Monday 23 December 2019
But what if they're right?
Finance Minister Bill Morneau is taking his Conservative opponents to task for suggesting that the Canadian economy is at risk of falling into recession. Unveiling his economic and fiscal update earlier this month, Morneau bragged that the economy was in good shape, noting that none of the private sector economists his department talks with was expecting a recession in 2020. I might say, as an erstwhile member of that profession, I take rather less comfort in that consensus than Morneau does. Still, he is undoubtedly right to say that there is not yet much talk of recession among economy-watchers.
Unfortunately for Morneau and the consensus, warning signs keep piling up. The labour market has lost all positive momentum in recent months and recorded a huge setback in November. Recent reports on manufacturing and retail sales have been weak. Now we see one of the broadest indicators starting to flash amber: StatsCan reported this morning that real GDP fell 0.1 percent in October, a result significantly weaker than expectations.
The biggest culprit for the decline was manufacturing, which saw a broad-based 1.4 percent pullback from the previous month. As StatsCan notes, this was the month of the GM strike in the United States, which had a severe spillover effect on Canada. Even granting the likelihood that the impact of the GM strike will be reversed when the November data appear, the fact remains that manufacturing has seen declines in four of the past five months, with both durable and non-durable good affected.
The weakness was not confined to manufacturing. Retail trade fell 1.1 percent in the month, its largest monthly decline in more than three years. Wholesale trade, which had provided a boost to GDP in September, also reversed in October. Construction activity overall was flat in the month, while extractive industries posted only a minimal gain amid continuing declines in oil sands activity in Alberta.
Morneau may be justified in warning the Tories not to talk the economy into a recession by scaring consumers and businesses into curbing their spending. That said, there are now plenty of indications that 2020 will be a tougher year, and there is no doubt that Morneau's fiscal plans do not leave him a lot of leeway if the economy really does start to head into a downturn.
And on that cheery note, may I wish all readers of this blog, wherever and whatever you may be celebrating, a happy Christmas season!
Wednesday 18 December 2019
Canada CPI creeps above target
StatsCan reported this morning that headline CPI rose 2.2 percent year-over-year in November, up from a 1.9 percent pace in each of the three preceding months. Gasoline prices were higher year-on-year in November for the first time since October 2018, and this was the key factor pushing the headline figure above the Bank of Canada's 2 percent target. Lower gasoline prices have in a sense masked the underlying trend in headline CPI for much of the past year: the all-items index excluding gasoline has been above 2 percent throughout this year. In November this aggregate was up 2.3 percent from a year ago, the same pace as in October.
The Bank of Canada's three preferred measures of core inflation also moved higher in the month. The average year-on-year increase in the three measures rose to just under 2.2 percent from 2.1 percent in October. One of the three core measures, CPI-median, now stands 2.4 percent higher than a year ago. This is the broadest of these three rather arcane measures, and the fact that it has moved further above target may start to be a matter of concern for the Bank.
There is nothing in the data to suggest that price pressures are getting out of hand. While the Bank will want to maintain the credibility of its targeting approach, it will also have to take account of the performance of the real economy as it contemplates its next policy move. In this regard, the shocking weakness in employment in November, as well as recently reported falls in retail and manufacturing sales, are likely to push the Bank toward easing some time in early 2020. As always, of course, the Bank's decisions will ultimately be data-dependent.
The Bank of Canada's three preferred measures of core inflation also moved higher in the month. The average year-on-year increase in the three measures rose to just under 2.2 percent from 2.1 percent in October. One of the three core measures, CPI-median, now stands 2.4 percent higher than a year ago. This is the broadest of these three rather arcane measures, and the fact that it has moved further above target may start to be a matter of concern for the Bank.
There is nothing in the data to suggest that price pressures are getting out of hand. While the Bank will want to maintain the credibility of its targeting approach, it will also have to take account of the performance of the real economy as it contemplates its next policy move. In this regard, the shocking weakness in employment in November, as well as recently reported falls in retail and manufacturing sales, are likely to push the Bank toward easing some time in early 2020. As always, of course, the Bank's decisions will ultimately be data-dependent.
Monday 16 December 2019
Canada fiscal update: no plan to return to balance
Some of the recent economic data, especially the startlingly weak November employment report, would seem to indicate that the Canadian economy is at risk of a downturn. Finance Minister Bill Morneau is unconcerned: unveiling the government's economic and fiscal update today, Morneau predicted that the Canadian economy would remain the second-fastest growing in the G7 this year and next. And he unveiled a sharply higher budget deficit for the current year, with only gradual reductions forecast for the five-year planning horizon.
The specific growth forecasts that Morneau is happy about are unimpressive: 1.7 percent this year and 1.6 percent in 2020. It may be true that this will place Canada second in the G7 growth table, but it is remarkable that the domestic economy is unable to keep pace with the economy of the United States, the best-performing economy in the G7 and Canada's largest trading partner by far.
The projected deficit for the current fiscal year (ending in March 2020) is now C$26.6 billion, up from just under $20 billion in the spring budget -- and almost twice as large as the final outcome of $14 billion in the previous fiscal year. To be fair to Morneau, this is not solely the result of a burst of new spending in the wake of the recent election. The government is booking almost $ 5 billion in public service pension costs as a result of persistently low interest rates, as well as $2 billion in costs relating to a new revenue sharing agreement for the Hibernia oil field offshore Newfoundland. The higher spending is only partially offset by a $1.7 billion increase in projected revenues.
As a result of the increased deficit this year, the debt-to-GDP ratio will edge up to 31.0 percent. This remains the lowest of any G7 member, as Morneau never tires of saying. Still, keeping this ratio on a downward track has been something of a shibboleth for this government, and it is mildly surprising to see that goal abandoned, however briefly. The deficit is forecast to edge higher in fiscal 2020-21, reaching $28.1 billion, before starting to decline in subsequent years, reaching a projected $11.6 billion in 2024-25. By that time the debt-to-GDP ratio is forecast to have fallen to 29 percent.
It's impossible for someone of my vintage to look at these projections and not think back to the fiscal dark ages in the 1980s. During that decade, governments regularly produced fiscal projections that showed chunky deficits for the near term, followed by significant improvements in the "out years". The chunky deficits always materialized; the later improvements never did. It was only when Finance Minister Paul Martin, in the early 1990s, effectively shortened the planning horizon to two years, that the government was finally able to control its spending and start reducing the deficit.
Martin's deficit cutting success was hugely assisted by the rapid growth posted by the US economy at the time. Morneau may not turn out to be so lucky, and if things do turn south for the Canadian economy, he may come to regret not giving himself a bit more wriggle room.
The specific growth forecasts that Morneau is happy about are unimpressive: 1.7 percent this year and 1.6 percent in 2020. It may be true that this will place Canada second in the G7 growth table, but it is remarkable that the domestic economy is unable to keep pace with the economy of the United States, the best-performing economy in the G7 and Canada's largest trading partner by far.
The projected deficit for the current fiscal year (ending in March 2020) is now C$26.6 billion, up from just under $20 billion in the spring budget -- and almost twice as large as the final outcome of $14 billion in the previous fiscal year. To be fair to Morneau, this is not solely the result of a burst of new spending in the wake of the recent election. The government is booking almost $ 5 billion in public service pension costs as a result of persistently low interest rates, as well as $2 billion in costs relating to a new revenue sharing agreement for the Hibernia oil field offshore Newfoundland. The higher spending is only partially offset by a $1.7 billion increase in projected revenues.
As a result of the increased deficit this year, the debt-to-GDP ratio will edge up to 31.0 percent. This remains the lowest of any G7 member, as Morneau never tires of saying. Still, keeping this ratio on a downward track has been something of a shibboleth for this government, and it is mildly surprising to see that goal abandoned, however briefly. The deficit is forecast to edge higher in fiscal 2020-21, reaching $28.1 billion, before starting to decline in subsequent years, reaching a projected $11.6 billion in 2024-25. By that time the debt-to-GDP ratio is forecast to have fallen to 29 percent.
It's impossible for someone of my vintage to look at these projections and not think back to the fiscal dark ages in the 1980s. During that decade, governments regularly produced fiscal projections that showed chunky deficits for the near term, followed by significant improvements in the "out years". The chunky deficits always materialized; the later improvements never did. It was only when Finance Minister Paul Martin, in the early 1990s, effectively shortened the planning horizon to two years, that the government was finally able to control its spending and start reducing the deficit.
Martin's deficit cutting success was hugely assisted by the rapid growth posted by the US economy at the time. Morneau may not turn out to be so lucky, and if things do turn south for the Canadian economy, he may come to regret not giving himself a bit more wriggle room.
Saturday 14 December 2019
Was it really Corbyn's fault?
A whole lot of left-leaning commentators are laying the blame for Boris Johnson's massive victory in the UK election at the feet of Labour Party leader Jeremy Corbyn. Here, for example, is Guardian columnist Polly Toynbee going straight for the jugular. I'm not sure that's fair.
A couple of weeks before the Brexit referendum of June 2016, I was in the UK on vacation. We got together with my cousins, who all live in rural areas a couple of hours outside London. I discovered to my horror that they all intended to vote for Brexit, based on the wholly false but widely held belief that the EU was imposing all manner of petty rules and regulations on the UK in a highly undemocratic way. It was clear to me then that if their views were in any way typical of the non-metropolitan electorate, the referendum might, unthinkably, favour Brexit. And so it turned out.
Going into the recent election, a lot of journalists and pro-remain commentators on social media were comforting themselves with the fact that almost all opinion polls were showing a majority of voters in favour of remaining in the EU. Maybe so, but people like my cousins were still vehemently pro-Brexit, with that vehemence only heightened by their perception that the opinion they expressed in the referendum had been ignored and scorned by politicians.
The vote for Brexit in 2016 largely reflected the opinions of voters in smaller cities and rural areas of England. Boris Johnson's strategists rightly divined that those voters still wanted Brexit, and thus focused their efforts on those areas, despite the fact that many of them had voted Labour without fail for many decades. It worked, and on election day we had the remarkable spectacle of hardscrabble former coal-mining areas kicking out Labour incumbents and electing Tories.
Where does Jeremy Corbyn fit into this? It's true that his position on Brexit has never been particularly clear. He may well have voted Leave back in 2016, and his pledge during the election campaign to hold another referendum but not to campaign for either side struck many voters as bizarre. His party's manifesto was a valiant and ambitious attempt to turn the focus of the campaign away from Brexit toward pressing domestic issues, including the health service and income inequality.
Nobody was listening, but what choice did Corbyn have? Coming out strongly against Brexit would have done nothing to win over the former Labour voters who were as determined as ever to ensure that this time, their desire to leave the EU would prevail. Coming out in favour of Brexit would have lost the support of the large number of Labour voters, particularly in an around London, who favoured remain, while almost certainly not winning back much support in pro-leave areas, which would still have seen Johnson as the more reliable path to a swift Brexit.
In short, Corbyn may not have performed well in the election, but it's hard to see how he could have done much better. The Brexiteers turned out en bloc for the Conservatives while remainers divided their votes among the other parties, delivering Johnson a clear path to victory. BoJo should enjoy his triumph while he can; it probably won't be long before people realize that "getting Brexit done" is going to take a lot more than one simple vote.
A couple of weeks before the Brexit referendum of June 2016, I was in the UK on vacation. We got together with my cousins, who all live in rural areas a couple of hours outside London. I discovered to my horror that they all intended to vote for Brexit, based on the wholly false but widely held belief that the EU was imposing all manner of petty rules and regulations on the UK in a highly undemocratic way. It was clear to me then that if their views were in any way typical of the non-metropolitan electorate, the referendum might, unthinkably, favour Brexit. And so it turned out.
Going into the recent election, a lot of journalists and pro-remain commentators on social media were comforting themselves with the fact that almost all opinion polls were showing a majority of voters in favour of remaining in the EU. Maybe so, but people like my cousins were still vehemently pro-Brexit, with that vehemence only heightened by their perception that the opinion they expressed in the referendum had been ignored and scorned by politicians.
The vote for Brexit in 2016 largely reflected the opinions of voters in smaller cities and rural areas of England. Boris Johnson's strategists rightly divined that those voters still wanted Brexit, and thus focused their efforts on those areas, despite the fact that many of them had voted Labour without fail for many decades. It worked, and on election day we had the remarkable spectacle of hardscrabble former coal-mining areas kicking out Labour incumbents and electing Tories.
Where does Jeremy Corbyn fit into this? It's true that his position on Brexit has never been particularly clear. He may well have voted Leave back in 2016, and his pledge during the election campaign to hold another referendum but not to campaign for either side struck many voters as bizarre. His party's manifesto was a valiant and ambitious attempt to turn the focus of the campaign away from Brexit toward pressing domestic issues, including the health service and income inequality.
Nobody was listening, but what choice did Corbyn have? Coming out strongly against Brexit would have done nothing to win over the former Labour voters who were as determined as ever to ensure that this time, their desire to leave the EU would prevail. Coming out in favour of Brexit would have lost the support of the large number of Labour voters, particularly in an around London, who favoured remain, while almost certainly not winning back much support in pro-leave areas, which would still have seen Johnson as the more reliable path to a swift Brexit.
In short, Corbyn may not have performed well in the election, but it's hard to see how he could have done much better. The Brexiteers turned out en bloc for the Conservatives while remainers divided their votes among the other parties, delivering Johnson a clear path to victory. BoJo should enjoy his triumph while he can; it probably won't be long before people realize that "getting Brexit done" is going to take a lot more than one simple vote.
Tuesday 10 December 2019
USMCA? CUSMA? Whatever you call it, it's finally done
It looks as if the long wait for ratification of the new trade deal that is to replace NAFTA is just about over. A signing ceremony is to take place in Mexico City today, with US Trade Representative Robert Lighthizer and Canada's Deputy Prime Minister Chrystia Freeland expected to be in attendance. Both the US and Canada still have to pass the deal through their legislatures, but that now looks like a formality.
Given that the countries cannot even agree on what to call the deal, the slow progress is perhaps not surprising. For the Americans it's USMCA, but Canada prefers CUSMA. However, the delay in proceeding with ratification was caused by much more significant issues. The Democrats in the US House of Representatives were concerned that provisions for workers'rights and the environment might be difficult to enforce in Mexico and refused to bring the deal forward until their concerns were addressed.
If you can cast your mind back to the summer of 2018, when the main round of negotiations came to a head, Canada was largely sidelined as the US and Mexico put the final touches on a deal, which was then presented to Canada almost on a take-it-or-leave it basis. Something similar has happened here again: the final negotiations took place in Mexico City this past weekend with Canada largely a spectator. It's a bit disconcerting to watch, but the apparent conclusion of this saga has to be a good thing, even if it does give Donald Trump an extra bragging point as election season starts to ramp up.
Given that the countries cannot even agree on what to call the deal, the slow progress is perhaps not surprising. For the Americans it's USMCA, but Canada prefers CUSMA. However, the delay in proceeding with ratification was caused by much more significant issues. The Democrats in the US House of Representatives were concerned that provisions for workers'rights and the environment might be difficult to enforce in Mexico and refused to bring the deal forward until their concerns were addressed.
If you can cast your mind back to the summer of 2018, when the main round of negotiations came to a head, Canada was largely sidelined as the US and Mexico put the final touches on a deal, which was then presented to Canada almost on a take-it-or-leave it basis. Something similar has happened here again: the final negotiations took place in Mexico City this past weekend with Canada largely a spectator. It's a bit disconcerting to watch, but the apparent conclusion of this saga has to be a good thing, even if it does give Donald Trump an extra bragging point as election season starts to ramp up.
First D-SIBs
This week in Ottawa, the Federal financial regulator OSFI has increased prudential capital requirements for the country's biggest banks. The so-called D-SIBs (Domestic Systemically Important Banks), which are six in number*, will now have to hold 2.25 percent of additional Tier 1 capital (also called CET1 capital) beyond the amounts required by international regulators, up from a current level of 2.0 percent. This will bring the total CET1 capital requirement to 10.25 percent, starting in April 2020.
In a sense, OSFI's announcement is purely symbolic, in that all six of the D-SIBs already hold significantly more CET1 capital than the new requirement. However, this is the third such increase mandated by OSFI in the past twelve months. The regulator is signalling that it is increasingly concerned over both domestic vulnerabilities (notably high household indebtedness) and global risks, and is warning the banks to be guided accordingly.
Canada's regulators have never stopped bragging about how well the country's financial institutions weathered the financial crisis a decade ago. It looks as if OSFI is determined to make sure that when the next crisis hits, it (and the banks themselves) can maintain that enviable track record.
* Bank of Montreal, Bank of Nova Scotia, Banque Nationale du Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto Dominion Bank. The final two of these institutions are also part of the global "too big to fail" roster.
In a sense, OSFI's announcement is purely symbolic, in that all six of the D-SIBs already hold significantly more CET1 capital than the new requirement. However, this is the third such increase mandated by OSFI in the past twelve months. The regulator is signalling that it is increasingly concerned over both domestic vulnerabilities (notably high household indebtedness) and global risks, and is warning the banks to be guided accordingly.
Canada's regulators have never stopped bragging about how well the country's financial institutions weathered the financial crisis a decade ago. It looks as if OSFI is determined to make sure that when the next crisis hits, it (and the banks themselves) can maintain that enviable track record.
* Bank of Montreal, Bank of Nova Scotia, Banque Nationale du Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto Dominion Bank. The final two of these institutions are also part of the global "too big to fail" roster.
Friday 6 December 2019
Data disaster
There's nothing ambiguous about the Canadian employment data for November. They're terrible. StatsCan reported this morning that employment fell by 71,000 in the month, the worst showing since the depths of the global financial crisis back in 2009. The national unemployment rate jumped a startling 0.4 percentage points to 5.9 percent. So much for my suggestion a month ago that the relative weakness in employment in October would be "largely unwound" in November because of the end of the strike at General Motors. Mea maxima culpa.
There is no consolation to be found in looking behind the headline numbers. Employment fell for the key male age cohort (ages 25-34). It fell in the goods-producing sector, led by declines in manufacturing and resource industries. It fell in the services sector, a development only partly explained by the termination of positions related to the Federal Election in mid-October. It fell in the private sector. It fell for both full-time and part-time work.
It's customary to point out the volatility of the Canadian employment data: the monthly changes in employment are not infrequently smaller than StatsCan's estimate of the standard error in its sampling. Not this time: the standard error for the number of persons employed is 30,100, suggesting that there is little likelihood that the data are providing a misleading picture.
The analyst consensus for today's number was for a 10,000 increase in employment, so this is a spectacular miss. Possibly the tall foreheads on Bay Street were lulled into a false sense of security by the soothing tone of the Bank of Canada's rate announcement earlier in the week. The odds that the Bank will have to join the global easing party in the near future just shortened dramatically -- and Justin Trudeau must be thanking his lucky stars that the fixed election date fell when it did.
The weakness in Canadian employment is particularly jarring when viewed against developments south of the border. US non-farm payrolls jumped 266,000 in November and data for the preceding two months were revised higher. The unemployment rate ticked down to a 50-year low of 3.5 percent. The end of the GM strike accounts for only a small portion of the November increase. The data won't stop Donald Trump from lambasting the Fed if it keeps rates on hold next week, as it surely will, but Trump would do well to count his blessings. If the Fed keeps its powder dry for now, the chances of the US economy remaining strong until election day look remarkably good.
There is no consolation to be found in looking behind the headline numbers. Employment fell for the key male age cohort (ages 25-34). It fell in the goods-producing sector, led by declines in manufacturing and resource industries. It fell in the services sector, a development only partly explained by the termination of positions related to the Federal Election in mid-October. It fell in the private sector. It fell for both full-time and part-time work.
It's customary to point out the volatility of the Canadian employment data: the monthly changes in employment are not infrequently smaller than StatsCan's estimate of the standard error in its sampling. Not this time: the standard error for the number of persons employed is 30,100, suggesting that there is little likelihood that the data are providing a misleading picture.
The analyst consensus for today's number was for a 10,000 increase in employment, so this is a spectacular miss. Possibly the tall foreheads on Bay Street were lulled into a false sense of security by the soothing tone of the Bank of Canada's rate announcement earlier in the week. The odds that the Bank will have to join the global easing party in the near future just shortened dramatically -- and Justin Trudeau must be thanking his lucky stars that the fixed election date fell when it did.
The weakness in Canadian employment is particularly jarring when viewed against developments south of the border. US non-farm payrolls jumped 266,000 in November and data for the preceding two months were revised higher. The unemployment rate ticked down to a 50-year low of 3.5 percent. The end of the GM strike accounts for only a small portion of the November increase. The data won't stop Donald Trump from lambasting the Fed if it keeps rates on hold next week, as it surely will, but Trump would do well to count his blessings. If the Fed keeps its powder dry for now, the chances of the US economy remaining strong until election day look remarkably good.
Wednesday 4 December 2019
If it ain't broke....
As expected, the Bank of Canada kept its overnight rate unchanged at 1.75 percent at the end of its Governing Council meeting today. The press release depicts an economy performing very much in line with the Bank's forecasts. Growth slowed in Q3, but fears of a global slowdown seem to be easing despite the persistence of trade tensions. Inflation hews very close to the 2 percent target, and any increase in headline CPI in the coming months, as past falls in gasoline prices drop out of the calculation, is expected to be temporary.
Unsurprisingly, trade fears seem to represent the greatest source of uncertainty for the Bank. This piece from Slate has a litany of wacky trade moves by Trump in just the past few days -- tariffs on Argentine and Brazilian steel, tariffs on French wine and cheese, contradictory signals on prospects for a trade deal with China. Canada is not directly in the firing line, though given Trump's gossamer-thin skin, Justin Trudeau really should be more careful about getting caught badmouthing him in public gatherings. Getting caught once, at the G7 meeting in Quebec City last year, was bad enough. Doing the same thing again at the NATO summit in London is asking for trouble.
Governor Stephen Poloz is entering the last six months of his tenure, which ends in June next year. Despite the relatively upbeat tone of today's announcement, markets still think the Bank will join its international peers in cutting rates before Poloz moves on. The next rate announcement is set for January 22, when the Bank will also release its updated forecasts. It promises that its rate decisions in the coming months will be based not only on trade and the global outlook, but also its reading of fiscal policy. If the Trudeau government follows through on the fiscal stimulus promised in the recent election campaign, the Bank may see less need to provide additional monetary stimulus.
Unsurprisingly, trade fears seem to represent the greatest source of uncertainty for the Bank. This piece from Slate has a litany of wacky trade moves by Trump in just the past few days -- tariffs on Argentine and Brazilian steel, tariffs on French wine and cheese, contradictory signals on prospects for a trade deal with China. Canada is not directly in the firing line, though given Trump's gossamer-thin skin, Justin Trudeau really should be more careful about getting caught badmouthing him in public gatherings. Getting caught once, at the G7 meeting in Quebec City last year, was bad enough. Doing the same thing again at the NATO summit in London is asking for trouble.
Governor Stephen Poloz is entering the last six months of his tenure, which ends in June next year. Despite the relatively upbeat tone of today's announcement, markets still think the Bank will join its international peers in cutting rates before Poloz moves on. The next rate announcement is set for January 22, when the Bank will also release its updated forecasts. It promises that its rate decisions in the coming months will be based not only on trade and the global outlook, but also its reading of fiscal policy. If the Trudeau government follows through on the fiscal stimulus promised in the recent election campaign, the Bank may see less need to provide additional monetary stimulus.
Friday 29 November 2019
Canada Q3 GDP report -- some positive signs
Statistics Canada reported this morning that real GDP rose at an annualized pace of 1.3 percent in Q3, down from a pace of 3.5 percent in Q2. The growth rate was in line with analysts' expectations, and it is worth noting that the strong growth rate seen in Q2 marked the only time in the past year that the economy has grown at a pace above 1.5 percent. For all the surprising strength shown by the labour market for much of this year, the economy is for the most part just edging ahead.
There were positives to be taken from today's report, mainly relating to investment spending. Housing investment grew at an annualized rate of 3.2 percent, the fastest pace since 2012, with a healthy gain in new housing construction. Business investment rose at a 2.6 percent pace, with all sub-categories posting gains. This is somewhat surprising, given the continuing uncertainty over trade and the global growth outlook, and only time will tell if this sort of performance can be maintained. Household spending advanced at a 0.4 percent pace in the quarter after being virtually unchanged in Q2, while inventory accumulation and -- ominously -- exports subtracted from the overall pace of growth.
It seems likely that growth for the current quarter will be similarly subdued. Despite regular reports of an imminent deal, trade tensions remain unresolved. Moreover, the recent week-long rail strike at CN Rail will weigh on growth. Normally the impact of labour disputes and such is quickly reversed once the strike is over. In this case, however, the interruption of oil shipments to US refineries can probably not be made up, as the system is basically running at full capacity. This suggests that export volumes will again be a drag on overall growth in the current quarter.
Today's numbers are largely in line with the Bank of Canada's most recent forecasts, which do not see the economy moving onto a faster growth path until some time in 2020. The Bank's next rate decision is just days away, scheduled for December 4. Today's data do not change the likelihood that the Bank will keep rates unchanged this time, with a rate cut looking more likely for some time in the first quarter of next year, particularly if global trade tensions persist.
There were positives to be taken from today's report, mainly relating to investment spending. Housing investment grew at an annualized rate of 3.2 percent, the fastest pace since 2012, with a healthy gain in new housing construction. Business investment rose at a 2.6 percent pace, with all sub-categories posting gains. This is somewhat surprising, given the continuing uncertainty over trade and the global growth outlook, and only time will tell if this sort of performance can be maintained. Household spending advanced at a 0.4 percent pace in the quarter after being virtually unchanged in Q2, while inventory accumulation and -- ominously -- exports subtracted from the overall pace of growth.
It seems likely that growth for the current quarter will be similarly subdued. Despite regular reports of an imminent deal, trade tensions remain unresolved. Moreover, the recent week-long rail strike at CN Rail will weigh on growth. Normally the impact of labour disputes and such is quickly reversed once the strike is over. In this case, however, the interruption of oil shipments to US refineries can probably not be made up, as the system is basically running at full capacity. This suggests that export volumes will again be a drag on overall growth in the current quarter.
Today's numbers are largely in line with the Bank of Canada's most recent forecasts, which do not see the economy moving onto a faster growth path until some time in 2020. The Bank's next rate decision is just days away, scheduled for December 4. Today's data do not change the likelihood that the Bank will keep rates unchanged this time, with a rate cut looking more likely for some time in the first quarter of next year, particularly if global trade tensions persist.
Friday 22 November 2019
Off to a bad start
Canada's Federal Election took place in the third week of October. It took a full month for Prime Minister Justin Trudeau to put together his Cabinet, and when the new team was unveiled this week, it contained an awful lot of familiar faces, particularly in the most senior positions.
Trudeau is taking the same leisurely approach to recalling Parliament. Reportedly he did not want the Commons to reconvene until the new year, but was somehow persuaded to bring the date forward to December 5. Somehow he and his advisers seem to have failed to notice that the union representing train operators at CN, the larger of Canada's national railroads, had set a strike date for this past Monday. With no deal in place, the strike duly began and is now in its fourth day.
Usually governments allow a threatened strike at either CN or the smaller CP to start, but then quickly legislate the workers back onto the job in order to avoid problems for the national economy. Trudeau's insouciant approach means that can't happen this time, and the damage is rapidly mounting.
The Province of Quebec is set to run out of propane by the end of the weekend, posing dangers to sectors from health care to agriculture. Similar problems are emerging in Northern Ontario. In Alberta and Saskatchewan, oil-by-rail shipments to US refineries have been drastically reduced, deepening the discount at which western Canadian oil already trades against benchmark crudes. Farmers in the same provinces have lost the ability to ship their products just as harvest season is coming to an end, raising the possibility of crops being left to rot in the fields.
The election left Trudeau without a majority in the Commons. His Liberals were completely shut out in Alberta and Saskatchewan and badly mauled by a resurgent Bloc Quebecois in Quebec. For the first time in decades, national unity is top of mind in political circles. If Trudeau recognizes the need to reach out to those three Provinces, his lack of action regarding the CN strike is a pretty strange way of showing it.
Trudeau is taking the same leisurely approach to recalling Parliament. Reportedly he did not want the Commons to reconvene until the new year, but was somehow persuaded to bring the date forward to December 5. Somehow he and his advisers seem to have failed to notice that the union representing train operators at CN, the larger of Canada's national railroads, had set a strike date for this past Monday. With no deal in place, the strike duly began and is now in its fourth day.
Usually governments allow a threatened strike at either CN or the smaller CP to start, but then quickly legislate the workers back onto the job in order to avoid problems for the national economy. Trudeau's insouciant approach means that can't happen this time, and the damage is rapidly mounting.
The Province of Quebec is set to run out of propane by the end of the weekend, posing dangers to sectors from health care to agriculture. Similar problems are emerging in Northern Ontario. In Alberta and Saskatchewan, oil-by-rail shipments to US refineries have been drastically reduced, deepening the discount at which western Canadian oil already trades against benchmark crudes. Farmers in the same provinces have lost the ability to ship their products just as harvest season is coming to an end, raising the possibility of crops being left to rot in the fields.
The election left Trudeau without a majority in the Commons. His Liberals were completely shut out in Alberta and Saskatchewan and badly mauled by a resurgent Bloc Quebecois in Quebec. For the first time in decades, national unity is top of mind in political circles. If Trudeau recognizes the need to reach out to those three Provinces, his lack of action regarding the CN strike is a pretty strange way of showing it.
Tuesday 19 November 2019
Preparing for the worst
Bank of Canada Senior Deputy Governor Carolyn Wilkins gave an important speech to the International Finance Club of Montreal this morning, titled "Financial Stability in an Uncertain World". She covered three inter-related topics: Canada's progress in taming vulnerabilities in its financial system; the worsening global economic outlook; and the Canadian financial system's ability to handle an economic crisis, if and when one arises.
As usual, the key financial vulnerability in the Bank's mind lies in the state of household finances and imbalances in the housing market. Ms Wilkins noted that the situation has improved in the past couple of years:
"Credit growth has moderated, and income growth has picked up. So the debt-to-income ratio has been stable over the past couple of years. Also, the share of new mortgages going to highly indebted borrowers fell to a low of 13 percent."
Part of the credit for this goes to the Bank itself and other regulators:
"Federal authorities made changes to mortgage-financing rules to ensure that borrowers could handle higher interest rates or lower incomes. British Columbia and Ontario introduced tax measures to reduce demand for housing from non-residents and speculative buyers. And the Bank increased its policy interest rate from 0.5 percent in mid-2017 to 1.75 percent last autumn, where it remains today. We did this to achieve our inflation target, and when borrowing costs rise, credit growth slows."
Although there are signs of reviving activity in the housing and mortgage markets, the Bank believes that "the regulatory and other measures in place will support the quality of new credit and mitigate the buildup of imbalances in the housing market."
Turning to the international situation, Ms Wilkins focused on the interplay between trade conflicts and financial markets. She noted that the high household debt levels seen in Canada are also seen elsewhere (Australia, Sweden). She also pointed out that the quality of corporate debt has been declining, with an increasing proportion of that debt being bundled into increasingly complex collateralized debt instruments, an ominous echo of the financial crisis a decade ago.
The risk the Bank sees is that a perfect storm could be in the offing:
"An increase in uncertainty or bad trade news could be the trigger. This, in turn, could spark a sharp reversal in risk premiums and lead to a drop in prices for assets, including for houses. Creditors would see more defaults, especially from corporations with lower credit ratings. Moreover, if enough investors rushed to adjust their portfolios at the same time, liquidity would dry up, amplifying the effects. All of this would find its way to the banking system, making it harder for business owners and families to borrow and intensifying the downturn."
Turning finally to the resilience of the Canadian financial system, Ms Wilkins presented a generally positive picture:
"Canadian banks are part of a global banking system that is more solid than it was a decade ago. Globally active banks are holding over US$2 trillion more capital than they were at the beginning of 2011, when the phase-in of the post-crisis reforms began. This translates to a 7-percentage point increase in their Tier 1 capital ratio. The leverage limits and new liquidity regulations also make these banks more resilient."
She noted that a recent IMF-designed stress test showed that the Canadian banking system could even withstand an extreme scenario in which unemployment jumped by six percentage points (effectively doubling the current rate) and house prices fell by 40 percent.
This was a timely speech, in view of growing fears that the global economy may be set for a downturn, taking the Canadian economy along with it. It is interesting that Ms Wilkins was the person chosen to deliver this reassurance. With Governor Stephen Poloz's term ending in the New Year, she appears to have the inside track to take on the top job.
As usual, the key financial vulnerability in the Bank's mind lies in the state of household finances and imbalances in the housing market. Ms Wilkins noted that the situation has improved in the past couple of years:
"Credit growth has moderated, and income growth has picked up. So the debt-to-income ratio has been stable over the past couple of years. Also, the share of new mortgages going to highly indebted borrowers fell to a low of 13 percent."
Part of the credit for this goes to the Bank itself and other regulators:
"Federal authorities made changes to mortgage-financing rules to ensure that borrowers could handle higher interest rates or lower incomes. British Columbia and Ontario introduced tax measures to reduce demand for housing from non-residents and speculative buyers. And the Bank increased its policy interest rate from 0.5 percent in mid-2017 to 1.75 percent last autumn, where it remains today. We did this to achieve our inflation target, and when borrowing costs rise, credit growth slows."
Although there are signs of reviving activity in the housing and mortgage markets, the Bank believes that "the regulatory and other measures in place will support the quality of new credit and mitigate the buildup of imbalances in the housing market."
Turning to the international situation, Ms Wilkins focused on the interplay between trade conflicts and financial markets. She noted that the high household debt levels seen in Canada are also seen elsewhere (Australia, Sweden). She also pointed out that the quality of corporate debt has been declining, with an increasing proportion of that debt being bundled into increasingly complex collateralized debt instruments, an ominous echo of the financial crisis a decade ago.
The risk the Bank sees is that a perfect storm could be in the offing:
"An increase in uncertainty or bad trade news could be the trigger. This, in turn, could spark a sharp reversal in risk premiums and lead to a drop in prices for assets, including for houses. Creditors would see more defaults, especially from corporations with lower credit ratings. Moreover, if enough investors rushed to adjust their portfolios at the same time, liquidity would dry up, amplifying the effects. All of this would find its way to the banking system, making it harder for business owners and families to borrow and intensifying the downturn."
Turning finally to the resilience of the Canadian financial system, Ms Wilkins presented a generally positive picture:
"Canadian banks are part of a global banking system that is more solid than it was a decade ago. Globally active banks are holding over US$2 trillion more capital than they were at the beginning of 2011, when the phase-in of the post-crisis reforms began. This translates to a 7-percentage point increase in their Tier 1 capital ratio. The leverage limits and new liquidity regulations also make these banks more resilient."
She noted that a recent IMF-designed stress test showed that the Canadian banking system could even withstand an extreme scenario in which unemployment jumped by six percentage points (effectively doubling the current rate) and house prices fell by 40 percent.
This was a timely speech, in view of growing fears that the global economy may be set for a downturn, taking the Canadian economy along with it. It is interesting that Ms Wilkins was the person chosen to deliver this reassurance. With Governor Stephen Poloz's term ending in the New Year, she appears to have the inside track to take on the top job.
Wednesday 13 November 2019
Meanwhile, across town....
All the attention in Washington DC today is on the start of the House impeachment hearings, which are monopolizing the airwaves, even here in Canada. Fed Governor Jerome Powell's testimony to the Joint Economic Committee of the Congress will hardly get a look-in, which is a pity, as he has some important things to say.
The Fed likes what it see in the economy, both currently and for the near future:
The U.S. economy is now in the 11th year of this expansion, and the baseline outlook remains favorable.
And:
Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely. This favorable baseline partly reflects the policy adjustments that we have made to provide support for the economy.
The testimony goes on to note the continuing risks to the US expansion posed by slower growth abroad and (euphemistically, put, this!) "trade developments". The Fed will be monitoring these risks, but overall, Powell's comments strongly suggest that the mini easing cycle the Fed has undertaken this year is at an end, barring an unforeseen deterioration in the outlook. .
Powell also has a few more general observations on monetary policy......
....the current low interest rate environment may limit the ability of monetary policy to support the economy.
And on fiscal policy:
.....the federal budget is on an unsustainable path, with high and rising debt: Over time, this outlook could restrain fiscal policymakers' willingness or ability to support economic activity during a downturn.
Neither of these statements is really disputable, but neither will be welcomed by Donald Trump. He has regularly castigated Powell and the FOMC for their failure to reduce interest rates further and faster, and with the election now less than a year away, Trump would not wish to have voters drawing any connection between his ill-advised tax cuts for the wealthy and the soaring budget deficit. On a slow news day, Powell's comments might have triggered a Twitter tirade from the Oval Office, but today, maybe Trump has more important things to think about.
The Fed likes what it see in the economy, both currently and for the near future:
The U.S. economy is now in the 11th year of this expansion, and the baseline outlook remains favorable.
And:
Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely. This favorable baseline partly reflects the policy adjustments that we have made to provide support for the economy.
The testimony goes on to note the continuing risks to the US expansion posed by slower growth abroad and (euphemistically, put, this!) "trade developments". The Fed will be monitoring these risks, but overall, Powell's comments strongly suggest that the mini easing cycle the Fed has undertaken this year is at an end, barring an unforeseen deterioration in the outlook. .
Powell also has a few more general observations on monetary policy......
....the current low interest rate environment may limit the ability of monetary policy to support the economy.
And on fiscal policy:
.....the federal budget is on an unsustainable path, with high and rising debt: Over time, this outlook could restrain fiscal policymakers' willingness or ability to support economic activity during a downturn.
Monday 11 November 2019
OK, "OK boomer"
Yours truly was born in early 1950, so I am very definitely a boomer. Unlike many in my age cohort, I am not in the least offended by the ongoing "OK, boomer" meme/putdown. A quick search back through this blog indicates that I have used the term "baby boomer" in at least fifteen posts, almost always to castigate my generation for its avarice and thoughtlessness. Here's a sample from March 2013:
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
There's an old adage that when there's something important to be done, one's choices are either to lead, follow or get out of the way. I'd respectfully suggest to my fellow boomers that it's time to let younger people lead: we should either follow or get out of the way. A good place to start would be with the passel of geriatrics currently shuffling toward the 2020 US Presidential election -- but I'm not holding my breath, because at my age that's a bit risky.
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
There's an old adage that when there's something important to be done, one's choices are either to lead, follow or get out of the way. I'd respectfully suggest to my fellow boomers that it's time to let younger people lead: we should either follow or get out of the way. A good place to start would be with the passel of geriatrics currently shuffling toward the 2020 US Presidential election -- but I'm not holding my breath, because at my age that's a bit risky.
Friday 8 November 2019
The GM effect?
Statistics Canada reported this morning that employment fell by 1800 in October -- a figure well within the sampling error for the series -- keeping the unemployment rate at 5.5 percent, just 0.1 percent above its all-time low. The ever-unreliable analysts' consensus had expected a gain of about 16,000; since the numbers were released, those self-same analysts have been noting that the pullback comes after very strong reports for August and September, implying that nobody should really have been surprised.
Isn't there another explanation? The most significant job losses in October were in the manufacturing sector in Ontario, which reportedly shed 23,000 positions. The lengthy strike at GM in the United States led to widely-reported shutdowns at GM plants in Oshawa and St Catharines, both in that Province. Almost all of the company's 7,600 employees in Canada were unemployed at precisely the time of StatsCan's monthly survey. On the entirely reasonable assumption that parts companies that supply GM were also forced to make temporary layoffs, it's not hard to make the case that the October setback will be largely unwound in the November data, since the GM strike has now ended.
I'm reluctant to be definitive about this because the StatsCan data release makes no mention of it, and none of the media outlets I have been able to check has picked up on it. However, the corresponding US non-farms payrolls survey for October, released a week ago, provided details of the impact of the GM strike on its data, offering reassurance that the relatively low rise in payrolls was the result of this temporary factor rather than a worsening trend. It would be surprising if the same were not true, albeit to a lesser extent, here in Canada.
The November data should tell us whether I'm right or not, and I will 'fess up or brag accordingly when the data are released in early December.
Isn't there another explanation? The most significant job losses in October were in the manufacturing sector in Ontario, which reportedly shed 23,000 positions. The lengthy strike at GM in the United States led to widely-reported shutdowns at GM plants in Oshawa and St Catharines, both in that Province. Almost all of the company's 7,600 employees in Canada were unemployed at precisely the time of StatsCan's monthly survey. On the entirely reasonable assumption that parts companies that supply GM were also forced to make temporary layoffs, it's not hard to make the case that the October setback will be largely unwound in the November data, since the GM strike has now ended.
I'm reluctant to be definitive about this because the StatsCan data release makes no mention of it, and none of the media outlets I have been able to check has picked up on it. However, the corresponding US non-farms payrolls survey for October, released a week ago, provided details of the impact of the GM strike on its data, offering reassurance that the relatively low rise in payrolls was the result of this temporary factor rather than a worsening trend. It would be surprising if the same were not true, albeit to a lesser extent, here in Canada.
The November data should tell us whether I'm right or not, and I will 'fess up or brag accordingly when the data are released in early December.
Thursday 7 November 2019
Fiscal ideology
It's not surprising that in a country as large and diverse as Canada, economic performance can vary significantly between regions. This has at times led to calls for monetary policy to be applied differently in different parts of the country, which is all but impossible. Fiscal policy is another matter: Canada is the home of so-called "fiscal federalism", by which the Ottawa government tries to ensure relatively equal provision of key services (such as education and health) from cost to coast.
A key element of fiscal federalism is the equalization programme, through which wealthier provinces provide financial assistance to poorer ones. As economic cycles unfold, Provinces can move between being "have" jurisdictions, which contribute to equalization, and "have nots", which receive it. The way resource taxes are structured means that Alberta is always likely to be classified as a "have" Province, while the Atlantic Provinces and, more controversially, Quebec are usually "have nots".
Aside from equalization, each Province manages a large taxation and spending budget of its own, which gives it some power to influence the state of its own economy. Right now it's interesting to look at how Alberta and Ontario are managing their finances. It's usually the case that when Alberta is doing particularly well economically, Ontario tends to lag. High oil prices are great for Alberta, for obvious reasons. They're not so good for Ontario, which has next to no oil and gas of its own and still depends heavily on auto manufacturing.
For the last couple of years, the Alberta economy has been suffering from low oil prices and a lack of infrastructure for getting its oil to market. In contrast Ontario has benefited from cheaper energy, not least from the boost provided to household spending power. As a simple illustration, consider that in the twelve months to September Ontario, with a population of just over 12 million, added over 250,000 jobs; Alberta, population 3.5 million, added fewer than 11,000.
Both Alberta and Ontario currently have right-of-centre Conservative governments, under Jason Kenny in Edmonton and Doug Ford in Toronto. Let's start with Alberta. Having failed to introduce a 2019-20 budget for the first half of the fiscal year, Alberta finally tabled one just days after the recent federal election. After noting that the Province contributed $22 billion in equalization payments last year, the Government announced a severe austerity package aimed at converting a budget deficit of $ 8.7 billion this year to a small surplus by 2022/23. Here is a good summary of what that entails.
This is the wrong budget at the wrong time. The Alberta economy is sputtering, for reasons that are largely not the Province's fault. Spending cuts will only slow the economy further. As the linked summary notes, Alberta has a low debt burden and the lowest taxation rates in Canada -- it is the only Province with no sales tax of its own. There was a clear alternative to austerity here: carefully targeted spending to help the economy ride out the current rough patch. The Kenney government has instead chosen a path that can only make things worse, and when that happens, it will no doubt blame the government in Ottawa, rather than admitting to its own bad judgement.
On Wednesday the Doug Ford government in Ontario tabled its Fall fiscal update. Ford's bull in a china shop approach to his job has not gone down well with voters. The Government has already had to backtrack on any number of half-baked ideas, and the budget it tabled back in the Spring was so badly received that Finance Minister Vic Fedeli lost his job.
New Finance Minister Rod Phillips announced that the deficit for the current fiscal year is now projected at $9.0 billion, compared to $10.3 billion forecast by the luckless Fedeli. Phillips portrayed this as proof that the deficit reduction strategy is working, even though the revised projection is higher than the final figure of $7.4 billion for the last fiscal year.
The real story here is that despite the Government's strident commitment to spending restraint, it is actually spending more than the previous Liberal government was planning. Any progress in deficit reduction is all thanks to outperformance on the revenue side, attributable to the solid performance of the Provincial economy. Truth to tell, eighteen months into its mandate the Ford government looks very much like the old-style tax-and-spend Liberal regimes that Ford supposedly despises.
The Ford government is still planning to eliminate the budget deficit by 2023. In contrast to Alberta, this does seem to be the right goal for Ontario at this time. The Province has the largest public debt of any non-sovereign jurisdiction in the world, a poisoned chalice that it usurped from California during the term of the previous Liberal government. The economy is moving ahead steadily, as the employment data quoted above demonstrate, so a cautious move back toward fiscal balance is justified. It remains to be seen whether Ford would pivot toward stimulus if the economy were to slip into recession. Based on what we see happening in Alberta, that might be too much to hope for.
A key element of fiscal federalism is the equalization programme, through which wealthier provinces provide financial assistance to poorer ones. As economic cycles unfold, Provinces can move between being "have" jurisdictions, which contribute to equalization, and "have nots", which receive it. The way resource taxes are structured means that Alberta is always likely to be classified as a "have" Province, while the Atlantic Provinces and, more controversially, Quebec are usually "have nots".
Aside from equalization, each Province manages a large taxation and spending budget of its own, which gives it some power to influence the state of its own economy. Right now it's interesting to look at how Alberta and Ontario are managing their finances. It's usually the case that when Alberta is doing particularly well economically, Ontario tends to lag. High oil prices are great for Alberta, for obvious reasons. They're not so good for Ontario, which has next to no oil and gas of its own and still depends heavily on auto manufacturing.
For the last couple of years, the Alberta economy has been suffering from low oil prices and a lack of infrastructure for getting its oil to market. In contrast Ontario has benefited from cheaper energy, not least from the boost provided to household spending power. As a simple illustration, consider that in the twelve months to September Ontario, with a population of just over 12 million, added over 250,000 jobs; Alberta, population 3.5 million, added fewer than 11,000.
Both Alberta and Ontario currently have right-of-centre Conservative governments, under Jason Kenny in Edmonton and Doug Ford in Toronto. Let's start with Alberta. Having failed to introduce a 2019-20 budget for the first half of the fiscal year, Alberta finally tabled one just days after the recent federal election. After noting that the Province contributed $22 billion in equalization payments last year, the Government announced a severe austerity package aimed at converting a budget deficit of $ 8.7 billion this year to a small surplus by 2022/23. Here is a good summary of what that entails.
This is the wrong budget at the wrong time. The Alberta economy is sputtering, for reasons that are largely not the Province's fault. Spending cuts will only slow the economy further. As the linked summary notes, Alberta has a low debt burden and the lowest taxation rates in Canada -- it is the only Province with no sales tax of its own. There was a clear alternative to austerity here: carefully targeted spending to help the economy ride out the current rough patch. The Kenney government has instead chosen a path that can only make things worse, and when that happens, it will no doubt blame the government in Ottawa, rather than admitting to its own bad judgement.
On Wednesday the Doug Ford government in Ontario tabled its Fall fiscal update. Ford's bull in a china shop approach to his job has not gone down well with voters. The Government has already had to backtrack on any number of half-baked ideas, and the budget it tabled back in the Spring was so badly received that Finance Minister Vic Fedeli lost his job.
New Finance Minister Rod Phillips announced that the deficit for the current fiscal year is now projected at $9.0 billion, compared to $10.3 billion forecast by the luckless Fedeli. Phillips portrayed this as proof that the deficit reduction strategy is working, even though the revised projection is higher than the final figure of $7.4 billion for the last fiscal year.
The real story here is that despite the Government's strident commitment to spending restraint, it is actually spending more than the previous Liberal government was planning. Any progress in deficit reduction is all thanks to outperformance on the revenue side, attributable to the solid performance of the Provincial economy. Truth to tell, eighteen months into its mandate the Ford government looks very much like the old-style tax-and-spend Liberal regimes that Ford supposedly despises.
The Ford government is still planning to eliminate the budget deficit by 2023. In contrast to Alberta, this does seem to be the right goal for Ontario at this time. The Province has the largest public debt of any non-sovereign jurisdiction in the world, a poisoned chalice that it usurped from California during the term of the previous Liberal government. The economy is moving ahead steadily, as the employment data quoted above demonstrate, so a cautious move back toward fiscal balance is justified. It remains to be seen whether Ford would pivot toward stimulus if the economy were to slip into recession. Based on what we see happening in Alberta, that might be too much to hope for.
Wednesday 30 October 2019
Divergent paths
It's rare to have a day on which both the US Federal Reserve and the Bank of Canada make rate announcements, but today has been such a day. With the Fed cutting the funds target by a further 25 basis points and the Bank of Canada once again standing pat, the current divergence between the paths of the two central banks is becoming ever more pronounced.
The Fed's decision to cut rates again was fully priced in by the markets. With the announcement earlier in the day that US GDP growth slowed to an annualized 1.9 percent in Q3, it is arguable that the Fed has fallen a little behind the curve in its easing cycle, a fact which means, alas, that Donald Trump's criticisms of Fed Chair Jerome Powell have at least some validity.
There had been some speculation that today's might be a "hawkish cut" with the Fed altering the wording of its press release to signify that it regards the easing cycle as being at an end. In the event, today's press release varied only slightly from September's, but the changes can be seen as very slightly hawkish. While the Fed's policy path will remain data-dependent, previous references to acting as needed to sustain the economic expansion have been removed. As with the previous cuts in this cycle, two FOMC members voted to keep rate unchanged. We will doubtless not have to wait long for Trump to take incoherent potshots at Powell and his colleagues.
Earlier today in Ottawa, the Bank of Canada issued a more detailed than usual release of its own to explain its decision not to cut rates just yet. Its case for staying on the sidelines rests on the combination of steady growth, which is expected to further narrow the already modest output gap in the next two years, inflation right at the 2 percent target level, and some evidence of rising wage pressures.
The Bank sees the risks to this baseline forecast coming mainly from "Ongoing trade conflicts and uncertainty (which) are restraining business investment, trade, and global growth." Strikingly, given the angst in Western Canada in the wake of the recent election, the Bank makes no direct reference to the sorry state of the energy sector, although it does acknowledge the fall in commodity prices generally.
Interestingly, the last three words of the release are "fiscal policy developments". Justin Trudeau's Liberals promised in their election platform to run significant budget deficits throughout their mandate. With the Liberals now dependent on the even more deficit-friendly NDP in the new House of Commons, fiscal policy may become a significant source of stimulus in the months ahead. Governor Stephen Poloz and his team are right to signal that this can and must influence the direction of monetary policy.
With that said, it is hard to see how the Bank will be able to stand aloof from the global easing cycle for much longer. Canada now has the highest official rate target in the developed world, and the currency is moving higher as funds flow into the country to take advantage. In the meantime there is growing media speculation about an economic slowdown, and not just in the energy sector: both Ford Motor Company and General Motors will shortly be slashing employment in Ontario. A rate cut during the next three months seems to be a safe bet, most likely when the Bank releases its next updated Monetary Policy Report in late January.
Wednesday 23 October 2019
The stranded Province
The Federal election results paint a picture of a deeply divided Canada. Solid Liberal red in southern Ontario; the revival of the Bloc Quebecois in la Belle Province; and in the three Prairie Provinces, a sea of Tory blue with the exception of one NDP redoubt in Alberta. Governing for the next four years, or however long the minority government lasts, is going to be challenging.
If the media are to be believed, the West is up in arms at the results, fearful that its interests will be neglected in Ottawa. There's talk, especially in Alberta, of a renewed fervour for separation from Canada -- inevitably, this has been dubbed "Wexit". Albertans need to think long and hard before even considering this.
It should first of all be said that there's no evidence that Justin Trudeau has it in for Alberta. He has tried everything he can to secure the extra pipeline capacity that the Province needs to export its oil, up to and including the purchase of the Trans-Mountain pipeline from its former owner, Kinder-Morgan. Attempts to expedite expansion of that pipeline have been stymied by fierce opposition from the government of British Columbia, as well as by some (but not all) of the Indigenous communities along the route.
The other potential pipeline routes run east and south. The Energy East plan was intended to supplant imported oil in Quebec and Atlantic Canada, but Quebec is even more fiercely anti-pipeline than BC is. Expansion of pipelines across the border into the US similarly faces strong opposition in North Dakota and elsewhere; the US, now self-sufficient in oil, has a dwindling interest in helping to solve Alberta's problems.
And that's Alberta's immediate problem in a nutshell. It lacks ready access either to tidewater or overland export markets. It's hard to see how poisoning relations with the rest of Canada, and potentially threatening an acrimonious divorce, would alleviate that problem in any way -- rather the reverse, in fact.
In truth, though, the problem is much worse than that. Albertans may not like it, but the world is on a path away from fossil fuels, at an ever-increasing pace. Investors are already starting to worry about oil wells and related infrastructure becoming "stranded assets" and are marking down share prices in response. Any new pipeline built today will take decades to pay off, and it seems very unlikely that the Alberta oil sector is going to last that long, at least not at anything like its present scale. We may not yet be talking about "the orderly management of decline", but we must surely be well past reckless doubling-down on what looks like a losing bet.
In short, Alberta is both boxed in by its geography and on the wrong side of progress. That seems like a situation where you would want all the help you can get from your friends and neighbours, rather than trying to barge ahead on your own. There's much that can be done to make the job easier: this very thoughtful article from the CBC website, written by a professor from the University of Calgary, is a good place to start.
If the media are to be believed, the West is up in arms at the results, fearful that its interests will be neglected in Ottawa. There's talk, especially in Alberta, of a renewed fervour for separation from Canada -- inevitably, this has been dubbed "Wexit". Albertans need to think long and hard before even considering this.
It should first of all be said that there's no evidence that Justin Trudeau has it in for Alberta. He has tried everything he can to secure the extra pipeline capacity that the Province needs to export its oil, up to and including the purchase of the Trans-Mountain pipeline from its former owner, Kinder-Morgan. Attempts to expedite expansion of that pipeline have been stymied by fierce opposition from the government of British Columbia, as well as by some (but not all) of the Indigenous communities along the route.
The other potential pipeline routes run east and south. The Energy East plan was intended to supplant imported oil in Quebec and Atlantic Canada, but Quebec is even more fiercely anti-pipeline than BC is. Expansion of pipelines across the border into the US similarly faces strong opposition in North Dakota and elsewhere; the US, now self-sufficient in oil, has a dwindling interest in helping to solve Alberta's problems.
And that's Alberta's immediate problem in a nutshell. It lacks ready access either to tidewater or overland export markets. It's hard to see how poisoning relations with the rest of Canada, and potentially threatening an acrimonious divorce, would alleviate that problem in any way -- rather the reverse, in fact.
In truth, though, the problem is much worse than that. Albertans may not like it, but the world is on a path away from fossil fuels, at an ever-increasing pace. Investors are already starting to worry about oil wells and related infrastructure becoming "stranded assets" and are marking down share prices in response. Any new pipeline built today will take decades to pay off, and it seems very unlikely that the Alberta oil sector is going to last that long, at least not at anything like its present scale. We may not yet be talking about "the orderly management of decline", but we must surely be well past reckless doubling-down on what looks like a losing bet.
In short, Alberta is both boxed in by its geography and on the wrong side of progress. That seems like a situation where you would want all the help you can get from your friends and neighbours, rather than trying to barge ahead on your own. There's much that can be done to make the job easier: this very thoughtful article from the CBC website, written by a professor from the University of Calgary, is a good place to start.
Tuesday 22 October 2019
Canada election grab-bag
Canada's Federal Election yesterday (October 21) saw Justin Trudeau's Liberal Party reduced to a minority government, with 157 seats in the House of Commons: 170 are needed for a majority. If you want to look at the outcome in more detail, here is the CBC's results page. In the meantime, here are a few thoughts about what just happened.
Trudeau does a Trump. Although the Liberals emerged as easily the largest party in the House, the Conservatives actually won a noticeably higher share of the popular vote -- 34.3 percent to 33.1 percent. When Donald Trump pulled off a similar feat in 2016, the explanation lay in the workings of the US Electoral College. In Canada the explanation is different: the Conservatives routinely rack up massive majorities in Alberta, boosting their share of the national vote but not helping them to elect enough members to unseat the Liberals, whose vote is more evenly spread across the rest of the country. To use a term sometimes employed by the psephologists, the Liberal vote is more "efficient" than the Conservative vote.
NDP: half-empty or half-full? Before the campaign started there were serious questions about whether the left-leaning NDP would be almost wiped out on voting day. During the campaign its leader, Jagmeet Singh, performed very strongly, with polls showing the party with the support of about 20 percent of the electorate. On polling day, however, the party's share of the vote was just under 16 percent and it lost a number of seats, especially in Quebec. So: better than was feared at the start of the campaign, but puzzlingly not as good as as expected on the big day.
The Bloc is back. The Bloc Quebecois, that is, which seemed to be on its deathbed a year ago but managed to triple its seat count on voting day, to be the third-largest party in the Commons. There does not seem to be any real revival in Quebecers' appetite for sovereignty. Rather, the Province's voters appear not to trust Trudeau to look after their interests. The SNC-Lavalin scandal earlier this year likely explains this. In the rest of Canada there was strong criticism of Trudeau for his attempt to interfere in the legal process, but in Quebec the perception was that he had not tried hard enough to protect jobs and investment.
All over for Scheer? Conservative leader Andrew Scheer had a bad campaign. It emerged a few weeks back that he is in fact a dual Canadian and US citizen, something he had not seen fit to disclose before. There was also a bizarre episode in which he claimed untruthfully to have worked at one time as an insurance agent, in an effort to pad out his strikingly thin resume. The victory in the popular vote may serve to keep him in post for now, but it probably will not take too many mis-steps for the knives to come out.
No coalition. It is unlikely that the Liberals will seek to set up a formal coalition with the NDP. Trudeau will want to pursue the Trans-mountain pipeline expansion, to which Singh's party is strongly opposed. Trudeau can rely on the Tories for support on that issue. On most other issues, the Liberal and NDP positions are similar enough that a Liberal minority can probably survive for quite some time without a formal deal, though this will require Trudeau to temper his customary disdain for the House of Commons.
Welcome back, Doug. The unpopularity of Doug Ford in Ontario, less than eighteen months into his Premiership, is remarkable. He basically went into purdah during the campaign, no doubt at the behest of the Tory party leadership, who were terrified that he might harm the chances of Andrew Scheer. Not that it helped: the Liberals heavily outpolled the Tories in the province, winning every single seat in the City of Toronto. Ford will no doubt re-emerge at any moment and may find it hard not to take a few potshots at Scheer.
Bye-bye Bernier. One truly heartening aspect of the results is the abject failure of the People's Party of Canada, led by Maxime Bernier, to make any impact. Bernier set up his populist vanity project after losing the Conservative leadership to Andrew Scheer. Its campaign, to the extent it could be noticed at all, seemed to consist solely of anti-immigrant rhetoric and attacks on Greta Thunberg. With any luck this will be adieu to Bernier and not just au revoir. He won't be missed.
It was a relatively short election campaign and it never really caught fire. Some of the leaders, notably Trudeau, have complained that it was mean-spirited, but the rhetoric, Bernier perhaps excepted, pales in comparison with the vitriol routinely heard in Trump's Washington or Brexit Britain. Still, let's hope we won't need a do-over any time soon.
Trudeau does a Trump. Although the Liberals emerged as easily the largest party in the House, the Conservatives actually won a noticeably higher share of the popular vote -- 34.3 percent to 33.1 percent. When Donald Trump pulled off a similar feat in 2016, the explanation lay in the workings of the US Electoral College. In Canada the explanation is different: the Conservatives routinely rack up massive majorities in Alberta, boosting their share of the national vote but not helping them to elect enough members to unseat the Liberals, whose vote is more evenly spread across the rest of the country. To use a term sometimes employed by the psephologists, the Liberal vote is more "efficient" than the Conservative vote.
NDP: half-empty or half-full? Before the campaign started there were serious questions about whether the left-leaning NDP would be almost wiped out on voting day. During the campaign its leader, Jagmeet Singh, performed very strongly, with polls showing the party with the support of about 20 percent of the electorate. On polling day, however, the party's share of the vote was just under 16 percent and it lost a number of seats, especially in Quebec. So: better than was feared at the start of the campaign, but puzzlingly not as good as as expected on the big day.
The Bloc is back. The Bloc Quebecois, that is, which seemed to be on its deathbed a year ago but managed to triple its seat count on voting day, to be the third-largest party in the Commons. There does not seem to be any real revival in Quebecers' appetite for sovereignty. Rather, the Province's voters appear not to trust Trudeau to look after their interests. The SNC-Lavalin scandal earlier this year likely explains this. In the rest of Canada there was strong criticism of Trudeau for his attempt to interfere in the legal process, but in Quebec the perception was that he had not tried hard enough to protect jobs and investment.
All over for Scheer? Conservative leader Andrew Scheer had a bad campaign. It emerged a few weeks back that he is in fact a dual Canadian and US citizen, something he had not seen fit to disclose before. There was also a bizarre episode in which he claimed untruthfully to have worked at one time as an insurance agent, in an effort to pad out his strikingly thin resume. The victory in the popular vote may serve to keep him in post for now, but it probably will not take too many mis-steps for the knives to come out.
No coalition. It is unlikely that the Liberals will seek to set up a formal coalition with the NDP. Trudeau will want to pursue the Trans-mountain pipeline expansion, to which Singh's party is strongly opposed. Trudeau can rely on the Tories for support on that issue. On most other issues, the Liberal and NDP positions are similar enough that a Liberal minority can probably survive for quite some time without a formal deal, though this will require Trudeau to temper his customary disdain for the House of Commons.
Welcome back, Doug. The unpopularity of Doug Ford in Ontario, less than eighteen months into his Premiership, is remarkable. He basically went into purdah during the campaign, no doubt at the behest of the Tory party leadership, who were terrified that he might harm the chances of Andrew Scheer. Not that it helped: the Liberals heavily outpolled the Tories in the province, winning every single seat in the City of Toronto. Ford will no doubt re-emerge at any moment and may find it hard not to take a few potshots at Scheer.
Bye-bye Bernier. One truly heartening aspect of the results is the abject failure of the People's Party of Canada, led by Maxime Bernier, to make any impact. Bernier set up his populist vanity project after losing the Conservative leadership to Andrew Scheer. Its campaign, to the extent it could be noticed at all, seemed to consist solely of anti-immigrant rhetoric and attacks on Greta Thunberg. With any luck this will be adieu to Bernier and not just au revoir. He won't be missed.
It was a relatively short election campaign and it never really caught fire. Some of the leaders, notably Trudeau, have complained that it was mean-spirited, but the rhetoric, Bernier perhaps excepted, pales in comparison with the vitriol routinely heard in Trump's Washington or Brexit Britain. Still, let's hope we won't need a do-over any time soon.
Friday 18 October 2019
Scheer nonsense
I know it's the last stages of the Federal election campaign and people are getting tired and querulous. Still, I can't escape the feeling that Andrew Scheer's Conservatives are genuinely clueless when it comes to fiscal policy.
Throughout the campaign, we've been seeing Tory TV spots arguing that "Justin Trudeau will keep hiking taxes to pay for his endless deficits". The endless deficits part is sort of true -- Trudeau is not promising any date for a return to balanced budgets -- but the logic of the statement as a whole escapes me. I mean, if Trudeau's Liberals are going to raise taxes, that should reduce the deficit, shouldn't it?
Now Scheer is doubling down on the same argument. Speaking today in Fredericton NB, he warned that a Liberal/NDP coalition (a not-unlikely outcome if the polls can be believed) would hike the Federal portion of the Goods and Services tax by 2 percentage points, cut transfer payments to Provinces (a hot button for a have-not Province like New Brunswick) -- and run a deficit of $40 billion. There's no evidence for this and Trudeau has promptly denied he has any such plans. The point is, though, that if a government of any stripe imposed a big hike in sales tax and cut transfer payments at the same time, it would find it almost impossible to rack up a deficit anywhere close to $40 billion.
It appears that Scheer can't make up his mind whether to attack his opponents as tax-and-spenders or as deficit-and-spenders. They're not the same thing, and in conflating them Scheer is coming very close to talking complete nonsense. Oh well, only three days until voting day, but it's looking very unlikely that we will get a clear-cut result. That's bad news for Scheer, whose only plausible coalition partner would seem to be the pro-sovereignty Bloc Quebecois. He wouldn't dare, would he??
Throughout the campaign, we've been seeing Tory TV spots arguing that "Justin Trudeau will keep hiking taxes to pay for his endless deficits". The endless deficits part is sort of true -- Trudeau is not promising any date for a return to balanced budgets -- but the logic of the statement as a whole escapes me. I mean, if Trudeau's Liberals are going to raise taxes, that should reduce the deficit, shouldn't it?
Now Scheer is doubling down on the same argument. Speaking today in Fredericton NB, he warned that a Liberal/NDP coalition (a not-unlikely outcome if the polls can be believed) would hike the Federal portion of the Goods and Services tax by 2 percentage points, cut transfer payments to Provinces (a hot button for a have-not Province like New Brunswick) -- and run a deficit of $40 billion. There's no evidence for this and Trudeau has promptly denied he has any such plans. The point is, though, that if a government of any stripe imposed a big hike in sales tax and cut transfer payments at the same time, it would find it almost impossible to rack up a deficit anywhere close to $40 billion.
It appears that Scheer can't make up his mind whether to attack his opponents as tax-and-spenders or as deficit-and-spenders. They're not the same thing, and in conflating them Scheer is coming very close to talking complete nonsense. Oh well, only three days until voting day, but it's looking very unlikely that we will get a clear-cut result. That's bad news for Scheer, whose only plausible coalition partner would seem to be the pro-sovereignty Bloc Quebecois. He wouldn't dare, would he??
Wednesday 16 October 2019
Canada CPI for September -- more of the same
Statistics Canada reported this morning that Canada's headline consumer price index rose 1.9 percent year-on-year in September, the same pace as in August. Once again the key factor keeping the headline reading just below the Bank of Canada's 2 percent target was the price of gasoline, which was 10 percent lower in September than in the same month last year. Excluding gasoline, the annual increase in CPI stood at 2.4 percent, the same as in August.
On an annual basis, all three of the Bank's preferred measures of core inflation edged up by 0.1 percentage point in September. The average of these three measures stood at 2.1 percent in the month, up from 2.0 percent in August -- hardly enough to trouble the Bank.
Once the Federal election is out of the way next Monday (21st), the way will be clear for the Bank to adjust its policy settings, if it sees fit, without risking accusations of political interference. The next Governing Council meeting is on the last day of the month. There seems no reason for the Bank to make any changes this time: inflation seems well in check, while the recent strong employment data show that the economy is in no need of additional monetary policy support at this time. The next rate change is almost certain to be a cut, but the Bank will likely remain comfortable lagging the Fed's easing cycle unless the exchange rate starts to strengthen.
On an annual basis, all three of the Bank's preferred measures of core inflation edged up by 0.1 percentage point in September. The average of these three measures stood at 2.1 percent in the month, up from 2.0 percent in August -- hardly enough to trouble the Bank.
Once the Federal election is out of the way next Monday (21st), the way will be clear for the Bank to adjust its policy settings, if it sees fit, without risking accusations of political interference. The next Governing Council meeting is on the last day of the month. There seems no reason for the Bank to make any changes this time: inflation seems well in check, while the recent strong employment data show that the economy is in no need of additional monetary policy support at this time. The next rate change is almost certain to be a cut, but the Bank will likely remain comfortable lagging the Fed's easing cycle unless the exchange rate starts to strengthen.
Friday 11 October 2019
Time to talk about the economy?
With less than two weeks to go, Canada's Federal Election campaign has seen remarkably little focus on the economy. Climate change has been a big issue (takeaway: Canadians want something done but they want somebody else to pay), as has the character of the leaders. Jagmeet Singh of the NDP has performed best, and got off one of the best lines in the TV debate when he said that Andrew Scheer and Justin Trudeau were basically arguing over who would be the worst choice for Canada.
There has been some talk about budget deficits, but attempts to portray Justin Trudeau as a profligate spendthrift have had little impact, largely because none of the main parties is promising a swift return to fiscal balance. But about GDP growth, employment, inflation? Next to nothing, unless you count vague pledges from just about every party to make life "more affordable" for the middle classes.
That may be about to change, because this morning Statistics Canada released an unexpectedly strong employment report for September. This is the last major piece of economic data before polling day rolls around on the 21st, and given the strength in the numbers, it would be surprising if the Trudeau Liberals don't pounce on this report to boost their case for re-election -- something on the lines of "you really don't want to mess this up, do you?", but maybe more subtly expressed.
The economy added 55,000 jobs in September, compared to a consensus expectation of less than 10,000. Almost all the jobs were full-time. The unemployment rate fell to 5.5 percent, just a tick above its all-time low. Over the past twelve months, the economy has added 456,000 jobs and wages have risen 2.6 percent, above the rate of inflation. The participation rate for the core working age cohort has reached an all-time high of 74.7 percent.
Not everything about the report was positive, as all of the month's gains represented either public sector jobs or self-employment. Moreover, fully 41,000 of the new positions were created in the Province of Ontario, though this is unlikely to upset Liberal election strategists, given the pivotal role of that Province, and particularly the Toronto region, in deciding the results of national elections.
Opinion polls show a very close race between the Liberals and the Conservatives, with each having about a third of decided voters across the country. The NDP and Green Party each have about 10 percent support and the separatist Bloc Quebecois is having a moment in its home province. A hung Parliament and a minority government look like the most probable outcomes, unless Trudeau and his team can use today's data to persuade more of the electorate to vote their pocketbooks.
There has been some talk about budget deficits, but attempts to portray Justin Trudeau as a profligate spendthrift have had little impact, largely because none of the main parties is promising a swift return to fiscal balance. But about GDP growth, employment, inflation? Next to nothing, unless you count vague pledges from just about every party to make life "more affordable" for the middle classes.
That may be about to change, because this morning Statistics Canada released an unexpectedly strong employment report for September. This is the last major piece of economic data before polling day rolls around on the 21st, and given the strength in the numbers, it would be surprising if the Trudeau Liberals don't pounce on this report to boost their case for re-election -- something on the lines of "you really don't want to mess this up, do you?", but maybe more subtly expressed.
The economy added 55,000 jobs in September, compared to a consensus expectation of less than 10,000. Almost all the jobs were full-time. The unemployment rate fell to 5.5 percent, just a tick above its all-time low. Over the past twelve months, the economy has added 456,000 jobs and wages have risen 2.6 percent, above the rate of inflation. The participation rate for the core working age cohort has reached an all-time high of 74.7 percent.
Not everything about the report was positive, as all of the month's gains represented either public sector jobs or self-employment. Moreover, fully 41,000 of the new positions were created in the Province of Ontario, though this is unlikely to upset Liberal election strategists, given the pivotal role of that Province, and particularly the Toronto region, in deciding the results of national elections.
Opinion polls show a very close race between the Liberals and the Conservatives, with each having about a third of decided voters across the country. The NDP and Green Party each have about 10 percent support and the separatist Bloc Quebecois is having a moment in its home province. A hung Parliament and a minority government look like the most probable outcomes, unless Trudeau and his team can use today's data to persuade more of the electorate to vote their pocketbooks.
Tuesday 8 October 2019
Shifting the conversation
This article from WIRED is a useful introduction to the work of Mariana Mazzucato, a London-based American economist who is trying to emphasize the role of public sector institutions in fostering technological change. She has already influenced some of the leading "progressive" Democrats in the US Congress (such as AOC), and has made some important contributions to the Green New Deal.
As the article relates, Mazzucato started thinking in depth about this issue while listening to UK PM David Cameron defending his disastrous austerity program after the financial crisis. Cameron was in effect seeking to get the public sector "out of the way" of private business so as to foster innovation. The supposed model was Silicon Valley, but Mazzucato recognized that describing the US tech sector as a bastion of unfettered capitalism was entirely false.
The first example she used to illustrate this was the iPhone, where Apple's work mainly consisted of bringing together innovations that had been made elsewhere with the support of public funds. There are, of course, many other possible examples, ranging from the trivial -- the discovery of Teflon as a by-product of the US space program -- to the profound -- the rapid advance in aviation technology thanks to government support, either direct (as in Europe) or indirect (through US military spending).
The problem as Mazzucato sees it is that while the state (read: taxpayers) is taking much of the risk associated with innovation, private companies are reaping most of the profits. Moreover, in recent years those companies have been spending those profits not on further research, but on share buybacks, which means of course that further technological progress continues to depend on the willingness and ability of the public to foot the bill.
Mazzucato's work seems to mesh well with that of Thomas Piketty in offering an alternative to the currently dominant free market narrative. Sadly, after making a huge splash a couple of years ago, Piketty has faded from public view, although he has recently come forth with a colossal new book. Whether these two original thinkers can make themselves heard in a world where economic conversations are dominated by trade wars and Brexit remains to be seen.
As the article relates, Mazzucato started thinking in depth about this issue while listening to UK PM David Cameron defending his disastrous austerity program after the financial crisis. Cameron was in effect seeking to get the public sector "out of the way" of private business so as to foster innovation. The supposed model was Silicon Valley, but Mazzucato recognized that describing the US tech sector as a bastion of unfettered capitalism was entirely false.
The first example she used to illustrate this was the iPhone, where Apple's work mainly consisted of bringing together innovations that had been made elsewhere with the support of public funds. There are, of course, many other possible examples, ranging from the trivial -- the discovery of Teflon as a by-product of the US space program -- to the profound -- the rapid advance in aviation technology thanks to government support, either direct (as in Europe) or indirect (through US military spending).
The problem as Mazzucato sees it is that while the state (read: taxpayers) is taking much of the risk associated with innovation, private companies are reaping most of the profits. Moreover, in recent years those companies have been spending those profits not on further research, but on share buybacks, which means of course that further technological progress continues to depend on the willingness and ability of the public to foot the bill.
Mazzucato's work seems to mesh well with that of Thomas Piketty in offering an alternative to the currently dominant free market narrative. Sadly, after making a huge splash a couple of years ago, Piketty has faded from public view, although he has recently come forth with a colossal new book. Whether these two original thinkers can make themselves heard in a world where economic conversations are dominated by trade wars and Brexit remains to be seen.
Monday 30 September 2019
Doubling down on deficits
In my previous post here, "Camp Justin", I stated that the Trudeau Liberals were "promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything." Now the party has released its full election platform, spelling out the full cost of doing more of the same for another four years. It's quite an eye-opener.
Recall that in the 2015 election campaign, Justin Trudeau pledged to run modest deficits to get the economy moving again, with a timetable to restore balance by 2019. He has often stated that he believes it was this pledge that won him that election. That belief is about to be put to the test, because the platform for the October 21 vote calls for much larger deficits, and this time with not even a hint of a plan to get back to balance.
Specifically, the plan calls for new spending -- sorry, "investments" -- of C$ 9.3 billion in 2020-21, rising to $17 billion by the fourth year of the new mandate. The Federal deficit, which was only boosted to $ 14 billion in the last fiscal year by some year-end accounting trickery, is projected to jump to $27 billion in 2010-21, then edge lower to $21 billion by 2024, a projection that requires some frankly heroic assumptions about revenue growth. The Federal debt/GDP ratio is projected to edge down from just below 31 percent currently to just above 30 percent by 2024.
There was a clear case for deficit spending in 2015. The economy was still having trouble gaining traction in the wake of the global financial crisis, and there was little scope for further monetary stimulus. The case for even bigger deficits now is rather weaker. The economy is, in the estimation of the Bank of Canada, operating close to potential, with little slack in the labour market and at least some signs of rising inflationary risks. Trudeau's calculus here is now nakedly political, rather than economic.
Will it work? Even before the full platform was unveiled, the Tories had been seeking to portray Trudeau as a spendthrift. Over the next few days, once the Tories and their ad agency have had a chance to work through the details of the Liberal plan, we can expect a whole lot more attacks along those lines. The contrast with the Tories own fiscal plans, which call for the budget to be returned to balance by 2014, will surely be brought into sharp relief.
One argument the Tories will certainly try to use is that by boosting deficits now, a Liberal government would leave itself no ammunition to fend off the next economic downturn. This does not make a whole lot of sense in today's context. With inflation not really an issue, it must be better to use fiscal and monetary measures to prevent or at least indefinitely delay that downturn, rather than hold off and then have to deal with all the problems that recessions bring. But even if the deficits are not dangerous in themselves -- and they're not -- can voters be persuaded to accept the prospect of several more years of deficit spending when they see that money is being borrowed to finance fripperies like camping "bursaries"? Stay tuned.
Recall that in the 2015 election campaign, Justin Trudeau pledged to run modest deficits to get the economy moving again, with a timetable to restore balance by 2019. He has often stated that he believes it was this pledge that won him that election. That belief is about to be put to the test, because the platform for the October 21 vote calls for much larger deficits, and this time with not even a hint of a plan to get back to balance.
Specifically, the plan calls for new spending -- sorry, "investments" -- of C$ 9.3 billion in 2020-21, rising to $17 billion by the fourth year of the new mandate. The Federal deficit, which was only boosted to $ 14 billion in the last fiscal year by some year-end accounting trickery, is projected to jump to $27 billion in 2010-21, then edge lower to $21 billion by 2024, a projection that requires some frankly heroic assumptions about revenue growth. The Federal debt/GDP ratio is projected to edge down from just below 31 percent currently to just above 30 percent by 2024.
There was a clear case for deficit spending in 2015. The economy was still having trouble gaining traction in the wake of the global financial crisis, and there was little scope for further monetary stimulus. The case for even bigger deficits now is rather weaker. The economy is, in the estimation of the Bank of Canada, operating close to potential, with little slack in the labour market and at least some signs of rising inflationary risks. Trudeau's calculus here is now nakedly political, rather than economic.
Will it work? Even before the full platform was unveiled, the Tories had been seeking to portray Trudeau as a spendthrift. Over the next few days, once the Tories and their ad agency have had a chance to work through the details of the Liberal plan, we can expect a whole lot more attacks along those lines. The contrast with the Tories own fiscal plans, which call for the budget to be returned to balance by 2014, will surely be brought into sharp relief.
One argument the Tories will certainly try to use is that by boosting deficits now, a Liberal government would leave itself no ammunition to fend off the next economic downturn. This does not make a whole lot of sense in today's context. With inflation not really an issue, it must be better to use fiscal and monetary measures to prevent or at least indefinitely delay that downturn, rather than hold off and then have to deal with all the problems that recessions bring. But even if the deficits are not dangerous in themselves -- and they're not -- can voters be persuaded to accept the prospect of several more years of deficit spending when they see that money is being borrowed to finance fripperies like camping "bursaries"? Stay tuned.
Friday 27 September 2019
Camp Justin
With the Canadian federal election now less than a month away -- polling day is October 21 -- the main parties are wheeling out a variety of expensive policy proposals that have one thing in common: the parties are very tight-lipped about how they plan to pay for all this largesse. The Conservatives are, predictably enough, promising to cut taxes; the NDP promises to roll out a national pharma-care programme; and the Green Party wants to beef up Canada's efforts to combat climate change.
And the Liberals? Well, for the most part, they're promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything. There are targeted tax cuts (for the amorphous "middle class", of course); a patchwork fill-in-the-gaps pharma-care programme; and a piecemeal approach to climate change centred on a carbon tax that is fiercely opposed by some Provinces.
But there's also this: Justin Trudeau took a ride in a canoe in Northern Ontario this week and then announced his government, if re-elected, would spend $150 million to create "bursaries" to allow 75,000 families to spend a few days camping in a national or provincial park. This is an idea that nobody can love, so it would be no surprise if it gets very little mention for the rest of the campaign. Trudeau already has a reputation among a wide swathe of the electorate as a spendthrift, and this scheme surely serves as proof of that, And even for those (like me) who think the fiscal situation is perfectly manageable, it calls into question Trudeau's sense of priorities. If you want to spend an extra 150 mil' to benefit young people, there are better uses for it: education, medical research, clean water for indigenous communities....
Out on the Campaign trail, Trudeau is behaving as though the whole blackface scandal never happened, and there are signs that he may get away with it. If his aim now is to reset his image as a serious leader of the country, this wacky bursary scheme is a thoroughly weird way to go about it.
And the Liberals? Well, for the most part, they're promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything. There are targeted tax cuts (for the amorphous "middle class", of course); a patchwork fill-in-the-gaps pharma-care programme; and a piecemeal approach to climate change centred on a carbon tax that is fiercely opposed by some Provinces.
But there's also this: Justin Trudeau took a ride in a canoe in Northern Ontario this week and then announced his government, if re-elected, would spend $150 million to create "bursaries" to allow 75,000 families to spend a few days camping in a national or provincial park. This is an idea that nobody can love, so it would be no surprise if it gets very little mention for the rest of the campaign. Trudeau already has a reputation among a wide swathe of the electorate as a spendthrift, and this scheme surely serves as proof of that, And even for those (like me) who think the fiscal situation is perfectly manageable, it calls into question Trudeau's sense of priorities. If you want to spend an extra 150 mil' to benefit young people, there are better uses for it: education, medical research, clean water for indigenous communities....
Out on the Campaign trail, Trudeau is behaving as though the whole blackface scandal never happened, and there are signs that he may get away with it. If his aim now is to reset his image as a serious leader of the country, this wacky bursary scheme is a thoroughly weird way to go about it.
Wednesday 18 September 2019
It's a gas, gas, gas -- again
Once again, the key mover in Canada's consumer price index for August was gasoline. Data released this morning by Statistics Canada showed that headline CPI rose 1.9 percent year-on-year, down from a 2.0 percent rise in July. Gasoline prices were 10.2 percent lower than a year ago, compared to a 6.9 percent decline in July. Recent events in Saudi Arabia may put an end to the weakness in energy prices, but the timing of StatsCan's monthly price surveys likely means that this will not show up until the October report.
To some degree, the fall in energy prices has been concealing a slight deterioration in Canada's underlying inflation outlook. Excluding gasoline, CPI rose 2.4 percent year-on-year in August, the same pace as in July. In a slightly unusual piece of editorializing, the press release noted that "broad-based gains in CPI over the past two quarters have coincided with strength in Canadian labour market conditions". Even so, the Bank of Canada's three preferred measure of core CPI remain well-behaved, rising by almost exactly 2 percent in August, in line with the Bank's target.
All eyes are now on the US Federal Reserve, which is generally expected to announce a 25 basis point cut in the Fed funds target later today. What do today's data tell us about the odds of the Bank of Canada following suit at the end of October? In themselves, the CPI numbers are not enough to alter the Bank's policy stance. However, there are mounting signs that the Trump-led tariff conflicts are taking a toll on the domestic economy.
Yesterday StatsCan reported that Canadian manufacturing sales fell 1.3 percent in July, on the heels of a 1.4 percent fall in June. In real terms, sales fell 1.6 percent in July. If the Fed indeed cuts rates today, there could be upward pressure on the Canadian dollar, which would further undermine the competitiveness of Canadian manufactures. The Bank will look to signal any change in its policy outlook ahead of the October 31 Council meeting, but will have to be cautious about saying anything that could be interpreted as political in advance of the October 21 Federal election.
To some degree, the fall in energy prices has been concealing a slight deterioration in Canada's underlying inflation outlook. Excluding gasoline, CPI rose 2.4 percent year-on-year in August, the same pace as in July. In a slightly unusual piece of editorializing, the press release noted that "broad-based gains in CPI over the past two quarters have coincided with strength in Canadian labour market conditions". Even so, the Bank of Canada's three preferred measure of core CPI remain well-behaved, rising by almost exactly 2 percent in August, in line with the Bank's target.
All eyes are now on the US Federal Reserve, which is generally expected to announce a 25 basis point cut in the Fed funds target later today. What do today's data tell us about the odds of the Bank of Canada following suit at the end of October? In themselves, the CPI numbers are not enough to alter the Bank's policy stance. However, there are mounting signs that the Trump-led tariff conflicts are taking a toll on the domestic economy.
Yesterday StatsCan reported that Canadian manufacturing sales fell 1.3 percent in July, on the heels of a 1.4 percent fall in June. In real terms, sales fell 1.6 percent in July. If the Fed indeed cuts rates today, there could be upward pressure on the Canadian dollar, which would further undermine the competitiveness of Canadian manufactures. The Bank will look to signal any change in its policy outlook ahead of the October 31 Council meeting, but will have to be cautious about saying anything that could be interpreted as political in advance of the October 21 Federal election.
Tuesday 17 September 2019
The reluctant spendthrifts
An emerging theme in the Canadian Federal election campaign that just got underway is fiscal discipline. The Tories are running a TV spot correctly accusing Justin Trudeau of having no plan to return to a balanced budget even in his second term of office, even though he won the 2015 election in part by promising to achieve a zero deficit by this year. Not that the Tories are any better: their leader Andrew Scheer has abandoned a pledge to move quickly to balance the books. He now promises to do so in five years -- which takes us past the next election.
Today the Department of Finance published its Annual Financial Report for the fiscal year 2018-19, which ended in March. The numbers are enlightening, in terms of how they compare to the campaign rhetoric, how they compare to the past, and how they show Canada in the international context.
The final outcome for the fiscal year was a deficit of C$ 14 billion, just a shade below the $14.9 billion estimated on budget day back in March. The thing is, for most of the fiscal year, the government was running at or close to a zero deficit; it was only a big spike in spending for March that pushed the number higher. This happens every year as governments try to book expenditures they have promised to make, even if the actual disbursements don't occur at the time. It would have looked odd for the Trudeau Liberals to be claiming to be using fiscal policy to support the economy if the budget was in fact close to balance.
The relatively favourable outcome reflected faster growth in revenues (up 6.7 percent) than in either program spending (up 4.7 percent) or public debt costs (up 6.3 percent). The notably slow growth in program spending reflects widely-reported difficulties in carrying out some of the Government's pledges, especially in areas such as infrastructure where other levels of government have been slow to provide matching funding. As for public debt charges, these now account for less than 7 percent of all spending, down from more than 30 percent in the fiscal dark ages of the mid-1990s.
Canada's public debt-to-GDP ratio now stands at 30.9 percent. This is the lowest figure for any G7 country and less than half the G7 average, though it should be kept in mind that the average is boosted by the very high indebtedness of Japan and Italy. It should also be kept in mind that Canada's Provinces also have debts of their own, with Ontario a particular deadbeat, so the fiscal situation for the entire public sector is not quite as rosy as today's data suggest.
Justin Trudeau was widely scorned back in 2015 for suggesting that if the economy grew, "the deficit will take care of itself". That line is already being used against him in the current campaign, but the fact is that the numbers prove that to a great extent, he was right. The Tories will still paint him as a spendthrift, but the data say otherwise.
Today the Department of Finance published its Annual Financial Report for the fiscal year 2018-19, which ended in March. The numbers are enlightening, in terms of how they compare to the campaign rhetoric, how they compare to the past, and how they show Canada in the international context.
The final outcome for the fiscal year was a deficit of C$ 14 billion, just a shade below the $14.9 billion estimated on budget day back in March. The thing is, for most of the fiscal year, the government was running at or close to a zero deficit; it was only a big spike in spending for March that pushed the number higher. This happens every year as governments try to book expenditures they have promised to make, even if the actual disbursements don't occur at the time. It would have looked odd for the Trudeau Liberals to be claiming to be using fiscal policy to support the economy if the budget was in fact close to balance.
The relatively favourable outcome reflected faster growth in revenues (up 6.7 percent) than in either program spending (up 4.7 percent) or public debt costs (up 6.3 percent). The notably slow growth in program spending reflects widely-reported difficulties in carrying out some of the Government's pledges, especially in areas such as infrastructure where other levels of government have been slow to provide matching funding. As for public debt charges, these now account for less than 7 percent of all spending, down from more than 30 percent in the fiscal dark ages of the mid-1990s.
Canada's public debt-to-GDP ratio now stands at 30.9 percent. This is the lowest figure for any G7 country and less than half the G7 average, though it should be kept in mind that the average is boosted by the very high indebtedness of Japan and Italy. It should also be kept in mind that Canada's Provinces also have debts of their own, with Ontario a particular deadbeat, so the fiscal situation for the entire public sector is not quite as rosy as today's data suggest.
Justin Trudeau was widely scorned back in 2015 for suggesting that if the economy grew, "the deficit will take care of itself". That line is already being used against him in the current campaign, but the fact is that the numbers prove that to a great extent, he was right. The Tories will still paint him as a spendthrift, but the data say otherwise.
Wednesday 11 September 2019
Do your homework!
I haven't had a rant about the incompetence/laziness of business journalists for a while. Time to correct that. This article from today's Toronto Star, headlined "Toronto leads new housing starts in August", contains a statistical error so blindingly obvious that you would think a grade school student would catch it.
The author is one Michael Lewis*, described as a "business reporter", so this is kind of story is his everyday bread and butter. In case the link fails to get you past the Star's increasingly onerous paywall, here's the offending paragraph:
According to the Canada Mortgage and Housing Corp., Ontario led the increase with seasonally adjusted starts jumping to 81,457, followed by Quebec at 48,772. Toronto was tops in metropolitan areas with 3,131 starts in August, while Montreal placed second with 2,031.
Let's dig into that for a second. Toronto is by far the biggest city in Ontario. According to World Atlas, Ontario's population in 2016 was about 13.5 million, with the City of Toronto accounting for about 2.7 million of that. Note that Lewis refers to the "metropolitan area"; if you add in the various groupings commonly cited -- in increasing order, the Greater Toronto Area (GTA), Greater Toronto-Hamilton Area (GTHA) and Greater Golden Horseshoe (whatever), you can easily come up with a population for the metropolitan area that's more than half of the Provincial total.
But we don't have to do that to spot Lewis's error. Using the numbers he quotes, it seems as if Toronto (population 2.7 million) had 3,131 housing starts in August, while the rest of the Province (population 10.8 million) had over 78,000! You'd think a reporter sitting in a Toronto newsroom and writing about business stories every day might have twigged to the fact that that's wildly implausible.
What happened here is perfectly simple. After using the seasonally adjusted and annualized data for the province, Lewis switched seamlessly, incorrectly and quite possibly unwittingly to the raw monthly numbers when referring to the individual cities. The source data can all be found in the original report from Canada Mortgage and Housing Corporation. In case you actually care, in Table 1 we find that housing starts in Ontario in August totalled 7,316 (not annualized or adjusted), with Toronto accounting for 3,131 of those.
This isn't rocket science. It isn't even economics in any real sense. It's just the sort of fact-checking that's supposedly the job of every journalist. Sadly, as I've often said in the past, if you want accuracy these days, you're probably better off relying on a blogger.
* Not that one!!
The author is one Michael Lewis*, described as a "business reporter", so this is kind of story is his everyday bread and butter. In case the link fails to get you past the Star's increasingly onerous paywall, here's the offending paragraph:
According to the Canada Mortgage and Housing Corp., Ontario led the increase with seasonally adjusted starts jumping to 81,457, followed by Quebec at 48,772. Toronto was tops in metropolitan areas with 3,131 starts in August, while Montreal placed second with 2,031.
Let's dig into that for a second. Toronto is by far the biggest city in Ontario. According to World Atlas, Ontario's population in 2016 was about 13.5 million, with the City of Toronto accounting for about 2.7 million of that. Note that Lewis refers to the "metropolitan area"; if you add in the various groupings commonly cited -- in increasing order, the Greater Toronto Area (GTA), Greater Toronto-Hamilton Area (GTHA) and Greater Golden Horseshoe (whatever), you can easily come up with a population for the metropolitan area that's more than half of the Provincial total.
But we don't have to do that to spot Lewis's error. Using the numbers he quotes, it seems as if Toronto (population 2.7 million) had 3,131 housing starts in August, while the rest of the Province (population 10.8 million) had over 78,000! You'd think a reporter sitting in a Toronto newsroom and writing about business stories every day might have twigged to the fact that that's wildly implausible.
What happened here is perfectly simple. After using the seasonally adjusted and annualized data for the province, Lewis switched seamlessly, incorrectly and quite possibly unwittingly to the raw monthly numbers when referring to the individual cities. The source data can all be found in the original report from Canada Mortgage and Housing Corporation. In case you actually care, in Table 1 we find that housing starts in Ontario in August totalled 7,316 (not annualized or adjusted), with Toronto accounting for 3,131 of those.
This isn't rocket science. It isn't even economics in any real sense. It's just the sort of fact-checking that's supposedly the job of every journalist. Sadly, as I've often said in the past, if you want accuracy these days, you're probably better off relying on a blogger.
* Not that one!!
Friday 6 September 2019
Validation for the Bank of Canada
The US Non-farm Payrolls report for September, released this morning, confirmed that the economy is moving onto a slower growth path. The addition of 130,000 jobs in the month fell short of market expectations. The unemployment rate held steady at 3.7 percent, while year-on-year wages growth stood at 3.7 percent. Average monthly payroll gains this year are significantly lower than in the same period of 2018.
In contrast, the Canadian jobs data was much stronger than than expected, at least at the headline level. The economy added 81,000 jobs in the month, although most of the new positions were part-time in nature. The private sector fully accounted for the job gains. In line with the trend seen since the start of the year, virtually all of the new jobs were in the service sector. This may well reflect uncertainty in the goods-producing sector resulting from the Trump trade wars.
(As an anecdotal aside. just about every restaurant and store in my own little tourist town is clamouring for workers. Considering that the tourist season is set to wind down as the cooler weather approaches, this is quite remarkable).
Over the past twelve months the economy has added 471,000 jobs, the highest figure for any twelve-month period since 2003. Just under two-thirds of the new jobs have been full-time in nature. Importantly, about four in five of the new jobs have been in the private sector, with public sector and self-employment little changed.
No doubt the Bank of Canada had advance knowledge of these numbers when it made its no-change policy decision this week. It appears that the Bank is taking little risk in declining to join in with the global monetary easing trend, at least in the short term.
In contrast, the Canadian jobs data was much stronger than than expected, at least at the headline level. The economy added 81,000 jobs in the month, although most of the new positions were part-time in nature. The private sector fully accounted for the job gains. In line with the trend seen since the start of the year, virtually all of the new jobs were in the service sector. This may well reflect uncertainty in the goods-producing sector resulting from the Trump trade wars.
(As an anecdotal aside. just about every restaurant and store in my own little tourist town is clamouring for workers. Considering that the tourist season is set to wind down as the cooler weather approaches, this is quite remarkable).
Over the past twelve months the economy has added 471,000 jobs, the highest figure for any twelve-month period since 2003. Just under two-thirds of the new jobs have been full-time in nature. Importantly, about four in five of the new jobs have been in the private sector, with public sector and self-employment little changed.
No doubt the Bank of Canada had advance knowledge of these numbers when it made its no-change policy decision this week. It appears that the Bank is taking little risk in declining to join in with the global monetary easing trend, at least in the short term.
Thursday 5 September 2019
Clusterfexit
The notion that history repeats itself first as tragedy, then as farce, originated with Karl Marx. This certainly applies to Brexit, but while the tragic part was very short -- the initial referendum back in 2016 -- the farcical part has now dragged on for more than three years, and only seems to be getting worse.
First the man who triggered the whole fiasco, David Cameron, promptly left the scene in the wake of the referendum. Then the leading candidates to replace him, Boris Johnson and Michael Gove, knifed each other in the back, allowing EU remainer Theresa May to take on the Prime Ministership and attempt to negotiate a deal with the EU. Then May rashly decided to call an early general election in which she managed to squander the Tories' majority in Parliament, leaving her government dependent on a shaky alliance with the Northern Ireland DUP, a throwback to earlier sectarian times. Then, after repeated failures, May managed to obtain a draft departure deal with the EU, only to have it rejected no fewer than three times by the House of Commons. At that point May resigned, eventually to be replaced by Boris Johnson.
Under Johnson's "leadership" events have only become more bizarre. He pledged to leave the EU by October 31 "do or die" -- i.e., deal or no deal. As regards getting a deal, however, his initial position was that he wouldn't even meet with the EU unless it first agreed to his key demand, abandonment of the so-called "backstop" for the Irish border. He subsequently agreed to meet with key leaders like Taoiseach Leo Varadkar, Chancellor Merkel and President Macron, with the main achievement being a picture showing Johnson with a foot on a coffee table at the Elysee Palace.
With the October 31 deadline drawing closer and no sign of progress, Johnson abruptly decided to force the issue. He obtained the Queen's consent to prorogue (suspend) Parliament in early September, aiming to recall it again just two weeks before the Brexit deadline. This was a blatant attempt to make it impossible for Parliament to prevent a no deal Brexit, and Parliament finally got its act together. This week, the House of Commons seized control of the agenda and passed a bill aimed at preventing a no-deal departure on October 31. Johnson then announced his intention to call an election for October 15, but the Commons denied him the two-thirds majority needed to do so. More than twenty of Johnson's own MPs voted against him and were promptly ousted from the party.
It looks like a stalemate. Prorogation is still set to happen next week. The Commons' bill preventing no-deal Brexit is being debated in the House of Lords; with fears of filibuster and amendments from pro-Brexit Tory peers seemingly lifted, it could receive Royal Assent within days. Taking a leaf from Theresa May's book, Tory grandee and arch Brexiteer Jacob Rees-Mogg plans to re-introduce the call for an early election on Monday, the eve of prorogation day.
There is no good way out of this. Even another referendum would be risky: with passions so heightened on all sides, the odds of civil disorder must be alarmingly high. An election is inevitable sooner rather than later, but probably won't settle anything. The Tories are deeply divided and afraid of being outflanked on the right by Nigel Farage's Brexit Party. Labour, led by the EU-skeptical Jeremy Corbyn (who is, whisper the word, an actual socialist), is not much more united. A hung Parliament looks to be the likeliest outcome.
The ultimate irony is that whether the UK leaves the EU with a deal or without one, the issues that have driven the astounding events of the past three years will remain unresolved. The shape of the future economic relationship between the UK and its biggest trading partner will still have to be determined. Marx's view of history may have had only two stages, but if we ever reach the end of the farcical part, a whole new stage will begin. First tragedy, then farce, then exhaustion?
First the man who triggered the whole fiasco, David Cameron, promptly left the scene in the wake of the referendum. Then the leading candidates to replace him, Boris Johnson and Michael Gove, knifed each other in the back, allowing EU remainer Theresa May to take on the Prime Ministership and attempt to negotiate a deal with the EU. Then May rashly decided to call an early general election in which she managed to squander the Tories' majority in Parliament, leaving her government dependent on a shaky alliance with the Northern Ireland DUP, a throwback to earlier sectarian times. Then, after repeated failures, May managed to obtain a draft departure deal with the EU, only to have it rejected no fewer than three times by the House of Commons. At that point May resigned, eventually to be replaced by Boris Johnson.
Under Johnson's "leadership" events have only become more bizarre. He pledged to leave the EU by October 31 "do or die" -- i.e., deal or no deal. As regards getting a deal, however, his initial position was that he wouldn't even meet with the EU unless it first agreed to his key demand, abandonment of the so-called "backstop" for the Irish border. He subsequently agreed to meet with key leaders like Taoiseach Leo Varadkar, Chancellor Merkel and President Macron, with the main achievement being a picture showing Johnson with a foot on a coffee table at the Elysee Palace.
With the October 31 deadline drawing closer and no sign of progress, Johnson abruptly decided to force the issue. He obtained the Queen's consent to prorogue (suspend) Parliament in early September, aiming to recall it again just two weeks before the Brexit deadline. This was a blatant attempt to make it impossible for Parliament to prevent a no deal Brexit, and Parliament finally got its act together. This week, the House of Commons seized control of the agenda and passed a bill aimed at preventing a no-deal departure on October 31. Johnson then announced his intention to call an election for October 15, but the Commons denied him the two-thirds majority needed to do so. More than twenty of Johnson's own MPs voted against him and were promptly ousted from the party.
It looks like a stalemate. Prorogation is still set to happen next week. The Commons' bill preventing no-deal Brexit is being debated in the House of Lords; with fears of filibuster and amendments from pro-Brexit Tory peers seemingly lifted, it could receive Royal Assent within days. Taking a leaf from Theresa May's book, Tory grandee and arch Brexiteer Jacob Rees-Mogg plans to re-introduce the call for an early election on Monday, the eve of prorogation day.
There is no good way out of this. Even another referendum would be risky: with passions so heightened on all sides, the odds of civil disorder must be alarmingly high. An election is inevitable sooner rather than later, but probably won't settle anything. The Tories are deeply divided and afraid of being outflanked on the right by Nigel Farage's Brexit Party. Labour, led by the EU-skeptical Jeremy Corbyn (who is, whisper the word, an actual socialist), is not much more united. A hung Parliament looks to be the likeliest outcome.
The ultimate irony is that whether the UK leaves the EU with a deal or without one, the issues that have driven the astounding events of the past three years will remain unresolved. The shape of the future economic relationship between the UK and its biggest trading partner will still have to be determined. Marx's view of history may have had only two stages, but if we ever reach the end of the farcical part, a whole new stage will begin. First tragedy, then farce, then exhaustion?
Wednesday 4 September 2019
Bank of Canada sets the stage for easing
As expected, the Bank of Canada kept its overnight rate target unchanged at 1.75 percent at today's Governing Council meeting. As the press release notes, "Canada's economy is operating close to potential and inflation is on target". Moreover, growth was higher than the Bank had expected in Q2, and wages have accelerated sharply in recent months, reflecting the tightness in the labour market.
Despite these apparent positives, the Bank is cautious about the outlook, expecting growth to slow in the second half of the year. The reason for this is simple: trade wars initiated by the Trump administration are starting to take a toll on the global growth outlook, which will inevitably have an impact on Canada's very open economy sooner rather than later. The press release makes it clear that these developments will be the key drivers of the Bank's policy decisions in the coming months.
The problem which the Bank of Canada (and other central banks) face is that monetary policy may prove largely ineffective in supporting growth in current circumstances. Even with borrowing costs at rock-bottom levels, businesses will be reluctant to invest as long as the threat of capricious tariffs persists. Fed Chair Jerome Powell voiced this uncertainty in announcing the FOMC's latest policy decision, earning himself a torrent of abuse from Donald Trump for his pains. A rate cut by the Bank of Canada might provide some marginal stimulus by weakening the exchange rate, but there is little likelihood of it fully offsetting the growing impact of tariff wars.
Today's Governing Council meeting was the last before Canada's Federal election. The next opportunity for the Bank to cut rates falls on October 30. Look for Governor Poloz and his colleagues to take every opportunity in the coming weeks to signal their intentions, while avoiding saying anything that might be regarded as overtly political. Markets are pricing in an even chance of a rate cut next month, and a move by the end of the year now looks almost certain, barring a sudden end to the tariff insanity. .
Despite these apparent positives, the Bank is cautious about the outlook, expecting growth to slow in the second half of the year. The reason for this is simple: trade wars initiated by the Trump administration are starting to take a toll on the global growth outlook, which will inevitably have an impact on Canada's very open economy sooner rather than later. The press release makes it clear that these developments will be the key drivers of the Bank's policy decisions in the coming months.
The problem which the Bank of Canada (and other central banks) face is that monetary policy may prove largely ineffective in supporting growth in current circumstances. Even with borrowing costs at rock-bottom levels, businesses will be reluctant to invest as long as the threat of capricious tariffs persists. Fed Chair Jerome Powell voiced this uncertainty in announcing the FOMC's latest policy decision, earning himself a torrent of abuse from Donald Trump for his pains. A rate cut by the Bank of Canada might provide some marginal stimulus by weakening the exchange rate, but there is little likelihood of it fully offsetting the growing impact of tariff wars.
Today's Governing Council meeting was the last before Canada's Federal election. The next opportunity for the Bank to cut rates falls on October 30. Look for Governor Poloz and his colleagues to take every opportunity in the coming weeks to signal their intentions, while avoiding saying anything that might be regarded as overtly political. Markets are pricing in an even chance of a rate cut next month, and a move by the end of the year now looks almost certain, barring a sudden end to the tariff insanity. .
Friday 30 August 2019
Canada's Q2 GDP -- strong but a bit strange
After eking out only minimal growth in the two preceding quarters, Canada's real GDP surged at a 3.7 percent annualized rate in Q2. This was the strongest performance in two years and comfortably topped the expert consensus expectation. Moreover, GDP grew 0.2 percent in June, a strong "handoff" to Q3 that likely portends another positive showing for the current quarter as a whole.
The headline number would appear to give the Bank of Canada every reason to leave interest rates unchanged at next week's Governing Council meeting, and that is indeed the likeliest outcome. However, the composition of the growth in Q2 will raise a few alarms at the Bank. The strong headline number was entirely the result of the external sector: export volumes rose 3.7 percent in the quarter (NB: not annualized), led by a 5.9 percent jump in energy exports, while import volumes fell by 1 percent.
These robust numbers were offset by some surprising weakness in the domestic economy: final domestic demand actually edged lower in the quarter. Real consumer spending rose only 0.1 percent, an unexpected outcome given the continuing strength in the employment market and the recent surge in wage growth. There have been signs recently that the jobs market is softening; if consumers were already becoming cautious ahead of that softening, as today's report suggests, then consumer spending could become a drag on overall growth for the remainder of the year.*
The second quarter also saw a 1.6 percent decline in business investment, led by a sharp fall in outlays on machinery and equipment. Notably, StatsCan reports a fall of more than 60 percent in spending on aircraft and other transportation equipment, a factor that also contributed to the decline in import volumes. This may well be attributable to the halt in deliveries of the Boeing 737 Max, which three Canadian airlines had been adding to their fleets.
Regardless of the noise in the data, the fact remains that the 3.7 percent growth figure is comfortably the highest in the G7, and almost twice as fast as the growth posted by the US in the same quarter. While Bank of Canada Governor Poloz and his colleagues will keep a wary eye on the external risks to the economy, there is no reason for them to rush into a rate cut just yet.
* The data for June showed some improvement in the consumer sector, but StatsCan attributes this to the Toronto Raptors' NBA playoff success, the very definition of a one-off event (at least until next year!).
The headline number would appear to give the Bank of Canada every reason to leave interest rates unchanged at next week's Governing Council meeting, and that is indeed the likeliest outcome. However, the composition of the growth in Q2 will raise a few alarms at the Bank. The strong headline number was entirely the result of the external sector: export volumes rose 3.7 percent in the quarter (NB: not annualized), led by a 5.9 percent jump in energy exports, while import volumes fell by 1 percent.
These robust numbers were offset by some surprising weakness in the domestic economy: final domestic demand actually edged lower in the quarter. Real consumer spending rose only 0.1 percent, an unexpected outcome given the continuing strength in the employment market and the recent surge in wage growth. There have been signs recently that the jobs market is softening; if consumers were already becoming cautious ahead of that softening, as today's report suggests, then consumer spending could become a drag on overall growth for the remainder of the year.*
The second quarter also saw a 1.6 percent decline in business investment, led by a sharp fall in outlays on machinery and equipment. Notably, StatsCan reports a fall of more than 60 percent in spending on aircraft and other transportation equipment, a factor that also contributed to the decline in import volumes. This may well be attributable to the halt in deliveries of the Boeing 737 Max, which three Canadian airlines had been adding to their fleets.
Regardless of the noise in the data, the fact remains that the 3.7 percent growth figure is comfortably the highest in the G7, and almost twice as fast as the growth posted by the US in the same quarter. While Bank of Canada Governor Poloz and his colleagues will keep a wary eye on the external risks to the economy, there is no reason for them to rush into a rate cut just yet.
* The data for June showed some improvement in the consumer sector, but StatsCan attributes this to the Toronto Raptors' NBA playoff success, the very definition of a one-off event (at least until next year!).
Wednesday 28 August 2019
This is the way the world ends
That Donald Trump -- such a card! Last week, talking about trade with China, he glanced heavenwards and declared himself "the Chosen One". The White House quickly clarified that he was joking, though he didn't seem to be smiling as he said it. Remarkably, this piece of casual blasphemy has attracted very little criticism from the evangelical "Christians" that make up most of both Trump's electoral base and the Republican caucuses in Congress.
Trump's gag writers have evidently been working overtime, because over the weekend he offered up the obviously humorous suggestion that nuclear bombs might be used to divert hurricanes away from the United States. And today brings the darkest gag of all: The Washington Post reports that Trump has promised presidential pardons to any of his aides who break the law in order to get the border wall built before next year's election.
White House officials have been quick to assert that Trump is "merely joking" when he says such things. Still, there's been plenty of evidence that he interprets his right to grant pardons very widely, including the possibility of pardoning himself -- not, of course, that he's ever done anything wrong. The morning show hosts on CNN were stunned by the WaPo story, pointing out that the right to grant pardons applies only to offenses that have already taken place. Assuring people of pardons in order to encourage them to break the law is sheer lawlessness.
There seems to be a lot of that about. UK Prime Minister Boris Johnson has today confirmed the worst fears of his opponents by announcing a scheme to "prorogue" Parliament early next month and recall it only in mid-October, leaving almost no time for elected politicians to prevent a no-deal Brexit on October 31. Recall that BoJo was elected PM only by the members of his own party, not the electorate at large; that he has a majority of 1 (one) in the House of Commons, a majority that exists only because of an unholy arrangement with the "Democratic" "Unionist" Party of Northern Ireland; and that all public opinion polls now suggest that a majority of the electorate opposes Brexit.
Proroguing Parliament in order to reset the legislative agenda via a new "Throne Speech" is a normal procedure. However, the length of the suspension is usually a matter of days, not weeks, and the timing of this particular prorogation is so egregious that Johnson's denials of any connection with the Brexit deadline are entirely risible.
What happens next? Opposition leader Jeremy Corbyn has already written to ask for a meeting with the Queen, who can (at least in theory) say no to Johnson's plan. A petition against prorogation is already gathering huge numbers of signatures, and street demonstrations are expected to start as early as this evening. A no confidence vote is likely as soon as Parliament returns in early September, and there is every possibility that enough disillusioned Tories will vote with the opposition parties and bring the Government down. Then what? A temporary coalition, as suggested by Corbyn, to seek a further delay in Brexit while a general election is held? Who knows? This is entirely uncharted territory.
This is the way the world ends, or at least the world as we have known it. Not with a bang, nor with a whimper, but with the tearing down of the basic principles of democratic societies by egotistical right-wing populists.
Trump's gag writers have evidently been working overtime, because over the weekend he offered up the obviously humorous suggestion that nuclear bombs might be used to divert hurricanes away from the United States. And today brings the darkest gag of all: The Washington Post reports that Trump has promised presidential pardons to any of his aides who break the law in order to get the border wall built before next year's election.
White House officials have been quick to assert that Trump is "merely joking" when he says such things. Still, there's been plenty of evidence that he interprets his right to grant pardons very widely, including the possibility of pardoning himself -- not, of course, that he's ever done anything wrong. The morning show hosts on CNN were stunned by the WaPo story, pointing out that the right to grant pardons applies only to offenses that have already taken place. Assuring people of pardons in order to encourage them to break the law is sheer lawlessness.
There seems to be a lot of that about. UK Prime Minister Boris Johnson has today confirmed the worst fears of his opponents by announcing a scheme to "prorogue" Parliament early next month and recall it only in mid-October, leaving almost no time for elected politicians to prevent a no-deal Brexit on October 31. Recall that BoJo was elected PM only by the members of his own party, not the electorate at large; that he has a majority of 1 (one) in the House of Commons, a majority that exists only because of an unholy arrangement with the "Democratic" "Unionist" Party of Northern Ireland; and that all public opinion polls now suggest that a majority of the electorate opposes Brexit.
Proroguing Parliament in order to reset the legislative agenda via a new "Throne Speech" is a normal procedure. However, the length of the suspension is usually a matter of days, not weeks, and the timing of this particular prorogation is so egregious that Johnson's denials of any connection with the Brexit deadline are entirely risible.
What happens next? Opposition leader Jeremy Corbyn has already written to ask for a meeting with the Queen, who can (at least in theory) say no to Johnson's plan. A petition against prorogation is already gathering huge numbers of signatures, and street demonstrations are expected to start as early as this evening. A no confidence vote is likely as soon as Parliament returns in early September, and there is every possibility that enough disillusioned Tories will vote with the opposition parties and bring the Government down. Then what? A temporary coalition, as suggested by Corbyn, to seek a further delay in Brexit while a general election is held? Who knows? This is entirely uncharted territory.
This is the way the world ends, or at least the world as we have known it. Not with a bang, nor with a whimper, but with the tearing down of the basic principles of democratic societies by egotistical right-wing populists.
Wednesday 21 August 2019
Will he or won't he?
Bank of Canada Governor Stephen Poloz, that is. Despite the Bank's generally upbeat view of the economic outlook, in recent weeks markets have begun to price in a greater probability of a rate cut, possibly as soon as next month. The logic is that if the Federal Reserve is cutting, the Bank will need to match or risk seeing the exchange rate move to an uncompetitive level.
This morning Statistics Canada released its report on consumer prices for July. Headline CPI rose 2 percent year-on-year, the same as in June and exactly in line with the Bank's target. Despite this, rate cut expectations have been tempered somewhat, on the basis that markets had been expecting a slightly lower number. Inasmuch as expectations for a rate cut were largely unrelated to the inflation outlook, this is slightly perverse.
All eight of the sub-indices calculated by StatsCan were higher year-on-year in July but, as has been the case for the past year and more, the key driver of the headline number was the price of gasoline. This rose month-on-month, but remained lower (by almost 7 percent) on an annual basis. This helped offset increases in prices for durable goods and food, as well as a sharp rise in air transportation costs. Anecdotally it appears that gasoline prices have retreated this month, so when StatsCan publishes its August data, it may well be that CPI moves just below the target range.
The bank's three preferred core measure of inflation showed virtually the same annual increases in July as in June. The mean of the three measures remains fractionally above the 2 percent target.
The Bank's next interest rate announcement is scheduled for two weeks from now, on September 4. With Labour Day out of the way, campaigning for the October Federal election will be getting into full swing. Although the Bank has changed its policy settings ahead of elections in the past, it would likely prefer not to do so. An external shock, such as another Fed rate cut, could force the Bank's hand, but in the absence of a sudden shift in Gov. Poloz's rhetoric, no rate cut is likely until the end of October, when the election will be safely out of the way.
This morning Statistics Canada released its report on consumer prices for July. Headline CPI rose 2 percent year-on-year, the same as in June and exactly in line with the Bank's target. Despite this, rate cut expectations have been tempered somewhat, on the basis that markets had been expecting a slightly lower number. Inasmuch as expectations for a rate cut were largely unrelated to the inflation outlook, this is slightly perverse.
All eight of the sub-indices calculated by StatsCan were higher year-on-year in July but, as has been the case for the past year and more, the key driver of the headline number was the price of gasoline. This rose month-on-month, but remained lower (by almost 7 percent) on an annual basis. This helped offset increases in prices for durable goods and food, as well as a sharp rise in air transportation costs. Anecdotally it appears that gasoline prices have retreated this month, so when StatsCan publishes its August data, it may well be that CPI moves just below the target range.
The bank's three preferred core measure of inflation showed virtually the same annual increases in July as in June. The mean of the three measures remains fractionally above the 2 percent target.
The Bank's next interest rate announcement is scheduled for two weeks from now, on September 4. With Labour Day out of the way, campaigning for the October Federal election will be getting into full swing. Although the Bank has changed its policy settings ahead of elections in the past, it would likely prefer not to do so. An external shock, such as another Fed rate cut, could force the Bank's hand, but in the absence of a sudden shift in Gov. Poloz's rhetoric, no rate cut is likely until the end of October, when the election will be safely out of the way.
Thursday 15 August 2019
Greta Expectations
All power to Greta Thunberg and her environmental activism, but...is the elaborate virtue signalling represented by her current sea voyage to New York really a good look?
It seems to suggest that in order to save the planet, you need super-rich friends with an expensive racing yacht, plus enough time on your hands to spend sixteen days on a journey that can be done in six hours. Remember, from New York she's heading to Chile, and she won't be doing that by boat. It doesn't seem to be the kind of message that will win many converts among ordinary folk.
So, bon voyage and a safe arrival, Ms Thunberg. But if you want to take the people along with you, you're gonna need a bigger boat.
It seems to suggest that in order to save the planet, you need super-rich friends with an expensive racing yacht, plus enough time on your hands to spend sixteen days on a journey that can be done in six hours. Remember, from New York she's heading to Chile, and she won't be doing that by boat. It doesn't seem to be the kind of message that will win many converts among ordinary folk.
So, bon voyage and a safe arrival, Ms Thunberg. But if you want to take the people along with you, you're gonna need a bigger boat.
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