to fire the CEO of the part-privatized Hydro One utility, whom Ford had dubbed the "six-million dollar man" because of his exorbitant salary. It turned out that firing this worthy cost a whole lot more than six mil' -- and this week the cost ballooned way higher. Hydro One had been planning to buy a US utility, Avista, but the deal has been nixed by US regulators because of the demonstrable risk of political interference. That leaves Hydro One facing a drop-dead fee in excess of $100 million, which will presumably be rolled into the rate base and picked up by consumers.
There's more. Ford unilaterally cut the size of Toronto City Council, in the middle of an election campaign, without ever having mentioned such a plan during his own election campaign. He has engineered the appointment of a long-time crony as Ontario Police Commissioner despite the fact that the gent in question never rose above the rank of Superintendent during his active policing career. The Province's chief auditor (not the same as the A-G) has resigned rather than sign off on the Finance Minister's wildly-overstated estimate of the fiscal deficit inherited from his predecessor. And so on.
Comparisons between Ford and Donald Trump become easier to make with each passing day. Ford loves rallies, craves adoration and clearly thinks that his position as Premier means that the rules, whether of politics or of simple common decency, just don't apply to him. He is starting to make noises about ambitions in Federal politics. We're probably safe until after next October's Federal election, but if current Tory leader makes a hash of things, the rest of Canada may have to start bracing itself for the Doug Ford experience.
Tuesday 4 December 2018
Saudi turbulence
It's clear that Saudi Crown Prince Mohammed bin Salman and his inner circle are not students of English history. If I were in MBS's sandals, with the wolves circling ever more menacingly, I'm pretty sure I'd be citing what you might call the King Henry II defense.
As related here by the always-reliable Wikipedia, Henry was having trouble with the Archbishop of Canterbury, Thomas Becket. The King supposedly uttered the fateful words "Will no-one rid me of this turbulent priest"? Four knights promptly set sail from Normandy to Canterbury, confronted Becket in the Cathedral and murdered him.
Henry was vilified and forced into public acts of expiation but kept his throne. MBS has probably left it too late, but if this defense -- basically, "Gee, I was just venting! I never meant for this to happen!" -- had been adopted earlier, it might well have worked. Especially as there's a guy in the White House that would dearly love to believe it.
As related here by the always-reliable Wikipedia, Henry was having trouble with the Archbishop of Canterbury, Thomas Becket. The King supposedly uttered the fateful words "Will no-one rid me of this turbulent priest"? Four knights promptly set sail from Normandy to Canterbury, confronted Becket in the Cathedral and murdered him.
Henry was vilified and forced into public acts of expiation but kept his throne. MBS has probably left it too late, but if this defense -- basically, "Gee, I was just venting! I never meant for this to happen!" -- had been adopted earlier, it might well have worked. Especially as there's a guy in the White House that would dearly love to believe it.
Friday 30 November 2018
Headwinds
The United States, Canada and Mexico formally signed the new USMCA* trade deal in a low key ceremony at the G20 in Buenos Aires this morning. However, with a Democrat majority set to take over the House of Representatives in little more than a month, uncertainty over trade within North America will persist for many more months. Meanwhile, there are growing indications that the Canadian economy faces a prolonged period of sluggish growth.
This morning Statistics Canada reported that real GDP growth slowed to a 2.0 percent annualized rate in Q3 from 2.9 percent in the prior quarter. Both business fixed investment and residential investment declined in the quarter. While it is possible that the slack in business investment partly reflected uncertainty over the trade negotiations, these numbers suggest that the economy may not prove resilient in the face of rising interest rates. Household consumption was virtually unchanged in the quarter, while -- somewhat perversely, given the trade uncertainties -- goods trade provided a boost to the overall growth rate.
The quarter ended on a weak note, with StatsCan reporting that GDP fell 0.1 percent month-on-month in September. This virtually locks in a weak final quarter for 2018, and there are few reasons to be optimistic that growth will pick up significantly in 2019.
This week's announcement that General Motors will be closing its venerable Oshawa assembly plant in 2019, as part of its global restructuring, has produced an outpouring of doom and gloom in Ontario. The woe is arguably overdone. About 2500 salaried workers will lose their jobs, which is obviously devastating for the families involved, but recall that before the original NAFTA replaced the old Auto Pact, employment at the plant was as much as ten times greater than it is now. This week's announcement is the last, and statistically the smallest, of many restructurings that have hit in Oshawa over the past two decades.
Employers all across the country are fretting over a shortage of skilled workers, so the economy should easily absorb those Oshawa workers that do not choose to retire. There may be a short-term impact on consumer sentiment, but unless there are more such announcements to come, the macroeconomic effects should be relatively minor.
Of much more concern is the collapse in oil prices. The global decline in the price of crude has raised concerns over the outlook for the world economy, but the decline in prices received by producers in Alberta has been much more severe. With all pipeline development essentially halted by legal action, rail capacity fully utilized and demand for oil sands crude in the US steadily eroding, Alberta crude has been trading at ever-widening discounts to the WTI benchmark. In some recent trading sessions, Alberta crude has been changing hands at as little as US$ 10/bbl. Wells are being abandoned and workers are losing their jobs. The daily cost to the Canadian economy has been estimated as high as C$ 80 million.
There is no relief in sight. The Alberta government is scrambling to purchase additional railcars in order to allow more crude to be shipped by rail, but this will take time. Meanwhile, it is being projected that the US will become a net exporter of crude some time next year, further undercutting Canada's export prospects. Unless a way can be found to ship Alberta oil to supplant imports in eastern Canadian refineries -- and that pipeline project is stalled indefinitely -- or to ship it to tidewater for export to Asia -- likewise stalled -- the outlook for the sector is undeniably grim.
Last but not least, how long can the US economy's sugar high, created by the Trump administration's tax cuts, continue? Official data show that US GDP growth in Q3, at 3.5 percent, was almost twice the pace seen in Canada. However, the cautious tone of this week's remarks from Chairman Jerome Powell suggest that the Fed may be starting to trim its expectations for future growth. All in all, it seems likely that the Bank of Canada will have little reason to raise rates any time soon -- and it may not be too long before we start wondering whether it has accumulated enough ammunition to fend off the next downturn.
* Stamping its little foot, Canada has announced that it will officially refer to the new deal as CUSMA. That's an odd choice in that it doesn't actually work in Canada's second official language, French. In the meantime, Mexico is calling it either TMEC or MUSCA, which happens to be the Latin term for a fly. And a quick Google search reveals that "cusma" is a Peruvian Spanish name for a sleeveless shirt.
This morning Statistics Canada reported that real GDP growth slowed to a 2.0 percent annualized rate in Q3 from 2.9 percent in the prior quarter. Both business fixed investment and residential investment declined in the quarter. While it is possible that the slack in business investment partly reflected uncertainty over the trade negotiations, these numbers suggest that the economy may not prove resilient in the face of rising interest rates. Household consumption was virtually unchanged in the quarter, while -- somewhat perversely, given the trade uncertainties -- goods trade provided a boost to the overall growth rate.
The quarter ended on a weak note, with StatsCan reporting that GDP fell 0.1 percent month-on-month in September. This virtually locks in a weak final quarter for 2018, and there are few reasons to be optimistic that growth will pick up significantly in 2019.
This week's announcement that General Motors will be closing its venerable Oshawa assembly plant in 2019, as part of its global restructuring, has produced an outpouring of doom and gloom in Ontario. The woe is arguably overdone. About 2500 salaried workers will lose their jobs, which is obviously devastating for the families involved, but recall that before the original NAFTA replaced the old Auto Pact, employment at the plant was as much as ten times greater than it is now. This week's announcement is the last, and statistically the smallest, of many restructurings that have hit in Oshawa over the past two decades.
Employers all across the country are fretting over a shortage of skilled workers, so the economy should easily absorb those Oshawa workers that do not choose to retire. There may be a short-term impact on consumer sentiment, but unless there are more such announcements to come, the macroeconomic effects should be relatively minor.
Of much more concern is the collapse in oil prices. The global decline in the price of crude has raised concerns over the outlook for the world economy, but the decline in prices received by producers in Alberta has been much more severe. With all pipeline development essentially halted by legal action, rail capacity fully utilized and demand for oil sands crude in the US steadily eroding, Alberta crude has been trading at ever-widening discounts to the WTI benchmark. In some recent trading sessions, Alberta crude has been changing hands at as little as US$ 10/bbl. Wells are being abandoned and workers are losing their jobs. The daily cost to the Canadian economy has been estimated as high as C$ 80 million.
There is no relief in sight. The Alberta government is scrambling to purchase additional railcars in order to allow more crude to be shipped by rail, but this will take time. Meanwhile, it is being projected that the US will become a net exporter of crude some time next year, further undercutting Canada's export prospects. Unless a way can be found to ship Alberta oil to supplant imports in eastern Canadian refineries -- and that pipeline project is stalled indefinitely -- or to ship it to tidewater for export to Asia -- likewise stalled -- the outlook for the sector is undeniably grim.
Last but not least, how long can the US economy's sugar high, created by the Trump administration's tax cuts, continue? Official data show that US GDP growth in Q3, at 3.5 percent, was almost twice the pace seen in Canada. However, the cautious tone of this week's remarks from Chairman Jerome Powell suggest that the Fed may be starting to trim its expectations for future growth. All in all, it seems likely that the Bank of Canada will have little reason to raise rates any time soon -- and it may not be too long before we start wondering whether it has accumulated enough ammunition to fend off the next downturn.
* Stamping its little foot, Canada has announced that it will officially refer to the new deal as CUSMA. That's an odd choice in that it doesn't actually work in Canada's second official language, French. In the meantime, Mexico is calling it either TMEC or MUSCA, which happens to be the Latin term for a fly. And a quick Google search reveals that "cusma" is a Peruvian Spanish name for a sleeveless shirt.
Monday 26 November 2018
Happy holidays to you too, General!
Toronto newsmedia began reporting on Sunday evening that General Motors was about to announce the closure of its assembly plant in Oshawa, Ontario (just east of Toronto), with the loss of about 2500 jobs. This morning the company made the closure official, as part of a major corporate cost-cutting exercise that will see it close five plants in North America and a further three in other parts of the world. About 15 percent of the company's hourly workforce will lose their jobs, along with a hefty 25 percent of salaried staff.
A lot of history is being torched here. The current Oshawa plant has been operating since the late 1950s, but GM has been the biggest employer in the city for much longer than that. Canada's own auto pioneer, Colonel Sam McLaughlin, set up shop there early in the twentieth century, selling his business to GM's predecessors in 1918. And on the US side of the border, the plant to be closed in Hamtramck*, MI is the last auto assembly plant within the limits of the city of Detroit, so this is surely the end of an era.
What's behind all this? It depends on who you ask.
General Motors says it's all about positioning the company for the future. The list of products that the company is discontinuing is heavy on sedans, from the tiny Chevy Volt to the chunky Buick LaCrosse. Customer demand has shifted abruptly away from this body type towards SUVs in recent years. Today's move by GM mirrors similar steps taken by Ford earlier this year; that company has effectively withdrawn from the sedan market is North America, apart from the sporty Mustang.**
If you consult the local media, you can find at least one respected business commentator, Eric Reguly at the Globe and Mail (paywall, sorry!) willing to point the finger of blame at Donald Trump. It's unlikely that GM would be closing a viable operation at Oshawa just to placate Trump, who doesn't seem too happy about all this anyway. However, the current administration has fed the SUV feeding frenzy through its watering-down of environmental measures, contributing to the demise of the sedan. Moreover, Trump's steel and aluminum tariffs remain in place despite the recent conclusion of trade negotiations, and GM has spoken of the impact these are having on its cost of doing business.
If you listen to the main Canadian union in the auto industry, Unifor, what we may be seeing here is yet another attempt by GM to shake governments down for more subsidies. That's also a view you can hear from callers to local talk radio stations. It's not at all far-fetched: the Oshawa plant has been under threat for many years but has always escaped closure, thanks in part to government money. Even with today's announcement, the plant is likely to stay open well into 2019, giving plenty of time for the Federal or Ontario governments to step forward with yet more blandishments, as the City of Oshawa (and of course Unifor) are already urging them to do.
One further factor may have sealed Oshawa's fate: its location. The North American auto industry is highly integrated across borders, with materials and components criss-crossing the border as vehicles are put together. Most of Ontario's auto and parts plants are in the southwest of the province, giving quick and easy access to the US border. Oshawa, unluckily for it, is on the wrong (i.e. east) side of Toronto. As that city's roads and rails become more and more congested, it must be harder and harder for GM to achieve the just-in-time cross-border deliveries it needs at an acceptable cost.
Talk radio hosts in my neighbouring city of St Catharines, home to a GM powertrain plant, are breathing a sigh of relief today that the 2500 or so jobs there have been spared in this round of cost cutting. It would be unwise to be complacent about that: GM's longer-term strategy clearly involves a shift toward electric vehicles. The gas-and-diesel, engine-and-transmission assemblies that are St Catharines' forte may not be needed for much longer.
* Strictly speaking Hamtramck is a separate municipality, but as it's completely surrounded by Detroit proper, I think the point stands.
** Initially when I posted this I said the surviving Ford sedan was the Camaro, which is of course a Chevy. I've never been much of a car guy, but still!
A lot of history is being torched here. The current Oshawa plant has been operating since the late 1950s, but GM has been the biggest employer in the city for much longer than that. Canada's own auto pioneer, Colonel Sam McLaughlin, set up shop there early in the twentieth century, selling his business to GM's predecessors in 1918. And on the US side of the border, the plant to be closed in Hamtramck*, MI is the last auto assembly plant within the limits of the city of Detroit, so this is surely the end of an era.
What's behind all this? It depends on who you ask.
General Motors says it's all about positioning the company for the future. The list of products that the company is discontinuing is heavy on sedans, from the tiny Chevy Volt to the chunky Buick LaCrosse. Customer demand has shifted abruptly away from this body type towards SUVs in recent years. Today's move by GM mirrors similar steps taken by Ford earlier this year; that company has effectively withdrawn from the sedan market is North America, apart from the sporty Mustang.**
If you consult the local media, you can find at least one respected business commentator, Eric Reguly at the Globe and Mail (paywall, sorry!) willing to point the finger of blame at Donald Trump. It's unlikely that GM would be closing a viable operation at Oshawa just to placate Trump, who doesn't seem too happy about all this anyway. However, the current administration has fed the SUV feeding frenzy through its watering-down of environmental measures, contributing to the demise of the sedan. Moreover, Trump's steel and aluminum tariffs remain in place despite the recent conclusion of trade negotiations, and GM has spoken of the impact these are having on its cost of doing business.
If you listen to the main Canadian union in the auto industry, Unifor, what we may be seeing here is yet another attempt by GM to shake governments down for more subsidies. That's also a view you can hear from callers to local talk radio stations. It's not at all far-fetched: the Oshawa plant has been under threat for many years but has always escaped closure, thanks in part to government money. Even with today's announcement, the plant is likely to stay open well into 2019, giving plenty of time for the Federal or Ontario governments to step forward with yet more blandishments, as the City of Oshawa (and of course Unifor) are already urging them to do.
One further factor may have sealed Oshawa's fate: its location. The North American auto industry is highly integrated across borders, with materials and components criss-crossing the border as vehicles are put together. Most of Ontario's auto and parts plants are in the southwest of the province, giving quick and easy access to the US border. Oshawa, unluckily for it, is on the wrong (i.e. east) side of Toronto. As that city's roads and rails become more and more congested, it must be harder and harder for GM to achieve the just-in-time cross-border deliveries it needs at an acceptable cost.
Talk radio hosts in my neighbouring city of St Catharines, home to a GM powertrain plant, are breathing a sigh of relief today that the 2500 or so jobs there have been spared in this round of cost cutting. It would be unwise to be complacent about that: GM's longer-term strategy clearly involves a shift toward electric vehicles. The gas-and-diesel, engine-and-transmission assemblies that are St Catharines' forte may not be needed for much longer.
* Strictly speaking Hamtramck is a separate municipality, but as it's completely surrounded by Detroit proper, I think the point stands.
** Initially when I posted this I said the surviving Ford sedan was the Camaro, which is of course a Chevy. I've never been much of a car guy, but still!
Thursday 22 November 2018
Moving target
It's all go at the Bank of Canada these days. Fresh from announcing the establishment of its new online Financial Stability Hub, the Bank has revealed that it is re-examining the entire basis of its monetary policy framework, which comes up for renewal in 2021. This press release summarizes the Bank's preliminary thoughts and contains a link to the full speech by Senior Deputy Governor Carolyn Wilkins.
By way of background, the Bank of Canada has based its monetary policy around a 2 percent inflation target for almost three decades. The policy is set via an agreement between the Bank and the Federal Government that is reviewed and updated every five years. This agreement comes up for renewal in 2021, and Ms Wilkins' speech makes it very clear that the Bank is looking for much more than cosmetic changes this time.
As the press release indicates, lessons the Bank has learned in the wake of the financial crisis have led it to believe that a wholesale review is necessary. There are two key factors: first, the Bank's estimates of a "neutral" rate of interest is much lower than it was before the crisis; second, the fact that nominal rates of interest may be lower in the future than they were historically may lead to excessive risk taking (read: borrowing) by households and businesses.
The problem with the lower neutral rate of interest is that it implies that the Bank has much less room to provide conventional forms of monetary stimulus when crises hit. If, as the Bank currently believes, the neutral rate is in a range of 2.5-3.5 percent, it has very little leeway to cut rates unless it moves into negative territory, something it has avoided until now.
As for excessive risk taking, it is tempting to suggest this reflects a too-narrow view of inflation on the Bank's part. It has used all kinds of inflation measures over the years, including its current trio of core indices, but these have all related to consumer prices in one way or another. Its conception of the neutral rate is likewise driven by its target for inflation at the consumer level. It has become apparent in the past two decades, and especially during the financial crisis, that tame consumer prices do not necessarily mean that monetary policy is correctly calibrated. The financial crisis was driven by run-ups in asset prices that central banks, led by the Greenspan Fed, chose largely to ignore.
Ms Wilkins' speech is explicitly intended to start a debate on the issues, and to get things going she lays out some of the alternatives being considered by the Bank. There have been suggestions in many countries that a 2 percent target is too low; would 4 percent perhaps allow more policy flexibility? Ms Wilkins notes that such a step would be hard on those living on fixed incomes, an important consideration as populations age, and could backfire if it triggered concerns that the target, once moved, could be subject to repeated change.
Other possibilities outlined by Ms Wilkins would require more drastic change. They include price level targeting; an explicit dual mandate, requiring the Bank to hit targets for both prices and output; and nominal GDP targeting. Each of these brings its own problems, not the least being that they would be much harder to explain to the general public than the present (deceptively) simple target.
Not, of course, that there's anything new about that. Ms Wilkins notes that average inflation since the 2 percent target came into effect in 1991 has been "pretty darn close" to the desired level. However, I would wager that if you stopped Canadians at random on the street and asked them what the current inflation rate is, not one in ten would give you a figure lower than 5 percent, and many would insist stridently that it's a whole lot higher than that. Good luck changing that, Ms Wilkins!
By way of background, the Bank of Canada has based its monetary policy around a 2 percent inflation target for almost three decades. The policy is set via an agreement between the Bank and the Federal Government that is reviewed and updated every five years. This agreement comes up for renewal in 2021, and Ms Wilkins' speech makes it very clear that the Bank is looking for much more than cosmetic changes this time.
As the press release indicates, lessons the Bank has learned in the wake of the financial crisis have led it to believe that a wholesale review is necessary. There are two key factors: first, the Bank's estimates of a "neutral" rate of interest is much lower than it was before the crisis; second, the fact that nominal rates of interest may be lower in the future than they were historically may lead to excessive risk taking (read: borrowing) by households and businesses.
The problem with the lower neutral rate of interest is that it implies that the Bank has much less room to provide conventional forms of monetary stimulus when crises hit. If, as the Bank currently believes, the neutral rate is in a range of 2.5-3.5 percent, it has very little leeway to cut rates unless it moves into negative territory, something it has avoided until now.
As for excessive risk taking, it is tempting to suggest this reflects a too-narrow view of inflation on the Bank's part. It has used all kinds of inflation measures over the years, including its current trio of core indices, but these have all related to consumer prices in one way or another. Its conception of the neutral rate is likewise driven by its target for inflation at the consumer level. It has become apparent in the past two decades, and especially during the financial crisis, that tame consumer prices do not necessarily mean that monetary policy is correctly calibrated. The financial crisis was driven by run-ups in asset prices that central banks, led by the Greenspan Fed, chose largely to ignore.
Ms Wilkins' speech is explicitly intended to start a debate on the issues, and to get things going she lays out some of the alternatives being considered by the Bank. There have been suggestions in many countries that a 2 percent target is too low; would 4 percent perhaps allow more policy flexibility? Ms Wilkins notes that such a step would be hard on those living on fixed incomes, an important consideration as populations age, and could backfire if it triggered concerns that the target, once moved, could be subject to repeated change.
Other possibilities outlined by Ms Wilkins would require more drastic change. They include price level targeting; an explicit dual mandate, requiring the Bank to hit targets for both prices and output; and nominal GDP targeting. Each of these brings its own problems, not the least being that they would be much harder to explain to the general public than the present (deceptively) simple target.
Not, of course, that there's anything new about that. Ms Wilkins notes that average inflation since the 2 percent target came into effect in 1991 has been "pretty darn close" to the desired level. However, I would wager that if you stopped Canadians at random on the street and asked them what the current inflation rate is, not one in ten would give you a figure lower than 5 percent, and many would insist stridently that it's a whole lot higher than that. Good luck changing that, Ms Wilkins!
Wednesday 21 November 2018
Canada fiscal update: all deficits, all the time
I posted here on November 2 that Finance Minister Bill Morneau would very likely use his Fall Economic Statement to announce the Trudeau government planned to continue the deficit financing path it adopted from the first day of its mandate. After all, Trudeau himself is reported to have said that it was his pledge to run deficits in order to stimulate the economy, initially viewed as a foolhardy gamble, that won him the election in 2015.
Today Morneau delivered the fiscal update and it turns out that (ahem) I was right. The government is planning on about C$ 17.5 billion in new spending over the next five years. To be more precise, it's planning to forego revenues of about $ 16.5 billion as it attempts to assist Canadian businesses to compete with the massive tax cuts instituted by the Trump administration: tax expenditures, rather than spending per se, although the bottom line impact is, of course, the same.
Morneau argued in his speech that Canada could not afford to match the US tax cut directly because to do so would cost billions in lost revenues. How does that differ from what is being announced today? The problem with the straight corporate tax cut instituted in the US is that there's no guarantee that corporations will actually invest the windfall. US corporations have shown over the past decade that they are quite willing to sit on mountains of cash, and there's no guarantee that the Trump windfall won't just be added to the pile.
Morneau's approach involves capital cost allowances and write-offs, with a particular focus on clean energy investments. Companies will only benefit from tax reductions if they undertake qualifying investments, which the government hopes will drive long-term growth and higher productivity.
As for the bottom line, the proposed measures will increase the deficit this year and in each year of the five-year planning horizon. A shortfall of $19 billion is now seen for the upcoming year, tapering to $12 billion in 2023. This will result in a very gradual decline in the debt/GDP ratio, but Morneau was careful to point out that on that measure, Canada's fiscal position is already the best among developed economies.
Recall that before the 2015 election, Trudeau's specific promise was to run deficits of $10 billion, but return the budget to balance by 2019. Today's update has no timetable for a return to balance. Canadians voted for the relatively cautious deficit plan in the last election, but what is being proposed now is quite different and may start to stir memories of the deficit spiral of the 1980s and early 1990s.
That's certainly how the opposition Tories will try to spin it, perhaps hoping that voters have forgotten that many of the biggest deficits in that era were run up by Tory governments, and that it took a Liberal government to straighten things out. On one reading, Doug Ford's victory in the Ontario provincial election, when he trounced a tax-and-spend Liberal election platform, might suggest that the Trudeaucrats won't be as lucky come next October as they were in 2015.
It seems, however, that the federal Liberals are judging that Ontario's vote was a "get rid of Kathleen Wynne at all costs" tidal wave that won't be repeated across the country. There are enough signs of buyers' remorse in Ontario -- Doug Ford's popularity has fallen sharply -- to suggest that might be the case. Today's fiscal update can be seen as the starting gun for next year's election; it seems very clear that Canadians will be offered a very stark choice, at least in terms of economic policy.
Today Morneau delivered the fiscal update and it turns out that (ahem) I was right. The government is planning on about C$ 17.5 billion in new spending over the next five years. To be more precise, it's planning to forego revenues of about $ 16.5 billion as it attempts to assist Canadian businesses to compete with the massive tax cuts instituted by the Trump administration: tax expenditures, rather than spending per se, although the bottom line impact is, of course, the same.
Morneau argued in his speech that Canada could not afford to match the US tax cut directly because to do so would cost billions in lost revenues. How does that differ from what is being announced today? The problem with the straight corporate tax cut instituted in the US is that there's no guarantee that corporations will actually invest the windfall. US corporations have shown over the past decade that they are quite willing to sit on mountains of cash, and there's no guarantee that the Trump windfall won't just be added to the pile.
Morneau's approach involves capital cost allowances and write-offs, with a particular focus on clean energy investments. Companies will only benefit from tax reductions if they undertake qualifying investments, which the government hopes will drive long-term growth and higher productivity.
As for the bottom line, the proposed measures will increase the deficit this year and in each year of the five-year planning horizon. A shortfall of $19 billion is now seen for the upcoming year, tapering to $12 billion in 2023. This will result in a very gradual decline in the debt/GDP ratio, but Morneau was careful to point out that on that measure, Canada's fiscal position is already the best among developed economies.
Recall that before the 2015 election, Trudeau's specific promise was to run deficits of $10 billion, but return the budget to balance by 2019. Today's update has no timetable for a return to balance. Canadians voted for the relatively cautious deficit plan in the last election, but what is being proposed now is quite different and may start to stir memories of the deficit spiral of the 1980s and early 1990s.
That's certainly how the opposition Tories will try to spin it, perhaps hoping that voters have forgotten that many of the biggest deficits in that era were run up by Tory governments, and that it took a Liberal government to straighten things out. On one reading, Doug Ford's victory in the Ontario provincial election, when he trounced a tax-and-spend Liberal election platform, might suggest that the Trudeaucrats won't be as lucky come next October as they were in 2015.
It seems, however, that the federal Liberals are judging that Ontario's vote was a "get rid of Kathleen Wynne at all costs" tidal wave that won't be repeated across the country. There are enough signs of buyers' remorse in Ontario -- Doug Ford's popularity has fallen sharply -- to suggest that might be the case. Today's fiscal update can be seen as the starting gun for next year's election; it seems very clear that Canadians will be offered a very stark choice, at least in terms of economic policy.
Saturday 17 November 2018
Gotta know when to fold'em
This posting is not about one of my usual topics. It's about the Netflix show "House of Cards", specifically the final series. If you haven't seen that, what follows may include a few things that could spoil your enjoyment of it -- although, if you do read on, you will see that I hardly think that would be possible.
For better or worse I have watched every episode of House of Cards. I started with the original UK series, which was dark and violent but spiced with a little dark humour. It gave us the briefly popular expression, "You might think that; I couldn't possibly comment".
The first series of the US remake followed the original very closely -- sometimes, scene for scene. It was Netflix's first attempt at a prestige drama series, and once they realized they had a hit on their hands, they commissioned a whole lot more of it. By the end of the recent (and final) series, there were more than 70 episodes. The plots became harder and harder to follow, but it always seemed reasonably plausible -- a Bizarro West Wing, if you like.
Then Kevin Spacey, who had played Senator-then-President Francis Underwood, had his little fall from grace. Filming for the final series was already under way. Netflix and its producers could have just walked away right then, but they took the fateful decision to kill off Spacey's character and rewrite the remaining episodes around his widow and successor Claire Underwood, played by Robin Wright.
Bad mistake! There have been long-running dramas before where the producers didn't quite know when enough was enough; the final series of The Wire is an obvious example. However, that was a masterpiece compared to the last run-out of House of Cards, which is truly abysmal. What went so badly wrong? I think there were several factors at play.
The Spacey factor. Kevin Spacey is a great actor. In his best roles he combines a suave exterior with an unmistakable inner menace. This made him perfect for the Underwood role. The recurring motif of "breaking the fourth wall", lifted from the British original, allowed him to communicate his nefarious intentions to the audience with a quizzical grin, allowing viewers along for the ride as his schemes played out.
Robin Wright is a good actor, but not one with much facility at humour. Her Claire Underwood is the ultimate ice maiden in every respect -- severe hairstyle, drab clothing, all-business dialogue. Her too-frequent breaches of the fourth wall are just menacing, rather than conspiratorial as Spacey's were.
The plot factor. The usual approach for a final series is to tie up the loose ends in some surprising ways, allowing the audience a last chance to hang with some well-loved or cordially-hated characters. A number of characters from the earlier series of House of Cards play important roles in the final episodes, but the main players (apart from Claire Underwood) are two people we've never met before. These are the Shepherd siblings, rich, rabidly right-wing, and evidently modelled on the Koch brothers. Introducing these newbies inevitably required the kind of scene-setting that's normally taken care of in a first series.
The result of bringing in the Shepherds is that the plot very quickly becomes difficult to follow. This isn't helped by the fact that the writing seems to be of a much lower calibre than before, possibly because of the rewriting needed to dispose of Kevin Spacey's role. Even the directing seems to suffer. If you want to sample the final series to see if I'm right about all this, just watch the fourth episode, a jumpy and incoherent mess.
The reality factor. Even while Spacey was still on board, the show's producers were fretting that the real world (i.e. Trumpistan) had turned so crazy that they might never be able to top it in a fictional universe. This seems to have seriously daunted them, and in response they didn't so much jump the shark as cartwheel over it and leave it floundering in their wake. The final series has a higher body count than a two-hour session of Call of Duty, there are threats of nuclear Armageddon .. and by the time the credits roll for the final time, there are more loose ends than a dollar-store rug.
I once wrote here that the modern tendency for series to bloat made one long for the return of a writer like Rod Serling, who could tell a complete story in less than thirty minutes. House of Cards stands out as a sad example of what happens when financial considerations are allowed to trump all else.
For better or worse I have watched every episode of House of Cards. I started with the original UK series, which was dark and violent but spiced with a little dark humour. It gave us the briefly popular expression, "You might think that; I couldn't possibly comment".
The first series of the US remake followed the original very closely -- sometimes, scene for scene. It was Netflix's first attempt at a prestige drama series, and once they realized they had a hit on their hands, they commissioned a whole lot more of it. By the end of the recent (and final) series, there were more than 70 episodes. The plots became harder and harder to follow, but it always seemed reasonably plausible -- a Bizarro West Wing, if you like.
Then Kevin Spacey, who had played Senator-then-President Francis Underwood, had his little fall from grace. Filming for the final series was already under way. Netflix and its producers could have just walked away right then, but they took the fateful decision to kill off Spacey's character and rewrite the remaining episodes around his widow and successor Claire Underwood, played by Robin Wright.
Bad mistake! There have been long-running dramas before where the producers didn't quite know when enough was enough; the final series of The Wire is an obvious example. However, that was a masterpiece compared to the last run-out of House of Cards, which is truly abysmal. What went so badly wrong? I think there were several factors at play.
The Spacey factor. Kevin Spacey is a great actor. In his best roles he combines a suave exterior with an unmistakable inner menace. This made him perfect for the Underwood role. The recurring motif of "breaking the fourth wall", lifted from the British original, allowed him to communicate his nefarious intentions to the audience with a quizzical grin, allowing viewers along for the ride as his schemes played out.
Robin Wright is a good actor, but not one with much facility at humour. Her Claire Underwood is the ultimate ice maiden in every respect -- severe hairstyle, drab clothing, all-business dialogue. Her too-frequent breaches of the fourth wall are just menacing, rather than conspiratorial as Spacey's were.
The plot factor. The usual approach for a final series is to tie up the loose ends in some surprising ways, allowing the audience a last chance to hang with some well-loved or cordially-hated characters. A number of characters from the earlier series of House of Cards play important roles in the final episodes, but the main players (apart from Claire Underwood) are two people we've never met before. These are the Shepherd siblings, rich, rabidly right-wing, and evidently modelled on the Koch brothers. Introducing these newbies inevitably required the kind of scene-setting that's normally taken care of in a first series.
The result of bringing in the Shepherds is that the plot very quickly becomes difficult to follow. This isn't helped by the fact that the writing seems to be of a much lower calibre than before, possibly because of the rewriting needed to dispose of Kevin Spacey's role. Even the directing seems to suffer. If you want to sample the final series to see if I'm right about all this, just watch the fourth episode, a jumpy and incoherent mess.
The reality factor. Even while Spacey was still on board, the show's producers were fretting that the real world (i.e. Trumpistan) had turned so crazy that they might never be able to top it in a fictional universe. This seems to have seriously daunted them, and in response they didn't so much jump the shark as cartwheel over it and leave it floundering in their wake. The final series has a higher body count than a two-hour session of Call of Duty, there are threats of nuclear Armageddon .. and by the time the credits roll for the final time, there are more loose ends than a dollar-store rug.
I once wrote here that the modern tendency for series to bloat made one long for the return of a writer like Rod Serling, who could tell a complete story in less than thirty minutes. House of Cards stands out as a sad example of what happens when financial considerations are allowed to trump all else.
Thursday 15 November 2018
Ontario economic statement: neither sizzle nor steak
Less than six months after taking office, Doug Ford's Ontario provincial government has been going through a rough patch. A string of allegations about sexual harassment, cover-ups and other misbehaviour have forced Ford into an early "recalibration" of his Cabinet.
Ford and his team were probably hoping that this week's Fall Economic Outlook would get the focus back onto its policy agenda. Good luck with that -- just a couple of days ago, Finance Minister Vic Fedeli became the latest to be accused of sexual misconduct* -- and by none other than Patrick Brown, who was ousted as leader of the PC Party, and ultimately replaced by Ford, earlier this year. Brown has a tell-all book coming out this week and has been all over the media plugging it.
The statement that Fedeli delivered today is usually characterized as a "mini-budget", but on this occasion there is so little of substance that the term "micro-budget" seems more apt. To begin at the bottom line, Fedeli now says that this year's deficit will be C$14.5 billion. This is $1 billion lower than Fedeli claimed when he first took office, but still almost twice as large as the deficit the former Liberal government had proposed.
Why the lower number now? Fedeli claims that the government has already reduced spending by $3.2 billion, but this simply reflects its well-advertised intention not to proceed with some of the previous government's pie-in-the-sky election promises. Actual spending cuts by the new government have, to date, been nugatory. The "spending cuts" have been offset by a $2.7 billion fall in revenues, most of it accounted for by the government's ideologically-driven move to abolish the cap-and-trade carbon pricing scheme it inherited.
As far as actual policy changes are concerned, the government is taking steps to remove anyone earning less than $30,000 per year from the provincial income tax rolls. This is a creditable move, although of course many such low income earners will still be liable for Federal income taxes, and today's move is further diluted by the fact that the minimum wage increase set for January 2019 has already been cancelled. At the other end of the tax scale, a planned increase for the highest income-earners has been scrapped.
In terms of non-revenue measures, a small number of "watchdog" positions in the public service will be eliminated in the name of cost saving. Rental controls on new-build homes will be eliminated. Plans for a third French-language university in the province have been cancelled. And in another step to portray the government as a friend to the bibulous, opening hours at provincially-owned liquor stores (which is all of them) will be extended to 11 pm.
Fedeli stated soon after taking office that the task of restoring the budget to balance would be a lengthy one. Based on the pace he has set so far, that looks like the safest of bets.
* Fedeli strenuously denies the charge -- and just for clarity, the accusation is not that he misbehaved with Patrick Brown!
Ford and his team were probably hoping that this week's Fall Economic Outlook would get the focus back onto its policy agenda. Good luck with that -- just a couple of days ago, Finance Minister Vic Fedeli became the latest to be accused of sexual misconduct* -- and by none other than Patrick Brown, who was ousted as leader of the PC Party, and ultimately replaced by Ford, earlier this year. Brown has a tell-all book coming out this week and has been all over the media plugging it.
The statement that Fedeli delivered today is usually characterized as a "mini-budget", but on this occasion there is so little of substance that the term "micro-budget" seems more apt. To begin at the bottom line, Fedeli now says that this year's deficit will be C$14.5 billion. This is $1 billion lower than Fedeli claimed when he first took office, but still almost twice as large as the deficit the former Liberal government had proposed.
Why the lower number now? Fedeli claims that the government has already reduced spending by $3.2 billion, but this simply reflects its well-advertised intention not to proceed with some of the previous government's pie-in-the-sky election promises. Actual spending cuts by the new government have, to date, been nugatory. The "spending cuts" have been offset by a $2.7 billion fall in revenues, most of it accounted for by the government's ideologically-driven move to abolish the cap-and-trade carbon pricing scheme it inherited.
As far as actual policy changes are concerned, the government is taking steps to remove anyone earning less than $30,000 per year from the provincial income tax rolls. This is a creditable move, although of course many such low income earners will still be liable for Federal income taxes, and today's move is further diluted by the fact that the minimum wage increase set for January 2019 has already been cancelled. At the other end of the tax scale, a planned increase for the highest income-earners has been scrapped.
In terms of non-revenue measures, a small number of "watchdog" positions in the public service will be eliminated in the name of cost saving. Rental controls on new-build homes will be eliminated. Plans for a third French-language university in the province have been cancelled. And in another step to portray the government as a friend to the bibulous, opening hours at provincially-owned liquor stores (which is all of them) will be extended to 11 pm.
Fedeli stated soon after taking office that the task of restoring the budget to balance would be a lengthy one. Based on the pace he has set so far, that looks like the safest of bets.
* Fedeli strenuously denies the charge -- and just for clarity, the accusation is not that he misbehaved with Patrick Brown!
Wednesday 14 November 2018
The banks are alright
The Bank of Canada today made an important addition to its website: the Financial Stability Hub, "a dedicated space....for timely analysis and research on financial stability issues". The Bank and its political bosses at the Department of Finance were little short of smug at the domestic banking sector's stability during the financial crisis a decade ago. With the next financial conniption only a matter of time, the Bank evidently thinks it's important to get an early start on convincing investors and depositors that the system is well-prepared and resilient.
The new Hub is off to a flying start, with three new papers added on the first day. A couple of these are worthy of comment: a report on the vulnerability of the financial system to house price corrections, and an analysis of the impact of recent policy changes on the mortgage market.
The paper on house price corrections is rich in acronyms, introducing us to a "suite of models" known as FRIDA: Framework for Risk Identification and Assessment. FRIDA and her less pronounceable offspring (including CDM and MFRAF) allow the Bank to model the macroeconomic impact of a house price correction and increase in financial stress. The Bank has specifically modelled the impact of a nationwide 20 percent fall in house prices. It considers this an improbable scenario, but it is worth noting that in the key Toronto and Vancouver markets, this would represent less than a 50 percent retracement of the price increases recorded in the past five years.
The results from FRIDA are reassuring. Thanks to tightened regulations, Canada's banks have more, higher quality capital than in the past. As a result, the scenario under consideration would result in lower bank earnings over a five-year time horizon, but would not threaten capital positions. That said, the Bank recognizes that things could turn out worse if a house price correction were to coincide with some other shock to the system -- a national recession, for example, or a loss of international investor confidence. It appears FRIDA will be set to work examining some of these additional risks in future reports.
As for the impact of policy changes on the mortgage market, the Bank cannot quite avoid taking a self-congratulatory tone. Its policy changes are having "a clear impact" on the market, and in particular the "number of new highly-indebted borrowers has fallen". This is worth focusing on, because the Bank's definition of "highly indebted" is terrifying: it refers to borrowers taking on a mortgage loan equivalent to 450 percent or more of their annual income. The Bank provides various measures of how its tighter rules have affected this segment, but the broadest measure is that the overall percentage of new borrowers falling into the highly indebted category has fallen from 18 percent to 13 percent.
The report also looks at regional trends in mortgage lending. Overall growth in the mortgage market has slowed in response to tighter rules and a pullback in house prices. The biggest declines have been seen in the formerly overheated Toronto and Vancouver markets. The number of new highly indebted borrowers in those markets has also fallen, but it remains worryingly higher than in the rest of the country. This suggests that even if the financial system as a whole could weather a correction, the level of pain in some parts of the country could still be extremely high.
One further vulnerability in the market gets only a passing mention in the report, but will bear watching as things evolve. Tighter mortgage rules at the major banks have pushed more borrowers into the arms of private lenders, whose lending criteria are unregulated and undoubtedly less stringent. In Toronto, the only area for which the Bank appears to have data, these lenders have boosted their share of overall mortgage lending, though it still stands short of 10 percent. The systemic issue here is not whether these folks, both borrowers and lenders, will run into trouble if house prices tumble. They undoubtedly will. But if I were the Bank of Canada, what I'd be worrying about is, what is the source of the money that the private lenders are so enthusiastically shovelling out?
The new Hub is off to a flying start, with three new papers added on the first day. A couple of these are worthy of comment: a report on the vulnerability of the financial system to house price corrections, and an analysis of the impact of recent policy changes on the mortgage market.
The paper on house price corrections is rich in acronyms, introducing us to a "suite of models" known as FRIDA: Framework for Risk Identification and Assessment. FRIDA and her less pronounceable offspring (including CDM and MFRAF) allow the Bank to model the macroeconomic impact of a house price correction and increase in financial stress. The Bank has specifically modelled the impact of a nationwide 20 percent fall in house prices. It considers this an improbable scenario, but it is worth noting that in the key Toronto and Vancouver markets, this would represent less than a 50 percent retracement of the price increases recorded in the past five years.
The results from FRIDA are reassuring. Thanks to tightened regulations, Canada's banks have more, higher quality capital than in the past. As a result, the scenario under consideration would result in lower bank earnings over a five-year time horizon, but would not threaten capital positions. That said, the Bank recognizes that things could turn out worse if a house price correction were to coincide with some other shock to the system -- a national recession, for example, or a loss of international investor confidence. It appears FRIDA will be set to work examining some of these additional risks in future reports.
As for the impact of policy changes on the mortgage market, the Bank cannot quite avoid taking a self-congratulatory tone. Its policy changes are having "a clear impact" on the market, and in particular the "number of new highly-indebted borrowers has fallen". This is worth focusing on, because the Bank's definition of "highly indebted" is terrifying: it refers to borrowers taking on a mortgage loan equivalent to 450 percent or more of their annual income. The Bank provides various measures of how its tighter rules have affected this segment, but the broadest measure is that the overall percentage of new borrowers falling into the highly indebted category has fallen from 18 percent to 13 percent.
The report also looks at regional trends in mortgage lending. Overall growth in the mortgage market has slowed in response to tighter rules and a pullback in house prices. The biggest declines have been seen in the formerly overheated Toronto and Vancouver markets. The number of new highly indebted borrowers in those markets has also fallen, but it remains worryingly higher than in the rest of the country. This suggests that even if the financial system as a whole could weather a correction, the level of pain in some parts of the country could still be extremely high.
One further vulnerability in the market gets only a passing mention in the report, but will bear watching as things evolve. Tighter mortgage rules at the major banks have pushed more borrowers into the arms of private lenders, whose lending criteria are unregulated and undoubtedly less stringent. In Toronto, the only area for which the Bank appears to have data, these lenders have boosted their share of overall mortgage lending, though it still stands short of 10 percent. The systemic issue here is not whether these folks, both borrowers and lenders, will run into trouble if house prices tumble. They undoubtedly will. But if I were the Bank of Canada, what I'd be worrying about is, what is the source of the money that the private lenders are so enthusiastically shovelling out?
Wednesday 7 November 2018
HELOC to pay
Canadian households' debt to income ratio seems to have stopped rising in recent quarters, and even retreated modestly, although it still remains near 1.70, well above the peak level recorded in the United States ahead of the financial crisis. The housing market has gone off the boil, with the result that mortgage lending growth has slowed.
That's all well and good, but there's another form of household debt that's causing concern for the Bank of Canada: the Home Equity Line of Credit, or HELOC. As this article from the Financial Post reports, the average outstanding balance on these lines of credit is C$ 70,000; a quarter of HELOC borrowers only pay down the interest each month; and the repayment schedules that borrowers describe to the Financial Consumer Agency of Canada (FCAC) look "optimistic".
Borrowing more money against the family homestead when property prices are rising is a time-honoured Canadian tradition, and in a sense the HELOC is just a new way of playing an old game. In its most benign form, remortgaging is a low-risk way of securing funds for property improvement, and this was the original notion when banks started making HELOCs available to their customers.
The FCAC is now concerned that some HELOC borrowers are not using the vehicle responsibly -- it has become a means of financing day-to-day consumption rather than investing in home improvements. Borrowers with no clear repayment strategy are likely to find even the interest payments burdensome as rates continue to rise. In the event of a downturn in property prices, the equity against which the line of credit is secured will start to shrink, potentially creating asset quality issues for the lenders.
For the last decade, household debt has seemed to be a looming problem that never quite erupts, and the rising concern over HELOCs is unlikely to signal an imminent crisis. However, many homeowners seem quite happy to enter retirement still burdened by mortgages and HELOCs, and there are ads all over the TV encouraging retirees to slap a reverse mortgage on their homes in order to boost their spending power. The younger generation would be well advised to temper its expectations for a windfall when my own cohort passes on.
That's all well and good, but there's another form of household debt that's causing concern for the Bank of Canada: the Home Equity Line of Credit, or HELOC. As this article from the Financial Post reports, the average outstanding balance on these lines of credit is C$ 70,000; a quarter of HELOC borrowers only pay down the interest each month; and the repayment schedules that borrowers describe to the Financial Consumer Agency of Canada (FCAC) look "optimistic".
Borrowing more money against the family homestead when property prices are rising is a time-honoured Canadian tradition, and in a sense the HELOC is just a new way of playing an old game. In its most benign form, remortgaging is a low-risk way of securing funds for property improvement, and this was the original notion when banks started making HELOCs available to their customers.
The FCAC is now concerned that some HELOC borrowers are not using the vehicle responsibly -- it has become a means of financing day-to-day consumption rather than investing in home improvements. Borrowers with no clear repayment strategy are likely to find even the interest payments burdensome as rates continue to rise. In the event of a downturn in property prices, the equity against which the line of credit is secured will start to shrink, potentially creating asset quality issues for the lenders.
For the last decade, household debt has seemed to be a looming problem that never quite erupts, and the rising concern over HELOCs is unlikely to signal an imminent crisis. However, many homeowners seem quite happy to enter retirement still burdened by mortgages and HELOCs, and there are ads all over the TV encouraging retirees to slap a reverse mortgage on their homes in order to boost their spending power. The younger generation would be well advised to temper its expectations for a windfall when my own cohort passes on.
Friday 2 November 2018
Canadian economy: still edging ahead
Statistics Canada reported this morning that the Canadian economy added 11,200 jobs in October. While this was marginally below the consensus expectation for a gain of 15,000, it was sufficient to push the unemployment rate down to 5.8 percent, matching a four-decade low, in part because labour force participation edged lower. The economy has added 205,000 jobs in the past year, with 173,000 of these representing full-time positions.
Full-time jobs more than fully accounted for the October increase in employment. There were 34,000 full-time positions created in the month, offset by a decline of about 22,000 in part-time employment. Here, however, we have to enter one of the caveats that often accompany Canadian employment data: by StatsCan's reckoning, most of the new full-time jobs (approximately 22,000) in fact represented self-employment, a category that shows remarkable volatility from month to month. Reflecting the moderation in employment gains in recent months, the year-on-year rise in average earnings fell marginally to 2.2 percent.
A second report from StatsCan today suggested that Canada's international trade sector is largely stagnant, but the data need to be interpreted carefully. Imports reportedly fell 1.5 percent in volume terms in September, which could be a sign of sluggish domestic demand, but the decline largely reflects the fact that StatsCan had to revise August import data sharply higher because of the late reporting of some major transactions. Exports were marginally lower in the month, a result of declining sales to countries other than the United States. However, with the US economy powering ahead and NAFTA uncertainties seemingly lifted, prospects for export growth remain positive.
Earlier in the week, StatsCan reported that real GDP rose 0.1 percent in August, its seventh consecutive monthly gain. This was above the consensus expectation for no change in the month, but in truth details of the report were not strong. All of the increase was the result of higher output in the services sector, mainly finance and insurance. The goods-producing sector was essentially flat in the month, despite gains in oil and gas extraction.
What are the policy implications of this week's reports? It is becoming more apparent that the Canadian economy is lagging further behind that of the US, which continues to benefit from the sugar rush provided by Trump's tax cuts. That underperformance may well be seized on by Finance Minister Morneau as justification for continued deficit spending when he tables his Fall Fiscal Update on November 21. As for the Bank of Canada, the data suggest that there is no real pressure to move interest rates rapidly toward more neutral settings. If the Bank's actions are data-dependent, this week's data clearly suggest further tightening will lag behind the pace set by the Federal Reserve, which implies that the exchange rate will drift moderately weaker over the winter months.
Full-time jobs more than fully accounted for the October increase in employment. There were 34,000 full-time positions created in the month, offset by a decline of about 22,000 in part-time employment. Here, however, we have to enter one of the caveats that often accompany Canadian employment data: by StatsCan's reckoning, most of the new full-time jobs (approximately 22,000) in fact represented self-employment, a category that shows remarkable volatility from month to month. Reflecting the moderation in employment gains in recent months, the year-on-year rise in average earnings fell marginally to 2.2 percent.
A second report from StatsCan today suggested that Canada's international trade sector is largely stagnant, but the data need to be interpreted carefully. Imports reportedly fell 1.5 percent in volume terms in September, which could be a sign of sluggish domestic demand, but the decline largely reflects the fact that StatsCan had to revise August import data sharply higher because of the late reporting of some major transactions. Exports were marginally lower in the month, a result of declining sales to countries other than the United States. However, with the US economy powering ahead and NAFTA uncertainties seemingly lifted, prospects for export growth remain positive.
Earlier in the week, StatsCan reported that real GDP rose 0.1 percent in August, its seventh consecutive monthly gain. This was above the consensus expectation for no change in the month, but in truth details of the report were not strong. All of the increase was the result of higher output in the services sector, mainly finance and insurance. The goods-producing sector was essentially flat in the month, despite gains in oil and gas extraction.
What are the policy implications of this week's reports? It is becoming more apparent that the Canadian economy is lagging further behind that of the US, which continues to benefit from the sugar rush provided by Trump's tax cuts. That underperformance may well be seized on by Finance Minister Morneau as justification for continued deficit spending when he tables his Fall Fiscal Update on November 21. As for the Bank of Canada, the data suggest that there is no real pressure to move interest rates rapidly toward more neutral settings. If the Bank's actions are data-dependent, this week's data clearly suggest further tightening will lag behind the pace set by the Federal Reserve, which implies that the exchange rate will drift moderately weaker over the winter months.
Monday 29 October 2018
The UK's wasted decade
When David Cameron's Tories came into power in 2010, in coalition with Nick Clegg's Liberal Democrats, I was still living in the UK. Like the rest of the world, the UK was grappling with the financial crisis that had erupted in 2008. The economy was wobbling and the banking system was shaky, with Northern Rock defunct, RBS in near-terminal trouble and so on.
Almost the Tories' first move, against all advice, was to set the economy on a path of fiscal austerity. The promise was that a few years of belt-tightening would get the budget back on track, and then the economy could drive forward. In the event, and to the surprise of no-one with the least sense of economic history, austerity made the fiscal situation worse and ensured years of sub-par growth. The date for a return to fiscal balance kept getting pushed farther into the future.
Then, just as the global economy was showing signs of picking up, Cameron pulled his next dumb stunt -- the Brexit referendum, which surely seals his position as the UK's worst Prime Minister ever. This entirely unnecessary vote, called purely for internal Tory party purposes, ensured that the second half of the decade would be even more divisive and disheartening than the first half had been.
Now, with Brexit Day five months away, Chancellor Phillip Hammond has tabled a budget that proclaims "the end of austerity". The fiscal situation is far from being repaired, even after seven years of austerity, and indeed Hammond is projecting significant budget deficits for the next several years. The sole justification for declaring austerity to be at an end is that the Tories desperately need to boost the morale of the country ahead of what looks ominously like a costly and messy divorce from the EU. Hammond admits that he will have to go right back to the drawing board if his assumption about the future UK-EU trading relationship -- an "average-type free trade deal", whatever that is -- turns out to be incorrect.
Watching the UK from our safe perch in Canada since 2012 has been agonizing. My wife said some time ago that if we were still living in Britain we'd be angry all the time, and we're too old to live like that. We may have Donald Trump as our next door neighbour and Doug Ford running our Province, but at least we're not contemplating national suicide.
Almost the Tories' first move, against all advice, was to set the economy on a path of fiscal austerity. The promise was that a few years of belt-tightening would get the budget back on track, and then the economy could drive forward. In the event, and to the surprise of no-one with the least sense of economic history, austerity made the fiscal situation worse and ensured years of sub-par growth. The date for a return to fiscal balance kept getting pushed farther into the future.
Then, just as the global economy was showing signs of picking up, Cameron pulled his next dumb stunt -- the Brexit referendum, which surely seals his position as the UK's worst Prime Minister ever. This entirely unnecessary vote, called purely for internal Tory party purposes, ensured that the second half of the decade would be even more divisive and disheartening than the first half had been.
Now, with Brexit Day five months away, Chancellor Phillip Hammond has tabled a budget that proclaims "the end of austerity". The fiscal situation is far from being repaired, even after seven years of austerity, and indeed Hammond is projecting significant budget deficits for the next several years. The sole justification for declaring austerity to be at an end is that the Tories desperately need to boost the morale of the country ahead of what looks ominously like a costly and messy divorce from the EU. Hammond admits that he will have to go right back to the drawing board if his assumption about the future UK-EU trading relationship -- an "average-type free trade deal", whatever that is -- turns out to be incorrect.
Watching the UK from our safe perch in Canada since 2012 has been agonizing. My wife said some time ago that if we were still living in Britain we'd be angry all the time, and we're too old to live like that. We may have Donald Trump as our next door neighbour and Doug Ford running our Province, but at least we're not contemplating national suicide.
Wednesday 24 October 2018
Bank of Canada: heading towards neutral
As expected, the Bank of Canada raised its interest rate target by 25 basis points to 1.75 percent today. The Bank also published its updated Monetary Policy Report. Senior Deputy Governor Carolyn Wilkins's opening statement provides a very full summary of the Bank's current thinking and the likely direction of monetary policy over the next few quarters.
The Bank considers that the economy is operating close to full capacity, and notes that the growth is broad-based. The NAFTA renegotiations, which had weighed on business investment, have been successfully completed, even if the deal has not yet been ratified by any of the three participants. This eliminates one potential impediment to continued growth, although the Bank notes that there is still uncertainty over the US-China trade relationship, which has significant implications for Canada.
In terms of inflation, the Ms Wilkins noted with evident satisfaction that the Bank's staff had been correct in their assessment earlier in the year, that the spike in headline CPI would prove transitory. Although headline CPI is still just above the Bank's target level, at 2.2 percent, the preferred core measures are all right at the target level, consistent with an economy operating at full capacity. Despite a healthy labour market and low unemployment, wage gains are well-contained at 2.3 percent year-on-year. However, the Bank sees this as a lagging indicator and expects wage pressures to move somewhat higher.
The Bank believes a "neutral" interest rate would be in a 2.5-3.5 percent range. Ms Wilkins's statement makes it clear that the Bank intends to move rates into that range. However, it is no longer describing its approach as "gradual", in order to remove any impression that there is any kind of pre-set path. Actual rate moves will be data-dependent. One factor the Bank is continuing to watch carefully is the level of household debt. This has shown some very slight moderation, but is still so high that each rate move by the Bank pushes more households toward financial stress.
One factor the Bank did not focus on today is fiscal policy. Despite the strong performance of the economy, the Federal Government continues to run significant deficits, with little improvement in prospect. This excellent piece from Bloomberg, published ahead of today's rate decision, summarizes the issue very well.
There will be a Federal election on October 21 2019, and between now and then Finance Minister Morneau will table a fiscal update (in the next few weeks) and a full budget in the spring. After the 2015 election Justin Trudeau bragged that it was his pledge to run small budget deficits, in contrast to the fiscal austerity of the previous Tory government, that won him the election.
Recall that the actual pledge was for deficits of $ 10 billion or so for just a couple of years, with a return to balance by about the time of next year's vote. Actual deficits have been near twice that size, with no path for a return to balance. These deficits are arguably unnecessary and are indisputably complicating the Bank of Canada's job, but the chances of Trudeau and Morneau changing tack with voting day approaching are just about zero.
Finally, a little hat-tip. It's unusual to find any business economist with a novel and arresting way of describing things, but Bloomberg's reporter has found one. Frances Donald of Manulife Asset Management is quoted as saying of the US and Canada that "these economies are sprinting in the middle of a marathon and that will lead to exhaustion". Well done, Ms Donald! I wish I'd said that, and at some point in the future I almost certainly will.
The Bank considers that the economy is operating close to full capacity, and notes that the growth is broad-based. The NAFTA renegotiations, which had weighed on business investment, have been successfully completed, even if the deal has not yet been ratified by any of the three participants. This eliminates one potential impediment to continued growth, although the Bank notes that there is still uncertainty over the US-China trade relationship, which has significant implications for Canada.
In terms of inflation, the Ms Wilkins noted with evident satisfaction that the Bank's staff had been correct in their assessment earlier in the year, that the spike in headline CPI would prove transitory. Although headline CPI is still just above the Bank's target level, at 2.2 percent, the preferred core measures are all right at the target level, consistent with an economy operating at full capacity. Despite a healthy labour market and low unemployment, wage gains are well-contained at 2.3 percent year-on-year. However, the Bank sees this as a lagging indicator and expects wage pressures to move somewhat higher.
The Bank believes a "neutral" interest rate would be in a 2.5-3.5 percent range. Ms Wilkins's statement makes it clear that the Bank intends to move rates into that range. However, it is no longer describing its approach as "gradual", in order to remove any impression that there is any kind of pre-set path. Actual rate moves will be data-dependent. One factor the Bank is continuing to watch carefully is the level of household debt. This has shown some very slight moderation, but is still so high that each rate move by the Bank pushes more households toward financial stress.
One factor the Bank did not focus on today is fiscal policy. Despite the strong performance of the economy, the Federal Government continues to run significant deficits, with little improvement in prospect. This excellent piece from Bloomberg, published ahead of today's rate decision, summarizes the issue very well.
There will be a Federal election on October 21 2019, and between now and then Finance Minister Morneau will table a fiscal update (in the next few weeks) and a full budget in the spring. After the 2015 election Justin Trudeau bragged that it was his pledge to run small budget deficits, in contrast to the fiscal austerity of the previous Tory government, that won him the election.
Recall that the actual pledge was for deficits of $ 10 billion or so for just a couple of years, with a return to balance by about the time of next year's vote. Actual deficits have been near twice that size, with no path for a return to balance. These deficits are arguably unnecessary and are indisputably complicating the Bank of Canada's job, but the chances of Trudeau and Morneau changing tack with voting day approaching are just about zero.
Finally, a little hat-tip. It's unusual to find any business economist with a novel and arresting way of describing things, but Bloomberg's reporter has found one. Frances Donald of Manulife Asset Management is quoted as saying of the US and Canada that "these economies are sprinting in the middle of a marathon and that will lead to exhaustion". Well done, Ms Donald! I wish I'd said that, and at some point in the future I almost certainly will.
Friday 19 October 2018
Canada CPI lower but rate hike still coming
Statistics Canada reported this morning that headline CPI rose 2.2 percent in the twelve months to September, down from 2.8 percent in August and well below the consensus expectation of a 2.7 percent rise. The spike in CPI during the summer months was largely the result of a big jump in gasoline prices. One can only assume that the economists who contribute to the consensus forecast are all tooling around in Teslas, because otherwise they would surely have noticed that gas prices have fallen back sharply as the so-called summer driving season has wound down.
Despite the relatively benign September data, a Bank of Canada rate hike this coming week is all but certain. The transportation index (which includes gasoline) was the largest single contributor to the gain in headline inflation, but all eight principal components of the index rose on an annual basis. This suggests that inflation pressures, while still modest, are widespread. Moreover, the average of the Bank's three favoured core inflation measures remains right at 2 percent, meaning that the Bank has little leeway to get things wrong.
The last-minute conclusion of the NAFTA renegotiation has removed a big cloud over the economy's prospects. Even before the deal was reached, business sentiment was positive and the economy was operating essentially at full capacity, with the labour market looking increasingly tight. The Bank of Canada has done a good job of staying abreast of the curve here, and another 25 bp tightening move this week would allow it to stay that way. This will in all likelihood be the final move for 2015, but with the Fed set to continue edging US rates higher in 2019, the Bank of Canada will not want to lag too far behind.
Despite the relatively benign September data, a Bank of Canada rate hike this coming week is all but certain. The transportation index (which includes gasoline) was the largest single contributor to the gain in headline inflation, but all eight principal components of the index rose on an annual basis. This suggests that inflation pressures, while still modest, are widespread. Moreover, the average of the Bank's three favoured core inflation measures remains right at 2 percent, meaning that the Bank has little leeway to get things wrong.
The last-minute conclusion of the NAFTA renegotiation has removed a big cloud over the economy's prospects. Even before the deal was reached, business sentiment was positive and the economy was operating essentially at full capacity, with the labour market looking increasingly tight. The Bank of Canada has done a good job of staying abreast of the curve here, and another 25 bp tightening move this week would allow it to stay that way. This will in all likelihood be the final move for 2015, but with the Fed set to continue edging US rates higher in 2019, the Bank of Canada will not want to lag too far behind.
Tuesday 16 October 2018
All cannabis, all the time
Jump for joy, because the big day is almost here -- recreational cannabis use becomes legal across Canada at midnight tonight -- which means those lucky Newfoundlanders get to toke up a full four-and-a-half hours ahead of the poor folks out in BC. Personally I couldn't care less -- pot is the dullest way of getting a buzz on that mankind has ever devised -- but it's got a whole lot of people excited. So here are some suitably scrambled thoughts on the whole thing.
If you're the kind of person who defines a politician as a someone who couldn't organize a two-car funeral, you'll find proof aplenty in the cannabis legalization saga. There wasn't exactly a public outcry in favour of legal weed before the last election. There was support for the smaller step of decriminalization, but Justin Trudeau decided to go all the way.
It turned out to be much harder than he expected, because the junior levels of government (Provinces and municipalities) weren't actually supportive. They recognized that the costs, both financial and social, would largely be borne by them in the shape of added burdens on their law enforcement and medical systems. In true Canadian style, there was a wrangle over who would get the benefit of the tax revenue on newly-legalized ganja.
Even with the tax issue settled, the Provinces kept stalling and asking for legalization to be delayed. As a result a policy that was supposed to be implemented during 2017 was pushed back to October 17, 2018, and some Provinces are still saying they're not really ready. To get them onside, Ottawa had to allow each Province to set some of its own rules within the general context of legalization. As a result Quebec has opted for a minimum age limit of 21 versus the national standard of 19, possession of small amounts by a minor is a punishable offence in some Provinces and not in others, and so on.
The election of Doug Ford as Premier of Ontario threw a last minute monkey wrench in the works. The previous Wynne government planned to open a chain of preternaturally dull, publicly-operated cannabis stores across the Province, a step that would have virtually guaranteed the continuing success of the existing illegal distribution system. True to his free enterprise principles, Ford scrapped that idiotic notion with a plan to issue licenses to private operators.
One small problem, though: there was no time to get potential sellers vetted and licensed by the big day. As a result, would-be tokers in Canada's largest province will only be able to score their weed online until April 2019 -- a step that seems to virtually guarantee the continuing success of the existing illegal distribution system. The eventual proliferation of small pot outlets also seems likely to lead to a lot more petty crime than Wynne's scheme would have.
There's going to be an almighty shake-out, and probably sooner rather than later. There are reportedly 135 marijuana enterprises listed on public stock exchanges, plus who knows how many more private companies. Oversupply looms, then, right? Wrong! Reportedly the expected amount of legal maryjane available in the first year of legalization will be only about one-third of projected demand. Evidently, a good proportion of the new firms are get-rich-quick schemes that may never actually get any product to market before either failing or getting bought out.
The media are going to need something else to write about once the fuss dies down. Both the Toronto Star and the Globe and Mail have been obsessing about pot for months. The Star website has had a "countdown to cannabis" clock on display for most of this year and is choc-a-bloc with weed stories. Today's (i.e. October 16's) print edition has three pot stories in the first four pages of the main paper, another on the first page of the business section...and a separate cannabis section running to several pages!
This whole business is important to my local area, and possibly not in a good way. Niagara has one of the more benign growing climates in Canada, and a high proportion of Canada's highest-grade agricultural land. In the past it was Canada's fruit belt, playing an honourable role in the Second World War by providing enormous quantities of canned fruit that helped protect allied troops from scurvy. Some of that has given way to wineries, but there is still a flourishing greenhouse sector providing much of Ontario's vegetable crop during the warmer months.
Greenhouses are now being converted to grow ops. These give off an appalling smell if not properly managed -- there's a reason marijuana is known as skunk -- and there are real concerns that the odour will affect the flavour of other crops in the region, especially grapes. Given that you can grow weed in your basement, it makes absolutely no sense to waste some of Canada's best agricultural land on this rather nasty crop, but that's where the money is perceived to be, so that's what's happening.
Oh well. It's going to happen whether I like it or not. So let's give the last word to the late, great Peter Tosh, who had a few strong ideas of his own on the subject.
If you're the kind of person who defines a politician as a someone who couldn't organize a two-car funeral, you'll find proof aplenty in the cannabis legalization saga. There wasn't exactly a public outcry in favour of legal weed before the last election. There was support for the smaller step of decriminalization, but Justin Trudeau decided to go all the way.
It turned out to be much harder than he expected, because the junior levels of government (Provinces and municipalities) weren't actually supportive. They recognized that the costs, both financial and social, would largely be borne by them in the shape of added burdens on their law enforcement and medical systems. In true Canadian style, there was a wrangle over who would get the benefit of the tax revenue on newly-legalized ganja.
Even with the tax issue settled, the Provinces kept stalling and asking for legalization to be delayed. As a result a policy that was supposed to be implemented during 2017 was pushed back to October 17, 2018, and some Provinces are still saying they're not really ready. To get them onside, Ottawa had to allow each Province to set some of its own rules within the general context of legalization. As a result Quebec has opted for a minimum age limit of 21 versus the national standard of 19, possession of small amounts by a minor is a punishable offence in some Provinces and not in others, and so on.
The election of Doug Ford as Premier of Ontario threw a last minute monkey wrench in the works. The previous Wynne government planned to open a chain of preternaturally dull, publicly-operated cannabis stores across the Province, a step that would have virtually guaranteed the continuing success of the existing illegal distribution system. True to his free enterprise principles, Ford scrapped that idiotic notion with a plan to issue licenses to private operators.
One small problem, though: there was no time to get potential sellers vetted and licensed by the big day. As a result, would-be tokers in Canada's largest province will only be able to score their weed online until April 2019 -- a step that seems to virtually guarantee the continuing success of the existing illegal distribution system. The eventual proliferation of small pot outlets also seems likely to lead to a lot more petty crime than Wynne's scheme would have.
There's going to be an almighty shake-out, and probably sooner rather than later. There are reportedly 135 marijuana enterprises listed on public stock exchanges, plus who knows how many more private companies. Oversupply looms, then, right? Wrong! Reportedly the expected amount of legal maryjane available in the first year of legalization will be only about one-third of projected demand. Evidently, a good proportion of the new firms are get-rich-quick schemes that may never actually get any product to market before either failing or getting bought out.
The media are going to need something else to write about once the fuss dies down. Both the Toronto Star and the Globe and Mail have been obsessing about pot for months. The Star website has had a "countdown to cannabis" clock on display for most of this year and is choc-a-bloc with weed stories. Today's (i.e. October 16's) print edition has three pot stories in the first four pages of the main paper, another on the first page of the business section...and a separate cannabis section running to several pages!
This whole business is important to my local area, and possibly not in a good way. Niagara has one of the more benign growing climates in Canada, and a high proportion of Canada's highest-grade agricultural land. In the past it was Canada's fruit belt, playing an honourable role in the Second World War by providing enormous quantities of canned fruit that helped protect allied troops from scurvy. Some of that has given way to wineries, but there is still a flourishing greenhouse sector providing much of Ontario's vegetable crop during the warmer months.
Greenhouses are now being converted to grow ops. These give off an appalling smell if not properly managed -- there's a reason marijuana is known as skunk -- and there are real concerns that the odour will affect the flavour of other crops in the region, especially grapes. Given that you can grow weed in your basement, it makes absolutely no sense to waste some of Canada's best agricultural land on this rather nasty crop, but that's where the money is perceived to be, so that's what's happening.
Oh well. It's going to happen whether I like it or not. So let's give the last word to the late, great Peter Tosh, who had a few strong ideas of his own on the subject.
Thursday 11 October 2018
Trump versus the Fed
We already knew that Donald Trump's understanding of economics was, to put it politely, limited. His trademark combination of insanely stimulative fiscal policy and tariff wars may be giving the US economy an adrenaline shot in the short term, but in the longer term it's a recipe for problems, quite possibly including a full-blown financial crisis. That crisis would most likely unfold with tariffs and a tight labour market leading to an upsurge in inflation, prompting the Fed to tighten interest rates more aggressively, resulting in a sharp rise in bond yields and a corresponding downturn in equity markets.
Some of those effects are already starting to be seen, even if this week's sudden equity selloff proves short-lived. Prices and wages are rising and the Fed is promising to react, as it should -- and Trump doesn't like it one bit. He has been complaining quietly about the Fed's gradual policy tightening for some time, but this week he has turned the volume up to 11, accusing the Fed of "going loco".
It's possible, as Jordan Weissmann seems to argue here, that Trump is just distancing himself from the Fed's actions so that he can blame the central bank if (or rather when) things go off the rails. Given Trump's bull-in-a-china-shop approach, however, it's quite possible that he is setting the stage to do something much more drastic, like firing Fed Chairman Jerome Powell and replacing him with someone more pliable.
The fact that this possibility is even remotely plausible is a clear indication of Trump's lack of understanding of economic policy and markets. With other key elements of US policy, notably fiscal and trade, having already gone loco, to use Trump's own phrase, the assurance of a stable hand at the Fed is one of the key factors keeping market participants from panicking.
If Trump continues to rail against the Fed, he will trigger exactly the kind of rout in fixed income and equity markets that he wants to avoid. Maybe there are calming voices among Trump's White House team that can rein him in, but as that team includes Larry Kudlow and Peter Navarro, you can't blame investors for feeling uneasy.
Some of those effects are already starting to be seen, even if this week's sudden equity selloff proves short-lived. Prices and wages are rising and the Fed is promising to react, as it should -- and Trump doesn't like it one bit. He has been complaining quietly about the Fed's gradual policy tightening for some time, but this week he has turned the volume up to 11, accusing the Fed of "going loco".
It's possible, as Jordan Weissmann seems to argue here, that Trump is just distancing himself from the Fed's actions so that he can blame the central bank if (or rather when) things go off the rails. Given Trump's bull-in-a-china-shop approach, however, it's quite possible that he is setting the stage to do something much more drastic, like firing Fed Chairman Jerome Powell and replacing him with someone more pliable.
The fact that this possibility is even remotely plausible is a clear indication of Trump's lack of understanding of economic policy and markets. With other key elements of US policy, notably fiscal and trade, having already gone loco, to use Trump's own phrase, the assurance of a stable hand at the Fed is one of the key factors keeping market participants from panicking.
If Trump continues to rail against the Fed, he will trigger exactly the kind of rout in fixed income and equity markets that he wants to avoid. Maybe there are calming voices among Trump's White House team that can rein him in, but as that team includes Larry Kudlow and Peter Navarro, you can't blame investors for feeling uneasy.
Friday 5 October 2018
Still going strong-(ish)
A few days ago a young man in my town wrote a post on one of our community Facebook groups, asking for suggestions about where he might find work. I and others were able to point to help-wanted ads at the local supermarket, hardware store, several restaurants, a seniors residence and more. Employers in our town (and the Niagara region as a whole) are finding it harder and harder to find the workers they need.
This morning StatsCan reported the results of its labour force survey for September, and it's clear that the tightness in the job market is not confined to our little area. After an unexpected decline in August, employment across Canada rose by 63,000 in the month, dropping the unemployment rate fractionally to 5.9 percent. The monthly gain was more than fully accounted for by a rise of 80,000 in part-time employment, but on a year-on-year basis, the 222,000 increase in the number employed is fully accounted for by full-time jobs.
Interestingly, the biggest job gain was recorded in Ontario, which saw an employment increase of 36,000 positions, all part-time in nature. This is the third increase in employment in Canada's largest province in the past four months. However, a rising participation rate resulted in a small increase in the provincial unemployment rate, which now matches the national figure of 5.9 percent.
Just this week, the new Doug Ford government announced that it would repeal the previous government's labour reform bill, which had increased the minimum wage and provided improvements to workers' non-wage benefits. Ford bellowed in the provincial legislature that the reforms had cost the province "60,000 jobs". It's true that employment fell by that amount in January, the first month of the higher minimum wage, but given that employment fell in most parts of Canada in that month, it's hardly likely that Ontario's wage policy was the culprit. As StatsCan reported this morning, employment in Ontario is up by 103,000 in the past twelve months, all accounted for by full-time jobs. Don't expect Doug Ford to mention that any time soon.
An unemployment rate just below 6 percent on a national level is as close to full employment as Canada is ever likely to get, given the structural factors that bias unemployment higher in the four Atlantic provinces. Wage pressures remain relatively well-contained, with average hourly earnings up 2.3 percent year-on-year in September. Even so, the tightness of the job market is one of the key factors that the Bank of Canada will have to consider as it sets monetary policy in the months ahead. With the NAFTA uncertainty out of the way, a 25 bp rate hike is likely at the end of this month, with a further increase probable early in 2019.
This morning StatsCan reported the results of its labour force survey for September, and it's clear that the tightness in the job market is not confined to our little area. After an unexpected decline in August, employment across Canada rose by 63,000 in the month, dropping the unemployment rate fractionally to 5.9 percent. The monthly gain was more than fully accounted for by a rise of 80,000 in part-time employment, but on a year-on-year basis, the 222,000 increase in the number employed is fully accounted for by full-time jobs.
Interestingly, the biggest job gain was recorded in Ontario, which saw an employment increase of 36,000 positions, all part-time in nature. This is the third increase in employment in Canada's largest province in the past four months. However, a rising participation rate resulted in a small increase in the provincial unemployment rate, which now matches the national figure of 5.9 percent.
Just this week, the new Doug Ford government announced that it would repeal the previous government's labour reform bill, which had increased the minimum wage and provided improvements to workers' non-wage benefits. Ford bellowed in the provincial legislature that the reforms had cost the province "60,000 jobs". It's true that employment fell by that amount in January, the first month of the higher minimum wage, but given that employment fell in most parts of Canada in that month, it's hardly likely that Ontario's wage policy was the culprit. As StatsCan reported this morning, employment in Ontario is up by 103,000 in the past twelve months, all accounted for by full-time jobs. Don't expect Doug Ford to mention that any time soon.
An unemployment rate just below 6 percent on a national level is as close to full employment as Canada is ever likely to get, given the structural factors that bias unemployment higher in the four Atlantic provinces. Wage pressures remain relatively well-contained, with average hourly earnings up 2.3 percent year-on-year in September. Even so, the tightness of the job market is one of the key factors that the Bank of Canada will have to consider as it sets monetary policy in the months ahead. With the NAFTA uncertainty out of the way, a 25 bp rate hike is likely at the end of this month, with a further increase probable early in 2019.
Monday 1 October 2018
Not A Free Trade Agreement
It went down to the wire, but it appears that Canada will be signing on to the trade deal previously agreed by the United States and Mexico. Part of the deal, very important to Trump, is that the new arrangement will not bear the name NAFTA. Instead it will be known by the unpronounceable acronym USMCA, standing for United States Mexico Canada Agreement. In one important sense that's not a bad change, because if there's one thing that the new deal doesn't achieve, it's free trade.
A cursory glance at Canada's "red lines" in the negotiations shows that many of the arguments were about how many of the anti-free trade provisions of NAFTA the country would be able to carry over into the new deal. Prominent among these, and a cause celebre for Trump after he received an earful from Wisconsin farmers during the election campaign, was Canada's system of "supply management" for dairy and other agricultural products. This was resolved in part by opening up 3.6 percent of the Canadian dairy market to US competition, a miserly concession that nevertheless has the dairy lobby crying doom.
The solutions found for many of the other contentious issues tend to show just how far the US moved off its initial bargaining positions in order to make the deal. For example, the initial US stance was that the new deal should expire after just five years, something that both Canada and Mexico found unacceptable. USMCA provides for an initial term of sixteen years, with the opportunity to extend it further after six years. Canada also seems to have won a victory over the so-called Section 19 dispute resolution mechanism, which the US wanted to abolish but which has been carried over essentially unchanged into the USMCA.
Other terms of the deal, including changes in auto rules of origin, patent protection, duty free shopping allowances and such, can be found here. Considering how minor, indeed almost cosmetic, as lot of the changes are, it's legitimate to wonder (a) why Trump was so anxious to blow up NAFTA and (b) why it was so hard for Canada to belly up to the bar until the last moment.
As far as Trump's motivation is concerned, the simplest explanation is is just likes taking credit for stuff. Making minor changes to an existing deal doesn't give him much to brag about at the mid-term elections, but a newly-named deal reached at the eleventh hour will look much more impressive to what remains of his base.
As for Canada, it's a little harder to be sure of what happened. As I have repeatedly suggested in previous postings, the Trudeau government has mismanaged this from the outset, dragging in all kinds of extraneous topics and generally not seeming to take the various deadlines set by the US (and by the political cycle in Mexico) at all seriously. The sudden rush to conclude a deal over the past week may have reflected a belated realization that Trump really might follow through on his threat to impose tariffs on Canadian autos. A cynic might also wonder if going down to the wire suited Trudeau well enough, with a Provincial election taking place today in Quebec, the Province likely to be hit hardest by the dairy concessions.
Removing the uncertainty over NAFTA should be good for both consumer sentiment and business investment in Canada. And it surely leaves the way clear for the Bank of Canada to raise interest rates again later this month.
A cursory glance at Canada's "red lines" in the negotiations shows that many of the arguments were about how many of the anti-free trade provisions of NAFTA the country would be able to carry over into the new deal. Prominent among these, and a cause celebre for Trump after he received an earful from Wisconsin farmers during the election campaign, was Canada's system of "supply management" for dairy and other agricultural products. This was resolved in part by opening up 3.6 percent of the Canadian dairy market to US competition, a miserly concession that nevertheless has the dairy lobby crying doom.
The solutions found for many of the other contentious issues tend to show just how far the US moved off its initial bargaining positions in order to make the deal. For example, the initial US stance was that the new deal should expire after just five years, something that both Canada and Mexico found unacceptable. USMCA provides for an initial term of sixteen years, with the opportunity to extend it further after six years. Canada also seems to have won a victory over the so-called Section 19 dispute resolution mechanism, which the US wanted to abolish but which has been carried over essentially unchanged into the USMCA.
Other terms of the deal, including changes in auto rules of origin, patent protection, duty free shopping allowances and such, can be found here. Considering how minor, indeed almost cosmetic, as lot of the changes are, it's legitimate to wonder (a) why Trump was so anxious to blow up NAFTA and (b) why it was so hard for Canada to belly up to the bar until the last moment.
As far as Trump's motivation is concerned, the simplest explanation is is just likes taking credit for stuff. Making minor changes to an existing deal doesn't give him much to brag about at the mid-term elections, but a newly-named deal reached at the eleventh hour will look much more impressive to what remains of his base.
As for Canada, it's a little harder to be sure of what happened. As I have repeatedly suggested in previous postings, the Trudeau government has mismanaged this from the outset, dragging in all kinds of extraneous topics and generally not seeming to take the various deadlines set by the US (and by the political cycle in Mexico) at all seriously. The sudden rush to conclude a deal over the past week may have reflected a belated realization that Trump really might follow through on his threat to impose tariffs on Canadian autos. A cynic might also wonder if going down to the wire suited Trudeau well enough, with a Provincial election taking place today in Quebec, the Province likely to be hit hardest by the dairy concessions.
Removing the uncertainty over NAFTA should be good for both consumer sentiment and business investment in Canada. And it surely leaves the way clear for the Bank of Canada to raise interest rates again later this month.
Thursday 27 September 2018
NAFTA smackdown
The Trump press conference at the UN on Wednesday was a remarkable event, partly because Trump rarely dares to face the media on his own, and partly because at times he managed to sound almost coherent and competent. Among the many topics he covered was the state of NAFTA negotiations with Canada, and he had nothing positive to say. Asked to comment on reports that he had turned down a sideline meeting* with Justin Trudeau, Trump responded:
“Yeah, I did. Because his tariffs are too high and he doesn’t seem to want to move and I’ve told him forget about it. And frankly we’re thinking about just taxing cars coming in from Canada. That’s the motherlode. That’s the big one.
We are very unhappy with the negotiations and the negotiating style of Canada. We don’t like their representative very much.”
A lot of this -- the high tariff complaint, the threat to impose auto tariffs -- is just the standard Trump rhetoric, but the complaint about Canada's negotiating style and about "their representative" is new. Canada's chief representative at the NAFTA talks is Foreign Affairs Minister Chrystia Freeland, and there have been rumours in the past about friction between her ad her US counterpart, Robert Lighthizer.
Freeland comes across in interviews as arrogant, strident and smug. A quick review of her bio would suggest that there was never much reason to suppose she'd be up to this job. She has had a relatively successful career as a journalist, but she is new to politics and has no background in diplomacy, trade or negotiation.
Freeland and her boss, Justin Trudeau, have maintained a remarkably insouciant attitude to the NAFTA renegotiations from the start, when they tabled an opening bargaining position that was heavy on gender equality and indigenous rights but rather light on specifics regarding trade. One can only imagine the raised eyebrows that produced in the White House -- and for that matter in Mexico City.
Freeland and Trudeau have stated all along that they will not sign "a bad agreement for Canada", but it appears that they do not understand what the choices are here. It is as if they believe that Canada has a choice between remaining in the current deal, negotiating the so-called "win-win-win" deal with the US and Mexico, or abandoning NAFTA and trading with the US under the benign aegis of the World Trade Organization.
The fact is that NAFTA as we have known it is dead, and if Canada cannot sign up to a deal comparable to that agreed between the US and Mexico, Trump will not be bound by WTO rules. His tariffs on steel and aluminum, and the repeated threats of auto tariffs, should surely have made that clear.
It may be that once the provincial election in Quebec is out of the way next week, fresh progress will suddenly be possible again. That Province's dairy farmers are fiercely protective of Canada's supply management system, one of Trump's major targets. However, a variety of media reports suggest that there remain numerous areas of disagreement beyond dairy, including dispute resolution and protection of Canada's cultural sector (again an issue with the most resonance in Quebec). It makes you wonder what they've actually been talking about for the past year and more -- and wonder also whether Trump may actually have a point about Canada's negotiating style.
* Trudeau's representatives have denied that a meeting with Trump was ever requested, but this may not be entirely true. Before heading down to New York, Trudeau told the media that a sideline meeting on NAFTA was very likely to happen.
“Yeah, I did. Because his tariffs are too high and he doesn’t seem to want to move and I’ve told him forget about it. And frankly we’re thinking about just taxing cars coming in from Canada. That’s the motherlode. That’s the big one.
We are very unhappy with the negotiations and the negotiating style of Canada. We don’t like their representative very much.”
A lot of this -- the high tariff complaint, the threat to impose auto tariffs -- is just the standard Trump rhetoric, but the complaint about Canada's negotiating style and about "their representative" is new. Canada's chief representative at the NAFTA talks is Foreign Affairs Minister Chrystia Freeland, and there have been rumours in the past about friction between her ad her US counterpart, Robert Lighthizer.
Freeland comes across in interviews as arrogant, strident and smug. A quick review of her bio would suggest that there was never much reason to suppose she'd be up to this job. She has had a relatively successful career as a journalist, but she is new to politics and has no background in diplomacy, trade or negotiation.
Freeland and her boss, Justin Trudeau, have maintained a remarkably insouciant attitude to the NAFTA renegotiations from the start, when they tabled an opening bargaining position that was heavy on gender equality and indigenous rights but rather light on specifics regarding trade. One can only imagine the raised eyebrows that produced in the White House -- and for that matter in Mexico City.
Freeland and Trudeau have stated all along that they will not sign "a bad agreement for Canada", but it appears that they do not understand what the choices are here. It is as if they believe that Canada has a choice between remaining in the current deal, negotiating the so-called "win-win-win" deal with the US and Mexico, or abandoning NAFTA and trading with the US under the benign aegis of the World Trade Organization.
The fact is that NAFTA as we have known it is dead, and if Canada cannot sign up to a deal comparable to that agreed between the US and Mexico, Trump will not be bound by WTO rules. His tariffs on steel and aluminum, and the repeated threats of auto tariffs, should surely have made that clear.
It may be that once the provincial election in Quebec is out of the way next week, fresh progress will suddenly be possible again. That Province's dairy farmers are fiercely protective of Canada's supply management system, one of Trump's major targets. However, a variety of media reports suggest that there remain numerous areas of disagreement beyond dairy, including dispute resolution and protection of Canada's cultural sector (again an issue with the most resonance in Quebec). It makes you wonder what they've actually been talking about for the past year and more -- and wonder also whether Trump may actually have a point about Canada's negotiating style.
* Trudeau's representatives have denied that a meeting with Trump was ever requested, but this may not be entirely true. Before heading down to New York, Trudeau told the media that a sideline meeting on NAFTA was very likely to happen.
Saturday 22 September 2018
Ontari-OWE
The newly-minted Doug Ford government in Ontario is breaking all kinds of precedents, but it's been quick to adhere to one tradition. Yesterday, to no-one's surprise, Finance Minister Vic Fedeli announced that the fiscal position the new government inherited was much worse than the outgoing Wynne government had let on.
The Wynne government unleashed a blizzard of spending initiatives in the weeks ahead of June's provincial election, but most of them had long time-fuses and thus had no impact on the near-term fiscal position. Fedeli's revisions to the numbers largely reflect two accounting issues, relating to the treatment of surpluses in public sector pension plans and the former government's so-called Fair Hydro Plan.
Treatment of public sector pensions has been a matter of dispute between the Province and its own Auditor-General for some time. The government liked to count these surpluses as an asset, but the A-G argued that as they did not represent funds that the government could spend, this was incorrect. I'm no accountant, but it seems to me that the A-G has this one right, and Fedeli agrees, so that "asset" is off the books again.
As for the Fair Hydro Plan, the previous government had responded to the outcry over the soaring cost of electricity, largely the result of a botched push for green energy, by extending the amortization period for energy-related assets and borrowing long-term against those assets in order to provide a break to consumers. A break, that is, for today's consumers at the expense of the future consumers who will have to pay back the debt. The wrinkle in the scheme was that the government booked the added debt not on its own balance sheet but on that of the principal power utility, Ontario Power Generation.
The combined effect of removing the pension assets from the balance sheet and putting the Fair Hydro debt onto the Province's books is to increase the deficit projection for this fiscal year by about C$ 5 billion. With a few other changes also taken into account, Fedeli forecasts a deficit for the year of C$15 billion, compared to the C$6.7 billion claimed by the former government.
Now what? One of the odd features of the recent election was that the Ford team won without ever presenting anything remotely resembling a fully-costed fiscal plan. Fedeli can't say circumstances have sadly forced him to tear his plan up, because he never had one in the first place. However, the Ford team did pledge to find "efficiencies" in the Ontario budget amounting to C$6 billion per year, and that plan still seems to be in place.
C$6 billion is about 4 percent of program spending, which doesn't sound unachievable, but there's a catch. Ford pledged to find those savings without firing any public sector employees. In many key areas of the public sector -- education and health care to name but two -- wages and benefits are a huge proportion of total costs, so that seems like an impossible proposition. It's also illogical: if you really can find "efficiencies", it follows that you are finding ways to achieve the same results with fewer resources. That must mean that you will have more employees than you need, and unless you let some of them go, you won't actually achieve any cost savings.
Some time before year-end Fedeli will have to move on from shredding Wynne's fiscal plan and table one of his own. It's likely that a lot of the initiatives hastily announced by Wynne ahead of the election -- expanded day care, high-speed trains and more -- will never see the light of day. Even so, Ontario, already the world's most indebted non-sovereign jurisdiction, is likely to accumulate yet more debt in the Ford government's first (and, please God, last) term in office.
The Wynne government unleashed a blizzard of spending initiatives in the weeks ahead of June's provincial election, but most of them had long time-fuses and thus had no impact on the near-term fiscal position. Fedeli's revisions to the numbers largely reflect two accounting issues, relating to the treatment of surpluses in public sector pension plans and the former government's so-called Fair Hydro Plan.
Treatment of public sector pensions has been a matter of dispute between the Province and its own Auditor-General for some time. The government liked to count these surpluses as an asset, but the A-G argued that as they did not represent funds that the government could spend, this was incorrect. I'm no accountant, but it seems to me that the A-G has this one right, and Fedeli agrees, so that "asset" is off the books again.
As for the Fair Hydro Plan, the previous government had responded to the outcry over the soaring cost of electricity, largely the result of a botched push for green energy, by extending the amortization period for energy-related assets and borrowing long-term against those assets in order to provide a break to consumers. A break, that is, for today's consumers at the expense of the future consumers who will have to pay back the debt. The wrinkle in the scheme was that the government booked the added debt not on its own balance sheet but on that of the principal power utility, Ontario Power Generation.
The combined effect of removing the pension assets from the balance sheet and putting the Fair Hydro debt onto the Province's books is to increase the deficit projection for this fiscal year by about C$ 5 billion. With a few other changes also taken into account, Fedeli forecasts a deficit for the year of C$15 billion, compared to the C$6.7 billion claimed by the former government.
Now what? One of the odd features of the recent election was that the Ford team won without ever presenting anything remotely resembling a fully-costed fiscal plan. Fedeli can't say circumstances have sadly forced him to tear his plan up, because he never had one in the first place. However, the Ford team did pledge to find "efficiencies" in the Ontario budget amounting to C$6 billion per year, and that plan still seems to be in place.
C$6 billion is about 4 percent of program spending, which doesn't sound unachievable, but there's a catch. Ford pledged to find those savings without firing any public sector employees. In many key areas of the public sector -- education and health care to name but two -- wages and benefits are a huge proportion of total costs, so that seems like an impossible proposition. It's also illogical: if you really can find "efficiencies", it follows that you are finding ways to achieve the same results with fewer resources. That must mean that you will have more employees than you need, and unless you let some of them go, you won't actually achieve any cost savings.
Some time before year-end Fedeli will have to move on from shredding Wynne's fiscal plan and table one of his own. It's likely that a lot of the initiatives hastily announced by Wynne ahead of the election -- expanded day care, high-speed trains and more -- will never see the light of day. Even so, Ontario, already the world's most indebted non-sovereign jurisdiction, is likely to accumulate yet more debt in the Ford government's first (and, please God, last) term in office.
Friday 21 September 2018
CPI data lock in Bank of Canada rate hike
As (not so) exclusively predicted here, the year-on-year rise in Canada's headline CPI edged lower in August, falling to 2.8 percent from 3.0 percent in July. The slight deceleration was largely the result of a slowing rate of increase in retail fuel prices, though these remain the largest contributor to the increase in the headline number. Excluding gasoline, the year-on-year rise in CPI for August was 2.2 percent, the same as in July.
Despite the slight moderation in headline inflation, the details of the report make it all but inevitable that the Bank of Canada will move to tighten its policy rate by a further 25 basis points in October. In particular:
So, a rate hike at the Governing Council meeting on October 24 looks just about certain, but with one caveat. The possibly illusory September 30 deadline for Canada to conclude its NAFTA talks with the US is approaching fast, with little sign that a deal is at hand. There are political reasons (notably a Quebec election set for early October) why the Trudeau government might prefer to hold off on announcing a deal until mid-month, but it is unclear whether the US side can accede to that.
If the NAFTA talks fall apart amid recriminations in the next few weeks, if the Canadian dollar takes a hit, and if Trump revives his threat to impose auto tariffs, the Bank might feel it has no choice but to hold back on a rate hike. That's not the most likely scenario, but it's far from an impossible one.
Despite the slight moderation in headline inflation, the details of the report make it all but inevitable that the Bank of Canada will move to tighten its policy rate by a further 25 basis points in October. In particular:
- Although, as noted, the transportation sub-index (which includes gasoline) was the largest contributor to the overall gain, all eight of StatsCan's sub-indices were higher in the month. This suggests that while inflationary pressures remain relatively well-contained, they are widespread and cannot be attributed solely to one-off factors.
- All three of the Bank's core measures now stand at or above the 2 percent target inflation rate. This is the first time this has been the case since 2012. If the Bank wishes financial markets to take these measures seriously, it almost has to respond to this.
So, a rate hike at the Governing Council meeting on October 24 looks just about certain, but with one caveat. The possibly illusory September 30 deadline for Canada to conclude its NAFTA talks with the US is approaching fast, with little sign that a deal is at hand. There are political reasons (notably a Quebec election set for early October) why the Trudeau government might prefer to hold off on announcing a deal until mid-month, but it is unclear whether the US side can accede to that.
If the NAFTA talks fall apart amid recriminations in the next few weeks, if the Canadian dollar takes a hit, and if Trump revives his threat to impose auto tariffs, the Bank might feel it has no choice but to hold back on a rate hike. That's not the most likely scenario, but it's far from an impossible one.
Friday 14 September 2018
Central banks' balancing act
It's not just the Bank of Canada that is facing unprecedented uncertainty as it contemplates its policy decisions. Both the ECB and the Bank of England are in uncharted territory too. For the Bank of Canada the great unknown is the fate of NAFTA; for policymakers in both London and Frankfurt, it's Brexit.
On Thursday both the ECB and the Bank of England indicated that they were maintaining their current policy stance for the time being, while being careful to acknowledge the risks that lie ahead. In the case of the ECB, that means that the wind-down of the quantitative easing program that began at mid-year will continue. Further, the Bank intends to keep its benchmark rate in negative territory (currently minus 0.4 percent) well into 2019.
While the Eurozone economy may not need the extraordinary stimulus of QE any longer, this is clearly not the time for the ECB to be tightening its more conventional policy settings. GDP growth within the zone is starting to slow. Uncertainties surrounding Brexit, the situation in Turkey and the political turmoil in Italy, all overlaid by the Trump-initiated trade war, make it very likely that business investment will remain weak until the situation becomes clearer. The ECB's job is made somewhat easier by the fact that inflation is under relatively good control; it currently stands at the target level of 2 percent but is expected to ease back in the coming months.
The task facing the ECB may be complicated, but it is as nothing compared to what confronts the Bank of England. The Bank's unanimous decision this week was to maintain its asset purchase program (i.e. QE) at its current level, and also to keep Bank Rate at 0.75 percent. Despite the unanimity, this cannot have been an easy decision. UK CPI has been edging above the Bank's 2 percent target for some time, standing at 2.5 percent in July. There are signs that the economy is moving into a situation of excess demand, and the current 3.0 percent annual rise in wage rates is ominous, particularly in light of the UK's customarily weak productivity performance.
Overshadowing all these factors, of course, is Brexit, with the immutable fixed date for departure now barely half a year away and a deal on future arrangements nowhere in sight. The Bank's press release notes that business uncertainty over the outlook is starting to mount, which is hardly surprising. Bank Governor Mark Carney announced this week that he had agreed to extend his stay at the Bank from a current end-date of June 2019 to January 2020. He celebrated this decision by warning that in the event of a no-deal Brexit, house prices could fall by as much as 35 percent, a pronouncement unlikely to make him popular with the property-obsessed middle class.
Carney seems to have done a good job at the Bank, overcoming early resentment of him as a foreign interloper, as well as sniping from Tory Brexiteers who see him as a spokesman for the so-called Project Fear. The next fifteen months, as he prepares himself for a return to the joys of an Ottawa winter (January, Mark? What are you thinking??) will put to the test his reputation as the leading central banker of his generation.
On Thursday both the ECB and the Bank of England indicated that they were maintaining their current policy stance for the time being, while being careful to acknowledge the risks that lie ahead. In the case of the ECB, that means that the wind-down of the quantitative easing program that began at mid-year will continue. Further, the Bank intends to keep its benchmark rate in negative territory (currently minus 0.4 percent) well into 2019.
While the Eurozone economy may not need the extraordinary stimulus of QE any longer, this is clearly not the time for the ECB to be tightening its more conventional policy settings. GDP growth within the zone is starting to slow. Uncertainties surrounding Brexit, the situation in Turkey and the political turmoil in Italy, all overlaid by the Trump-initiated trade war, make it very likely that business investment will remain weak until the situation becomes clearer. The ECB's job is made somewhat easier by the fact that inflation is under relatively good control; it currently stands at the target level of 2 percent but is expected to ease back in the coming months.
The task facing the ECB may be complicated, but it is as nothing compared to what confronts the Bank of England. The Bank's unanimous decision this week was to maintain its asset purchase program (i.e. QE) at its current level, and also to keep Bank Rate at 0.75 percent. Despite the unanimity, this cannot have been an easy decision. UK CPI has been edging above the Bank's 2 percent target for some time, standing at 2.5 percent in July. There are signs that the economy is moving into a situation of excess demand, and the current 3.0 percent annual rise in wage rates is ominous, particularly in light of the UK's customarily weak productivity performance.
Overshadowing all these factors, of course, is Brexit, with the immutable fixed date for departure now barely half a year away and a deal on future arrangements nowhere in sight. The Bank's press release notes that business uncertainty over the outlook is starting to mount, which is hardly surprising. Bank Governor Mark Carney announced this week that he had agreed to extend his stay at the Bank from a current end-date of June 2019 to January 2020. He celebrated this decision by warning that in the event of a no-deal Brexit, house prices could fall by as much as 35 percent, a pronouncement unlikely to make him popular with the property-obsessed middle class.
Carney seems to have done a good job at the Bank, overcoming early resentment of him as a foreign interloper, as well as sniping from Tory Brexiteers who see him as a spokesman for the so-called Project Fear. The next fifteen months, as he prepares himself for a return to the joys of an Ottawa winter (January, Mark? What are you thinking??) will put to the test his reputation as the leading central banker of his generation.
Friday 7 September 2018
Not as bad as it looks
Statistics Canada reported this morning that the Canadian economy lost almost 52,000 jobs in August, pushing the national unemployment rate up to 6 percent. The Bank of Canada's Governing Council undoubtedly had a preview of the data when it met this week, and the numbers must have played a role in the decision to keep interest rates on hold for the time being.
Behind the headline, the data are not quite as dire. Full time employment actually rose more than 40,000 in the month, bringing the year-on-year rise in such jobs to 326,000, or 2.2 percent. This was more than offset by the loss of 92,000 part-time positions, with a remarkable 80,000 of those losses reportedly coming in Ontario. To put this full time/part time split into some sort of perspective, the average work week per employee on a national basis stood at 36.1 hours in August 2018, compared to 36.0 in the same month of 2017.
As always, the sheer volatility in Canada's monthly labour force data mean that the numbers need to be treated with caution. Aside from the widely divergent trend in full-time and part time numbers, other oddities in the August figures include the sharp fall in employment reported for Ontario,(where most media reports suggest that labour shortages are becoming more widespread, and a rise in employment in Alberta, where the local economy is supposedly in some trouble. A reported loss of 38,000 public sector jobs in the month also looks dubious.
It is always a good rule when looking at economic data not to put too much weight on the figures for any one month. That is especially true when the numbers are as volatile as the Canadian jobs data seem to be. The fall in employment reported today may well turn out to be a one-off event, but there is one other element of today's report that bears watching from a policy standpoint. The year on year rise in wages, which moved well above 3 percent in the first half of the year, has now slipped for two straight months, standing at 2.9 percent in August. If that trend continues, it gives the Bank of Canada one less thing to worry about.
Behind the headline, the data are not quite as dire. Full time employment actually rose more than 40,000 in the month, bringing the year-on-year rise in such jobs to 326,000, or 2.2 percent. This was more than offset by the loss of 92,000 part-time positions, with a remarkable 80,000 of those losses reportedly coming in Ontario. To put this full time/part time split into some sort of perspective, the average work week per employee on a national basis stood at 36.1 hours in August 2018, compared to 36.0 in the same month of 2017.
As always, the sheer volatility in Canada's monthly labour force data mean that the numbers need to be treated with caution. Aside from the widely divergent trend in full-time and part time numbers, other oddities in the August figures include the sharp fall in employment reported for Ontario,(where most media reports suggest that labour shortages are becoming more widespread, and a rise in employment in Alberta, where the local economy is supposedly in some trouble. A reported loss of 38,000 public sector jobs in the month also looks dubious.
It is always a good rule when looking at economic data not to put too much weight on the figures for any one month. That is especially true when the numbers are as volatile as the Canadian jobs data seem to be. The fall in employment reported today may well turn out to be a one-off event, but there is one other element of today's report that bears watching from a policy standpoint. The year on year rise in wages, which moved well above 3 percent in the first half of the year, has now slipped for two straight months, standing at 2.9 percent in August. If that trend continues, it gives the Bank of Canada one less thing to worry about.
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