Statistics Canada reported today that GDP grew 0.6 percent in January, well above the consensus expectation of a 0.3 percent gain*. The good news on overall economic activity follows recent positive data on external trade, retail sales and employment, Many economists are rushing to upgrade their expectations for the whole of Q1, with an annualized growth rate above 3 percent now almost inevitable.
Manufacturing posted the strongest growth, with a 1.9 percent monthly increase, but strength was evident in most parts of the economy. The economy has now grown in each month bar one (October) since last June. Although expansion in the third quarter of last year was largely attributable to the bounce-back from the Fort McMurray wildfire disaster, it appears that the economy has now developed a broader-based momentum of a kind not seen not seen for several years.
This is Canada, so we have to ask: what can go wrong? The first and most obvious risk is the situation south of the border. The Trump administration is starting to set out its stall for the promised renegotiation of the NAFTA agreement, and has also announced its intention to investigate the "trade practices" of Canada and a number of other countries. Even before any of this leads to actual policy changes, there is a risk that fear of trade restrictions might cast a chill on business sentiment in Canada.
Closer to home, the biggest risk remains the housing market. Prices in the Toronto area rose 27 percent in 2016 and a similar increase is foreseen for this year, barring some steps by the authorities to cool the market. There is no possibility that the Bank of Canada will be raising rates any time soon, but Provincial and municipal politicians are making noises about taking steps to slow things down. British Columbia had reasonable success last year with its tax on foreign purchasers, and the Ontario budget (likely on April 27) may well try something similar. Given the customary ineptitude of both Ontario and Toronto politicians, there's a clear risk that they could get this wrong, with potentially damaging consequences either immediately (if they do too much) or later (if they don't do enough).
Neither of these risks seems unduly severe in the near term. This being the last day of March, higher-than-expected growth for Q1 is already baked in, and the momentum is likely to persist at least through mid-year. Good news for policymakers, and vindication for Federal Finance Minister Bill Morneau's relatively cautious fiscal stance in his budget earlier this month.
* I can't pass over an obvious bit of economic illiteracy in the linked article. I don't think you'd need a PhD to figure that if the economy grew 0.6 percent in January, then the annualized growth rate has to be north of 7 percent -- and yet the reporter states it was 2.3 percent. Knowing the difference between "annualized" and "year over year" is apparently not a pre-requisite for an economics reporter at Canada's national broadcaster.
Friday, 31 March 2017
Wednesday, 29 March 2017
Wrexit
I was planning to pen a few sad words on the UK's triggering of Article 50 today, but find that Anthony Barnett has done so much more eloquently here.
Barnett's characterization of Brexit as "government of the old, by the old and for the old" is undoubtedly spot-on, given the voting patterns evident in last June's fateful referendum. However, the most interesting part of this article is his evisceration of Theresa May and her "blatant power grab", which Barnett describes as "an attempt to restore a 17th century version of sovereignty that is bound to fail".
Well worth reading, and an interesting foretaste of the book on Brexit (and populism generally) that Barnett has in the works.
Barnett's characterization of Brexit as "government of the old, by the old and for the old" is undoubtedly spot-on, given the voting patterns evident in last June's fateful referendum. However, the most interesting part of this article is his evisceration of Theresa May and her "blatant power grab", which Barnett describes as "an attempt to restore a 17th century version of sovereignty that is bound to fail".
Well worth reading, and an interesting foretaste of the book on Brexit (and populism generally) that Barnett has in the works.
Tuesday, 28 March 2017
Poloz on trade
Stephen Poloz has now been at the helm of the Bank of Canada for three years, probably enough time for many people to have forgotten that he's not a banker by profession. His expertise is in the field of foreign trade; before coming to the Bank of Canada he was head of Canada's Export Development Corporation.
In a speech today in Oshawa, Ontario (the Canadian home of General Motors), Poloz returns to his roots*, making the case for Canada to stay open to flows of trade, immigrants and capital as it has always done in the past. With official Ottawa holding its breath to see when the Trump administration will turn its attention to the promised (threatened?) renegotiation of the NAFTA agreement, it's a timely topic.
The pushback against decades of free trade, and particularly multilateral (as opposed to bilateral) trade agreements, predates the election of Trump. What lies behind it is the sense that, whatever the theoretical benefits of open markets might be, too many people have found themselves much worse off, while a rather smaller number have prospered mightily. This is, of course, a much-simplified view. Shareholders in some corporations have done very well out of free trade, but others have seen their companies wither and die (as the entire US auto industry almost did). Auto workers in Flint MI have seen their livelihoods destroyed, but employees in the "right to work" states in the south and in Mexico have benefited. Still, the narrative that free trade is a destroyer of "good jobs" has proved powerful in an era of populism.
In calling for Canada to maintain its free trade stance, Poloz addresses this directly:
“What is crucial is that we deploy some of the benefits of being open to assist those who need help adjusting to global forces. Failing to do so invites doubt and puts everyone’s progress at stake.”
Exactly so; that's what it says in the textbooks. But when does that ever happen? The winners pocket the gains and the losers are left to pick up the pieces. In my own area, the highly-skilled metal-bashers of a few decades ago are working for minimum wage in call centres or in the casinos of Niagara Falls. They can no longer afford the vehicles they used to build.
If we look ahead toward the renegotiation of NAFTA, we can easily see which sectors in Canada may be at risk. An obvious example is the dairy industry, which operates under a system of "supply management" that keeps foreign products out of the local market. That's why I pay several times as much for milk, butter and eggs as I would if I lived five miles away, across the Niagara River. US dairy producers have had their sights on the supply management system for years, and it's certain to be a sticking point when the NAFTA negotiations start.
Canadians would doubtless be overjoyed to start paying less for basic foodstuffs. Would they also be prepared to pony up some extra taxes to provide a cushion for the farmers that get put out of business? That's a whole lot less certain.
* In more ways than one: Oshawa is his home town.
In a speech today in Oshawa, Ontario (the Canadian home of General Motors), Poloz returns to his roots*, making the case for Canada to stay open to flows of trade, immigrants and capital as it has always done in the past. With official Ottawa holding its breath to see when the Trump administration will turn its attention to the promised (threatened?) renegotiation of the NAFTA agreement, it's a timely topic.
The pushback against decades of free trade, and particularly multilateral (as opposed to bilateral) trade agreements, predates the election of Trump. What lies behind it is the sense that, whatever the theoretical benefits of open markets might be, too many people have found themselves much worse off, while a rather smaller number have prospered mightily. This is, of course, a much-simplified view. Shareholders in some corporations have done very well out of free trade, but others have seen their companies wither and die (as the entire US auto industry almost did). Auto workers in Flint MI have seen their livelihoods destroyed, but employees in the "right to work" states in the south and in Mexico have benefited. Still, the narrative that free trade is a destroyer of "good jobs" has proved powerful in an era of populism.
In calling for Canada to maintain its free trade stance, Poloz addresses this directly:
“What is crucial is that we deploy some of the benefits of being open to assist those who need help adjusting to global forces. Failing to do so invites doubt and puts everyone’s progress at stake.”
Exactly so; that's what it says in the textbooks. But when does that ever happen? The winners pocket the gains and the losers are left to pick up the pieces. In my own area, the highly-skilled metal-bashers of a few decades ago are working for minimum wage in call centres or in the casinos of Niagara Falls. They can no longer afford the vehicles they used to build.
If we look ahead toward the renegotiation of NAFTA, we can easily see which sectors in Canada may be at risk. An obvious example is the dairy industry, which operates under a system of "supply management" that keeps foreign products out of the local market. That's why I pay several times as much for milk, butter and eggs as I would if I lived five miles away, across the Niagara River. US dairy producers have had their sights on the supply management system for years, and it's certain to be a sticking point when the NAFTA negotiations start.
Canadians would doubtless be overjoyed to start paying less for basic foodstuffs. Would they also be prepared to pony up some extra taxes to provide a cushion for the farmers that get put out of business? That's a whole lot less certain.
* In more ways than one: Oshawa is his home town.
Thursday, 23 March 2017
Canada budget: nothing to see here
The Federal budget tabled by Finance Minister Bill Morneau on Wednesday was a remarkably uninspiring document. By some calculations, new spending initiatives amounted to "only" C$ 1,3 billion, the smallest amount in living memory. Rumours of significant tax changes targetting the wealthy proved unfounded, with the only significant changes being minor hikes in "sin taxes" and an "Uber tax" designed to ensure that ride-sharing is subject to the same sales taxes as conventional taxis.
The lack of action, at least by comparison with Morneau's first budget a year ago, prompted the Toronto Star, which never saw a deficit it didn't like, to warn the government not to "lose its nerve" on fiscal policy. This is surely misguided advice. Last year's budget set Federal spending on a sharply higher course than the previous Tory government had envisaged -- indeed, a higher course than most voters had expected when they supported Justin Trudeau's promise of fiscal stimulus. That higher spending track remains intact, and is reflected in the C$ 28.5 billion deficit projected for the current fiscal year. That's $3 billion higher than projected in the fall fiscal update, although this week's figure includes restoration of the long-established $3 billion annual "contingency", so there is no real deterioration in the near-term outlook.
The big spending plans outlined by Morneau last year, including a boost in infrastructure spending, were always intended to roll out over several years. That's still the case, although there is now evidence of a slightly cynical adjustment in the spending trajectory to ensure maximum impact just before the next election. The medium term deficit projections, never worth the paper they're printed on, show the shortfall only gradually shrinking, reaching $18.8 billion in 2021/22. So, pace the Toronto Star, we do not appear to be returning to Tory-style austerity.
It seems clear that the Liberals lack the political courage to take any more steps on the revenue side, having introduced a higher income tax rate for top earners a year ago. There were rumours that the favourable tax treatment of stock options, which largely benefits the top executives of large corporations (and costs the government close to $1 billion a year) might be scaled back. Despite pre-election pledges to do this, Morneau has kept this egregious break in place.
There were also pre-budget rumours of a change in capital gains taxation, which is currently levied at half the rate of tax on other forms of personal income. Again, nothing, even though such a measure might have helped to rein in speculative property purchases. Indeed, Ontario's provincial Finance Minister had almost begged Morneau to enact such a measure. Interestingly, however, the government is now collecting data on home sales as part of individuals' annual income tax filings, so in the event that they ever do decide to alter this tax, they will have a much better database to work from.
All-in-all, then, a stay-the-course kid of budget -- and that may not be a bad thing. After all, it is still very unclear how the economic policies of the new Trump administration may affect Canada, especially in terms of a possible renegotiation of the NAFTA agreement. Moreover, it is arguable that the economy really does not need any further government stimulus at this time. Recent data on employment, external trade and wholesale and retail trade all suggest that the economy has picked up considerable momentum in the past half-year or so. Better for Morneau to stay on his existing course and keep his options open, in case more action is needed in the future.
Last and very much least, the budget signals the demise of the venerable Canada Savings Bond (CSB) program, once described to me by a colleague as "the biggest goddamn Christmas club in the world". With the costs of conventional borrowing so low, the expense of tapping individuals' savings through this program no longer make sense. It won't be missed.
The lack of action, at least by comparison with Morneau's first budget a year ago, prompted the Toronto Star, which never saw a deficit it didn't like, to warn the government not to "lose its nerve" on fiscal policy. This is surely misguided advice. Last year's budget set Federal spending on a sharply higher course than the previous Tory government had envisaged -- indeed, a higher course than most voters had expected when they supported Justin Trudeau's promise of fiscal stimulus. That higher spending track remains intact, and is reflected in the C$ 28.5 billion deficit projected for the current fiscal year. That's $3 billion higher than projected in the fall fiscal update, although this week's figure includes restoration of the long-established $3 billion annual "contingency", so there is no real deterioration in the near-term outlook.
The big spending plans outlined by Morneau last year, including a boost in infrastructure spending, were always intended to roll out over several years. That's still the case, although there is now evidence of a slightly cynical adjustment in the spending trajectory to ensure maximum impact just before the next election. The medium term deficit projections, never worth the paper they're printed on, show the shortfall only gradually shrinking, reaching $18.8 billion in 2021/22. So, pace the Toronto Star, we do not appear to be returning to Tory-style austerity.
It seems clear that the Liberals lack the political courage to take any more steps on the revenue side, having introduced a higher income tax rate for top earners a year ago. There were rumours that the favourable tax treatment of stock options, which largely benefits the top executives of large corporations (and costs the government close to $1 billion a year) might be scaled back. Despite pre-election pledges to do this, Morneau has kept this egregious break in place.
There were also pre-budget rumours of a change in capital gains taxation, which is currently levied at half the rate of tax on other forms of personal income. Again, nothing, even though such a measure might have helped to rein in speculative property purchases. Indeed, Ontario's provincial Finance Minister had almost begged Morneau to enact such a measure. Interestingly, however, the government is now collecting data on home sales as part of individuals' annual income tax filings, so in the event that they ever do decide to alter this tax, they will have a much better database to work from.
All-in-all, then, a stay-the-course kid of budget -- and that may not be a bad thing. After all, it is still very unclear how the economic policies of the new Trump administration may affect Canada, especially in terms of a possible renegotiation of the NAFTA agreement. Moreover, it is arguable that the economy really does not need any further government stimulus at this time. Recent data on employment, external trade and wholesale and retail trade all suggest that the economy has picked up considerable momentum in the past half-year or so. Better for Morneau to stay on his existing course and keep his options open, in case more action is needed in the future.
Last and very much least, the budget signals the demise of the venerable Canada Savings Bond (CSB) program, once described to me by a colleague as "the biggest goddamn Christmas club in the world". With the costs of conventional borrowing so low, the expense of tapping individuals' savings through this program no longer make sense. It won't be missed.
Thursday, 16 March 2017
Canada's debt spiral
Another day, another record level of household debt in Canada. It was reported yesterday that the ratio of Canadian household debt to disposable income reached a new record of 1.673 (i.e. $1.673 in debt per $1 of income) in the final quarter of 2016. It was only a couple of years ago that this ratio topped the 1.63 peak seen in the US just before the financial crisis, and it's only been onwards and upwards since then.
An economist at my old shop, Toronto Dominion, Diana Petramala, tries to find comfort where she may: "Debt growth has accelerated somewhat, but it is not growing at the double digit pace that would normally be considered dangerous". I'm not sure where that rule comes from, and I would suggest to Ms Petramala that if a ratio reaches an all-time record high at a time when interest rates are at a record low, that might be danger enough to be going along with.
The other thing that is regularly trotted out as a reason not to worry about the level of debt is the seeming rise in household net worth. Sure enough, that's being cited again now, but it's still a dangerous fallacy. Your home is a very illiquid asset, especially in the event of a downturn in the market. High house prices have only been possible because of rising debt; when the music stops, a large number of people are going to find themselves unable to find the financing to keep up their debt payments.
Canada may, in fact, be close to a situation in which the household debt burden is unmanageable whether the economy expands or falters. If growth continues at the pace seen in recent months, the Bank of Canada will be forced to follow the Fed in raising rates, which would immediately push some of the most highly indebted households over the brink. And if growth stalls and people start losing their jobs, widespread mortgage defaults would be inevitable. Stress tests supposedly show that bank balance sheets could easily withstand a significant housing market correction. Let's hope so.
An economist at my old shop, Toronto Dominion, Diana Petramala, tries to find comfort where she may: "Debt growth has accelerated somewhat, but it is not growing at the double digit pace that would normally be considered dangerous". I'm not sure where that rule comes from, and I would suggest to Ms Petramala that if a ratio reaches an all-time record high at a time when interest rates are at a record low, that might be danger enough to be going along with.
The other thing that is regularly trotted out as a reason not to worry about the level of debt is the seeming rise in household net worth. Sure enough, that's being cited again now, but it's still a dangerous fallacy. Your home is a very illiquid asset, especially in the event of a downturn in the market. High house prices have only been possible because of rising debt; when the music stops, a large number of people are going to find themselves unable to find the financing to keep up their debt payments.
Canada may, in fact, be close to a situation in which the household debt burden is unmanageable whether the economy expands or falters. If growth continues at the pace seen in recent months, the Bank of Canada will be forced to follow the Fed in raising rates, which would immediately push some of the most highly indebted households over the brink. And if growth stalls and people start losing their jobs, widespread mortgage defaults would be inevitable. Stress tests supposedly show that bank balance sheets could easily withstand a significant housing market correction. Let's hope so.
Wednesday, 15 March 2017
Bank bashing
Canada's Big Five banks are racking up record profits, so I guess it's no surprise that there's a ready market for stories suggesting they're doing so by nefarious means. Step forward the public broadcaster, CBC, which began last week by calling out my former firm, Toronto-Dominion, but is now widening the net to include all of the banks. It seems there are plenty of whistleblowers among the employees of each bank willing to tell tales (anonymously, of course) to the CBC.
All of the stories basically say the same thing: bank counter staff and others are under ever-increasing pressure to boost revenues by selling things to customers that they didn't ask for, don't need or can't afford. I have to say that some of the commonly-cited examples make no sense to me. Supposedly, bank staff increase a lot of people's credit card or overdraft limits without asking them first. How exactly does this hurt the customer? My credit card fee is not affected by my credit card limit, and a higher credit card limit only affects me if I actually use it. You could also ask, by the way, how raising such limits without the customer's knowledge helps the bank, but I'd have to leave it to the bank to answer that, as I can't figure it out.
I'm ten years retired from TD and was never involved in the retail side of things, so I have no real direct knowledge of that business. I did touch base with a fellow retiree who is in a position to know, and was told that the number of customer complaints about aggressive selling is extremely small. Moreover, bank front-line staff are judged not only on their sales success but also on their customer satisfaction rankings, so excessive aggression would almost certainly be counterproductive.
My own local TD branch shows no signs of the kind of behaviour that CBC is talking about here; maybe that's a benefit of living in a smaller community. In any case, I'm wondering whether the people complaining about bank selling practices have had any dealings recently with a car dealership, or an appliance store, or an insurance agent, all of which have a well-documented history of pressure tactics -- remember William H. Macy's car salesman in "Fargo"?
All of that said, the bank staff coming forward to tell tales to the CBC do seem to have one common complaint: they're under increasing pressure to produce revenues, and fear losing their jobs if they don't succeed. This is, perhaps, a clue to the whole story. Bricks-and-mortar banking is being increasingly supplanted by the internet, even for quite complex transactions. Branch staff are surely aware of this, and aware that banks are quietly closing money-losing locations all across the country. Those fears of losing their jobs are very likely well-founded, whether they resort to dodgy sales techniques or not.
TD and all of the other banks have responded to the CBC stories by stressing that all of their staff are expected to abide by a code of conduct. However, the Financial Consumer Agency of Canada (which I confess I had never heard of before) has now announced an investigation, starting next month, and politicians are demanding action. Bank-bashing season may well last all year long.
All of the stories basically say the same thing: bank counter staff and others are under ever-increasing pressure to boost revenues by selling things to customers that they didn't ask for, don't need or can't afford. I have to say that some of the commonly-cited examples make no sense to me. Supposedly, bank staff increase a lot of people's credit card or overdraft limits without asking them first. How exactly does this hurt the customer? My credit card fee is not affected by my credit card limit, and a higher credit card limit only affects me if I actually use it. You could also ask, by the way, how raising such limits without the customer's knowledge helps the bank, but I'd have to leave it to the bank to answer that, as I can't figure it out.
I'm ten years retired from TD and was never involved in the retail side of things, so I have no real direct knowledge of that business. I did touch base with a fellow retiree who is in a position to know, and was told that the number of customer complaints about aggressive selling is extremely small. Moreover, bank front-line staff are judged not only on their sales success but also on their customer satisfaction rankings, so excessive aggression would almost certainly be counterproductive.
My own local TD branch shows no signs of the kind of behaviour that CBC is talking about here; maybe that's a benefit of living in a smaller community. In any case, I'm wondering whether the people complaining about bank selling practices have had any dealings recently with a car dealership, or an appliance store, or an insurance agent, all of which have a well-documented history of pressure tactics -- remember William H. Macy's car salesman in "Fargo"?
All of that said, the bank staff coming forward to tell tales to the CBC do seem to have one common complaint: they're under increasing pressure to produce revenues, and fear losing their jobs if they don't succeed. This is, perhaps, a clue to the whole story. Bricks-and-mortar banking is being increasingly supplanted by the internet, even for quite complex transactions. Branch staff are surely aware of this, and aware that banks are quietly closing money-losing locations all across the country. Those fears of losing their jobs are very likely well-founded, whether they resort to dodgy sales techniques or not.
TD and all of the other banks have responded to the CBC stories by stressing that all of their staff are expected to abide by a code of conduct. However, the Financial Consumer Agency of Canada (which I confess I had never heard of before) has now announced an investigation, starting next month, and politicians are demanding action. Bank-bashing season may well last all year long.
Friday, 10 March 2017
Jobs, jobs, jobs
To the best of my knowledge, Donald Trump has not yet claimed credit for the yuuuge non-farm labour data released this morning, though others on the right are trying to do that for him. The US economy added 235,000 jobs in February, above the Wall St consensus for a gain of about 200,000. The numbers may have been boosted by a surge in construction industry hiring, reflecting the early spring in parts of the country, but it's still an impressive showing. What's more, average hourly earnings, which have been steadily ticking higher for many months, rose 2.8 percent from a year ago, the unemployment rate edged down to 4.7 percent and the participation rate rose, all clear signs of a tightening labour market.
With these data to hand, a Fed rate hike later this month must now be considered a done deal. Just how will the White House respond to that? Trump said during the election campaign that he would fire Fed Chair Janet Yellen, simply on the grounds that she is not a card-carrying Republican. There have been few signs of a feud between the new administration and the Fed, but it remains to be seen whether there are enough cool heads in the President's inner circle to warn him that ditching Yellen would be a sure-fire way of derailing the economy and the markets.
There was positive jobs news in Canada this morning also, as the economy added 15,000 jobs in February, versus an analysts consensus of a loss of 5,000 jobs. (Is it my imagination, or is the consensus becoming less and less reliable?) As ever, the details of the report warrant caution, as StatsCan estimates that the economy added 105,000 full-time jobs in the month, offset by a loss of 90,000 part-time positions. This is a sharp reversal of the pattern seen over the past year and more. Given that job gains were confined to three Provinces that make up just 20 percent of the national population (BC, Saskatchewan and Manitoba), there are reasons aplenty to take today's data with a grain of salt.
All of that said, the employment data for the past several months add to a picture of an economy that is performing more strongly than expected. Most notably, Canada recorded three straight months of trade surpluses from November to January, with exports reaching a record high. The data may well translate into revenue gains for the Federal government, making Finance Minister Morneau's task easier as he prepares to deliver his second budget on March 22. It is widely expected to be a stand-pat document, with the government still not sure what to expect from the Trump administration. Also standing pat, despite the run of strong data: the Bank of Canada, which remains most unlikely to follow any Fed rate moves over the balance of this year.
With these data to hand, a Fed rate hike later this month must now be considered a done deal. Just how will the White House respond to that? Trump said during the election campaign that he would fire Fed Chair Janet Yellen, simply on the grounds that she is not a card-carrying Republican. There have been few signs of a feud between the new administration and the Fed, but it remains to be seen whether there are enough cool heads in the President's inner circle to warn him that ditching Yellen would be a sure-fire way of derailing the economy and the markets.
There was positive jobs news in Canada this morning also, as the economy added 15,000 jobs in February, versus an analysts consensus of a loss of 5,000 jobs. (Is it my imagination, or is the consensus becoming less and less reliable?) As ever, the details of the report warrant caution, as StatsCan estimates that the economy added 105,000 full-time jobs in the month, offset by a loss of 90,000 part-time positions. This is a sharp reversal of the pattern seen over the past year and more. Given that job gains were confined to three Provinces that make up just 20 percent of the national population (BC, Saskatchewan and Manitoba), there are reasons aplenty to take today's data with a grain of salt.
All of that said, the employment data for the past several months add to a picture of an economy that is performing more strongly than expected. Most notably, Canada recorded three straight months of trade surpluses from November to January, with exports reaching a record high. The data may well translate into revenue gains for the Federal government, making Finance Minister Morneau's task easier as he prepares to deliver his second budget on March 22. It is widely expected to be a stand-pat document, with the government still not sure what to expect from the Trump administration. Also standing pat, despite the run of strong data: the Bank of Canada, which remains most unlikely to follow any Fed rate moves over the balance of this year.
Tuesday, 7 March 2017
In one pocket and out of the other
Last week I posted ("There is no free power") about the Ontario Liberal government's desperate scheme to stem voter anger about the Province's sky-high costs for electricity -- or hydro, as it's still sometime called here. The political opposition and just about all media commentators have seen the scheme for what it is: a shell game that will push the costs of the Liberals' myriad past mistakes onto future generations of taxpayers, while adding further costs in the form of higher financing charges.
Even though it already seems unlikely that Premier Kathleen Wynne and her cabinet of incompetents will reap any electoral benefit from the scheme, you can't accuse her of not trying. Today the devoutly pro-Liberal Toronto Star gave over a large chunk of its op-ed page for an article by Wynne that attempts to explain the new program. A couple of paragraphs are worth quoting in full:
Based on the reaction to her plan over the past week, that's looking like a very bad bet indeed.
Even though it already seems unlikely that Premier Kathleen Wynne and her cabinet of incompetents will reap any electoral benefit from the scheme, you can't accuse her of not trying. Today the devoutly pro-Liberal Toronto Star gave over a large chunk of its op-ed page for an article by Wynne that attempts to explain the new program. A couple of paragraphs are worth quoting in full:
The other structural change has to do with the way we finance programs that help low-income families afford hydro and that subsidize the high cost of delivering electricity to rural and remote customers. Previously, the costs of both programs fell to ratepayers. That, too, was not fair.
Hydro is a necessity. The province, not ratepayers, should ensure everyone can afford to access to it. So, we’re moving those programs off your bill and accounting for them in the provincial budget.
Don't you just love that stuff about how "the Province" rather than power users should be paying for these subsidies? Close to 100 percent of Ontarians use electricity; close to 100 percent pay taxes. Ultimately the Province has no money to spend except whatever it can pilfer from the citizenry, who are exactly the same people as the hydro ratepayers. So we have two possibilities here: either Ms Wynne is unaware of these basic truths, in which case she is unqualified for the job she holds; or she understands all of this perfectly well, but is shamelessly hoping that she can pull the wool over the eyes of enough voters to get her party re-elected just over a year from now.Based on the reaction to her plan over the past week, that's looking like a very bad bet indeed.
Friday, 3 March 2017
Economic illiteracy
The business sections of the print media are replete with columns trying to impart financial literacy to their readers. Problem is, a lot of the business and finance reporters themselves are woefully lacking.
Last night two business economists were being interviewed on the CTV evening news about the strong Canadian GDP data released earlier in the day. GDP rose at a 2.6 percent annualized rate in the final quarter of 2016, way above expectations, as you can read here.
First up, the interviewer was completely foxed by the fact that a fall in imports in any particular period has the statistical effect of raising the GDP growth rate*, although it has to be said that the two economists did a very bad job of explaining what happened. Imports in Q3 had been boosted by the importation of a massive piece of offshore drilling equipment; that didn't recur in Q4, so imports appeared to fall at a double-digit annualized rate, and that increased GDP growth.
That's a bit technical, so maybe we can give the interviewer a mulligan there. Not on the next doozy, though. One of the economists said that if Canada's economy lagged the US, the Bank of Canada would not follow any rate hikes by the Fed, and that might cause the CAD exchange rate to weaken, "maybe to 1.40". The reporter visibly flinched and said "So, a 60-cent dollar then"! Well, no, the reciprocal of 1.40 is actually 71.42 cents (US), which is only a few cents weaker than the currency is presently trading.
It's hard to come up with any real excuse for such an elementary error, especially as the strength or otherwise of the Canadian dollar is a staple of every business news bulletin. No wonder the Canadian public has so much trouble managing its finances!
* In simplified terms, GDP = C + I + G + (X-M), where C = consumption, I = investment, G = government spending, X = exports and M = imports. So if the change in M is negative, that boosts GDP.
Last night two business economists were being interviewed on the CTV evening news about the strong Canadian GDP data released earlier in the day. GDP rose at a 2.6 percent annualized rate in the final quarter of 2016, way above expectations, as you can read here.
First up, the interviewer was completely foxed by the fact that a fall in imports in any particular period has the statistical effect of raising the GDP growth rate*, although it has to be said that the two economists did a very bad job of explaining what happened. Imports in Q3 had been boosted by the importation of a massive piece of offshore drilling equipment; that didn't recur in Q4, so imports appeared to fall at a double-digit annualized rate, and that increased GDP growth.
That's a bit technical, so maybe we can give the interviewer a mulligan there. Not on the next doozy, though. One of the economists said that if Canada's economy lagged the US, the Bank of Canada would not follow any rate hikes by the Fed, and that might cause the CAD exchange rate to weaken, "maybe to 1.40". The reporter visibly flinched and said "So, a 60-cent dollar then"! Well, no, the reciprocal of 1.40 is actually 71.42 cents (US), which is only a few cents weaker than the currency is presently trading.
It's hard to come up with any real excuse for such an elementary error, especially as the strength or otherwise of the Canadian dollar is a staple of every business news bulletin. No wonder the Canadian public has so much trouble managing its finances!
* In simplified terms, GDP = C + I + G + (X-M), where C = consumption, I = investment, G = government spending, X = exports and M = imports. So if the change in M is negative, that boosts GDP.
Thursday, 2 March 2017
There is no free power
Ontario's Liberal government, in power for the past fourteen years, is quite staggeringly incompetent on all fronts. A couple of examples will suffice here. "Reforms" to the bargaining process for teachers' unions were introduced before the last election, purely to ensure labour peace during the campaign. Since then, scarcely a month has gone by without one group of teachers or another working to rule, on strike or threatening job action, because the reforms were so ill considered. Or consider the Province's doctors who, after working without a contract for many months, turned down a proposed new agreement with the Ministry of Health and are now contemplating a partial withdrawal of services that could well put patients' lives at risk.
These failures are bad enough, but nothing riles up Ontarians more than the soaring cost of electricity -- or "hydro", as it's still commonly known, even though most of it is now generated by nuclear or gas-fired plants or renewables. Truth to tell, the Liberals' Tory predecessors deserve part of the blame here, but most of it justly falls on current Premier Kathleen Wynne and her erstwhile boss, former Premier Dalton McGuinty.
McGuinty it was who pushed through a rapid decommissioning of Ontario's coal-fired generation capacity, mainly to burnish his green credentials. To keep the lights on, the Province then offered wildly generous contracts for the development of renewables, plus of course the gas-fired backups needed for when the wind don't blow and the sun don't shine. Oh, and McGuinty, with Wynne at his side, tried to win a couple of key seats in the last-but-one Provincial election by cancelling a couple of unpopular gas generating plants, at a cost to taxpayers of $ 1 billion or more. (Sadly, it worked).
Ontario now regularly finds itself with so much power that it is forced to sell the surplus to neighbouring jurisdictions, mainly in the United States, at a loss. And Ontario residents and businesses confront soaring monthly bills loaded with bizarre "global adjustment charges" and "delivery charges" to pay for all this folly.
Facing an election in 2018, Premier Wynne is trying to defuse the voters' anger by cutting power prices. At the start of the year, the Province removed its own portion of the harmonized (i.e. Federal/Provincial) sales tax from electricity bills, which amounted to an 8 percent cut. And today she has announced further steps that will supposedly reduce bills by a further 17 percent, for a 25 percent reduction in total.
Sounds good, but it's actually just a shell game. Part of the reduction will be achieved by shifting a program that helps lower income power users into general spending, so taxpayers will simply be paying out the money in a different way at a different time of the year, the hope presumably being that they won't notice. The biggest part of the reduction, however, comes by spreading out the cost of all the good and bad things that have been done over the past decade over a much longer period.
Cancelling the contracts was never an option, of course, so this is the only available course. Now, there's arguably a case for matching the term of financing more closely to the expected life of the assets. However, there should be no mistaking the fact that the cost of reducing power bills now will be higher bills much further out into the future, because of the added years of borrowing that will now have to be paid for. Again, Ms Wynne and her colleagues must be hoping that the taxpayers and voters won't notice.
Will it work? The opposition parties will be quick to point out the flaws in the scheme. And maybe Ms Wynne has acted too soon: people may be grateful for the rate relief when it shows up on their bills come the summer, but will they still feel that way when polling day rolls around in the spring of 2018? I'd bet against it, especially as experience suggests that the Liberals will pull of at least one more monster screw-up between now and then.
These failures are bad enough, but nothing riles up Ontarians more than the soaring cost of electricity -- or "hydro", as it's still commonly known, even though most of it is now generated by nuclear or gas-fired plants or renewables. Truth to tell, the Liberals' Tory predecessors deserve part of the blame here, but most of it justly falls on current Premier Kathleen Wynne and her erstwhile boss, former Premier Dalton McGuinty.
McGuinty it was who pushed through a rapid decommissioning of Ontario's coal-fired generation capacity, mainly to burnish his green credentials. To keep the lights on, the Province then offered wildly generous contracts for the development of renewables, plus of course the gas-fired backups needed for when the wind don't blow and the sun don't shine. Oh, and McGuinty, with Wynne at his side, tried to win a couple of key seats in the last-but-one Provincial election by cancelling a couple of unpopular gas generating plants, at a cost to taxpayers of $ 1 billion or more. (Sadly, it worked).
Ontario now regularly finds itself with so much power that it is forced to sell the surplus to neighbouring jurisdictions, mainly in the United States, at a loss. And Ontario residents and businesses confront soaring monthly bills loaded with bizarre "global adjustment charges" and "delivery charges" to pay for all this folly.
Facing an election in 2018, Premier Wynne is trying to defuse the voters' anger by cutting power prices. At the start of the year, the Province removed its own portion of the harmonized (i.e. Federal/Provincial) sales tax from electricity bills, which amounted to an 8 percent cut. And today she has announced further steps that will supposedly reduce bills by a further 17 percent, for a 25 percent reduction in total.
Sounds good, but it's actually just a shell game. Part of the reduction will be achieved by shifting a program that helps lower income power users into general spending, so taxpayers will simply be paying out the money in a different way at a different time of the year, the hope presumably being that they won't notice. The biggest part of the reduction, however, comes by spreading out the cost of all the good and bad things that have been done over the past decade over a much longer period.
Cancelling the contracts was never an option, of course, so this is the only available course. Now, there's arguably a case for matching the term of financing more closely to the expected life of the assets. However, there should be no mistaking the fact that the cost of reducing power bills now will be higher bills much further out into the future, because of the added years of borrowing that will now have to be paid for. Again, Ms Wynne and her colleagues must be hoping that the taxpayers and voters won't notice.
Will it work? The opposition parties will be quick to point out the flaws in the scheme. And maybe Ms Wynne has acted too soon: people may be grateful for the rate relief when it shows up on their bills come the summer, but will they still feel that way when polling day rolls around in the spring of 2018? I'd bet against it, especially as experience suggests that the Liberals will pull of at least one more monster screw-up between now and then.
Wednesday, 1 March 2017
Two views on the housing market
The front page of the print edition of today's Toronto Star features two wildly divergent assessments of that city's much discussed housing market. One is close to delusional, the other close to despairing. Let's take a look.
First, the delusional: this report on a presentation by Mark Renzoni, president of CBRE, the global real estate brokerage. Renzoni believes that Toronto's real estate prices are not out of line with those in other "world cities" such as London, New York and Hong Kong. Stop right there! I spent almost all of my working life in Toronto and London, and have visited New York and Hong Kong many times over the years. Torontonians, especially in the media, lap up comparisons between their city and those other metropolises, but the truth is, there is no real substance to them. Toronto is significantly smaller than all three of those supposed comparators on a population basis and it's very much less important economically. It's by far the biggest fish in the smallish Canadian pond, and it's reasonably significant within North America, but globally? Nope.
From that dubious start, Renzoni goes on to describe a fantasy version of what he imagines Toronto to be like: "There's great jobs, there's a sense of optimism, there's confidence in the job market and interest rates are low". Really? Can he be talking about the city that's the child poverty capital of Canada, the city where well-paid stable jobs are being continuously swapped out for lower-paying contract "gigs"? He then goes on to pooh-pooh the idea that foreign money is driving the market: in his view, it's all just supply-and-demand, Canadians seeing housing as a way to build wealth while keeping a roof over their heads.
In this, he's in full agreement with the Toronto Real Estate Board (TREB), which published its annual market review at the end of January. Sensitive to the widespread belief that foreign buyers were pushing local prices into the stratosphere, the Board commissioned a survey that purported to show that only 4.9 percent of home sales in the Toronto area in 2016 involved foreign purchasers. (Page 13 of the linked report, if you are sufficiently curious). To put it mildly this survey, which contradicts all recent experience and anecdotal evidence, was greeted with significant skepticism. It was seen mainly as an attempt by the TREB to forestall any steps by Toronto-area governments to implement the type of market-cooling steps initiated (with considerable success) in British Columbia last year.
The fact is that TREB's member companies, as well as multinationals like CBRE, are making out like bandits as Toronto real estate prices soar, and they're desperate to avoid having anyone derail the gravy train. What better way to forestall that than to assure everyone that the manifestly overextended market is just reflecting the honest attempts of hard-working Canadian families to better themselves by plunging headlong into real estate? When I was in the bond business, we used to call that "talking your book".
Now, the despairing: this article by Jennifer Wells, one of the Star's more experienced business reporters. Ms Wells is driving at a bigger theme -- the failure of governments to arrest the declining fortunes of the "middle class", but let's focus on her views on real estate:
That rings a whole lot more true than the Pollyanna views of CBRE and TREB. While every passing week seems to bring the announcement of another massive condo development in downtown Toronto, the supply of new single-family homes continues to dwindle, and prices continue to soar -- up more than 25 percent in the last year alone. It may all be driven by supply and demand, but it's surely not healthy, and it's hard to see how it ends well.
First, the delusional: this report on a presentation by Mark Renzoni, president of CBRE, the global real estate brokerage. Renzoni believes that Toronto's real estate prices are not out of line with those in other "world cities" such as London, New York and Hong Kong. Stop right there! I spent almost all of my working life in Toronto and London, and have visited New York and Hong Kong many times over the years. Torontonians, especially in the media, lap up comparisons between their city and those other metropolises, but the truth is, there is no real substance to them. Toronto is significantly smaller than all three of those supposed comparators on a population basis and it's very much less important economically. It's by far the biggest fish in the smallish Canadian pond, and it's reasonably significant within North America, but globally? Nope.
From that dubious start, Renzoni goes on to describe a fantasy version of what he imagines Toronto to be like: "There's great jobs, there's a sense of optimism, there's confidence in the job market and interest rates are low". Really? Can he be talking about the city that's the child poverty capital of Canada, the city where well-paid stable jobs are being continuously swapped out for lower-paying contract "gigs"? He then goes on to pooh-pooh the idea that foreign money is driving the market: in his view, it's all just supply-and-demand, Canadians seeing housing as a way to build wealth while keeping a roof over their heads.
In this, he's in full agreement with the Toronto Real Estate Board (TREB), which published its annual market review at the end of January. Sensitive to the widespread belief that foreign buyers were pushing local prices into the stratosphere, the Board commissioned a survey that purported to show that only 4.9 percent of home sales in the Toronto area in 2016 involved foreign purchasers. (Page 13 of the linked report, if you are sufficiently curious). To put it mildly this survey, which contradicts all recent experience and anecdotal evidence, was greeted with significant skepticism. It was seen mainly as an attempt by the TREB to forestall any steps by Toronto-area governments to implement the type of market-cooling steps initiated (with considerable success) in British Columbia last year.
The fact is that TREB's member companies, as well as multinationals like CBRE, are making out like bandits as Toronto real estate prices soar, and they're desperate to avoid having anyone derail the gravy train. What better way to forestall that than to assure everyone that the manifestly overextended market is just reflecting the honest attempts of hard-working Canadian families to better themselves by plunging headlong into real estate? When I was in the bond business, we used to call that "talking your book".
Now, the despairing: this article by Jennifer Wells, one of the Star's more experienced business reporters. Ms Wells is driving at a bigger theme -- the failure of governments to arrest the declining fortunes of the "middle class", but let's focus on her views on real estate:
"I was 28 when my then-boyfriend and I purchased a home. In Toronto. We entered into that transaction with my brother and his girlfriend. By my rough math our combined early career incomes — gross — exceeded the total house price by 20 per cent. The year was 1983. I do not recall those days as being especially penny pinching. We renovated the basement.
I now look at hard-working thirtysomethings who today pull down a salary equivalent to what I pulled down then. So: wage stagnation. And a house isn’t $115,000. Home ownership has been pushed out of reach, at least in the GTA. Co-ownership has become a dinner party talking point.
On-call shift work, precarious employment, depleting health care benefits from those employers who still offer them. Pensions? We know which way that trend has gone, with the ceaseless erosion of defined benefit pension plays in favour of RRSP-type defined contribution plans, which suck."
That rings a whole lot more true than the Pollyanna views of CBRE and TREB. While every passing week seems to bring the announcement of another massive condo development in downtown Toronto, the supply of new single-family homes continues to dwindle, and prices continue to soar -- up more than 25 percent in the last year alone. It may all be driven by supply and demand, but it's surely not healthy, and it's hard to see how it ends well.
Bank of Canada: short and to the point
As universally expected, the Bank of Canada left its target interest rate unchanged at 0.5 percent today. The statement accompanying the announcement was concise almost to the point of being curt.
In brief, the Bank is "looking through" the 2.1 percent rise in headline CPI in the year to January, believing that its three new indices of core inflation all show "Material excess capacity" in the economy. Although GDP growth in the final quarter of 2016 may have been slightly higher than expected -- and we'll know soon enough; the data are due for release tomorrow (Thursday) -- the Bank sees exports continuing to be held back by competitiveness issues.
Perhaps the most meaningful segment of the statement is the reference to "persistent economic slack in Canada, in contrast to the United States". This statement principally reflects the much higher unemployment rate in Canada, together with the marked absence of any labour cost pressures. There could be no clearer indication that the Bank of Canada has no intention of following any rate moves that the Federal Reserve may make during the remainder of this year.
In brief, the Bank is "looking through" the 2.1 percent rise in headline CPI in the year to January, believing that its three new indices of core inflation all show "Material excess capacity" in the economy. Although GDP growth in the final quarter of 2016 may have been slightly higher than expected -- and we'll know soon enough; the data are due for release tomorrow (Thursday) -- the Bank sees exports continuing to be held back by competitiveness issues.
Perhaps the most meaningful segment of the statement is the reference to "persistent economic slack in Canada, in contrast to the United States". This statement principally reflects the much higher unemployment rate in Canada, together with the marked absence of any labour cost pressures. There could be no clearer indication that the Bank of Canada has no intention of following any rate moves that the Federal Reserve may make during the remainder of this year.
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