Finance Minister Bill Morneau's third budget bears the title "Equality and growth". It is not quite a do-nothing budget, but it is obvious that Morneau and his boss, PM Justin Trudeau, are already looking ahead to the October 2019 election. The Spring 2019 budget will no doubt roll out some major measures that are only hinted at in this week's document.
The principal example here -- and a thoroughly good thing -- is the possible introduction of a national pharmacare plan. Absurd as it may seem, Canada is the only country whose publicly-funded health system does not cover prescription pharmaceuticals for most of the population. A special task force has been set up to figure out how to do this; it will be headed by former Ontario Health Minister (and Cliff Richard lookalike) Dr. Eric Hoskins, who has just overseen implementation of a partial pharmacare plan in Ontario. You can bet your life that the task force will have a plan ready to launch come budget day next year; whether it will have ideas on defraying the estimated C$19 billion annual cost is another question.
So what about Equality and Growth? The equality agenda means more spending, albeit spread over several years, on programs to encourage more female participation in the workforce and to address the seemingly intractable problems of Canada's indigenous population. The government has convinced itself that bringing more women into the workforce, and ensuring that they are paid the same as men, will add C$150 billion to GDP over the next five years. There is even (no tittering in the back row!) something called a Feminist International Assistance Policy, which will receive C$2 billion in fresh funding over the same five-year period.
Oddly, the budget has nothing to say about the biggest equality issue of all -- the rising inequality of overall income distribution between "the 1 percent" and the rest of the population. Closing tax loopholes and cracking down on offshore tax havens were major themes in the Liberals' 2015 election platform, but after some early desultory measures, Morneau seems to have given up. The most egregious loophole of all, the favourable treatment of employee stock options, is still in place. If, as most of this week's budget implies, the Liberals will again be seeking to outflank their opponents on the left come election time, the failure to deal effectively with this issue will represent a significant Achilles' heel. Judging by his initial response to the budget, NDP leader Jagmeet Singh already recognizes this.
As for growth, Morneau is hoping for the best and not spending much time preparing for the worst. The economy is set to slow gently from the heady pace seen for much of 2017 -- indeed, this is already happening -- but is expected to continue expanding steadily through the five-year forecast horizon. Morneau acknowledges the risks posed to the Canadian economy by the uncertain future of NAFTA and the recent US tax cuts, but the budget includes no specific measures to address either. This may, of course, be a smart approach: excessive fretting about NAFTA could well trigger a damaging loss of confidence in the business sector. The only thing resembling a provision for risk is the usual C$3 bn contingency built into the numbers, something first introduced by Paul Martin way back in the 1990s. That would not go very far if things really started to go sideways.
When Justin Trudeau boldly announced his willingness to start running budget deficits in the 2015 election campaign, it represented a return to Keynesian economics. The economy was still struggling to gain traction after the global financial crisis, and unemployment was unacceptably high. It is much harder to make the case for fiscal stimulus today. The Bank of Canada has been warning for months that the economy is very close to full capacity, and despite some odd employment numbers in January, the unemployment rate is close to multi-decade lows. Bank Governor Stephen Poloz is set to raise rates by at least a further 75 basis points this year in an effort to prevent inflation from moving above the 2 percent target. Nothing in this budget makes Poloz's job easier.
Against this background, the total absence of any real commitment to deficit reduction is troubling. A deficit of C$18.1 bn is foreseen for 2018-19, just over $1bn lower than in the year just ending, and the shortfall is projected to fall only to C$12 bn by the end of the five-year planning horizon. Tory leader Andrew Scheer has been quick to seize on this, reminding voters that back in 2015, Trudeau promised that the budget would be brought back into balance by 2019. Indeed, Scheer pointed to a rather absurd Department of Finance study that projected no return to balance until 2045. Fiscal irresponsibility shapes up as a major theme for the Tories at election time.
All in all, then, this is an old-fashioned Liberal tax-and-spend budget, except without the tax part. There are no significant revenue raising measures in the budget, but there are a whole lot of spending plans that will be very expensive, assuming they are actually delivered. The Liberals are doubling down on what won them the election in 2015, but times have changed, and this is a much riskier approach now than it was back then.
Wednesday 28 February 2018
Saturday 24 February 2018
Canadian budget preview
Finance Minister Bill Morneau will table the 2018 Canadian Federal Budget this coming Tuesday. With the economy looking reasonably strong in terms of growth and employment, no significant change of course is likely. However, Morneau and his staff will have to strike a careful balance in the face of a number of looming uncertainties.
Many of these uncertainties relate to developments south of the border. The steep tax cuts that were finally passed by Congress raise real issues about Canada's tax competitiveness. The US business tax rate, once significantly higher than the equivalent Canadian rate, is now much lower. Morneau has said that he will not be rushed into matching the US move, claiming that there are factors other than tax rates that determine where businesses locate and invest. Maybe so, but the Government will have to be alert to any signs that Canada is starting to lose out because of the lower tax regime in the US.
Then, of course, there's NAFTA. The signals emerging from all three national capitals are so mixed that it would be foolhardy to attempt to predict the final outcome. The Trudeau government claims it has "Plan B and Plan C and Plan D" all ready in case NAFTA falls apart. It would be prudent for Morneau not to use up all of his fiscal firepower this week, in case those plans have to be put into effect.
The next federal election is not until Fall 2019, so Morneau will introduce at least one more budget before campaigning begins in earnest. However, it's worth recalling that when Justin Trudeau first proposed a return to deficit financing, he pledged to get the budget back into balance by 2019. That promise was quickly abandoned, but if the Government makes no commitment at all to start moving back toward balance, however slowly, it is beyond doubt that the opposition Tories will be quick to call Morneau out for fiscal irresponsibility.
A further consideration, in terms of how stimulative fiscal policy should now be, is the interaction between fiscal and monetary policy. January CPI data showed that the Bank of Canada's obscure core measures of inflation, which have been slowly rising since mid-2017, are close to moving above the 2 percent target. Further rate hikes are already inevitable, and excessive fiscal stimulus at a time when the economy is already close to full capacity would seem certain to force the Bank to move further and faster than it otherwise would.
There have been surprisingly few leaks ahead of this budget, which may mean it will be a non-event. Supposedly there will be measures aimed at correcting gender inequality; there may be some minor help for beleaguered local newspapers; and no doubt there will be talk about closing tax loopholes. Over to you, Mr Morneau.
Many of these uncertainties relate to developments south of the border. The steep tax cuts that were finally passed by Congress raise real issues about Canada's tax competitiveness. The US business tax rate, once significantly higher than the equivalent Canadian rate, is now much lower. Morneau has said that he will not be rushed into matching the US move, claiming that there are factors other than tax rates that determine where businesses locate and invest. Maybe so, but the Government will have to be alert to any signs that Canada is starting to lose out because of the lower tax regime in the US.
Then, of course, there's NAFTA. The signals emerging from all three national capitals are so mixed that it would be foolhardy to attempt to predict the final outcome. The Trudeau government claims it has "Plan B and Plan C and Plan D" all ready in case NAFTA falls apart. It would be prudent for Morneau not to use up all of his fiscal firepower this week, in case those plans have to be put into effect.
The next federal election is not until Fall 2019, so Morneau will introduce at least one more budget before campaigning begins in earnest. However, it's worth recalling that when Justin Trudeau first proposed a return to deficit financing, he pledged to get the budget back into balance by 2019. That promise was quickly abandoned, but if the Government makes no commitment at all to start moving back toward balance, however slowly, it is beyond doubt that the opposition Tories will be quick to call Morneau out for fiscal irresponsibility.
A further consideration, in terms of how stimulative fiscal policy should now be, is the interaction between fiscal and monetary policy. January CPI data showed that the Bank of Canada's obscure core measures of inflation, which have been slowly rising since mid-2017, are close to moving above the 2 percent target. Further rate hikes are already inevitable, and excessive fiscal stimulus at a time when the economy is already close to full capacity would seem certain to force the Bank to move further and faster than it otherwise would.
There have been surprisingly few leaks ahead of this budget, which may mean it will be a non-event. Supposedly there will be measures aimed at correcting gender inequality; there may be some minor help for beleaguered local newspapers; and no doubt there will be talk about closing tax loopholes. Over to you, Mr Morneau.
Tuesday 20 February 2018
Household debt: nothing to worry about?
The ratio of Canadian households' debt to their disposable income has risen inexorably over the past several years. This is in sharp contrast to other developed countries, including the US, which saw rising debt burdens in the wake of the financial crisis but have since experienced net paydowns of debt. Everyone from the lowliest financial blogger, through the Bank of Canada all the way up to the OECD and IMF, has warned repeatedly of the risks that the debt burden poses to the economy.
In today's Toronto Star, business columnist David Olive tries to argue that there is nothing to worry about here. And he's not alone: a recent study from National Bank Financial also made the case that the risks have been overstated -- indeed, they argue that in the aggregate, Canadian households' finances are actually quite conservative. Some of the numbers that Olive uses are from that piece of research. Are Olive and NBF right? Let's take a look, focusing primarily on the David Olive piece*.
Olive's primary reason for not worrying about debt is that the relevant authorities, including the Bank of Canada and various levels of government, have been aware of the emerging problem for years and have been taking steps to head it off. This is true, at least to the extent that the indebtedness problem is housing-related. Both the Province of BC (in 2016) and Ontario (in 2017) took steps to cool the overheated markets in their major cities (Vancouver and Toronto, respectively), and these steps seem to have had the desired effect. At the national level, the government has been acting for several years to enforce tighter lending standards; at the start of this year, stress-testing for new mortgages was extended even to borrowers who were not looking for mortgage insurance.
This is all well and good, but as Olive admits, the household debt/disposable income now stands at 171 percent. Olive claims as mitigation the fact that half of households report having no debt at all, but since the quoted ratio includes all households including the debt-free, it follows that the ratio for those who actually have debt is in fact much higher. Indeed, StatsCan reported late last year that for low-income households, which by definition are the least able to afford to carry debt, the ratio is an ugly 333 percent.
Separate reports have shown that the number of such ultra-high debt households has been rising steadily. The percentage of households reporting that they would be unable to meet their obligations if they missed even one paycheck has also been rising, although the surveys that produce these reports may not be as scientific as StatsCan or Bank of Canada data. In any case, while Olive may be correct to assert that a personal insolvency crisis is "not in the cards", the number at risk is undoubtedly high enough to represent a major social crisis if the worst were ever to occur. Olive's suggestion that higher minimum wages will alleviate the problem seems Pollyannaish, not least because the minimum wage increase at the start of the year only applied in Ontario.
While Olive notes that the Bank of Canada's steps to remove monetary stimulus will add to some borrowers' problems, he suggests that the much lower absolute level of rates will mitigate the impact. He reminds us that in the 1980s, rates peaked at "a nosebleed 24 percent or so", whereas today the Bank of Canada reference rate is just 1.25 percent.
The all-time peak for the Bank Rate was actually 21.03 percent, hit in August 1981. That's still pretty nosebleed-y, but Olive's is not an apples-to-apples comparison. Households do not borrow at the Bank of Canada rate. One of the justified gripes against the banks in recent years is that the rates charged to consumers have not fallen by anything like as much as official rates have. Moreover, even though mortgage rates are certainly much lower than they were in the not-too-distant past, a large part of the household debt buildup has been in the form of home equity lines of credits (HELOCs) that command much fancier rates. And that's not to mention the plethora of usurious payday-style lenders that clog the airwaves with their pitches every day of the week.
What's the bottom line here? Olive argues his case persuasively, but it's foolhardy to second-guess such authorities as the Bank of Canada and the OECD. It is probably safe to assert that, barring a major reversal in Canada's economic fortunes, the overall household debt burden is manageable, and does not put the vaunted stability of the financial system at risk. Even so, millions of Canadians live in households that are at serious financial risk even if nothing goes wrong at the macro level. Luck and good policy decisions have kept the wolf from the door up until now; more of the same will be needed for a good many years to come.
*For some reason this appears only in the print version of the paper and not online. I will post a link as soon as one appears, and in the meantime you will have to trust me to quote him accurately and fairly.
In today's Toronto Star, business columnist David Olive tries to argue that there is nothing to worry about here. And he's not alone: a recent study from National Bank Financial also made the case that the risks have been overstated -- indeed, they argue that in the aggregate, Canadian households' finances are actually quite conservative. Some of the numbers that Olive uses are from that piece of research. Are Olive and NBF right? Let's take a look, focusing primarily on the David Olive piece*.
Olive's primary reason for not worrying about debt is that the relevant authorities, including the Bank of Canada and various levels of government, have been aware of the emerging problem for years and have been taking steps to head it off. This is true, at least to the extent that the indebtedness problem is housing-related. Both the Province of BC (in 2016) and Ontario (in 2017) took steps to cool the overheated markets in their major cities (Vancouver and Toronto, respectively), and these steps seem to have had the desired effect. At the national level, the government has been acting for several years to enforce tighter lending standards; at the start of this year, stress-testing for new mortgages was extended even to borrowers who were not looking for mortgage insurance.
This is all well and good, but as Olive admits, the household debt/disposable income now stands at 171 percent. Olive claims as mitigation the fact that half of households report having no debt at all, but since the quoted ratio includes all households including the debt-free, it follows that the ratio for those who actually have debt is in fact much higher. Indeed, StatsCan reported late last year that for low-income households, which by definition are the least able to afford to carry debt, the ratio is an ugly 333 percent.
Separate reports have shown that the number of such ultra-high debt households has been rising steadily. The percentage of households reporting that they would be unable to meet their obligations if they missed even one paycheck has also been rising, although the surveys that produce these reports may not be as scientific as StatsCan or Bank of Canada data. In any case, while Olive may be correct to assert that a personal insolvency crisis is "not in the cards", the number at risk is undoubtedly high enough to represent a major social crisis if the worst were ever to occur. Olive's suggestion that higher minimum wages will alleviate the problem seems Pollyannaish, not least because the minimum wage increase at the start of the year only applied in Ontario.
While Olive notes that the Bank of Canada's steps to remove monetary stimulus will add to some borrowers' problems, he suggests that the much lower absolute level of rates will mitigate the impact. He reminds us that in the 1980s, rates peaked at "a nosebleed 24 percent or so", whereas today the Bank of Canada reference rate is just 1.25 percent.
The all-time peak for the Bank Rate was actually 21.03 percent, hit in August 1981. That's still pretty nosebleed-y, but Olive's is not an apples-to-apples comparison. Households do not borrow at the Bank of Canada rate. One of the justified gripes against the banks in recent years is that the rates charged to consumers have not fallen by anything like as much as official rates have. Moreover, even though mortgage rates are certainly much lower than they were in the not-too-distant past, a large part of the household debt buildup has been in the form of home equity lines of credits (HELOCs) that command much fancier rates. And that's not to mention the plethora of usurious payday-style lenders that clog the airwaves with their pitches every day of the week.
What's the bottom line here? Olive argues his case persuasively, but it's foolhardy to second-guess such authorities as the Bank of Canada and the OECD. It is probably safe to assert that, barring a major reversal in Canada's economic fortunes, the overall household debt burden is manageable, and does not put the vaunted stability of the financial system at risk. Even so, millions of Canadians live in households that are at serious financial risk even if nothing goes wrong at the macro level. Luck and good policy decisions have kept the wolf from the door up until now; more of the same will be needed for a good many years to come.
*For some reason this appears only in the print version of the paper and not online. I will post a link as soon as one appears, and in the meantime you will have to trust me to quote him accurately and fairly.
Thursday 15 February 2018
Paying for journalism
Traditional media, especially print, are in trouble everywhere. Newspapers have relied on advertising revenues for years, but that revenue source is drying up as advertisers move online. More and more people are relying on aggregators like Facebook as their principal source of news, even though Facebook's ability to filter out fake stories is almost entirely non-existent.
Here in Canada there have been suggestions that the government should provide financial help to the media, in order to stem a tsunami of newspaper closings and keep independent journalism alive. The government appears reluctant to put money into what it regards as a failing business model, but has proposed no alternatives of its own.
Last month the Chairman of the country's largest newspaper group, Torstar, took to the pages of the Toronto Star to call out the Trudeau government for its perceived neglect of the problem. It was quite a rant: self-serving, as you'd expect, but also shamelessly hypocritical in parts. Let's take a look.
We can begin with the second sentence, where Honderich bemoans the fact that "many smaller communities are now news deserts, with no local newspapers". Honderich would certainly know about that, because at the end of November Torstar closed down about twenty local papers in Ontario. The interesting twist is that the day before they were closed, all of those papers were owned by Torstar's competitor, Postmedia Group. The two companies arranged a swap of about forty papers in all, then promptly shuttered all but a handful of them.
If you were just going to close the papers, why go to the trouble of trading them with another company first? Surprisingly, there hasn't been any attention paid to this, but the only plausible explanation is that there was some tax or other financial advantage to Torstar and Postmedia in doing it this way. Torstar has been very vocal about tax avoidance in recent months, yet what we appear to have here is a transaction structured for maximum tax benefit -- and one that results in the closure of a raft of newspapers that Honderich then has the gall to editorialize about!
The specific recommendations that Honderich lists all amount to asking the government to direct more money towards the press, either directly or in the form of tax breaks. It is apparently self-evident to Honderich that the type of journalism practiced by the Toronto Star and its competitors deserves this largesse, but in truth, the case is far from ironclad.
The Star as it exists today is not so much a newspaper as a viewspaper. Hard news coverage fills an ever shrinking proportion of its pages, and much of that comes from wire services like CP or Bloomberg rather than the paper's own newsroom. Instead there is a growing amount of "gotcha" journalism, under bylines such as "Star investigation" and "Star gets action".
Then there are the columnists, who seem to be multiplying in numbers even as real reporters are mercilessly winnowed out. The Star is unashamedly left-of-centre, as is its perfect right: in most respects it is the house organ of the Liberal Party of Canada. The columnists are all cut from the same cloth: pro-diversity, pro-feminism, anti-austerity. I have no problem with those views -- they're the same as mine, more or less -- but I seriously question the notion that they should be subsidized by the taxpayer, as Honderich would like.
To be clear, this is not an anti-Star rant. The tabloid Toronto Sun, owned by the aforementioned Postmedia, embraces a right-wing populist stance; the National Post, once owned by "Lord" Conrad Black, is more old-style conservative; and so on across the country. It's fine for the proprietors of these papers to disseminate their views as long as they are doing it with their own money. If they want public money to support them, on the basis that their work constitutes "quality journalism", then I do indeed have a big fat problem with that. And it seems it's not just me.
Here in Canada there have been suggestions that the government should provide financial help to the media, in order to stem a tsunami of newspaper closings and keep independent journalism alive. The government appears reluctant to put money into what it regards as a failing business model, but has proposed no alternatives of its own.
Last month the Chairman of the country's largest newspaper group, Torstar, took to the pages of the Toronto Star to call out the Trudeau government for its perceived neglect of the problem. It was quite a rant: self-serving, as you'd expect, but also shamelessly hypocritical in parts. Let's take a look.
We can begin with the second sentence, where Honderich bemoans the fact that "many smaller communities are now news deserts, with no local newspapers". Honderich would certainly know about that, because at the end of November Torstar closed down about twenty local papers in Ontario. The interesting twist is that the day before they were closed, all of those papers were owned by Torstar's competitor, Postmedia Group. The two companies arranged a swap of about forty papers in all, then promptly shuttered all but a handful of them.
If you were just going to close the papers, why go to the trouble of trading them with another company first? Surprisingly, there hasn't been any attention paid to this, but the only plausible explanation is that there was some tax or other financial advantage to Torstar and Postmedia in doing it this way. Torstar has been very vocal about tax avoidance in recent months, yet what we appear to have here is a transaction structured for maximum tax benefit -- and one that results in the closure of a raft of newspapers that Honderich then has the gall to editorialize about!
The specific recommendations that Honderich lists all amount to asking the government to direct more money towards the press, either directly or in the form of tax breaks. It is apparently self-evident to Honderich that the type of journalism practiced by the Toronto Star and its competitors deserves this largesse, but in truth, the case is far from ironclad.
The Star as it exists today is not so much a newspaper as a viewspaper. Hard news coverage fills an ever shrinking proportion of its pages, and much of that comes from wire services like CP or Bloomberg rather than the paper's own newsroom. Instead there is a growing amount of "gotcha" journalism, under bylines such as "Star investigation" and "Star gets action".
Then there are the columnists, who seem to be multiplying in numbers even as real reporters are mercilessly winnowed out. The Star is unashamedly left-of-centre, as is its perfect right: in most respects it is the house organ of the Liberal Party of Canada. The columnists are all cut from the same cloth: pro-diversity, pro-feminism, anti-austerity. I have no problem with those views -- they're the same as mine, more or less -- but I seriously question the notion that they should be subsidized by the taxpayer, as Honderich would like.
To be clear, this is not an anti-Star rant. The tabloid Toronto Sun, owned by the aforementioned Postmedia, embraces a right-wing populist stance; the National Post, once owned by "Lord" Conrad Black, is more old-style conservative; and so on across the country. It's fine for the proprietors of these papers to disseminate their views as long as they are doing it with their own money. If they want public money to support them, on the basis that their work constitutes "quality journalism", then I do indeed have a big fat problem with that. And it seems it's not just me.
Friday 9 February 2018
Parsing the Canadian jobs data
After several months of exceptionally strong job gains, market expectations were for some sort of correction in January. StatsCan delivered in spades, reporting a decline of 88,000 in the number of people employed in the month, the sharpest decline in more than a decade. The unemployment rate ticked up to 5.9 percent from January's multi-decade low of 5.8 percent.
Does this mean that the positive job market conditions seen throughout 2017 have vanished? Examination of the details of the data suggest this may not be the case. The key trends seen through last year were still evident in January, despite the attention-grabbing headline figure. The economy added 49,000 full-time jobs in January, maintaining the positive momentum that has seen 414,000 full-time positions created over the past twelve months. Part-time employment was shrinking slowly throughout 2017, and it was this component that created the drop in overall employment, as part-time positions shrank by 137,000 during January.
I've written here many times before about the volatility in the sub-components of StatsCan's jobs data -- full versus part-time, employed versus self-employed and so on -- and that may be a factor again here. However, on this particular occasion there may be a significant new factor at work: the sharp jump in Ontario's minimum wage that took place at the start of the year. Unsurprisingly, the right-leaning National Post has been quick to identify that as the culprit.
There is certainly circumstantial evidence within the data to support that conclusion. Ontario led the way in job losses in January, shedding 51,000 positions, all of them part-time. Still, that provides no explanation for the 86,000 part-time jobs lost in other Provinces that didn't hike their minimum wage. Moreover, if the minimum wage hike is to blame, that requires us to believe that employers, apprised of the coming wage hike many months ahead of time, continued hiring at a rapid clip right up to the end of the year, only to go to the trouble and expense of firing tens of thousands of workers at the turn of the year.
That's not impossible, but it's not likely. It is quite possible that some quirk in the seasonal adjustment of the data -- this has been a cold and stormy winter across much of the country -- accounts for as much or more of the job losses as the minimum wage hike does. Best to withhold judgement on that until we see one or two further months of data.
No doubt the Bank of Canada will also be watching the numbers for the next month or two for evidence of whether the employment situation really has taken a turn for the worse. However, there is one data point in today's release that will certainly have caught the Bank's attention. Wage gains jumped to 3.3 percent year-on-year in January from 2.7 percent in December. It is much more likely that this increase can be attributed in large measure to the Ontario minimum wage hike. If the labour market starts tightening again in the coming months, that evidence of wage cost pressures will certainly spur the Bank towards further rate increases.
Does this mean that the positive job market conditions seen throughout 2017 have vanished? Examination of the details of the data suggest this may not be the case. The key trends seen through last year were still evident in January, despite the attention-grabbing headline figure. The economy added 49,000 full-time jobs in January, maintaining the positive momentum that has seen 414,000 full-time positions created over the past twelve months. Part-time employment was shrinking slowly throughout 2017, and it was this component that created the drop in overall employment, as part-time positions shrank by 137,000 during January.
I've written here many times before about the volatility in the sub-components of StatsCan's jobs data -- full versus part-time, employed versus self-employed and so on -- and that may be a factor again here. However, on this particular occasion there may be a significant new factor at work: the sharp jump in Ontario's minimum wage that took place at the start of the year. Unsurprisingly, the right-leaning National Post has been quick to identify that as the culprit.
There is certainly circumstantial evidence within the data to support that conclusion. Ontario led the way in job losses in January, shedding 51,000 positions, all of them part-time. Still, that provides no explanation for the 86,000 part-time jobs lost in other Provinces that didn't hike their minimum wage. Moreover, if the minimum wage hike is to blame, that requires us to believe that employers, apprised of the coming wage hike many months ahead of time, continued hiring at a rapid clip right up to the end of the year, only to go to the trouble and expense of firing tens of thousands of workers at the turn of the year.
That's not impossible, but it's not likely. It is quite possible that some quirk in the seasonal adjustment of the data -- this has been a cold and stormy winter across much of the country -- accounts for as much or more of the job losses as the minimum wage hike does. Best to withhold judgement on that until we see one or two further months of data.
No doubt the Bank of Canada will also be watching the numbers for the next month or two for evidence of whether the employment situation really has taken a turn for the worse. However, there is one data point in today's release that will certainly have caught the Bank's attention. Wage gains jumped to 3.3 percent year-on-year in January from 2.7 percent in December. It is much more likely that this increase can be attributed in large measure to the Ontario minimum wage hike. If the labour market starts tightening again in the coming months, that evidence of wage cost pressures will certainly spur the Bank towards further rate increases.
Wednesday 7 February 2018
Brexit and nostalgia
I got into an interesting -- and, I should add, entirely polite* -- Twitter debate about trade with some Brexit supporters yesterday. I don't think anybody's mind was changed, but I did come away with a better understanding of what some Brexiteers want.
The starting point was a tweet by one of the Brexiteers pointing out that the share of UK trade going to the EU has been falling in recent years, despite the "frictionless" border. Therefore, it ought to be easy in a post-Brexit world to replace any trade that might be lost with the remaining EU countries by increasing trade with the rest of the world.
I pointed out that experience in Canada suggested that in fact, redirecting trade flows is extremely difficult. Successive Canadian governments going at least as far back as Pierre Trudeau in the 1970s have tried to wean Canada off its dependence on the US market, to no apparent avail: our neighbour to the south still accounts for upwards of 70 percent of both exports and imports. It seems probable that the same "gravitational" effect would be seen between the UK and the EU.
It was only quite late in the tweet exchange that my chief interlocutor made it plain that what he was really concerned with was trade in goods, and specifically manufactured goods, not goods and services. He pointed out that the UK's manufacturing base accounts for about 10 percent of GDP, against 20 percent in Germany, and asserted that the UK needs to rebuild that percentage to about 15 percent.
I honestly have no idea how you would go about achieving that. Redirecting the UK's trade flows away from Europe and towards low-cost manufacturing powerhouses in Asia would likely have the opposite effect. Theresa May talks fondly of a trade deal with the US, but has anyone noticed what's happening on the US trade front recently? NAFTA talks are teetering on the edge of failure; Trump has imposed tariffs on imports of solar panels and appliances; and Buy America programs for public sector procurement are springing up in various states, including Texas (aimed at Mexico) and New York (aimed at Canada).
These practical considerations, of course, beg the more fundamental question: why, exactly, would it be a good idea to swim against the tide of history and try to rebuild the manufacturing sector at all? It's hardly likely to be a massive job creator: to the extent that richer countries can compete with newly-industrializing nations at all, it would surely entail massive investment in automation and robotics. UK prosperity has for many years been based on the success of the financial sector, especially banking. Job losses in that sector post Brexit are likely to swamp any gains in manufacturing employment that might be eked out.
I already knew that much of the motivation for Brexit voters was based on nostalgia for a rosier past, without perceived intervention and nitpicking regulations from Brussels, and with fewer foreigners cluttering up the place. I hadn't quite realized that this also extended to a yearning for the old economy. one with factories and mills and -- who knows -- maybe a few coal mines too. The UK ceased being the world's leading manufacturing power some time around the Great War. Brexit may turn the clock back in all sorts of ways, but a revival in manufacturing will not be one of them.
*Well, maybe apart from the moment when I was accused of being a "Bremoaner bot"!
The starting point was a tweet by one of the Brexiteers pointing out that the share of UK trade going to the EU has been falling in recent years, despite the "frictionless" border. Therefore, it ought to be easy in a post-Brexit world to replace any trade that might be lost with the remaining EU countries by increasing trade with the rest of the world.
I pointed out that experience in Canada suggested that in fact, redirecting trade flows is extremely difficult. Successive Canadian governments going at least as far back as Pierre Trudeau in the 1970s have tried to wean Canada off its dependence on the US market, to no apparent avail: our neighbour to the south still accounts for upwards of 70 percent of both exports and imports. It seems probable that the same "gravitational" effect would be seen between the UK and the EU.
It was only quite late in the tweet exchange that my chief interlocutor made it plain that what he was really concerned with was trade in goods, and specifically manufactured goods, not goods and services. He pointed out that the UK's manufacturing base accounts for about 10 percent of GDP, against 20 percent in Germany, and asserted that the UK needs to rebuild that percentage to about 15 percent.
I honestly have no idea how you would go about achieving that. Redirecting the UK's trade flows away from Europe and towards low-cost manufacturing powerhouses in Asia would likely have the opposite effect. Theresa May talks fondly of a trade deal with the US, but has anyone noticed what's happening on the US trade front recently? NAFTA talks are teetering on the edge of failure; Trump has imposed tariffs on imports of solar panels and appliances; and Buy America programs for public sector procurement are springing up in various states, including Texas (aimed at Mexico) and New York (aimed at Canada).
These practical considerations, of course, beg the more fundamental question: why, exactly, would it be a good idea to swim against the tide of history and try to rebuild the manufacturing sector at all? It's hardly likely to be a massive job creator: to the extent that richer countries can compete with newly-industrializing nations at all, it would surely entail massive investment in automation and robotics. UK prosperity has for many years been based on the success of the financial sector, especially banking. Job losses in that sector post Brexit are likely to swamp any gains in manufacturing employment that might be eked out.
I already knew that much of the motivation for Brexit voters was based on nostalgia for a rosier past, without perceived intervention and nitpicking regulations from Brussels, and with fewer foreigners cluttering up the place. I hadn't quite realized that this also extended to a yearning for the old economy. one with factories and mills and -- who knows -- maybe a few coal mines too. The UK ceased being the world's leading manufacturing power some time around the Great War. Brexit may turn the clock back in all sorts of ways, but a revival in manufacturing will not be one of them.
*Well, maybe apart from the moment when I was accused of being a "Bremoaner bot"!
Friday 2 February 2018
Are equity markets trying to tell us something?
Donald Trump isn't always wrong about everything. He's certainly correct when he says that the US economy is doing well, though he's equally surely wrong when he tries to claim all the credit for the steady growth and rising employment that continues month after month. Even the IMF, rarely accused of enthusiasm, is boosting its growth forecasts for 2018, not just for the US but for the entire global economy.
So why are we seeing clear signs that the long-lasting bull market in equities is coming to an end? Why, right after the Department of Labor released a stronger-than-expected non-farm payrolls report for January, did the Big Board sell off by more than 1 percent this morning?
A clue to the answer can be found in the quote (within the linked article) from an economist at BMO Capital Markets. He refers to the "relentless" rise in bond yields, which has taken the 10-year Treasury yield to (I hope you're sitting down at this point).... 2.8 percent!
Those of us with longer memories than BMO man might see that number a little differently. US nominal GDP is growing at about a 5 percent rate right now. GDP growth in real terms slowed to about 2.6 percent in the final quarter of 2017, but is expected to maintain at least that pace through this year. Inflation has edged up to stand slightly above the Fed's 2 percent comfort zone. Unemployment is at a rock-bottom 4.1 percent and there are increasing reports of labor shortages in certain sectors. Take all of those factors together, and there's surely a cast-iron case to be made that the 10-year Treasury yield is at least 250 basis points lower than historical experience would suggest.
Without doubt, an economy recording several years of steady growth, with no end to the expansion in sight, should see rising equity markets. However, the fact that those markets are selling off as the longevity of the expansion seems more assured can only mean one thing. A large part of the extraordinary run-up in stock prices has been based not on the US economy's fundamentals, sound as they are, but on the Fed's provision of almost free money over the course of almost a decade.
It seems certain that the post-Yellen Fed will continue the twin paths of slowly raising rates and gradually tapering QE that we have seen over the past year. That implies that the correction in stock prices has further to go. However, it seems unlikely that the underlying strength of the US economy will be undermined by a further 75-100 bp rise in the funds target and a similar rise in Treasury yields. This may turn out to be one of the many instances in which the stock market forecasts an economic downturn that never quite materializes.
So why are we seeing clear signs that the long-lasting bull market in equities is coming to an end? Why, right after the Department of Labor released a stronger-than-expected non-farm payrolls report for January, did the Big Board sell off by more than 1 percent this morning?
A clue to the answer can be found in the quote (within the linked article) from an economist at BMO Capital Markets. He refers to the "relentless" rise in bond yields, which has taken the 10-year Treasury yield to (I hope you're sitting down at this point).... 2.8 percent!
Those of us with longer memories than BMO man might see that number a little differently. US nominal GDP is growing at about a 5 percent rate right now. GDP growth in real terms slowed to about 2.6 percent in the final quarter of 2017, but is expected to maintain at least that pace through this year. Inflation has edged up to stand slightly above the Fed's 2 percent comfort zone. Unemployment is at a rock-bottom 4.1 percent and there are increasing reports of labor shortages in certain sectors. Take all of those factors together, and there's surely a cast-iron case to be made that the 10-year Treasury yield is at least 250 basis points lower than historical experience would suggest.
Without doubt, an economy recording several years of steady growth, with no end to the expansion in sight, should see rising equity markets. However, the fact that those markets are selling off as the longevity of the expansion seems more assured can only mean one thing. A large part of the extraordinary run-up in stock prices has been based not on the US economy's fundamentals, sound as they are, but on the Fed's provision of almost free money over the course of almost a decade.
It seems certain that the post-Yellen Fed will continue the twin paths of slowly raising rates and gradually tapering QE that we have seen over the past year. That implies that the correction in stock prices has further to go. However, it seems unlikely that the underlying strength of the US economy will be undermined by a further 75-100 bp rise in the funds target and a similar rise in Treasury yields. This may turn out to be one of the many instances in which the stock market forecasts an economic downturn that never quite materializes.
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