Canada GDP: good news, but a headache for the Bank of Canada

Canada's GDP grew 0.6 percent in January, the strongest monthly gain since 2013. This was twice as fast as the analysts' consensus had predicted  a failure that is frankly a bit puzzling, considering that StatsCan had reported just a couple of weeks ago that industrial production rebounded very sharply in the same month.

Sure enough, the details of the StatsCan report show that the goods-producing sectors led the way in January. Manufacturing output jumped by 1.9 percent in the month, and has now gained more than 3 percent in just the last two months.  Durable goods output is especially strong, which signals an ongoing revival in the traditional heavy manufacturing heartland of southern Ontario.  Needless to say, this rebound is largely the result of the weakness of the exchange rate, which has given a strong boost to exports.

Aside from manufacturing, strength in the economy was broad-based.  Retail trade, utilities and finance all posted solid gains,  So, remarkably, did the oil and gas sector, with extraction of non-conventional oil rising. There was even a modest increase in demand for drilling services, which may suggest that the oil patch is growing more confident that the worst has passed for oil and gas prices.

The recent evidence of a rebound in the Canada's economy, combined with this week's dovish noises from Fed Chair Janet Yellen, have allowed the Canadian dollar to extend its recent gains. At the time of writing, the exchange rate is trading above 77 cents (US), its highest level so far in 2016 and well above the lows near 68 cents that were plumbed in mid-January.

This is where things get tricky for the Bank of Canada.  Governor Stephen Poloz has never quite come out and advocated a weak exchange rate, but it's been perfectly clear that the Bank has been looking for improved competitiveness to help rebalance the economy away from its excessive dependence on resource production.  So far, so good, it would appear, but the Bank must now be starting to worry whether the currency's 10 percent rally over the past two months will begin to reverse that competitive advantage.

The unexpectedly cautious note struck by Dr Yellen this week makes that judgment call even harder. The Fed's current stance could well push the CAD (and AUD and NZD, among others) higher, even if the momentum in Canada's non-oil exports starts to fade.  Yet there is little that the Bank of Canada can do to lean against exchange rate strength, given the risks that even easier monetary policy would pose for the domestic economy.

Just last week, StatsCan reported that Canadian households' debt-to-income ratio rose to 165.4 percent in the final quarter of last year, yet another all-time record.  Gov. Poloz has seemed to wash his hands of any responsibility for this in the past, but the Bank must be acutely aware of how quickly things could go awry once interest rates finally start to rise.

If the revival in growth is a mixed blessing for the central bank, it's unequivocally great news for Finance Minister Bill Morneau. The budget he tabled last week contained a remarkable number of cushions, including a huge $ 6 billion contingency provision, an improbably low oil price forecast and a projected GDP growth rate of just 0.4 percent per annum. That's right -- Morneau is basing his projections on a growth rate for all of 2016 (and each of the next four years) that's lower than the economy achieved in January alone. It's already looking very likely that faster growth will push revenues much higher than Morneau has forecast, giving him a windfall that will allow the new government both to boost spending a little further and bring the deficit in well under target.

Your candle is killing the planet!

This letter, which appeared in the Toronto Star on Thursday last, is worth quoting in full:

During Earth Hour we spent much of the evening chatting on Twitter. We were shocked by how many pictures we saw of people gathered around candles.

Earth Hour can be such a teachable moment for all of us, especially the young. They can learn that global warming is caused by extra carbon dioxide in the air. They can learn that CO2 release is really the enemy of all creatures who share this planet and anything we can do to reduce this rate of release is a good thing.

But on this Earth Hour, we lit candles, which are CO2 emitters, and we kept our furnaces online, which are a major carbon dioxide source.

What happened to the teachable moment? It’s gone. Better to bring out the batteries and flashlights and to explain why CO2-emitting candles and furnaces are not appropriate for Earth Hour.

By using that short lesson we strengthen the association in children’s minds between the problem of CO2 release and global warming.

That's right. It's not enough that we turn the clock back to the start of the industrial revolution in order to save the planet.  According to this gent, we have to go much further, even forgoing the candlelight that our ancestors, or at least the better-off among them, used in much earlier times.

I wonder how the author of this letter imagines that his "batteries and flashlights" got powered up. I wonder where he bought the clockwork computer that I am assuming he must have used to access Twitter during Earth Hour.  I wonder if he's aware that batteries, including the rechargeables that he presumably favours, are full of toxic chemicals.

But leave all that aside.  The really important point that he's missing is that doing something about climate change is much easier for us than it was for our great-great-great-great grandparents, because we're so much wealthier.  That's why the pea-souper fogs I can vaguely recall from when I was growing up in London haven't been seen for decades. It's why pollution levels in major North American and European cities have been brought under control. It's why, according to some estimates, global carbon dioxide emissions seem to have plateaued in the last couple of years. And it's why the big challenge in the immediate future is to stop the rise in CO2 omissions in massively populated countries like China and India, which aspire to reach the developed world's standard of living.

Most well-informed experts assure us that we can make the transition to a low carbon economy without sacrificing our overall standard of living.  That's good, because if we're all supposed to adopt the hair shirt that the Star's correspondent seems to advocate, people will start falling by the wayside very quickly -- starting with me.  

Deep in the red

As seems to be the norm these days, Canada's new Federal government was careful to leak much of the bad news ahead of its first budget, which was tabled in Ottawa today.  Finance Minister Bill Morneau had walked back the campaign promise of small, temporary deficits, announcing weeks ago that even without new spending, the budget deficit was on track to hit C$18 billion for the 2016-17 fiscal year. This in turn removed any prospect of eliminating the deficit by the time of the next election (2019), as the Liberals had originally proposed.

So today's announcement of a $29.4 billion deficit for the current year came as little surprise.  An almost identical deficit is projected for next year, followed by a gradual decline to just below $18 billion by 2019-20.  The torrent of red ink reflects the new Government's determination to push ahead with its spending promises, despite the much-worse-than-expected fiscal situation it inherited. Most of the promised targets for increased spending get something: the amorphous "middle classes" (lower income tax, simplified and increased child benefits); infrastructure (albeit somewhat back-end loaded); aboriginal peoples (with a focus on education and clean water).  Among the losers: higher income earners, facing a new top tax bracket, and the military, starved for cash just as it was under the Tories.

From an economist's standpoint, one key assumption stands out. The government is projecting annual GDP growth of only 0.4 percent over the five-year planning horizon.  This is far lower than even the most pessimistic analysts' expectations, and well below the numbers Finance Minister Morneau tabled just a few weeks ago.  It's very clear that the government is hoping that somewhat faster growth will (a) increase revenues and thus keep the deficit lower than forecast and (b) allow Trudeau and Morneau to point to faster growth as proof that their damn the torpedoes approach is working.

That's politically astute; however, as Canadians learned back in the 1980s and 1990s, adopting a very long schedule for reducing the deficit is risky in itself -- the temptation to keep putting off the evil day of reckoning is very strong.  Deficit financing at a time of slow growth and cheap money is good economics, but we shall have to wait and see if this government, unlike so many of its predecessors on both left and right, will know when enough is enough.

RIP, Rob Ford

Even with the appalling terrorist attacks in Brussels this morning, and the Trudeau government's first budget coming down this afternoon, Canadian media are giving wall-to-wall coverage to the passing of Toronto's former Mayor, Rob Ford, earlier today.  He was just 46 years old and had been undergoing treatment for cancer for more than a year.  There are some nasty comments to be found on Twitter, to be sure, but for the most part, even Ford's many detractors are abiding by the dictum, "de mortuis nil nisi bonum" -- never speak ill of the dead.*

Ford was a big man who lived life large.  His populist politics were never mine, but then they weren't intended to be. "Ford Nation", as it became known, largely consisted of poorer, less educated people who felt that the boom times in Toronto were leaving them behind. There's a clear comparison, albeit on a vastly different scale, with the rise of Donald Trump.  Even when he was undergoing his first, seemingly successful round of chemo in late 2014, Ford remained diligent about always returning phone calls from his constituents, people who were more used to being ignored by all levels of government, except around voting day.

Truth to tell, he was never a great mayor, and in his worst moments he made Toronto an international laughing stock. Yet he always seemed like a cheerful oaf it would be fun to spend an evening with. His ever-loyal family is grieving his loss, and his city will be a poorer and less interesting place without him. Rest in peace, big guy.

* I know that's not the literal translation, but it's the usual English way of expressing the thought.

Remarkably good news

Recent Canadian employment reports have been mixed, with strength in Ontario largely offset by weakness just about everywhere else.  The data have seemed to suggest that the Bank of Canada's weak dollar policy (they don't call it that, but that's what it is) might be having the desired effect of goosing the non-resource sectors of the economy, especially manufacturing, which is largely concentrated in southern Ontario.

Now we may have proof. A new StatsCan report today shows that Canada's manufacturing output reached an all-time high in January, led by shipments of autos, auto parts and food products.  Although the bulk of the improvement was seen in Ontario and Quebec, manufacturing output also rose in six other provinces, with only two (including beleaguered Alberta) showing declines.

It's only one month's data, but it's another small piece of evidence suggesting that the downward-revised 2016 GDP growth forecasts recently posted by the Finance Ministry, Bank of Canada and most private sector analysts may turn out to be excessively pessimistic.

The company you keep?

Canadian aerospace/transportation giant Bombardier Inc is currently awaiting a decision from the Federal government over the company's request for an injection of capital.  The government of Quebec and its pension fund have already ponied up more than C$ 2 billion, and Bombardier figures a further billion from the Feds should just about see it right.  Both the Quebec government and the government of Ontario, which between them provide the home for most of Bombardier's facilities (and jobs) are anxious for the Feds to come up with the cash.

Unfortunately, the headlines about Bombardier in recent months have been far from positive.

• The company's C-series jet project, which has chewed through its cash holdings at a fearsome pace, remains on a knife edge.  An order from Air Canada last month was good news, but was immediately outweighed by the news that an earlier and larger order from Republic Airlines was at risk of falling through as a result of a Chapter 11 filing.  

• The Toronto Transit Commission (TTC) is still awaiting the bulk of an order for streetcars that Bombardier has proven itself incapable of delivering on time. The company won the (highly suspect) bidding process by promising to do the bulk of the work in Thunder Bay, Ontario. However, it turns out that much of the work is being carried out in Mexico, and Bombardier has been quick to blame its employees there for the delays.  Even so, it continues to send more and more work offshore, despite lobbying hard for more Canadian taxpayer dollars.

• A signalling contract for London Underground was pulled from Bombardier after it became evident that the company would be unable to perform the specified tasks and would run wildly over budget. A report released this week brands Bombardier's performance as "nothing short of a disaster". 

• With Bombardier holding out the begging bowl, the Canadian media have been looking into the company's structure. The founding family maintains effective control of the operation through its holding of most of the company's voting stock; most common shareholders have non-voting shares. This is causing problems for governments as they look for ways to keep control of how their bailout dollars are spent. Moreover, the company's leisure products division (ski-doos, jet skis and such) is run by the founding family as a separate business -- and is highly profitable.

Supporters of a Federal bailout talk of Bombardier as a "national champion" in the field of high tech. Even PM Justin Trudeau, whose government seems to be taking its time about coming to the bailout party, has sung the praises of the C-series jet.  Yet the company's recent history is a litany of overstretch and failure, and it's far from certain that putting in more public money will finally cause it to get its act together. Whichever way Trudeau finally decides to jump on this one, the critics will be ready to pounce.

Brotherly love

Polish joke, circa 1975.  "Are the Russians our friends, or are they our brothers?"  "Obviously they are our brothers, because you get to choose your own friends".

It seems unlikely that Justin Trudeau has heard that old chestnut.  If he had he might not have told President Obama and the assembled dignitaries yesterday that Canada and the US are really more like siblings than friends.  Brothers don't always get along, as was very apparent during the latter years of Stephen Harper's decade as Canada's Prime Minister.  Possibly Harper's biggest error -- and there are plenty to choose from -- occurred when he opined that US approval of the Keystone XL pipeline project was "a no-brainer".  Not the way to win over your cerebral big brother.

It's nice to see Obama and Trudeau getting along so well, but maybe we Canadians should enjoy it while we can.  If the US shifts to the right after November's elections, things might turn chilly real fast.  Whether the Republican candidate is Donald Trump or one of the chasing pack, a GOP presidential victory would inevitably bring more trade protectionism, heightened anti-immigrant feeling and possibly increased military adventurism, none of which fits in any way with Trudeau's determinedly sunny outlook.

Even a victory by Hillary Clinton would almost inevitably see Canadian interests. from free trade to global affairs, under increasing threat.  One way or another, it's not a happy prospect, and all the pomp and glad-handing in DC over the last three days can't change that.

Sweet spot

Things haven't been easy for Bank of Canada Governor Stephen Poloz over the last two years, with the currency in the tank and the economy struggling to cope with the decline in global raw materials prices. As I've said repeatedly on this blog, Poloz hasn't helped his own cause with some of his jaw-dropping musings, but the job was never going to be an easy one.

It's still not easy now, but it's maybe getting a little easier.  Oil prices have stabilized and even bounced back a bit.  There are signs that non-oil exports are beginning to improve in response to the long and steep decline in the exchange rate.  The C$ itself has recovered smartly from its mid-January lows, but is still fully 30 percent down from its cyclical highs.  Against this background, it was no surprise that the Bank opted to keep its key lending rate at 0.5 percent when it made its monthly policy announcement earlier today.

The Bank has cut its GDP growth forecast for the year to 1.4 percent, broadly in line with the Department of Finance's outlook and the private sector consensus. However, today's statement notes that the stimulative spending expected in the Federal budget later this month could push the growth rate slightly higher.  It's also possible, although difficult to quantify, that the palpably better mood in the country under the new Government could also translate into higher growth, particularly on the consumer side.

The Bank will be keeping a wary eye on the exchange rate -- too much strength would be unwelcome -- while also hoping that the past weakness in the currency does not push inflation any higher.  All in all, however, it seems likely that interest rates will remain at current levels through this year and very possibly well into 2017 -- and the Bank will not have to resort to the negative rates that Gov. Poloz seemed to be pondering just a couple of months ago.

An idiot's guide to Brexit

There are plenty of reasons why the so-called "Brexit" -- the UK's possible departure from the EU -- would be a dumb move.  Pro-Brexit campaigners are dreaming in technicolor if they think that the EU will allow the UK to keep intact its vital trade links with its European neighbours in the event that it votes (on June 23) to leave the union. When people like Mark Carney warn of damage to the UK and EU economies, and even the global economy, if Brexit actually happens, a lot of people seem to be shrugging their shoulders: what else would you expect the Governor of the Bank of England to say, right? But it's unlikely that he's merely crying wolf here: the downward spiral of Sterling since the referendum date was firmed up is clear evidence that the threat is real.

Which brings us to the Toronto Star's unreliably opinionated business columnist, David Olive.  In this column in Saturday's paper, he makes a few good points -- and a whole lot of really dumb ones. Let's take a look.

• "The Brexit pamphleteers also claim Britain on her own would be freer to bring about the prosperity that non-EU Scandinavian countries enjoy. They must be thinking of oil-rich Norway, since the average per capita income of the other Scandinavian countries is only slightly higher than Britain’s."  

That's simply incorrect, as this table (which uses IMF data) shows.  Norway is certainly the richest Scandinavian country in terms of GDP per capita, but Denmark, Sweden, Finland and even Iceland all comfortably outrank the UK by this measure. 

• "Cut off from its integration with the European financial system, London’s role as a gateway to Europe would wither. Frankfurt, already the de facto fiscal-policy capital of the EU, could eclipse London in commercial finance as well, given its centre-stage role and location within the EU."  

Where to start?  It's arguable that London's financial role could be one of the things least affected by Brexit. After all, the UK has never joined the single currency, yet it nonetheless remains the predominant banking and financial centre in Europe, so why would Brexit change that?  As for the reference to Frankfurt as the "fiscal policy capital of the EU", this is simply wrong. If Olive is trying to say that Germany drives EU fiscal policy, he's on firm ground -- but Germany's fiscal policy is made in Berlin, not Frankfurt.  Lastly, if banks do start to leave London after a Brexit, the likely destination is Paris, rather than "Mainhattan" -- international bankers take their lifestyles very seriously.  

• "This sorry state of affairs was manufactured largely by one man, British PM David Cameron. The brutal austerity measures with which Cameron chose to confront the Great Recession were exactly not what the doctor ordered. Britain’s painfully slow economic recovery accounts in large degree for today’s British discontent generally, and with immigrants in particular."  

Cameron's misguided austerity drive is a well-worn theme of David Olive's.   He's right to assert that fiscal austerity was the wrong medicine for the UK economy in the wake of the financial crisis, but here's the thing: although Cameron and his Chancellor George Osborne talked a good game in terms of spending cuts, program spending in fact continued to grow in the early years of the Tory-LibDem coalition.  That's why the target date for eliminating the budget deficit keeps receding into the future with each budget.  As for Britain's "painfully slow" economic recovery, suffice it to say that the UK's growth has hugely outpaced the Eurozone's, as this table from Eurostat demonstrates.  In 2014, the latest year for which full data are available, UK GDP rose 2.9 percent. The Eurozone's rose 0.9 percent. 

• "When the Eurotunnel opened in 1994, a poll showed that a majority of Britons were bracing for an onslaught a rabies-infected vermin, cats, dogs and foxes from France, where many Britons believe rabid animals are rampant. No one in France has died of rabies since 1924. Still, protestors routinely gathered at the Folkestone end of the Chunnel to protest the dire outcome this megaproject would mean for Britain."   

I'm only citing this paragraph because it contains the only fact that Olive and his minions actually bothered to check -- although, as this story shows, it's not strictly true.  

It's hard to predict how the vote will go in June: best guess is that the Brits will reluctantly vote to stay in.  Very clearly, though, if it were left to David Olive to make the case for Europe, the pro-Brexit side would win in a landslide.  

Will the strong US economy benefit Canada?

The US non-farm payrolls report for February, released this morning, shows that the economy is continuing to advance strongly. A total of 242,000 jobs were added in the month, well ahead of the consensus expectation of 195,000. The unemployment rate stayed at 4.9 percent, but only because of a welcome rise in the participation rate, which rose to 62.9 percent, its highest level in a year. The only (minor) sign of weakness in the report was an unexpected 0.1 percent fall in earnings, the first time this has happened since 2014.

Needless to say, the Republican Party's response to the data has focused on that last item rather than the positive headline numbers. The Party's fabulously-named national Chairman, Reince Priebus, issues a statement to the effect that the Obama administration was letting down working Americans. Labor Secretary Peres, appearing with the almost-as-fabulously named Wolf Blitzer at lunchtime, had a telling retort.  He noted that when Mitt Romney ran against Obama in 2008, he pledged that a Republican administration would get the unemployment rate down to 6 percent -- by the end of 2016. It seems unlikely that anything as boring as facts will play a role come election day, but we live in hope.

Canada's employment data are usually released on the same day as US non-farms, but this month Canada's numbers will be a week behind. However, there was one data release from Ottawa today that suggests the steady improvement in the US economy, combined with the weak exchange rate, is now spilling over into Canada.  The headline for Canada's international trade report for January showed that the country's trade deficit rose to $655 million in January from $631 million in the final month of 2015. Looking behind that headline, however, there was plenty of cause for optimism.

Canada's exports rose 1 percent in the month in nominal terms, but consider this: a 2.5 percent decline in export prices (oil again) was more than offset by a 3.6 percent surge in export volumes. All of the growth in exports can be attributed to sales to the United States, which rose 2.6 percent in the month; Canada has a healthy trade surplus with the US, offset by a deficit with the rest of the world.

There's more good news in the StatsCan report. Non-energy exports rose 2.3 percent in January, with strong gains in a number of key categories, including consumer goods, autos and auto parts, and pharmaceuticals. Aircraft exports fell sharply, but only after a strong gain in December.  This category may show steadier gains once (if?) Bombardier starts shipping its C-Series jets to airlines in the next few months.

Maybe, just maybe, these data show that the worst may be over for the Canadian economy, which flirted with recession throughout 2015. That's certainly what the foreign exchange market seems to think: the Canadian dollar, which sank as low as 69 cents (US) as little as six weeks ago, today rose above 75 cents (US) for the first time since November. Overall, that's good news for the folks at the Bank of Canada: the C$ is still weak enough to keep non-oil exports competitive, but no longer so weak that it poses a serious threat to the Bank's inflation target. Let's hope Gov. Poloz doesn't throw a spanner in the works with one of his ill-timed musings.

Canada Q4 GDP: better than nothing

For once, we have a positive surprise in Canadian economic data: GDP grew at a 0.8 percent annualized rate in the final quarter of last year. That's only one-third as fast as in the preceding quarter, but it handily beats the Bay Street analysts' consensus, which foresaw no growth at all for the quarter.

For 2015 as a whole, the economy posted a growth rate of just 1.2 percent, significantly below the average pace seen over the past half-decade, and well short of the growth rate posted by Canada's largest trading partner, the United States. Given the well-publicized travails in the resource sector, however, it's something of an achievement that the economy saw any growth at all.

In his recent get-the-bad-news-out-of-the-way economic statement, Finance Minister Bill Morneau dialed back the Government's growth forecast for this year, predicting a sluggish pace in line with last year's performance.  Might this be too pessimistic?  The freefall in energy prices seems to have abated, while the lower exchange rate has now been in place for long enough that we can perhaps look for it to have a real impact on non-oil exports as the year progresses. Moreover, Morneau's budget later this month is supposed to include new spending on infrastructure, with a promised emphasis on "spade-ready" projects. This could give growth a modest boost by the second half of the calendar year.  Can it be that the political tyro Morneau is setting the bar deliberately low, so as to be able to take the credit if things do start to go well?  I'm just asking.

Lastly, an observation that will be familiar to any long-term readers of this blog. Today's figures were good news, so naturally none of the major media saw any reason to give the story any prominence. If GDP had fallen by 0.8 percent in Q4, that would of course have triggered a rash of large-font headlines.