Canada GDP: good news is no news

Canada's GDP rose 0.5 percent in July, slightly above the analysts' consensus.  As expected, the continuing recovery in the Alberta oil sands industry, in the wake of May's devastating forest fires, led the expansion. Economists at TD Bank are estimating that growth for Q3 as a whole will be at a 3 percent annual rate, which they hyperbolically describe as a "barn burner".  Of course, if the Bank of Canada is right and the economy's potential growth is now as low as 1.5 percent annually, that may indeed be as good as things are likely to get.

For sure, growth will slow in the final quarter of the year, with oil sands output back to normal and other sectors struggling to gain traction. One small puzzle in today's data is the 0.8 percent decline in construction activity.  The rebuilding activity in the Fort McMurray area may boost that sector in the coming months, although the impact on national GDP growth should not be overestimated.  What's more surprising is that, with housing prices at astonishing levels in Toronto and Vancouver, and with interest rates set to remain at rock-bottom levels far into the future, residential construction activity is generally sluggish. That may be offset by strength in non-residential construction as the Federal infrastructure program speeds up.

The numbers today are generally good, but will Canadians actually find out about them?  In keeping with their usual practice of focusing on the economy only when they can put the word "recession" in the headline, the major media outlets are giving the story as little coverage as possible. That story on the CBC website I linked to at the start?  It's the fifth of five items in the Business section of the home page -- and that section is way down at the bottom.  Apparently the national broadcaster thinks Canadians need to know about Donald Trump's latest piece of appalling behaviour, rather than what's going on in their own backyard.

"It's a pity both sides can't lose"

Henry Kissinger supposedly said that about the Iran-Iraq war three decades ago.  After watching last night's Presidential debate -- I lasted through about half of it before firing up Netflix -- I'm overwhelmed by the same feeling.

America is going to elect as its next President one of two uninspiring septuagenarians.  (I'm rounding up in Hillary Clinton's case, but not by much).  Ms Clinton is a machine politician with demonstrably bad judgment (the private e-mail server) and a fair amount of ethical baggage.  If she has any new ideas, she's keeping them to herself.  Donald Trump is a property developer with a track record of bankruptcies and a reality TV performer with a nice line in bullying.  If he has any good ideas, he's keeping them to himself.

By any normal political calculus, Clinton won the debate last night, but she didn't get anywhere close to landing a knockout blow.  Her failure to follow up when Trump almost bragged about how he profited from the wreckage of so many people's lives in the financial crisis -- "that's called business" -- was distressing.  For his part, Trump appears to think he was too well-behaved last night and is promising to "hit her harder" in the remaining debates -- assuming he actually turns up: his criticisms of the moderator might just be a prelude to walking out in a huff.

Hoo boy -- if watching forty minutes of these aging pugilists last night was enough to wear me out, the next four years are going to be a real trial, whoever wins in November.

Staying low

Might we just have seen evidence that the Bank of Canada's low rates/low dollar policy is starting to pay off?

Speaking in Quebec City yesterday, Bank of Canada Governor Stephen Poloz made it very clear that low interest rates are here to stay. The title of his presentation -- "Living with lower for longer" -- says it all.  The Bank believes that the reduced potential growth rate of the economy -- perhaps as little as 1.5 percent annually -- must condition not only its own policy approach, but also the way Canadians manage their own finances.  A lower growth rate means that the "normal" level of interest rates must be lower than in the past.  That in turn means that Canadians saving and investing for their retirement need to put more money aside.

The Bank remains convinced that the fiscal stimulus measures initiated by the Trudeau government will boost GDP in the second half of this year and beyond, but it evidently sees that interest rates and the exchange rate will need to remain near current levels for a prolonged period.  Bay Street economists' forecasts for when the Bank may start to raise rates are being steadily pushed back, with at least one -- my old shop at TD -- seeing no move before 2019.  

Until recently, there has been little evidence that the low dollar has been doing much to boost the economy.  Employment in the manufacturing sector has continued to shrink, albeit more slowly than before.  However, the new contract agreement reached this week between General Motors and its main union, Unifor (the former CAW) might just suggest that things are changing.  GM's venerable manufacturing plant at Oshawa, Ontario, has long been seen as vulnerable to closure, but the new agreement will see The General investing heavily to continue vehicle assembly there after current model runs conclude in 2019.

What's more, GM will be returning some engine assembly work from Mexico to its St Catharines Powertrain plant right here in Niagara. After years of seeing work flow in the opposite direction, Unifor is right to see this as a triumph.  There have of course been concessions on the union's part, with the defined benefit plans that the auto industry once offered now receding in the rear-view mirror.  Regrettable as this may be, the union is undoubtedly correct in seeing that GM jobs with less-desirable pensions are better than no GM jobs at all.

The union is claiming a big victory here, and vindication of its seemingly risky strategy of targeting GM (rather than Ford or Chrysler) for the pattern-setting first negotiation.  Fair enough -- but it's surely true that GM would have been a much tougher nut to crack if its management did not believe that the low Canadian dollar would be around for many years to come.  Yesterday's speech by Gov Poloz shows that to be a pretty safe bet.

Head of Statistics Canada quits

Wayne Smith, Canada's Chief Statistician,  unexpectedly resigned today, citing a loss of independence at Statistics Canada. The decision relates mainly to the confidentiality of census information, and makes Smith the second Chief Statistician to resign as a result of the former Harper government's abolition of the long-form census.  Who knew number crunching was so political?

The Liberal government has reinstated the long form census, but Smith has apparently been unable to reverse some of the other changes that flowed from Harper's original decision.  There's no reason to suspect any direct political interference in the data as such, but it's never a good sign when something like this happens.

UPDATE, September 17:  The Government has wasted no time in appointing a new Chief Statistician, which suggests Smith's departure was no surprise.

Canadian household debt: onwards and upwards

StatsCanada reported this morning that the household debt-to-income ratio in Canada hit yet another all-time record high of 167.6 percent in the second quarter of the year.  This was almost 2.5 percentage points higher than in Q1, so the rate of deterioration in this already worrisome ratio actually seems to be accelerating.  It's small wonder that almost half of Canadian households now report they are living from paycheck to paycheck.  

But doesn't this graph, taken from the StatsCan release, suggest that the problem may not be that bad? After all, the debt-to-total assets ratio seems to have been falling for the past six or seven years, even as the debt-to-income ratio has mounted.  The main factor driving the positive trend in the debt-to-asset ratio has, of course,  been the steady rise in home prices, which has largely been driven by ultra low interest rates. 

Plenty of Canadians certainly take comfort from the fact that the value of their home is increasing, even as they struggle with their mortgage and other debt payments each month.  Are they right to do so?  Probably not.  The Bank of Canada may be more than a year away from raising interest rates, but as and when it does so, two things can be confidently predicted:  debt payments will become even more of a burden, especially for those paycheck-to-paycheck households; and house prices will stall and then reverse, resulting in a deterioration in the debt-to-asset ratio.

For most Canadian households, the family home is by far the largest asset.  When the market turns, liquidating that asset in order to service an intractable debt burden is unlikely to be easy. 

The Party's over....but which Party?

Ross Douthat wrote an interesting piece recently that neatly sums up this most bizarre Presidential election campaign. His views are always worthy of attention because he's a right-of-centre columnist at the normally left-of-centre New York Times.

As Douthat puts it, Hillary Clinton is "the most disliked nominee of modern times -- except, of course, for her opponent".   It's an odd symbiosis:  Trump would lose in a landslide to any Democrat but Clinton, and Clinton would be trounced by any Republican but Trump.  Douthat actually finds that consoling; he worries that if Trump were to be trounced, the establishment would breathe a big sigh of relief and then ignore the populist pressures that gave rise to Trumpism in the first place. Conrad Black, of all people, makes a similar point here.  

As Douthat sees it, the fact that Clinton is such a lousy candidate makes it unlikely that Trump will be shellacked come November. "Because she can't put him away, we have to take him seriously -- and only by taking him seriously can we learn enough to make sure the next Trump isn't far stronger, and far worse".

Fair enough. But let's ponder Douthat's final sentence:  'Unless, of course, she loses".  Throughout the improbable Trump campaign, much of the media has had the entire Republican Party on death watch.  The assumption has been that Trump would go down in flames so spectacularly that the GOP would implode, with new parties forming around the Tea Party faction and what's left of the party's moderate wing.  Despite some high-profile defections, however, the party has in fact held together remarkably well in the face of the Trump malignancy.  Disaster on election day now seems most unlikely, so if Trump does in fact lose in a close contest, the GOP will probably dust itself down and immediately start preparing for the next round of midterms.

Maybe, then, it's the Democratic Party we should be worrying about,  given the no longer unimaginable possibility that Trump wins.  Consider: the economy is doing OK,  and the party has thrown its full weight behind a highly-experienced candidate who embodies the American political establishment.  And she's defeated by a preposterous, serially bankrupt reality TV show host with no prior political experience!  

How does the party come back from that, if it happens?  The soul-searching will be brutal, and there's every possibility that Democrats take a sharp turn to the left.  Despite all the crowds and enthusiasm whipped up by Bernie Sanders earlier in the year, that's almost certainly not going to wash with a majority of the American public.   

This election campaign has shown that everything you thought you knew about US politics is wrong.  It's unlikely that the rewriting of the rule book will end on election day, regardless of which undesirable winds up in the White House.

Canadian employment rebounds, sort of

Judging purely by the headline number, the August employment report released today by Statistics Canada was encouraging. The number of Canadians in work jumped by 26,000, much higher than the analysts' consensus and largely reversing the 31,000 decline reported for July.  The unemployment rate actually ticked up 0.1 percent, to 7.0 percent, but that reflected an increase in the number of people looking for work, which is often seen as a positive sign.

Dig into the data, however, and it all gets a bit less rosy. Before we do that, though, the usual caveat about the Canadian employment numbers: the wild monthly gyrations in sub-categories (public vs. private employment, self-employment and so on) make it very difficult to discern underlying trends -- and may even cast doubt on the validity of StatsCan's survey methods.

 Take public sector employment, for example.  Today's report shows a 57,000 increase in the number of public employees in August, or about 1.6 percent.  But that comes in the wake of a reported decline of 42,000 in July.  Reports of mass firings and mass hirings in the public sector over the past couple of months are hard to find, and here's the killer point: these are supposedly seasonally adjusted data, so wild swings of this sort are not supposed to happen.  Yet they're a feature of just about every monthly report.

Assuming that we choose to believe that 57,000 figure, it then starts to cast a bit of a shadow over the entire report.  One of the positives that analysts have tried to take from today's number is the fact that there was a strong gain in full time work -- up 52,000 in the month -- offset by the loss of 26,000 part time jobs.  But if all or most of those full-time jobs are in the public sector, that doesn't tell us much about the overall state of the economy.

If we then look at the breakdown by industry, there's further cause for concern.  Most notably, there was only a 3,900 increase in the number of manufacturing jobs in August, and the number of such jobs has fallen by over 17,000, or about 1 percent, in the last twelve months. Far from offsetting the problems in the resource sector, as the Bank of Canada has been hoping (and very likely praying) for several years now, the manufacturing sector is actually adding to those problems, despite the supposed advantage of a weak exchange rate.

Finally, one small local triumph: according to StatsCan the unemployment rate in my own region (St Catharines-Niagara) fell by a full percentage point in August, to 6.8 percent.  It's impossible to slice-and-dice the data enough to confirm this, but it may well be that the weak exchange rate has given a nice boost to the tourism sector, which is now the area's economic mainstay.  That's certainly the impression you get from the number of out-of-Province cars circling the main streets of Niagara-on-the-Lake looking for parking spaces!

An upbeat Bank of Canada

As expected, the Bank of Canada kept its reference rate unchanged at 0.5 percent today.  While acknowledging that GDP growth in the first half of 2016 was lower than expected, reflecting both the Alberta forest fires an a disappointing export performance, the Bank is expecting a solid rebound in the second half of the year, resulting in "above potential" GDP growth.

The Bank's optimism reflects several factors, including a continuing recovery in oil output, rebuilding efforts in Alberta and a boost to consumption resulting from improved child benefit payments.  Exports may continue to be a drag on growth, but the Bank expects the Federal infrastructure spending spree to start having a measurable effect later in the year.  No doubt it is a source of relief to the Bank that the burden of getting the economy moving again no longer falls solely on monetary policy.

As ever, the Bank's press release throws in a couple of caveats at the end. While its concern over the Vancouver housing market seems to have eased somewhat, thanks to a new tax on foreign buyers, the Bank notes that "financial vulnerabilities associated with household imbalances remain elevated". As if to illustrate the point, a survey released today shows that almost half of Canadian households live quite literally from paycheck to paycheck. Almost 40 percent say they are "overwhelmed" by their debt.  And this is with mortgage rates stable at 3 percent or lower!  The Bank must be terrified at the thought of what is likely to happen when the time finally arrives for it to start raising interest rates.

Canada -- the last free trader??

Justin Trudeau appears to believe that the protectionist sentiments being seen in the US and Europe are unlikely to spill over into Canada.  Really?  The media regularly run columns from the likes of Linda McQuaig and the self-appointed Council of Canadians (aka Maude Barlow) pointing out the failings of the NAFTA agreement and warning of catastrophe in the event that the either the TransPacific Partnership (TPP) or the Canada-Europe Trade Accord (CETA) ever comes into effect.

For the most part, commentators like McQuaig and Barlow are worried about the investor protection aspects of deals like TPP or CETA, rather than the trade aspects per se.  Still, there's plenty of evidence that NAFTA played a major role in accelerating the decline of Canada's manufacturing sector, a decline which shows no sign of slowing even with the Canadian dollar way below its cyclical highs.  Either TPP or NAFTA would inevitably mean more of the same.

The UK's Brexit vote has put the CETA deal in doubt, and TPP seems to be dead on arrival, with both US presidential candidates seemingly opposed to it.  Blind faith in the benefits of globalization is in short supply these days, except, it seems, in Justin Trudeau's government.  But if the rest of the world is about to start playing hardball, Trudeau would be well advised to start thinking hard about just what that means for a country as trade-reliant as Canada.

UPDATE, September 6: This breathless scare story by George Moonbat in the Guardian shows clearly why Justin Trudeau should not be counting his chickens just yet.