Call it: the law of unintended consequences. A few weeks ago, when Toronto's city council was trying to quarantine scandal-plagued Mayor Rob Ford, it took away most of his powers, including the power to direct the city's response in the event of an emergency. But it neglected to remove his power actually to declare an emergency. Big mistake!
Last week, the city and its surrounding area, known as the GTA (Greater Toronto Area), took the brunt of a huge ice storm. About one third of the homes in the city itself lost power, transit and roads were thrown into chaos, and so on. Seven days later, a few poor souls are still freezing in the dark, but the response of the emergency services to the crisis has been commendable, with hundreds of linemen giving up their Christmases, power workers coming in from as far way as Manitoba, and so on.
But Mayor Ford has refused all entreaties to declare the situation to be an emergency. And why? Because as soon as he did so, he'd have been sidelined, since all the emergency powers now belong to his funereally-visaged deputy, Norm Kelly. Instead, Ford has been hogging all the TV time, very obviously trying to emulate Calgary Mayor Naheed Nenshi, who became a national cult figure earlier in the year when his city was flooded.
Then again, does it really matter if an emergency is formally declared? It doesn't make any difference what you call it, as long as you do something about it, and everything possible has been done over the past week to get the lights back on. There's certainly no reason to think that Ford himself has any discernible skills as an electrician -- something for which, given his weight, the city's utility poles must be profoundly grateful.
Interestingly, Ford is not the only local politician to be blasted by the media as the crisis has dragged on. The afore-mentioned Norm Kelly scandalized the press by disappearing off to Florida at the height of the blackout. His critics were barely mollified when it emerged that he was only away for 24 hours, and had travelled only for the purpose of visiting his seriously ill sister.
And just down the lake in Oshawa, Mayor John Henry had the temerity to fly off on vacation to Jamaica, just hours before the ice storm hit and took out the power in parts of his city. He has rejected any suggestion that he should come home early. Like Messrs Ford and Kelly, Mayor Henry could have made no practical contribution to solving the crisis, but there's every possibility that the self-righteous electors of Oshawa will punish him when the municipal elections roll around next October. Still, at least that means he'll be able to take his vacation next winter in peace.
Saturday, 28 December 2013
Tuesday, 24 December 2013
Durables and junk
Data for US durable good orders in November were released this morning, and very strong they were, too, adding to the gathering impression that the US economy is set for strong growth in 2014. Durables orders rose by 3.5% in the month, the strongest gain since January.
The report prompted a business reporter on one of the Canadian TV networks to claim that the data meant that US consumer goods spending would be strong in the early part of next year. No, it doesn't! This interpretation is wrong in at least two important ways.
First, the durables report is clearly about investment, not consumption. The fact that companies are stepping up orders for durables may suggest that they're confident that somebody will buy the stuff once it's made. But they could be wrong: if consumers don't step up to the plate, there'll be a whole lot of inventory sitting around, which would in due course act as a serious drag on growth. (This relates to a very venerable economics concept referred to as the "accelerator", if you care.) Moreover, as the name should suggest, durables goods take a lot of time to produce, so goods being ordered today won't be produced for many months -- even years in some cases, such as aircraft.
And that's the second flaw in the reporter's analysis. If he'd bothered to look at the details of the report, he might have noticed that the strongest gains were posted by orders for non-defense aircraft (up 21%; Boeing had a banner month) and defense aircraft (up 10%). Unless you imagine that the super-rich are going on a plane-buying splurge, these items are never going to register in the consumption data.
I once told a colleague that one of the main functions of an economist in a dealing room was to make sure that the traders weren't bamboozled by all of the junk analysis that appeared within minutes of every important data release. Seems that's just as true today as it's ever been.
* * * * *
Merry Christmas and best wishes for the New Year to all readers of the blog!!
The report prompted a business reporter on one of the Canadian TV networks to claim that the data meant that US consumer goods spending would be strong in the early part of next year. No, it doesn't! This interpretation is wrong in at least two important ways.
First, the durables report is clearly about investment, not consumption. The fact that companies are stepping up orders for durables may suggest that they're confident that somebody will buy the stuff once it's made. But they could be wrong: if consumers don't step up to the plate, there'll be a whole lot of inventory sitting around, which would in due course act as a serious drag on growth. (This relates to a very venerable economics concept referred to as the "accelerator", if you care.) Moreover, as the name should suggest, durables goods take a lot of time to produce, so goods being ordered today won't be produced for many months -- even years in some cases, such as aircraft.
And that's the second flaw in the reporter's analysis. If he'd bothered to look at the details of the report, he might have noticed that the strongest gains were posted by orders for non-defense aircraft (up 21%; Boeing had a banner month) and defense aircraft (up 10%). Unless you imagine that the super-rich are going on a plane-buying splurge, these items are never going to register in the consumption data.
I once told a colleague that one of the main functions of an economist in a dealing room was to make sure that the traders weren't bamboozled by all of the junk analysis that appeared within minutes of every important data release. Seems that's just as true today as it's ever been.
* * * * *
Merry Christmas and best wishes for the New Year to all readers of the blog!!
Friday, 20 December 2013
So far, so good
The Federal Reserve must be greatly relieved that equity markets have reacted positively to this week's decision to start to "taper" its quantitative easing (QE) program. The rise in stock prices suggests that the market's remorseless advance to record highs this year has been mostly in response to improving prospects for the US economy, rather than just a reaction to Ben Bernanke's monthly helicopter drops.
It's certainly more difficult now to deny that the US economy is moving onto a firmer footing. Today it was announced that GDP growth in Q3 had been revised upward to an annual rate of 4.1%. This is the strongest performance since 2011, and is particularly remarkable considering that the latter part of Q3 was dominated by mounting fears of a US debt default and government shutdown. Although growth for the full year will be far below 2012's pace, the economy has a solid base for growth in 2014, which suggests that the FOMC, which must have been aware of the imminent upward revision to the GDP data, was right to start the taper.
All good then? Well, maybe, but one key sentence in Chairman Bernanke's post-FOMC statement may produce a little queasiness in anyone who remembers the first decade of the new millennium: "The Committee also clarified its guidance on interest rates, emphasizing that the current near-zero range for the federal funds rate target likely will remain appropriate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal."
If there's one lesson that should have been learned from the performance of the Greenspan Fed, it's that cheap money leads to reckless investment decisions, and eventually to a financial crisis. There's nothing anywhere in the post-FOMC statement to suggest that the Fed even acknowledges that risk. We really don't need to go down that road again, do we?
It's certainly more difficult now to deny that the US economy is moving onto a firmer footing. Today it was announced that GDP growth in Q3 had been revised upward to an annual rate of 4.1%. This is the strongest performance since 2011, and is particularly remarkable considering that the latter part of Q3 was dominated by mounting fears of a US debt default and government shutdown. Although growth for the full year will be far below 2012's pace, the economy has a solid base for growth in 2014, which suggests that the FOMC, which must have been aware of the imminent upward revision to the GDP data, was right to start the taper.
All good then? Well, maybe, but one key sentence in Chairman Bernanke's post-FOMC statement may produce a little queasiness in anyone who remembers the first decade of the new millennium: "The Committee also clarified its guidance on interest rates, emphasizing that the current near-zero range for the federal funds rate target likely will remain appropriate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal."
Tuesday, 17 December 2013
Pension puzzles
A meeting between Canadian federal and provincial finance ministers has failed to agree on a deal to improve Canada's meager public pensions. Most of the provinces, led by Ontario, argue that improvements to the Canada Pension Plan (CPP) are essential in order to avoid rising poverty levels as baby boomers enter retirement. The federal government argues, as it has for the past half decade, that the economy cannot currently sustain the higher employee and employer contributions that would be required. Who's right?
Let's start with the federal claim that higher pension contributions would be a "job killer". Can businesses afford to pay more. or would they have to cut back on investment in order to do so? For larger companies the answer is very clear. As Mark Carney famously said when he was at the Bank of Canada, Canadian corporations are sitting on hoards of cash -- "dead money" -- and refusing to undertake new investments anyway. Raising pension contributions and allowing the CPP administrators to invest the extra cash would arguably liberate some of that cash. Small businesses may have a harder time of it, but the scale of any contribution increase would likely be too small to have any major impact on job creation.
What about consumers? Economic theories of consumption behaviour don't generally posit that current consumption spending is driven entirely by current income. Other factors -- time of life, the nature of income at any particular time, and so on -- also play a role. It's true that higher pension contributions reduce current income. However, most economists would argue that in the absence of adequate pension provision, rational individuals will curb their current consumption and increase their savings in an effort to provide for their needs in later life.
That word "rational" is doing a lot of work there. Much mainstream economic theory is based on the assumption that individuals act rationally, in their own best interests. It can often seem like a heroic assumption, and the facts as they relate to Canadians' efforts to provide for their own retirement place it under extreme stress, to put it mildly. Consider:
* The individual savings rate has fallen from about 20% of income a couple of decades to about a quarter of that now.
* Only about a third of workers contribute to tax-efficient personal retirement plans, known in Canada as RSPs, even though such plans have been around for better than three decades, and even as the inadequacy of both public and company pensions has become more and more apparent.
* Those who do contribute to RSPs don't contribute anything close to the allowable maximum. The aggregate RSP "pot" is less than 10% of the size it would theoretically be if everyone had "maxed out" each year.
* The average individual RSP portfolio is only about $37000, or only about two-thirds of the average annual wage. That's not a pension "pot" -- more of a thimble.
So how are new retirees coping? Tales of outright poverty are mercifully few, but there's plenty of evidence that a large number of boomers are continuing to work past normal retirement age in order to make ends meet. That's certainly the case in our own geezer-heavy neighbourhood. So is the time-honoured practice of cashing out on the family home in the city and moving to something cheaper and more bijou out in the sticks. Whether that can continue to work as the flood of retiring boomers starts to outnumber the cohort of young workers looking to buy city homes remains to be seen.*
Given that many boomers have ignored decades of advice to save more, you can easily argue that it's nobody's fault but their own if they find themselves strapped for cash in retirement. But boomers vote, so politicians have to pay attention. Ontario has reacted to the failure of this week's ministerial conference by pledging to start its own pension plan to supplement the CPP. The Liberal government will no doubt make this a central plank of its campaign for the election that's expected in the spring, and woe betide the opposition party that dares to say nay.
We can only hope that the Liberals resist the temptation to buy boomer votes with millenials' money. Piling higher pension contributions on the young in order to pay for their own far-off retirement is one thing, but penalizing them in order to cosset their feckless elders is something else altogether.**
*Especially as a lot of younger workers seem to want to live in downtown condos rather than the big suburban family homes that the boomers will be selling.
** In case this is your first time reading this blog, and in case you think I'm "talking my own book" here, be advised that I will be 64 years old on my next birthday, which is a month from now.
Let's start with the federal claim that higher pension contributions would be a "job killer". Can businesses afford to pay more. or would they have to cut back on investment in order to do so? For larger companies the answer is very clear. As Mark Carney famously said when he was at the Bank of Canada, Canadian corporations are sitting on hoards of cash -- "dead money" -- and refusing to undertake new investments anyway. Raising pension contributions and allowing the CPP administrators to invest the extra cash would arguably liberate some of that cash. Small businesses may have a harder time of it, but the scale of any contribution increase would likely be too small to have any major impact on job creation.
What about consumers? Economic theories of consumption behaviour don't generally posit that current consumption spending is driven entirely by current income. Other factors -- time of life, the nature of income at any particular time, and so on -- also play a role. It's true that higher pension contributions reduce current income. However, most economists would argue that in the absence of adequate pension provision, rational individuals will curb their current consumption and increase their savings in an effort to provide for their needs in later life.
That word "rational" is doing a lot of work there. Much mainstream economic theory is based on the assumption that individuals act rationally, in their own best interests. It can often seem like a heroic assumption, and the facts as they relate to Canadians' efforts to provide for their own retirement place it under extreme stress, to put it mildly. Consider:
* The individual savings rate has fallen from about 20% of income a couple of decades to about a quarter of that now.
* Only about a third of workers contribute to tax-efficient personal retirement plans, known in Canada as RSPs, even though such plans have been around for better than three decades, and even as the inadequacy of both public and company pensions has become more and more apparent.
* Those who do contribute to RSPs don't contribute anything close to the allowable maximum. The aggregate RSP "pot" is less than 10% of the size it would theoretically be if everyone had "maxed out" each year.
* The average individual RSP portfolio is only about $37000, or only about two-thirds of the average annual wage. That's not a pension "pot" -- more of a thimble.
So how are new retirees coping? Tales of outright poverty are mercifully few, but there's plenty of evidence that a large number of boomers are continuing to work past normal retirement age in order to make ends meet. That's certainly the case in our own geezer-heavy neighbourhood. So is the time-honoured practice of cashing out on the family home in the city and moving to something cheaper and more bijou out in the sticks. Whether that can continue to work as the flood of retiring boomers starts to outnumber the cohort of young workers looking to buy city homes remains to be seen.*
Given that many boomers have ignored decades of advice to save more, you can easily argue that it's nobody's fault but their own if they find themselves strapped for cash in retirement. But boomers vote, so politicians have to pay attention. Ontario has reacted to the failure of this week's ministerial conference by pledging to start its own pension plan to supplement the CPP. The Liberal government will no doubt make this a central plank of its campaign for the election that's expected in the spring, and woe betide the opposition party that dares to say nay.
We can only hope that the Liberals resist the temptation to buy boomer votes with millenials' money. Piling higher pension contributions on the young in order to pay for their own far-off retirement is one thing, but penalizing them in order to cosset their feckless elders is something else altogether.**
*Especially as a lot of younger workers seem to want to live in downtown condos rather than the big suburban family homes that the boomers will be selling.
** In case this is your first time reading this blog, and in case you think I'm "talking my own book" here, be advised that I will be 64 years old on my next birthday, which is a month from now.
Thursday, 12 December 2013
There he goes again
I'm not sure whether it's me that's starting to sound like a broken record, or whether it's Bank of Canada Governor Stephen Poloz. Once again the Governor has presented a startlingly downbeat view on the Canadian economy, full of fears about deflation, and once again I find myself wondering why he seems so badly out of synch with the rest of the global fraternity of central bankers.
In the US, markets are again trembling at the thought that the Fed might decide to "taper" its quantitative easing program as soon as next week, when the FOMC is set to meet. Recent economic data have been generally upbeat, and the labour market is looking a bit more robust. A move this month would allow Ben Bernanke to take any flak that may fly when the deed is done, while waiting until early in 2014 might allow incoming Fed Chairman Yellen to allay fears that she is too dovish by half. One way or another, the start of the taper is not far away.
Over in London, Bank of England Governor Mark Carney was compelled just last month to amend his much-vaunted "forward guidance" to markets, amid clear signs that the UK recovery is strengthening and deepening. It looks likely that the unemployment rate will fall to 7%, which Carney had earlier identified as a key level for the Bank, some time in 2014, with a tightening move presumably not far behind. This week Gov. Carney has also felt moved to reassure markets that the Bank would act to prevent the housing market from reaching "warp speed". Perhaps Mrs Carney, who famously complained about the cost of housing when the family moved to London at mid-year, has had a word in his ear.
An interesting sideline here, by the way, is that one of the B of E's MPC members, Martin Weale, has expressed doubts about both the forward guidance policy and the significance of a 7% unemployment rate. The uber-confident Carney is not known for tolerating dissent, so Weale can no doubt expect a visit to the woodshed, or worse, in the very near future.
So why are things different in Canada, at least in Gov. Poloz's opinion? His fears of deflation relate mainly to the potential impact of price discounting by retailers, in the face of an invasion by US big box stores (WalMart, Target). There's no doubt this is having an effect: two weeks before Christmas, just about every item in the main department store close by us was discounted by at least 40%. However, the weakening Canadian dollar should mean that this is a short-lived phenomenon.
As for the real economy, the Governor does not see a return to full capacity for another two years, thanks in part to an unexpectedly slow recovery in business investment. Evidently Mark Carney's complaints, when he was at the Bank of Canada, about corporations hoarding "dead money" must have fallen on dead ears -- and it's hard to see how Poloz's incessant doom and gloom musings will loosen up the purse strings.
Most commentators would say that the main risk the Bank faces in pledging to keep rates low is that the housing market could overheat, as everyone from the IMF to Nouriel Roubini has warned. However, it seems that the Bank remains of the view that the excesses in the housing market, and the concomitant rise in household debt, will gradually resolve themselves without any crisis. We shall see.
It's interesting to wonder what the Federal government is making of the new Governor. Until a few months ago, it was a proud boast often heard both from the politicians and former Governor Carney that Canada had weathered the financial crisis and its aftermath much better than any other developed country. It's always seemed likely that the Harper Tories would fight the next election on their economic and fiscal record. If events really do pan out the way Gov Poloz appears to expect, that might not be such a great strategy.
In the US, markets are again trembling at the thought that the Fed might decide to "taper" its quantitative easing program as soon as next week, when the FOMC is set to meet. Recent economic data have been generally upbeat, and the labour market is looking a bit more robust. A move this month would allow Ben Bernanke to take any flak that may fly when the deed is done, while waiting until early in 2014 might allow incoming Fed Chairman Yellen to allay fears that she is too dovish by half. One way or another, the start of the taper is not far away.
Over in London, Bank of England Governor Mark Carney was compelled just last month to amend his much-vaunted "forward guidance" to markets, amid clear signs that the UK recovery is strengthening and deepening. It looks likely that the unemployment rate will fall to 7%, which Carney had earlier identified as a key level for the Bank, some time in 2014, with a tightening move presumably not far behind. This week Gov. Carney has also felt moved to reassure markets that the Bank would act to prevent the housing market from reaching "warp speed". Perhaps Mrs Carney, who famously complained about the cost of housing when the family moved to London at mid-year, has had a word in his ear.
An interesting sideline here, by the way, is that one of the B of E's MPC members, Martin Weale, has expressed doubts about both the forward guidance policy and the significance of a 7% unemployment rate. The uber-confident Carney is not known for tolerating dissent, so Weale can no doubt expect a visit to the woodshed, or worse, in the very near future.
So why are things different in Canada, at least in Gov. Poloz's opinion? His fears of deflation relate mainly to the potential impact of price discounting by retailers, in the face of an invasion by US big box stores (WalMart, Target). There's no doubt this is having an effect: two weeks before Christmas, just about every item in the main department store close by us was discounted by at least 40%. However, the weakening Canadian dollar should mean that this is a short-lived phenomenon.
As for the real economy, the Governor does not see a return to full capacity for another two years, thanks in part to an unexpectedly slow recovery in business investment. Evidently Mark Carney's complaints, when he was at the Bank of Canada, about corporations hoarding "dead money" must have fallen on dead ears -- and it's hard to see how Poloz's incessant doom and gloom musings will loosen up the purse strings.
Most commentators would say that the main risk the Bank faces in pledging to keep rates low is that the housing market could overheat, as everyone from the IMF to Nouriel Roubini has warned. However, it seems that the Bank remains of the view that the excesses in the housing market, and the concomitant rise in household debt, will gradually resolve themselves without any crisis. We shall see.
It's interesting to wonder what the Federal government is making of the new Governor. Until a few months ago, it was a proud boast often heard both from the politicians and former Governor Carney that Canada had weathered the financial crisis and its aftermath much better than any other developed country. It's always seemed likely that the Harper Tories would fight the next election on their economic and fiscal record. If events really do pan out the way Gov Poloz appears to expect, that might not be such a great strategy.
Sunday, 8 December 2013
Use your disillusion
The Toronto Star* is currently running a tremendous series of articles on the breakdown of social cohesion in Canada. The research has been led by Michael Valpy, who is now an academic but was at one time, if memory serves, an occasional commentator on religious issues. I hope he wouldn't be offended by my saying that there's a deep religious sensibility running just below the surface of these articles.
The pieces published so far have already looked at a wide range of cohesion issues: the problems faced by aboriginal peoples, the difficulties immigrants encounter in trying to make their way in a new land, the age-old issue of "what does Quebec want?", and so on. However, as an economist and baby boomer I'm most interested in the growing wealth gap between older Canadians and the young. Indeed, it's an issue I've posted about many times on this blog, most recently just a couple of posts ago ("Pay it backward").
In an article titled "The young will inherit a future they didn't choose", Valpy and his team identify a cohort they dub "Spectators". They're mostly male, mostly under the age of 35, and they've made the decision effectively to turn their backs on participation in mainstream Canadian society, because they've concluded the game has been rigged against them. As one "Spectator" puts it, "(people) are caught in a yoke by the richies ... The gap between the rich and the poor is getting bigger and the rich are putting in mechanisms to stop anybody else from getting rich.”
Ouch. I'm a retired boomer with a son who falls into the "Spectator" age bracket. I'd never allow anyone to claim that I got my education and made my money easily, but I'm appalled at how much harder it now is for people my son's age to get themselves established in the workforce, even with the benefit of a university degree. To quote from the study again, “In a decade or two.....the younger voters will be in the prime of their lives and paying for the political choices of their now departed grandparents which are not likely to reflect the priorities or, one could speculate, the needs of next Canada.”
Indeed so. There are few signs that my generation, which votes en masse, is prepared to stop awarding itself all sorts of prizes and baubles and passing the bill on to its descendants. (Unlike our own parents, we don't even have the tattered excuse that "we were in the war". We just feel entitled.) Sadly, there are even fewer signs that the "Spectators" can be persuaded that the only way to prevent this from happening is to start turning out on election day themselves. They know they've got a problem, but they have no real idea of what they can do about it.
The Star hasn't announced whether the full Atkinson series will be published as one of its e-books or in a conventional paper format, or will remain as a series of pieces in the daily paper. It's sufficiently sobering and important to merit a much wider audience -- both within Canada and elsewhere, because these problems are common to every advanced nation today.
* Like a lot of other newspapers, the Star now has a paywall, but non-subscribers can read up to ten articles a month free of charge, which will be enough to give you the flavour of this series.
The pieces published so far have already looked at a wide range of cohesion issues: the problems faced by aboriginal peoples, the difficulties immigrants encounter in trying to make their way in a new land, the age-old issue of "what does Quebec want?", and so on. However, as an economist and baby boomer I'm most interested in the growing wealth gap between older Canadians and the young. Indeed, it's an issue I've posted about many times on this blog, most recently just a couple of posts ago ("Pay it backward").
In an article titled "The young will inherit a future they didn't choose", Valpy and his team identify a cohort they dub "Spectators". They're mostly male, mostly under the age of 35, and they've made the decision effectively to turn their backs on participation in mainstream Canadian society, because they've concluded the game has been rigged against them. As one "Spectator" puts it, "(people) are caught in a yoke by the richies ... The gap between the rich and the poor is getting bigger and the rich are putting in mechanisms to stop anybody else from getting rich.”
Ouch. I'm a retired boomer with a son who falls into the "Spectator" age bracket. I'd never allow anyone to claim that I got my education and made my money easily, but I'm appalled at how much harder it now is for people my son's age to get themselves established in the workforce, even with the benefit of a university degree. To quote from the study again, “In a decade or two.....the younger voters will be in the prime of their lives and paying for the political choices of their now departed grandparents which are not likely to reflect the priorities or, one could speculate, the needs of next Canada.”
Indeed so. There are few signs that my generation, which votes en masse, is prepared to stop awarding itself all sorts of prizes and baubles and passing the bill on to its descendants. (Unlike our own parents, we don't even have the tattered excuse that "we were in the war". We just feel entitled.) Sadly, there are even fewer signs that the "Spectators" can be persuaded that the only way to prevent this from happening is to start turning out on election day themselves. They know they've got a problem, but they have no real idea of what they can do about it.
The Star hasn't announced whether the full Atkinson series will be published as one of its e-books or in a conventional paper format, or will remain as a series of pieces in the daily paper. It's sufficiently sobering and important to merit a much wider audience -- both within Canada and elsewhere, because these problems are common to every advanced nation today.
* Like a lot of other newspapers, the Star now has a paywall, but non-subscribers can read up to ten articles a month free of charge, which will be enough to give you the flavour of this series.
Wednesday, 4 December 2013
Walking the tightrope
Bank of Canada Governor Stephen Poloz, in the job for just under six months, has firmly established his credentials as the world's most dovish central banker. As expected, the Bank has again maintained its reference rate at 1 percent (or "a rock bottom 1 percent", as the media would have it). However, the tone of its commentary is becoming ever more bleak, and this is starting to trigger some speculation that the Bank might be considering aping the recent unexpected rate cut by the ECB.
What's worrying the Bank is not the absence of growth. Real GDP growth accelerated to a two-year high of 2.7% (annualized rate) in Q3, and growth forecasts for 2014 are being marked sharply higher, mainly on expectations that continuing expansion in the US will pull the Canadian economy along. However, the Bank is very worried about the continuing -- and largely unpredicted -- fall in the inflation rate, which slipped to only 0.7% in October, far below the official 2% target. Did I say Target?? The Bank appears to believe that the arrival of US discount chains, including Target, in the Canadian marketplace is leading to heightened price competition and keeping the measured inflation rate subdued. Most Canadians would say that's a good thing (and ironically, Target is reportedly falling way short of its sales projections), but for the Bank it's apparently a real cause for concern.
What happens next? As the linked article notes, some Bay Street experts think that the Bank is trying to achieve monetary easing without actually cutting rates, by talking the dollar down. If that's the plan, it seems to be working. The currency's months-long slide from above parity with the US dollar is gathering pace; it's now near the 93-cent level, and plenty of experts see it falling below 90-cents in early 2014. A weaker dollar helps the Bank out in many ways. It gives a boost to the beleaguered manufacturing sector, which has been hollowed out by the currency's strength in recent years. It adds directly to the cost of imported goods, and by making cross-border shopping less attractive, it gives local retailers more room to boost prices. As these effects play out, the weakness in inflation is likely to reverse quite sharply in the months ahead.
The interesting question, of course, is this: if the Bank is really so concerned about the risks of deflation, why doesn't it just bite the bullet and cut rates? The answer to this lies in the state of the housing market and the growth of consumer indebtedness. The Bank persists in denying that there are any signs of a bubble in the housing market, but all the evidence suggests that the cheap-money-fueled boom in the condo market is leading to serious oversupply in the country's biggest cities. At the same time, consumer debt is stubbornly high, with the debt/disposable income ratio close to the levels that led to disaster in the US half a decade ago.
A weak dollar may be just what Gov. Poloz needs in the short term. At some point, however, the Bank will have no choice but to start thinking about raising rates. When that happens, a lot of consumers (and a lot of condo owners who have bought properties as an investment) will start to feel pain very quickly.
What's worrying the Bank is not the absence of growth. Real GDP growth accelerated to a two-year high of 2.7% (annualized rate) in Q3, and growth forecasts for 2014 are being marked sharply higher, mainly on expectations that continuing expansion in the US will pull the Canadian economy along. However, the Bank is very worried about the continuing -- and largely unpredicted -- fall in the inflation rate, which slipped to only 0.7% in October, far below the official 2% target. Did I say Target?? The Bank appears to believe that the arrival of US discount chains, including Target, in the Canadian marketplace is leading to heightened price competition and keeping the measured inflation rate subdued. Most Canadians would say that's a good thing (and ironically, Target is reportedly falling way short of its sales projections), but for the Bank it's apparently a real cause for concern.
What happens next? As the linked article notes, some Bay Street experts think that the Bank is trying to achieve monetary easing without actually cutting rates, by talking the dollar down. If that's the plan, it seems to be working. The currency's months-long slide from above parity with the US dollar is gathering pace; it's now near the 93-cent level, and plenty of experts see it falling below 90-cents in early 2014. A weaker dollar helps the Bank out in many ways. It gives a boost to the beleaguered manufacturing sector, which has been hollowed out by the currency's strength in recent years. It adds directly to the cost of imported goods, and by making cross-border shopping less attractive, it gives local retailers more room to boost prices. As these effects play out, the weakness in inflation is likely to reverse quite sharply in the months ahead.
The interesting question, of course, is this: if the Bank is really so concerned about the risks of deflation, why doesn't it just bite the bullet and cut rates? The answer to this lies in the state of the housing market and the growth of consumer indebtedness. The Bank persists in denying that there are any signs of a bubble in the housing market, but all the evidence suggests that the cheap-money-fueled boom in the condo market is leading to serious oversupply in the country's biggest cities. At the same time, consumer debt is stubbornly high, with the debt/disposable income ratio close to the levels that led to disaster in the US half a decade ago.
A weak dollar may be just what Gov. Poloz needs in the short term. At some point, however, the Bank will have no choice but to start thinking about raising rates. When that happens, a lot of consumers (and a lot of condo owners who have bought properties as an investment) will start to feel pain very quickly.
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