The news that Canada's economy had been in a technical recession back in the first half of the year (well, from January to May) was fodder for some large-font headlines and much hand-wringing in the media. Today we get news that GDP grew in July for a second consecutive month -- and it's not much of a story at all. In fact, the rabidly anti-Harper Toronto Star can't even find room for it on the home page of its website -- you have to click on the separate "Business" section, well down the page, to find it.
Most private sector analysts are revising their growth forecasts for Q3 and for the rest of 2015 sharply higher, and it seems likely that the Bank of Canada will be doing the same when it updates its published forecast in October. This should mean that there is no prospect of any further monetary easing by the Bank, which should reduce the downside for the exchange rate, even if the US Federal Reserve starts raising rates in the next little while.
This is undoubtedly good news for Stephen Harper's Tories, who look likely to emerge as the largest single party in the October 19 election, even though about two-thirds of the electorate (including your humble scribe) heartily wish them gone. Harper and his cadaverous Finance Minister, Joe Oliver, have been widely scorned for downplaying the recession, but it looks as if they were right. There's every possibility that revisions to the data -- which can take several years to complete -- will eventually show that it never actually happened.
Wednesday, 30 September 2015
Friday, 25 September 2015
Anger is an energy
Last year we spent a couple of weeks in the company of a hundred or more wealthy Americans, cruising the rivers of Europe. It was a great trip and they were mostly great travelling companions, but one thing we couldn't help noticing was how angry they were. Angry about immigration, angry about Obamacare, angry about Obama himself. Most of them proudly identified as Republicans.
That anger is plainly fueling the chaotic race for the GOP Presidential nomination, particularly the rise of Donald Trump. One of Trump's most popular ideas has been his plan to build, at Mexico's expense, a wall along the entire border between the two countries. Now that idea has been, well, trumped by the suggestion that the US also needs a wall to separate itself off from Canada. This article, originally from Bloomberg News, suggests that the notion has the support of 41 percent of US voters, and has almost 50 percent backing in the southern states.
The Canada-US border is, according to the article, almost 9000 kilometres long -- for the benefit of US readers, that's better than 5000 miles. It goes without saying that a wall of that size would make the Great Wall of China look like your backyard fence. So it's not going to happen. Still, the article, much of which is tongue-in-cheek, contains a few snippets that are worth commenting on, to wit:
That anger is plainly fueling the chaotic race for the GOP Presidential nomination, particularly the rise of Donald Trump. One of Trump's most popular ideas has been his plan to build, at Mexico's expense, a wall along the entire border between the two countries. Now that idea has been, well, trumped by the suggestion that the US also needs a wall to separate itself off from Canada. This article, originally from Bloomberg News, suggests that the notion has the support of 41 percent of US voters, and has almost 50 percent backing in the southern states.
The Canada-US border is, according to the article, almost 9000 kilometres long -- for the benefit of US readers, that's better than 5000 miles. It goes without saying that a wall of that size would make the Great Wall of China look like your backyard fence. So it's not going to happen. Still, the article, much of which is tongue-in-cheek, contains a few snippets that are worth commenting on, to wit:
- Thomas Caldwell, a financial executive in Toronto, is quoted as saying "There's not a horde of Canadians rushing to get in to America, let me tell you". Well, yes and no, Tom. This morning as I was driving around the Niagara region, local radio was reporting delays of up to an hour at the border bridges, of which there are four in a twenty-mile stretch. A lot of my neighbours go to the US every week to stock up on groceries, even with the Canadian dollar at such a low level. Canadians may not want to be Americans, but they sure love to shop like them.
- Another Toronto financial executive -- well, this is Bloomberg -- mocks the 50 percent of southerners who want a wall: "They don't even know where Canada is". Probably some truth in that. A former colleague of mine, a Spaniard, loved to tell the tale of how he went to St Louis to study. One of the questions he was asked most often: how long did it take to drive from Spain to Missouri? (Yes, I know St Louis isn't in the south, but it's a good story).
- The Donald says he wouldn't build a wall along the 49th parallel: "I love Canada", he says. Might not be mutual, big guy! One of the tallest new towers in Toronto has Trump's name on it. It's been a source of messy litigation because a lot of the buyers of units in the building, which is a hotel/condo thingy, claim they were misled about the income potential. Trump has remained aloof from the fray, noting that basically his only role was to cash a nice fat check for allowing his name to be used.
- A Tory running for re-election in eastern Ontario asks how anyone could build a wall along the border in his neck of the woods, seeing as it's water -- the St Lawrence Seaway, to be precise. Good question, but we were in that area a few weeks ago and saw just how porous the border is down there. One small island has a very short bridge adorned with the flags of both countries, claimed to be the shortest crossing between the two countries. No fearsome looking border security types in evidence either.
Sunday, 20 September 2015
Will "shy Tories" decide Canada's election?
Cast your mind back a few months to the UK's general election. On the eve of the vote, opinion polls were pointing to a too-close-to-call outcome between the Tories and Labour. On polling day, however, the Tories trounced both Labour and the Lib Dems, ending up -- against all expectations -- with a solid majority government. Poring over their latest failure, the pollsters settled on the idea that a lot of people who had been polled had been "shy Tories" -- people fully committed to backing David Cameron, but too embarrassed to admit that to a stranger.
Could we see the same thing when Canada votes on October 19? This columnist seems to think it's a possibility, though not an important one. Opinion polls show the three main parties -- Tories, Liberals and NDP -- each with about 30 percent voter support. Harper's 30 percent , his "base" vote, is certainly very far from being shy. Early in the interminable campaign, a grey-haired gent got international press coverage for screaming abuse at a reporter who had the temerity to ask Prime Minister Harper questions about the ongoing Senate expenses scandal. Among other things he accused her -- and reporters in general -- of being tax evaders.
This kind of anger is a characteristic of Harper's "base", though it's legitimate to ask what they're so angry about. After all, their man has been in office for over a decade, a time in which he has quite deliberately run the country in ways that the remaining 70 percent of the population find abhorrent: strident and blinkered foreign policy, scorn for other levels of government, disregard for the environment, cuts in social programmes. That's what the "base" wanted, and that's what Harper has delivered, so I ask again: what are they so angry about?
Most analysts assume that Harper's real support will never be much more or less than that 30 percent "base". To win the election, or at least to attain a minority government, he needs to shake loose, for one day only, a smattering of wavering souls from the other major parties. Fully 70 percent of Canadian voters are heartily sick of Harper, but at least some of them can be bribed with targeted tax cuts -- a Harper specialty -- or made fretful about terrorist threats.
This ought not to work, but the opposition parties are making it easier for the Tories by shying away from radical proposals. The supposedly socialist NDP has vowed not to run an fiscal deficit, while promising a number of new initiatives that seem sure to be expensive -- a national daycare programme, for example. The Liberals are ready to run deficits to finance infrastructure spending in an effort to jumpstart the economy -- but only small deficits, and only for three years. Ten years of Harperism, echoed at the local level by politicians like former Toronto Mayor Rob Ford, have made the notion of activist government, financed either by a somewhat higher tax burden or through deficits, something almost unmentionable.
Against the odds, then, this election now seem to be taking place on Harper's terms. Given that the other parties aren't promising anything very different, why not stick with good old Stephen and his supposedly firm hand on the tiller, rather than gamble on callow Justin Trudeau or angry Tom Mulcair? It's not a pitch that's going to win my vote, but there may be enough voters -- "one day" Tories rather than "shy" ones -- to make Harper's party the largest in the House of Commons come October 20.
UPDATE, 24 September: Maybe not so shy after all? This poll shows the Tories pulling ahead of their opponents, with almost enough support to form a majority government. And yet in my own discussions with friends and acquaintances in our riding, which is currently Tory, I can't find anyone who's enthusiastic about giving Stephen Harper another term, and a whole lot who are horrified at the prospect.
Could we see the same thing when Canada votes on October 19? This columnist seems to think it's a possibility, though not an important one. Opinion polls show the three main parties -- Tories, Liberals and NDP -- each with about 30 percent voter support. Harper's 30 percent , his "base" vote, is certainly very far from being shy. Early in the interminable campaign, a grey-haired gent got international press coverage for screaming abuse at a reporter who had the temerity to ask Prime Minister Harper questions about the ongoing Senate expenses scandal. Among other things he accused her -- and reporters in general -- of being tax evaders.
This kind of anger is a characteristic of Harper's "base", though it's legitimate to ask what they're so angry about. After all, their man has been in office for over a decade, a time in which he has quite deliberately run the country in ways that the remaining 70 percent of the population find abhorrent: strident and blinkered foreign policy, scorn for other levels of government, disregard for the environment, cuts in social programmes. That's what the "base" wanted, and that's what Harper has delivered, so I ask again: what are they so angry about?
Most analysts assume that Harper's real support will never be much more or less than that 30 percent "base". To win the election, or at least to attain a minority government, he needs to shake loose, for one day only, a smattering of wavering souls from the other major parties. Fully 70 percent of Canadian voters are heartily sick of Harper, but at least some of them can be bribed with targeted tax cuts -- a Harper specialty -- or made fretful about terrorist threats.
This ought not to work, but the opposition parties are making it easier for the Tories by shying away from radical proposals. The supposedly socialist NDP has vowed not to run an fiscal deficit, while promising a number of new initiatives that seem sure to be expensive -- a national daycare programme, for example. The Liberals are ready to run deficits to finance infrastructure spending in an effort to jumpstart the economy -- but only small deficits, and only for three years. Ten years of Harperism, echoed at the local level by politicians like former Toronto Mayor Rob Ford, have made the notion of activist government, financed either by a somewhat higher tax burden or through deficits, something almost unmentionable.
Against the odds, then, this election now seem to be taking place on Harper's terms. Given that the other parties aren't promising anything very different, why not stick with good old Stephen and his supposedly firm hand on the tiller, rather than gamble on callow Justin Trudeau or angry Tom Mulcair? It's not a pitch that's going to win my vote, but there may be enough voters -- "one day" Tories rather than "shy" ones -- to make Harper's party the largest in the House of Commons come October 20.
UPDATE, 24 September: Maybe not so shy after all? This poll shows the Tories pulling ahead of their opponents, with almost enough support to form a majority government. And yet in my own discussions with friends and acquaintances in our riding, which is currently Tory, I can't find anyone who's enthusiastic about giving Stephen Harper another term, and a whole lot who are horrified at the prospect.
Thursday, 17 September 2015
Fed up? Not just yet
The market view over whether the US Federal Reserve would raise interest rates this month was slow to gel, but eventually there was a near-unanimous consensus that there would be no move. And so it has proved, with only one dissenting voice on the FOMC.
A quick skim through the press release suggests that the Fed is content with the way the domestic economy is performing: activity is expanding "at a moderate pace", the labour market is strengthening and inflation expectations are stable. The key reasons for keeping rates on hold yet again seem to relate to international factors. Growth in US net exports has been slow, reflecting the emergence of slower growth in a number of key markets. The Fed appears to believe that a faltering expansion in the rest of the world will exert downward pressure on both growth and inflation in the US.
Is this the Greenspan Fed redux? Regardless of what was happening in the domestic economy -- bubbles in the housing market, overvaluation of financial assets -- the Maestro could always find a reason not to lean too hard on the monetary brakes. Looking at the current US situation objectively, it's impossible to justify keeping rates in a 0-25 basis point range any longer, but that's where we are.
The problem Ms Yellen and her colleagues face, of course, is that they and we have never been here before. Nobody has any idea what will happen when the Fed starts to take away the seven years' worth of free money that the markets have been gorging on. None of the central bankers who devised the emergency response to the financial crisis, back in 2007/8, gave much thought to the question of how their bold experiment might be brought to an end when the time came, but it's a racing certainty that none of them thought the experiment would still be going on seven years later.
It's clear that a lot of analysts and market players are terrified of what may happen when the FOMC pulls the trigger -- check out this piece from the CBC website, published before today's announcement. The one thing that seems safe to say is that continually finding reasons not to hike rates is not going to make things any easier when a move finally comes.
A quick skim through the press release suggests that the Fed is content with the way the domestic economy is performing: activity is expanding "at a moderate pace", the labour market is strengthening and inflation expectations are stable. The key reasons for keeping rates on hold yet again seem to relate to international factors. Growth in US net exports has been slow, reflecting the emergence of slower growth in a number of key markets. The Fed appears to believe that a faltering expansion in the rest of the world will exert downward pressure on both growth and inflation in the US.
Is this the Greenspan Fed redux? Regardless of what was happening in the domestic economy -- bubbles in the housing market, overvaluation of financial assets -- the Maestro could always find a reason not to lean too hard on the monetary brakes. Looking at the current US situation objectively, it's impossible to justify keeping rates in a 0-25 basis point range any longer, but that's where we are.
The problem Ms Yellen and her colleagues face, of course, is that they and we have never been here before. Nobody has any idea what will happen when the Fed starts to take away the seven years' worth of free money that the markets have been gorging on. None of the central bankers who devised the emergency response to the financial crisis, back in 2007/8, gave much thought to the question of how their bold experiment might be brought to an end when the time came, but it's a racing certainty that none of them thought the experiment would still be going on seven years later.
It's clear that a lot of analysts and market players are terrified of what may happen when the FOMC pulls the trigger -- check out this piece from the CBC website, published before today's announcement. The one thing that seems safe to say is that continually finding reasons not to hike rates is not going to make things any easier when a move finally comes.
Saturday, 12 September 2015
Harper's economic record
Our old friend David Olive at the Toronto Star has a piece in today's edition examining Canada's economic record under Stephen Harper. Economic stability was supposed to be one of the key planks in Harper's re-election campaign, but recent data, including a very mild recessionette in the first half of the year, have seriously damaged the story. In any case, this being the Star, it's no surprise that Olive finds the Tories wanting in most respects.
Piling Peleon on Ossa, Olive compares Harper's record not just with those of other countries over the past decade, but also with what was achieved under previous Canadian Prime Ministers. The first of these strikes me as much more valid than the second. Broadly speaking, everyone was facing the same problems from 2007 on, so it's legitimate to measure one country against another. It's far less reasonable to draw comparisons between what Harper has done and, for example, what Pierre Trudeau did three decades ago.
Anyway, let's assess Olive's assessment.
Olive's sour conclusion is the best that can be said is that Canada under Harper muddled through the post-crisis era better than most other countries. And even for this modest achievement, Olive tries to assign much of the credit elsewhere -- specifically, to former Bank of Canada Governor Mark Carney. Here, Olive may actually be onto something. Unlike much of the rest of the G7, Canada did not have to undertake an emergency bailout of its financial system. Some credit for this indeed goes to Carney, and some to the late Jim Flaherty, who as Harper's Finance Minister took a very hands-on approach to the banks as the crisis unfolded.
Arguably, however, most of the credit for the stability of the financial system should go to Messrs Chretien and Martin. Back in 1998, two pairs of Canada's Big Five banks -- first Royal and BMo, and then TD and CIBC -- announced plans to merge, with the specific aim of becoming bigger players on the world stage. The government of the day disallowed the mergers; one can only speculate how differently things might have turned out post-2007, if those deals have gone ahead. Given Olive's zeal to deprive Harper of any credit for anything at all, I'm surprised he didn't mention that.
Piling Peleon on Ossa, Olive compares Harper's record not just with those of other countries over the past decade, but also with what was achieved under previous Canadian Prime Ministers. The first of these strikes me as much more valid than the second. Broadly speaking, everyone was facing the same problems from 2007 on, so it's legitimate to measure one country against another. It's far less reasonable to draw comparisons between what Harper has done and, for example, what Pierre Trudeau did three decades ago.
Anyway, let's assess Olive's assessment.
- Job creation: Olive admits that Canada's record in this regard is better than the rest of the G7 -- but then tries to knock it down anyway. He argues that you'd expect more jobs to be created in a country that has higher population growth, as Canada does because of its high immigration levels. Why should this be so? If rapid population growth drove employment growth, sub-Saharan Africa would presumably be booming. Olive also notes that Canada's unemployment rate is higher than that in other G7 countries: true, but this is nothing new. Structural unemployment, especially in the Atlantic provinces, has always biased the national jobless rate higher.
- Fiscal prudence: Olive correctly states that Harper, despite embracing austerity, has in fact presided over seven straight years of budget deficits. There may be a small surplus this year, but only because of fiscal finagling, as Olive outlines. Interestingly, he offers no comparisons with the rest of the G7 here, presumably because he knows that the fiscal performance of most other G7 countries, including the US and the UK, has been so much worse. Finally, he contrasts Harper's performance with the decade of surpluses rung up by PMs Chretien and Martin. True enough -- but unlike Harper, that was achieved in an era of rapid global economic expansion, not near stagnation.
- Economic growth: Olive has to admit that Canada's GDP has grown more than that of any other G7 country during the Harper years. He argues that growth was faster under PMs Martin, Chretien, Mulroney and Trudeau -- but then, as noted above, everyone else was posting faster growth back then too.
- Prosperity: Olive notes that growth in real GDP per head in the Harper years has averaged a "barely discernible" 0.4 percent per annum. Once again he offers no comparisons with the rest of the G7, for obvious reasons -- they did even worse -- but instead attempts to blacken Harper by comparing him unfavourably with every PM since the Great Depression!
Olive's sour conclusion is the best that can be said is that Canada under Harper muddled through the post-crisis era better than most other countries. And even for this modest achievement, Olive tries to assign much of the credit elsewhere -- specifically, to former Bank of Canada Governor Mark Carney. Here, Olive may actually be onto something. Unlike much of the rest of the G7, Canada did not have to undertake an emergency bailout of its financial system. Some credit for this indeed goes to Carney, and some to the late Jim Flaherty, who as Harper's Finance Minister took a very hands-on approach to the banks as the crisis unfolded.
Arguably, however, most of the credit for the stability of the financial system should go to Messrs Chretien and Martin. Back in 1998, two pairs of Canada's Big Five banks -- first Royal and BMo, and then TD and CIBC -- announced plans to merge, with the specific aim of becoming bigger players on the world stage. The government of the day disallowed the mergers; one can only speculate how differently things might have turned out post-2007, if those deals have gone ahead. Given Olive's zeal to deprive Harper of any credit for anything at all, I'm surprised he didn't mention that.
Thursday, 10 September 2015
"The Russians are coming! The Russians are coming!"
There was an incident during the endless wars that followed the breakup of Yugoslavia that was scary and comical at the same time. The US and its allies, who if memory serves had been bombing the snot out of Serbia for several weeks, managed to finagle a resolution through the UN Security Council, authorizing the deployment of a peacekeeping mission under UN auspices. The mission was, of course, supposed to consist of hastily rebadged NATO armour. However, the Russians, who had watched aghast as their fellow Slavs were bombarded, quickly painted up a few vehicles of their own and deployed them to an airfield in Serbia.
The head of the NATO mission, a US general, demanded that the British army turf the Russians out. The leader of the British forces, General Sir Mike Jackson, refused an order for probably the only time in his career, saying "I'm not starting World War Three for you"!
Fast forward to the present, and we find the US military getting its BVDs in a knot all over again about Russian military deployments, this time in Syria. The fact is that the Russians have had military personnel in Syria for years: the country is the site of their only naval base on the Mediterranean. Their wish to maintain that slender foothold explains their willingness to support the vicious Assad regime with regular weapons supplies.
Now there are some signs that Russia may be sending ground troops to Syria to fight ISIS directly, something which the US and its allies (including the UK, Australia and Canada) have been highly reluctant to do. On the principle that the enemy of my enemy is my friend, you might think the arrival of Russian boots on the ground would be a welcome development, but it evidently isn't.
Here's the thing. The US and its allies have all kinds of military assets in the Middle East and are merrily bombing away in Syria and Iraq, to little apparent effect but with mounting civilian casualties. But that's OK: those are our guys. But let the Russians turn up with a thousand or so soldiers -- that's the reported number -- and actually take on the ISIS bad guys hand-to-hand, and it's apparently cause for alarm.
Or look at the Ukraine conflict. There are constant reports about the increased level of Russian aerial activity over the Baltic Sea, and naval manoeuvres in the Black Sea. Both of those bodies of water are on Russia's borders, and the Russia is stepping up its activities there mainly because of the hugely increased presence of NATO aircraft and ships in the region, thousands of kilometers from their home bases.
Vladimir Putin is not someone who's easy to trust, but the West's incessant fear-mongering and denigration of Russia since the collapse of the USSR has given him and his compatriots very little reason to trust us, either. This doesn't yet feel like the Cold War that loomed over us when I was growing up, but it's an unpleasant and unstable kind of standoff that could surely be improved if the two sides could just start treating each other with a bit of respect.
The head of the NATO mission, a US general, demanded that the British army turf the Russians out. The leader of the British forces, General Sir Mike Jackson, refused an order for probably the only time in his career, saying "I'm not starting World War Three for you"!
Fast forward to the present, and we find the US military getting its BVDs in a knot all over again about Russian military deployments, this time in Syria. The fact is that the Russians have had military personnel in Syria for years: the country is the site of their only naval base on the Mediterranean. Their wish to maintain that slender foothold explains their willingness to support the vicious Assad regime with regular weapons supplies.
Now there are some signs that Russia may be sending ground troops to Syria to fight ISIS directly, something which the US and its allies (including the UK, Australia and Canada) have been highly reluctant to do. On the principle that the enemy of my enemy is my friend, you might think the arrival of Russian boots on the ground would be a welcome development, but it evidently isn't.
Here's the thing. The US and its allies have all kinds of military assets in the Middle East and are merrily bombing away in Syria and Iraq, to little apparent effect but with mounting civilian casualties. But that's OK: those are our guys. But let the Russians turn up with a thousand or so soldiers -- that's the reported number -- and actually take on the ISIS bad guys hand-to-hand, and it's apparently cause for alarm.
Or look at the Ukraine conflict. There are constant reports about the increased level of Russian aerial activity over the Baltic Sea, and naval manoeuvres in the Black Sea. Both of those bodies of water are on Russia's borders, and the Russia is stepping up its activities there mainly because of the hugely increased presence of NATO aircraft and ships in the region, thousands of kilometers from their home bases.
Vladimir Putin is not someone who's easy to trust, but the West's incessant fear-mongering and denigration of Russia since the collapse of the USSR has given him and his compatriots very little reason to trust us, either. This doesn't yet feel like the Cold War that loomed over us when I was growing up, but it's an unpleasant and unstable kind of standoff that could surely be improved if the two sides could just start treating each other with a bit of respect.
Wednesday, 9 September 2015
He didn't, and he won't next time either
The Bank of Canada kept its overnight rate target unchanged at 0.5 percent today, in line with the expectations of most analysts. The statement released by the Bank contains some of the most strangulated prose imaginable -- "the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate" (!) -- but generally offers a balanced view of the near-term outlook. Inflation is within the target range despite some upward pressure from the weaker exchange rate; household spending is strong and growth in the US economy is providing a lift to exports; slowing growth in China needs to be watched; and the financial system is in good shape.
One word you won't find in the press release is "recession". The media have been using the term ad nauseam ever since Stats Can reported a decline in GDP for the second quarter, even though all indications are that the economy returned to a positive path as long ago as June. That resumption of growth has allowed the Bank to avoid a rate cut that might have been seen as politically-loaded, with the election now a mere six weeks away.
Prime Minister Stephen Harper is no doubt relieved at the Bank's inaction, as his government's supposedly adept stewardship of the economy has been a key plank in what's starting to look like a very shaky re-election platform. However, it's unlikely that either the media or the opposition parties will stop using the R-word, so today's rate decision is unlikely to provide the Tories with any lasting comfort. All the evidence at this point is that the voting public is keen to see the back of Harper; barring unforeseen events, which can never be ruled out in such a long campaign, the Bank of Canada's next rate decision (on October 19, two days after election day) is likely to be overshadowed by the ongoing formation of a new government. It's a safe bet that the Bank won't want to cut rates then.
One word you won't find in the press release is "recession". The media have been using the term ad nauseam ever since Stats Can reported a decline in GDP for the second quarter, even though all indications are that the economy returned to a positive path as long ago as June. That resumption of growth has allowed the Bank to avoid a rate cut that might have been seen as politically-loaded, with the election now a mere six weeks away.
Prime Minister Stephen Harper is no doubt relieved at the Bank's inaction, as his government's supposedly adept stewardship of the economy has been a key plank in what's starting to look like a very shaky re-election platform. However, it's unlikely that either the media or the opposition parties will stop using the R-word, so today's rate decision is unlikely to provide the Tories with any lasting comfort. All the evidence at this point is that the voting public is keen to see the back of Harper; barring unforeseen events, which can never be ruled out in such a long campaign, the Bank of Canada's next rate decision (on October 19, two days after election day) is likely to be overshadowed by the ongoing formation of a new government. It's a safe bet that the Bank won't want to cut rates then.
Friday, 4 September 2015
I wouldn't, but he might
We now have to hand all of the economic data that the Bank of Canada will consider as it makes its next rate decision, with the announcement due on September 9. On balance, the recent numbers suggest that the Bank probably shouldn't see any need to cut rates again. Consider:
Taking all of these numbers together, and considering the almost unanimous forecaster consensus that growth will continue, it seems likely that the Bank of Canada will opt to keep rates at their current level (0.50%) this month. Of course, Governor Poloz has made a habit of surprising markets this year. If he's tempted to do so again this week, he might want to pause and consider whether a further rate cut would even be effective.
The goal of cutting rates is, of course, to drive the currency lower, in hopes of boosting non-oil exports. This report from TD Economics persuasively argues that exchange rate manipulation is no longer very effective as a way of increasing export volumes. I've been saying that for some time, but it's good to see it spelled out in an authoritative report like this. I hope Governor Poloz slips a copy into his briefcase for some light reading over the Labour Day weekend.
- As noted in a previous post, the Canadian economy was in a "technical recession" in the first half of this year. However, monthly GDP data showed the economy returning to positive growth in June, and most forecasters expect a slow expansion to continue through the second half of the year and into 2016.
- Trade data released on Thursday were generally encouraging, with exports rising 2.3 percent in the month. For the first time in many years, automotive-related exports exceeded oil shipments, offering at least a glimmer of hope that the sharp depreciation in the exchange rate might be having some impact.
- Employment data for August, released this morning, were also largely positive. The headline number of jobs added, just 12,000, was unspectacular, but the month saw more than 50,000 full-time positions created, offset by a smaller number of part-time jobs lost. The unemployment rate ticked higher, but this reflected a rise in the participation rate, something that is generally interpreted as a sign of improving confidence. As an aside, employment is generally a lagging indicator of overall economic activity. If the economy was indeed in recession earlier this year, one might expect that employment would be falling now -- and it isn't. This may mean that revisions to GDP data will eventually reveal that the recession never happened.
Taking all of these numbers together, and considering the almost unanimous forecaster consensus that growth will continue, it seems likely that the Bank of Canada will opt to keep rates at their current level (0.50%) this month. Of course, Governor Poloz has made a habit of surprising markets this year. If he's tempted to do so again this week, he might want to pause and consider whether a further rate cut would even be effective.
The goal of cutting rates is, of course, to drive the currency lower, in hopes of boosting non-oil exports. This report from TD Economics persuasively argues that exchange rate manipulation is no longer very effective as a way of increasing export volumes. I've been saying that for some time, but it's good to see it spelled out in an authoritative report like this. I hope Governor Poloz slips a copy into his briefcase for some light reading over the Labour Day weekend.
Tuesday, 1 September 2015
Canada in recession (or not)
The media are making a huge deal of the fact that Canada's GDP edged down in the second quarter of the year; this is the second straight quarterly decline, so the economy is "officially", as the media love to say, in a "technical recession". Samples of the media coverage can be found here and here.
And yet....at the same time as it released the quarterly figures, Statistics Canada also released monthly data that show real GDP actually increased by 0.5 percent in June. So although the quarterly data allowed the media to declare a recession, as they had been chomping at the bit to do for the last several days, the real story is that the economy shrank for five months before starting to grow again. Most forecasters, both in government and out, expect that growth at a moderate pace will continue for the remainder of the year. The recession, in other words, is already over -- indeed, it was over before the media even got to pronounce it as "official".
If you take a look at the actual StatsCan report, you'll see that the weakness in the first half of the year was concentrated in the resource producing sector of the economy, as you would expect. That's unlikely to improve any time soon -- the government of Alberta, the biggest energy-producing province, admitted just this week that the provincial economy there had slipped into recession. However, there are few signs that the rest of the economy is stumbling. Household consumption accelerated smartly in Q2, and there was even a small gain in export volumes.
So where does this leave the Bank of Canada, whose next rate decision is imminent? That export gain in Q2, welcome though it was, must be seen as disappointing, considering the sharp fall in the exchange rate in the last two years. Will the Bank be tempted to cut rates again in hopes of pushing the currency even lower, or will it see the June gain in GDP as reason to stand pat? Stay tuned.
And yet....at the same time as it released the quarterly figures, Statistics Canada also released monthly data that show real GDP actually increased by 0.5 percent in June. So although the quarterly data allowed the media to declare a recession, as they had been chomping at the bit to do for the last several days, the real story is that the economy shrank for five months before starting to grow again. Most forecasters, both in government and out, expect that growth at a moderate pace will continue for the remainder of the year. The recession, in other words, is already over -- indeed, it was over before the media even got to pronounce it as "official".
If you take a look at the actual StatsCan report, you'll see that the weakness in the first half of the year was concentrated in the resource producing sector of the economy, as you would expect. That's unlikely to improve any time soon -- the government of Alberta, the biggest energy-producing province, admitted just this week that the provincial economy there had slipped into recession. However, there are few signs that the rest of the economy is stumbling. Household consumption accelerated smartly in Q2, and there was even a small gain in export volumes.
So where does this leave the Bank of Canada, whose next rate decision is imminent? That export gain in Q2, welcome though it was, must be seen as disappointing, considering the sharp fall in the exchange rate in the last two years. Will the Bank be tempted to cut rates again in hopes of pushing the currency even lower, or will it see the June gain in GDP as reason to stand pat? Stay tuned.
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