Canadian economy stagnant at year-end

November 2018 was not a good month for the Canadian economy.  Statistics Canada reported this morning that real GDP fell by 0.1 percent in the month.  This was the second such contraction in three months, interrupted by a 0.3 percent gain in October.  There is little reason to think that the picture improved significantly in December, so it looks likely that GDP for Q4 as a whole will come in flat.  Some business journalists are already starting to talk up the possibility of a recession.

Although 13 of the 20 sectors in the StatsCan data showed growth in November, there were some conspicuous losers. Output in the goods-producing sectors fell by 0.3 percent in the month, the third decline in four months.  Oil output was particularly weak, in part because of weather conditions off the east coast, but also in part because of very low prices for Alberta crude, which led to widespread well shutdowns.  Since this weakness preceded the Alberta government's imposition of output cuts, it seems safe to assume that this sector continued to represent a drag on overall growth through December and into the new year.

Elsewhere in the good-producing segment, manufacturing output posted a 0.5 percent fall in the month, its third fall in four months.  Construction output was also down, in this case for the sixth consecutive month. Output in the service sector and the public sector were essentially flat in the month.

Today's data all but ensure that the Bank of Canada will remain on the sidelines for many months to come: a further rate hike before mid-year is surely completely off the table.  The more dovish tone sounded by the US Fed earlier this week will make it easier for the Bank to keep rates unchanged.  That said, talk of a recession is surely premature, though it no longer seems entirely far-fetched to suggest that the next policy move, when it comes, might be a rate cut.

The political implications of the data are intriguing.  With Parliament back in session, the campaign for the October Federal Election is in full swing, and if the economy is entering a softer phase, the Liberals' re-election chances will take a hit.  And here in Ontario, Premier Doug Ford is warning that the Federal carbon tax that comes into effect in April will trigger a recession.  That's almost certainly wrong, but Ford is saying it loudly and often, and it will be no surprise if his counterpart in Ottawa, Andrew Scheer, starts focusing on the same message.

Just for fun, here's a link to the CBC website report on the GDP data. Ignore the article itself -- if you're a connoisseur of ignorance, venom and bad grammar, just scroll through the comments!

Labour force

One of the more prescient comments about the recent US government shutdown came from a columnist on Slate -- Matt Yglesias, if I recall correctly.  Said columnist suggested that if air traffic controllers walked off the job, the shutdown would be ended right away.

Air traffic controllers in the US are deemed an essential service and hence barred from striking. Way back in the 1990s the controllers' union of the day, PATCO, called a strike anyway, and Ronald Reagan promptly fired them all.  So it took a little while for today's controllers to realize that while they might not be allowed to strike as such, there was nothing to prevent them from calling in sick.  By January 25 the number of controllers taking this option was sufficient to force the FAA to halt operations for a brief period at La Guardia, Newark and one or two more airports in the north-east.  Lo and behold, a deal to end the shutdown, at least temporarily, was in place within 24 hours.

So it's probably safe to make this prediction:  if the two sides in Congress are unable to come up with a budget deal by mid-month and the government shuts down again, air traffic controllers will start calling in sick in large numbers from day one.  Since there are probably at least a few congresspersons who realize this, the chances of avoiding another shutdown may be somewhat better than most commentators expect.

Holding government workers hostage in partisan political fights is frankly immoral, and if the workers and unions have figured out a way to make shutdowns untenable, that's surely a good thing.  It would be better, of course, if the politicians themselves swore off this negotiating tactic.  They might want to consider that if you're going to pass a law to declare someone an essential worker, and hence bar them from striking, it might be only fair to have a parallel law that compels you to pay them.     

Pity Theresa May!

I know it's hard to feel any sympathy for Theresa May -- I mean, nobody forced her to take the damn job -- but let's just think for a minute about how she is likely to be remembered by history. Spoiler alert: it's not going to be pretty.

May has been an awful Prime Minister. Unimaginative and inflexible, mostly humourless and occasionally shrill. Opportunistically called an election to boost her majority of Parliament, only to lose that majority altogether.  Endlessly deferential to the unlovely DUP,  on whose support she depends.  After two years of "negotiations" delivered a Brexit deal that absolutely no-one really likes.  It's a shocking track record, but Theresa isn't even going to have the mild (if perverse) consolation of being the UK's worst PM ever.  Her immediate predecessor, David "the Invisible Man" Cameron, the author of the whole Brexit fiasco,  has a lock on that, possibly for all time.

No matter what happens on March 29 or whenever this whole festering mess comes to a head, a huge chunk of the British population will be unhappy, and Theresa is going to get the blame.

• Brexit on the terms set out in May's deal?  Satisfies no-one -- Brexiteers will see it as "BRINO" (Brexit in name only) while Remainers will be that the deal carries all the costs of just staying in the EU while losing many of the benefits.  

• No deal Brexit?  Fears of near-term shortages of everything from food to medications are real.  For the longer term, companies are already relocating staff away from London to Paris, Brussels and elsewhere as a precaution.  If there really is a no-deal Brexit, expect much more of the same.

• No Brexit at all?  Nigel Farage and others have been shameless about threatening civil disorder if that were to happen.

It's been apparent for some time that only a second referendum, this time with a clear question, is the one course that offers any hope of averting a truly disastrous outcome, but May has steadfastly rejected that possibility.   So, even as we ponder May's likely place in the history books, we should remember that she still has the opportunity to do the right thing, but simply refuses to take it. 

Softly softly

As expected, the Bank of Canada held its target rate unchanged after its Governing Council meeting today.  Governor Stephen Poloz's statement to the media indicates that the Bank still thinks that rates will have to move to a more neutral level over time, but it is clear that the pace of any further tightening will be slower than seemed likely just a few months ago. 

The Bank acknowledges that the US-inspired trade war is starting to have an impact on Canada's growth prospects, but its main focus is clearly on the problems of the domestic oil sector.  In effect, the Bank faces a dilemma -- the economy of Alberta, in particular, desperately needs continuing policy support, while the situation in most other parts of the country calls for further tightening.

Governor Poloz illustrated this point by quoting two recent employment-related statistics. He noted that the overall gain of about 9000 in national employment reported for December was made up of a sharp decline of 17,000 jobs in Alberta but a solid gain of 26,000 positions in the rest of the country.  Further, the Bank appears to attribute the slowing pace of wage gains in the second half of 2018 to the energy sector as well.  Gov. Poloz observed that year-on-year wage gains in Q3/2018 stood at 1.8 percent in the oil producing provinces, but 2.6 percent in the rest of the country.  That discrepancy surely widened further in the final quarter of the year.

The Bank has now lowered its forecast for GDP growth this year to 1.7 percent from 2.1 percent previously.  It has also marginally cut its inflation outlook for the immediate future, though it still expects CPI to move back up to the 2 percent target by year end.  These revisions mean that any further movement back toward a neutral rate will be very slow -- it is very likely that rates will not be lifted again until after mid-year, and there are even a few media commentators now suggesting that the Bank's next move could be a rate cut.

In the meantime, while the current level of interest rates still seems impossibly low to those of us with long memories, the Bank's cautious rate hikes to date are starting to hurt vulnerable households. As this report indicates, the number of household seeking debt relief in the final quarter of 2018 was the largest since the peak of the financial crisis in 2011.  Just one more reason for the Bank of Canada to proceed with great caution.

Trump and Erdogan do the impossible

US National Security Advisor John Bolton has always been one of the least appealing characters on the right wing of American politics.  The jingoism!  The belligerence!  The comedy mustache!

How remarkable is it, then, to see that in the current nasty spat between the US and Turkey, Bolton seems to be the only player showing any decency.  Trump's decision to order a speedy withdrawal of US forces from Syria seems to have been a spur-of-the-moment decision taken after a phone call with Turkish President Erdogan.  Nobody from the US military had any kind of heads-up on this, and even before the first GI started packing for the journey home, Defense Secretary Jim Mattis quit, firing off a very harshly-worded letter to Trump into the bargain.

One of the many concerns raised by Trump's impetuousness was the fate of the Kurds who have been doing a lot of the front-line fighting against ISIS alongside the US. Turkey sees all Kurds as terrorists, and as soon as the US decision was made public, began an ominous troop buildup on the border of the Syrian territory currently held by the Kurds. 

Bolton, presumably as taken aback as everyone else by Trump's announcement, stated on a visit to the Middle East that the US would not fully withdraw from Syria until it was assured that its erstwhile allies, the Kurds, would be safe. At this Erdogan flew into a rage, making it clear that his deal with President Trump would override anything that Bolton or anyone else might say. It hardly needs to be said that this reaction makes Turkey's intentions towards the Kurds crystal clear. 

The US has always had a mixed reputation on the international stage -- a bad country to have as an enemy, but sometimes an even worse one to have as an ally.  Abandoning the Kurds to their fate would be immoral in itself, and potentially damaging to any future US military joint ventures -- who wants to risk being thrown to the wolves at a moment's notice?

Trump's problem is that he really cannot tell America's friends from its enemies.  Erdogan and Kim Jong Un?  Strongmen we can do business with.  European Union?  A rival.  Canada and Mexico?  Unscrupulous trading partners.  If Trump now decides to throw the unlovable John Bolton under the bus to appease Erdogan, US relations with the rest of the world will plunge to new depths of distrust. 

Jobs, policies and politics

The US jobs report for December was stunningly strong; Canada's, not so much.  What do the data tell us about the outlook for equity markets, monetary policy and politics in the two countries?

Let's start with the US.  The labour market added 312,000 jobs in December, far above market expectations.  Somewhat perversely, the unemployment rate ticked up to 3.9 percent, but that only happened because 400,000 people joined the workforce in the month.  That "encouraged worker effect" is usually taken as a sign of growing confidence.  One more positive aspect to the data: wage growth now stands at 3.2 percent year-on-year, comfortably outpacing the rise in CPI.

Donald Trump has been quick to laud the data as "great", which indeed they are.  He may not be so happy if the numbers persuade the Fed that it needs to continue tightening its policy settings, but Fed Chairman Jerome Powell seems to be signalling at most a moderate pace of tightening for the time being.

The jobs data, together with Powell's remarks, set the stage for a sharp rebound in the major stock indices in Friday's trading.  If the rebound is short-lived, as has been the case in the recent past, that could be taken as a sign that the nervousness in stock markets does not reflect concern over the economy per se, but rather worries about factors such as the trade tensions with China and the entirely pointless government shutdown -- both of which can directly blamed on Donald Trump.

Given the market's panicky reaction to Apple's earnings warning this week, and the likelihood that many other companies are facing the same problems as Apple, that seems like the way to bet.  However, if you want to put a more Trump-friendly spin on this, you could argue that the very robust jobs data show that the trade war is not having any negative impact on the economy -- may, indeed, as Trump would have you believe, be having a positive one.  That would defy anything in the textbooks, but that fact is unlikely to deter Trump and his supporters from depicting it that way.

Moving on to Canada, a key takeaway from today's numbers is, as ever, the extreme volatility in StatsCan's employment survey.  After a remarkable (improbable?) reported increase of over 90,000 jobs in November, the economy added a mere 9,500 positions in December.  The strongest job gains were seen in the manufacturing sector (good), but December featured an 18,000 loss in full-time employment (bad), with the headline gain entirely attributable to part-time positions. The national unemployment rate was unchanged at 5.6 percent, matching the lowest-ever reading for this series.

Given the month-to-month volatility in the data, it's best to look at the year-on-year numbers for an indication of the underlying trend.  The Canadian economy added 185,000 full-time jobs in the year to December 2018, with a negligible offsetting loss of part-time positions.  This represented slower growth than in either 2016 and 2017, unsurprising at this stage of the business cycle. Despite the evident tightening in the labour market, wage gains have been generally tame for at least the past six months, standing at just 1.5 percent in December, below the rate of inflation.

From a monetary policy standpoint the data, particularly the performance of wages, suggest the Bank of Canada need be in no hurry to make its next tightening move.  That implies that the exchange rate will remain under some moderate downward pressure this year, even if the Fed maintains a cautious stance.

And, as this is an election year, what are the political implications?  The Trudeau government will undoubtedly have its fingers crossed that the tepid December data do not signal how things will go in the new year.  In that regard, the fall in employment in Alberta that was seen in December may be an ominous sign.  The opposition Tories will no doubt focus on that regional employment weakness, but will also want to argue that even where employment is still growing, workers aren't actually getting any richer. As ever, differing narratives regarding the economy will be a major element in the election campaign as we head to the polls in October.

Walls and ceilings

The government shutdowns that seem to be a regular feature of life in Washington DC these days are generally blamed on the bloody-mindedness of the members of Congress, on both sides of the aisle.  That's certainly a big part of the problem, but another element is the fact that the US budgetary process is fundamentally flawed.  The so-called "debt ceiling" is unknown outside the United States, and there's a good reason for that: it effectively makes the whole budget mathematically unresolvable. 

I wrote about this during a previous shutdown in 2013:

Most economists and media commentators realize that the debt ceiling is far more trouble than it's worth, which is why it's an unknown concept outside the United States.  It's likely that most politicians on both sides of the debate (the tea party types probably excluded) know this too.  The fact is that trying to set a debt ceiling separately from spending and taxation decisions makes for a mathematically over-determined system.

In simplified form, there are three variables in play: taxation, spending and the deficit (financing of which results in the government's debt).  You can decide how much you want to spend and how much tax you want to raise, and then the deficit (and addition to debt) follows mechanistically.  Or you can decide how much of a deficit you are prepared to tolerate and how much taxation you want to raise, and those two figures will determine how much you can spend.  You can't determine all three things independently, yet that's what the debt ceiling attempts to do. 

The current shutdown is not about the ceiling as such -- it's about the wall.  However, as they take over the House of Representatives, the Democrats are trying to change the rules so that the debt ceiling becomes less of an obstacle in the future.  In particular they are trying to reintroduce something akin to the old "Gephardt Rule", which effectively avoided House-Senate wrangles over the debt ceiling for many years.

It's worth keeping an eye on the progress of these rule changes, because the Treasury Department will run out of borrowing authority by the end of March, and even with the use of "extraordinary measures" could be pushed to the brink of default by some time in the summer.  At least a few commentators are fretting that Donald Trump, who is likely to become increasingly frustrated and angry as the year progresses, might actually be reckless enough to countenance a default,  the ultimate gesture of defiance to the established order.

Of course, the sensible thing for Congress to do would be just to abolish the debt ceiling altogether. Unfortunately, both sides seem to enjoy these opportunities for grandstanding far too much for that to happen. Sure, 800,000 Americans are either furloughed or working without pay, but who cares about them?