Personal possession and consumption of cannabis became legal in Canada in October 2018, fulfilling one of the promises Justin Trudeau made ahead of the 2015 election. Over the last few months, cannabis has become something of an obsession for the print media. Check out the front page of the Toronto Star website -- scroll down and you find that "Cannabis" has a section all of its own, on a parallel with Politics or Sport.
The media have reported obsessively on everything cannabis-related: the emergence of literally hundreds of would-be cannabis entrepreneurs and the subsequent winnowing out/attrition as the industry has consolidated; the creation of cannabis cultivation courses at colleges across the country; the criteria for the establishment of retail pot stores, with anything close to a school deemed a no-no; the conversion of existing greenhouses to cannabis cultivation, with the attendant nuisance issues, mostly related to the smell -- they don't call it "skunk" for nothing. And so on, and on.
For all of this appearance of frenzied activity, it's only this coming Monday, April 1, that the first retail cannabis stores will open in Ontario. There will only be a maximum of 25 stores at the outset, because of one unlikely problem: there isn't enough cannabis to go around. It appears that a lot of the activity so breathlessly reported in the press was only taking place on paper. Not enough legal cannabis is being grown as yet, and the shortage is expected to last for a good while longer.
Notice the reference there to "a maximum of 25 stores". The actual number to open on Monday will be smaller than that. The Government ran an auction to determine who got the first precious batch of licenses, but it now appears that a lot of the winners were completely unprepared for success, and are unable to open for business on the big day. You might have thought that the Government would have sought to pre-qualify the bidders, given the severely constrained number of licenses available, but either that didn't occur to anyone, or it was incompetently done.
There's an old joke that says "crime wouldn't pay if the Government ran it". Cannabis use may no longer be a crime in Canada, but the same principle seems to be at work. A big part of the rationale for legalization was the desire to eliminate the illicit market for cannabis, in the hope of keeping users away from harder and more dangerous drugs. Based on how things have gone so far, the dealer hanging out down the block won't have to worry about unemployment any time soon.
Friday 29 March 2019
Friday 22 March 2019
Canadian economic data look weak, but....
We have known for some time that the Canadian economy ended 2018 on a weak note, with real GDP expanding a meager 0.1 percent in the fourth quarter. Two reports released today appear to suggest that the sluggish growth pattern has persisted into the new year.
Retail sales fell 0.3 percent in January, according to data released this morning by Statistics Canada. This marked the third consecutive monthly decline, but it should be noted that this series is reported in nominal terms, so the weakness in gasoline prices that has been evident since mid-2018 has served to depress the apparent trend in retail sales. In real terms, retail sales were flat in January, after a modest 0.2 percent decline in December. On a year-on-year basis, retail sales were up 1.8 percent in January in real terms.
Even after stripping out the misleading price effects, these are hardly robust numbers. The widely-reported rise in Canadian households' debt burden is very likely crimping spending plans, especially for big ticket (and usually debt-financed) purchases such as vehicles. With business investment and exports both exhibiting weakness, it will be difficult for the economy to gain much forward momentum in the near term.
StatsCan also reported consumer price data this morning. Headline CPI rose 1.5 percent year-on-year in February, up from 1.4 percent in January. Like the retail sale data, CPI figures in recent months have been disproportionately affected by the remarkable fall in gasoline prices. This now seems to be at an end: gas prices actually rose month-on-month in February for the first time since July 2018, though they remain lower on a year-to-year basis. Since retail gas prices have continued to rise in recent weeks, it is reasonable to assume that the headline CPI figure will edge higher again in March.
Stripping out gasoline prices, the increase in CPI for February stood at 2.1 percent, unchanged from January. Moreover, the average of the Bank of Canada's favoured core inflation indicators actually slipped to 1.8 percent in February from 1.9 percent in the previous month.
These numbers certainly support the consensus expectation that the Bank of Canada will be on the sidelines, policy-wise, for some months to come -- my old shop at TD Economics thinks there will be no change right through 2020. There is however, one key piece of data that is, for now, telling a very different story. Employment jumped 56,000 in February, its second straight strong monthly increase, and the unemployment rate remains close to multi-decade lows at 5.8 percent.
Employment is, of course, usually regarded as a lagging indicator of economic activity. Even so, it is a little surprising that the apparent weakening in GDP growth that has been apparent since the third quarter of 2018 has not yet shown up at all in the jobs data. The next labour force data release is set for April 5. After two successive strong numbers, it would be unsurprising if the numbers for March showed some pullback; and if the GDP, retail sales and other recent data are accurate, that pullback could be substantial.
Retail sales fell 0.3 percent in January, according to data released this morning by Statistics Canada. This marked the third consecutive monthly decline, but it should be noted that this series is reported in nominal terms, so the weakness in gasoline prices that has been evident since mid-2018 has served to depress the apparent trend in retail sales. In real terms, retail sales were flat in January, after a modest 0.2 percent decline in December. On a year-on-year basis, retail sales were up 1.8 percent in January in real terms.
Even after stripping out the misleading price effects, these are hardly robust numbers. The widely-reported rise in Canadian households' debt burden is very likely crimping spending plans, especially for big ticket (and usually debt-financed) purchases such as vehicles. With business investment and exports both exhibiting weakness, it will be difficult for the economy to gain much forward momentum in the near term.
StatsCan also reported consumer price data this morning. Headline CPI rose 1.5 percent year-on-year in February, up from 1.4 percent in January. Like the retail sale data, CPI figures in recent months have been disproportionately affected by the remarkable fall in gasoline prices. This now seems to be at an end: gas prices actually rose month-on-month in February for the first time since July 2018, though they remain lower on a year-to-year basis. Since retail gas prices have continued to rise in recent weeks, it is reasonable to assume that the headline CPI figure will edge higher again in March.
Stripping out gasoline prices, the increase in CPI for February stood at 2.1 percent, unchanged from January. Moreover, the average of the Bank of Canada's favoured core inflation indicators actually slipped to 1.8 percent in February from 1.9 percent in the previous month.
These numbers certainly support the consensus expectation that the Bank of Canada will be on the sidelines, policy-wise, for some months to come -- my old shop at TD Economics thinks there will be no change right through 2020. There is however, one key piece of data that is, for now, telling a very different story. Employment jumped 56,000 in February, its second straight strong monthly increase, and the unemployment rate remains close to multi-decade lows at 5.8 percent.
Employment is, of course, usually regarded as a lagging indicator of economic activity. Even so, it is a little surprising that the apparent weakening in GDP growth that has been apparent since the third quarter of 2018 has not yet shown up at all in the jobs data. The next labour force data release is set for April 5. After two successive strong numbers, it would be unsurprising if the numbers for March showed some pullback; and if the GDP, retail sales and other recent data are accurate, that pullback could be substantial.
Wednesday 20 March 2019
Canadian Federal Budget: spendthrift but unambitious
No-one expected Finance Minister Bill Morneau's 2019 Budget, tabled on Tuesday, to set a course for restoring the Federal finances to balance. It didn't: the coming fiscal year will see a deficit of just under $20 billion (all figures in Canadian dollars), with only a very gradual decline after that. And everyone expected the budget, with an eye to the October election, to include some carefully-targeted new spending initiatives. It did: some $22 billion in new spending over the next five years. All in all, the only surprising thing about this budget is just how little it all adds up to.
The budget arrives amid signs that the Canadian economy is entering a slower phase of expansion. As usual, the Department of Finance uses an average of private sector forecasts for planning purposes. The consensus for GDP growth this year, at 1.8 percent, is slightly lower than before, but forecasts for the rest of the 5-year horizon are little changed at an average of 1.8 percent. Factoring in a marginally lower inflation outlook, the 5-year forecast for nominal GDP -- crucial in predicting revenues -- is slightly lower than before.
As for the fiscal outlook, it should first be noted that the outcome for the fiscal year just ending (2018-19) is much better than initially expected, in large part because of strong revenues. The final figure might have been as low as $9.1 billion, compared to a projection of $15.1 billion as recently as last fall, but in the time-honored way, the government has chosen to spend the bounty in this budget, bringing a final deficit for the year of $14.9 billion. That is set to rise to $16.8 billion in the new fiscal year, plus the customary $3 billion contingency provision to produce the final figure of $19.8 billion. The deficit is set to fall to $9.8 billion, still including the contingency amount, by 2023-24. This allows the debt:GDP ratio to fall gently from the current 30.8 percent to 28.6 percent by the end of the planning period.
In terms of specific spending measures, the favoured description among analysts seems to be "grab bag", which is accurate enough. Under the overall rubric of "investing in the middle class", the budget includes measures to improve affordability in the housing market; a start on a national pharmacare plan; skills training; infrastructure development; and reconciliation with Canada's indigenous peoples. A glance at the first two of these will serve to illustrate the lack of ambition in the overall plan.
The first element of the plan for the housing market involves allowing first-time buyers to withdraw a larger amount from their retirement savings in order to make a down-payment. The current limit of $25,000 will rise to $35,000. The obvious flaw here, of course, is that most first-time buyers have not had time to accumulate this much cash in their retirement plans. Add in the fact that even the higher limit is a mere fleabite in the context of home prices in Vancouver and Toronto, and this looks like an almost meaningless change.
The second part of the plan is a First Time Home Buyer Initiative, a shared equity scheme that will see the Government's mortgage guarantor, CMHC, offering help with down-payments in return for a share in the increase in the value of the property. Even the example quoted in the background paper makes it clear that the overall impact of this on mortgage affordability would be very limited, and there is of course the risk that the very existence of this programme will serve to push vendors' asking prices higher.
As for pharmacare, the absence of universal coverage for prescription drugs is one of the major lacunae, along with the absence of dental care, in Canada's national medicare plans. The budget proposes to make a start on rectifying this, but it's a very modest start. A Canada Drug Agency will be set up, tasked at the outset with developing a national formulary (or pharmacopeia, to use the old term) for eventual drug coverage. The fly in the ointment here is that health care is in fact the responsibility of the individual Provinces, with the Federal government only having a role in setting national standards. Given the fractiousness of the Provinces, and given that they will be the ones largely expected to pay for this, the establishment of a proper pharmacare plan lies far in the future.
The actual introduction of the budget on Tuesday was bizarre. The opposition parties had threatened to delay it, as part of their protests over the SNC-Lavalin affair, so Morneau resorted to a little trickery to get the documents tabled. The budget speech was delivered against a cacophony of opposition MPs calling for Jody Wilson-Raybould to be allowed to offer further testimony on the affair.
This is probably a preview of how the election campaign itself will unfold. The Liberals will try to press on with their agenda, such as it is, trying to ignore the SNC-Lavalin mess. The opposition parties will focus on the scandals, with the Tories throwing in a few accusations of fiscal irresponsibility for good measure. It's far from clear that Morneau's surprisingly unambitious budget will allow the Liberals to win that argument.
The budget arrives amid signs that the Canadian economy is entering a slower phase of expansion. As usual, the Department of Finance uses an average of private sector forecasts for planning purposes. The consensus for GDP growth this year, at 1.8 percent, is slightly lower than before, but forecasts for the rest of the 5-year horizon are little changed at an average of 1.8 percent. Factoring in a marginally lower inflation outlook, the 5-year forecast for nominal GDP -- crucial in predicting revenues -- is slightly lower than before.
As for the fiscal outlook, it should first be noted that the outcome for the fiscal year just ending (2018-19) is much better than initially expected, in large part because of strong revenues. The final figure might have been as low as $9.1 billion, compared to a projection of $15.1 billion as recently as last fall, but in the time-honored way, the government has chosen to spend the bounty in this budget, bringing a final deficit for the year of $14.9 billion. That is set to rise to $16.8 billion in the new fiscal year, plus the customary $3 billion contingency provision to produce the final figure of $19.8 billion. The deficit is set to fall to $9.8 billion, still including the contingency amount, by 2023-24. This allows the debt:GDP ratio to fall gently from the current 30.8 percent to 28.6 percent by the end of the planning period.
In terms of specific spending measures, the favoured description among analysts seems to be "grab bag", which is accurate enough. Under the overall rubric of "investing in the middle class", the budget includes measures to improve affordability in the housing market; a start on a national pharmacare plan; skills training; infrastructure development; and reconciliation with Canada's indigenous peoples. A glance at the first two of these will serve to illustrate the lack of ambition in the overall plan.
The first element of the plan for the housing market involves allowing first-time buyers to withdraw a larger amount from their retirement savings in order to make a down-payment. The current limit of $25,000 will rise to $35,000. The obvious flaw here, of course, is that most first-time buyers have not had time to accumulate this much cash in their retirement plans. Add in the fact that even the higher limit is a mere fleabite in the context of home prices in Vancouver and Toronto, and this looks like an almost meaningless change.
The second part of the plan is a First Time Home Buyer Initiative, a shared equity scheme that will see the Government's mortgage guarantor, CMHC, offering help with down-payments in return for a share in the increase in the value of the property. Even the example quoted in the background paper makes it clear that the overall impact of this on mortgage affordability would be very limited, and there is of course the risk that the very existence of this programme will serve to push vendors' asking prices higher.
As for pharmacare, the absence of universal coverage for prescription drugs is one of the major lacunae, along with the absence of dental care, in Canada's national medicare plans. The budget proposes to make a start on rectifying this, but it's a very modest start. A Canada Drug Agency will be set up, tasked at the outset with developing a national formulary (or pharmacopeia, to use the old term) for eventual drug coverage. The fly in the ointment here is that health care is in fact the responsibility of the individual Provinces, with the Federal government only having a role in setting national standards. Given the fractiousness of the Provinces, and given that they will be the ones largely expected to pay for this, the establishment of a proper pharmacare plan lies far in the future.
The actual introduction of the budget on Tuesday was bizarre. The opposition parties had threatened to delay it, as part of their protests over the SNC-Lavalin affair, so Morneau resorted to a little trickery to get the documents tabled. The budget speech was delivered against a cacophony of opposition MPs calling for Jody Wilson-Raybould to be allowed to offer further testimony on the affair.
This is probably a preview of how the election campaign itself will unfold. The Liberals will try to press on with their agenda, such as it is, trying to ignore the SNC-Lavalin mess. The opposition parties will focus on the scandals, with the Tories throwing in a few accusations of fiscal irresponsibility for good measure. It's far from clear that Morneau's surprisingly unambitious budget will allow the Liberals to win that argument.
Friday 15 March 2019
"The Age of Leverage"
This speech by Bank of Canada Senior Deputy Governor Carolyn Wilkins, delivered in Vancouver this week, is well worth reading. As the title suggests, the theme is debt: Ms Wilkins points out that the aggregate level of global borrowing is now about three times as large as global GDP. The Bank has often fretted in the past about excessive borrowing within Canada, particularly in the household sector, but Ms Wilkins casts the net much more broadly than that.
Needless to say, she mentions the Canadian household debt/income ratio, currently at 178 percent, as a key vulnerability for the domestic economy and financial system. Indeed, StatsCan reported today that the ratio actually edged higher in the final quarter of last year, dashing earlier hopes that Canadians might be starting to conquer their addiction to debt.
With that out of the way, Ms Wilkins turns her attention to other forms of debt. She notes the burgeoning level of public debt, led by Japan and the United States. It's clear enough from the tone of her remarks that the Bank is not an adherent of Modern Monetary Theory, even though she notes that the enormous debts of those two countries in particular are "less of a worry" than the public debts of Eurozone countries.
Ms Wilkins's focus then switches to private sector corporate debt. She notes the solid improvement in banks' balance sheets since the financial crisis -- indeed, this is one of the key reasons for her belief that the current level of international debt need not lead to a fresh crisis. However, she is concerned at the rapid growth of corporate debt in China, and also the growth in the debt of non-bank financial institutions, which have expanded to fill the gap left by traditional banks as the latter have repaired their balance sheets.
There's plenty to be gloomy about here, but in the end Ms Wilkins manages to sound an optimistic note. A crisis is probably avoidable, given that the financial system is in better shape than it was in 2007, just before the financial crisis hit; given that China is starting to take steps towards deleveraging; and given that global GDP growth makes debts easier to carry and service.
The obvious risk to this rosy scenario is that the global economic expansion is becoming positively geriatric. Anything that causes growth to slow or even reverse would soon turn bloated borrowing into a problem. In this context, Ms Wilkins identifies "one thing we should absolutely not do: have a trade war". When the world's most enthusiastic borrower is also its main trade belligerent, that's clearly a major source of risk going forward.
Needless to say, she mentions the Canadian household debt/income ratio, currently at 178 percent, as a key vulnerability for the domestic economy and financial system. Indeed, StatsCan reported today that the ratio actually edged higher in the final quarter of last year, dashing earlier hopes that Canadians might be starting to conquer their addiction to debt.
With that out of the way, Ms Wilkins turns her attention to other forms of debt. She notes the burgeoning level of public debt, led by Japan and the United States. It's clear enough from the tone of her remarks that the Bank is not an adherent of Modern Monetary Theory, even though she notes that the enormous debts of those two countries in particular are "less of a worry" than the public debts of Eurozone countries.
Ms Wilkins's focus then switches to private sector corporate debt. She notes the solid improvement in banks' balance sheets since the financial crisis -- indeed, this is one of the key reasons for her belief that the current level of international debt need not lead to a fresh crisis. However, she is concerned at the rapid growth of corporate debt in China, and also the growth in the debt of non-bank financial institutions, which have expanded to fill the gap left by traditional banks as the latter have repaired their balance sheets.
There's plenty to be gloomy about here, but in the end Ms Wilkins manages to sound an optimistic note. A crisis is probably avoidable, given that the financial system is in better shape than it was in 2007, just before the financial crisis hit; given that China is starting to take steps towards deleveraging; and given that global GDP growth makes debts easier to carry and service.
The obvious risk to this rosy scenario is that the global economic expansion is becoming positively geriatric. Anything that causes growth to slow or even reverse would soon turn bloated borrowing into a problem. In this context, Ms Wilkins identifies "one thing we should absolutely not do: have a trade war". When the world's most enthusiastic borrower is also its main trade belligerent, that's clearly a major source of risk going forward.
Tuesday 12 March 2019
Let the bribery begin
Canada's Federal budget will be tabled by Finance Minister Bill Morneau a week from today, on March 19. As we're now just seven months away from the Federal election, there really can't be much doubt about what we can expect the budget to contain, but just in case you're not sure, those helpful Liberals are offering a big hint.
Last night on TV there was a new commercial featuring a bunch of "ordinary Canadians" extolling the virtues of the various social program they benefit from -- child support, old age security. student loans and so on. It ended with the usual cheery, plinky-plonk musical phrase from O Canada that all these things use. The message, almost in so many words: don't miss out on your share of the booty!
These ads are so blatantly partisan that I'm amazed the elections watchdog allows the government to run them. Very evidently, the budget will be offering a whole lot more of the same, in hopes of persuading the electorate to forget about the rather shambolic state the Trudeau government has gotten itself into. Will the electorate ignore the scandals if there's enough money on offer? Very possibly, but in the meantime I'll be hitting the mute button during the ad breaks for the next seven months or so.
Last night on TV there was a new commercial featuring a bunch of "ordinary Canadians" extolling the virtues of the various social program they benefit from -- child support, old age security. student loans and so on. It ended with the usual cheery, plinky-plonk musical phrase from O Canada that all these things use. The message, almost in so many words: don't miss out on your share of the booty!
These ads are so blatantly partisan that I'm amazed the elections watchdog allows the government to run them. Very evidently, the budget will be offering a whole lot more of the same, in hopes of persuading the electorate to forget about the rather shambolic state the Trudeau government has gotten itself into. Will the electorate ignore the scandals if there's enough money on offer? Very possibly, but in the meantime I'll be hitting the mute button during the ad breaks for the next seven months or so.
Friday 8 March 2019
Engineering failure
Canada's SNC-Lavalin Affair has been rumbling on for several weeks, with no end in sight. For a fairly obscure legal/bureaucratic matter it has created a lot of heat domestically and even attracted a lot of international attention. This article on CBC News is a comprehensive (and regularly updated) summary of the issues.
In essence, the whole affair centres on whether the Trudeau government attempted to interfere in judicial due process for political reasons. SNC-Lavalin, an engineering company, is facing legal action relating to bribery and other offences committed several years ago -- the age of the accusations can be judged from the fact that the son of the late Colonel Gaddafi is a bit player.
Canada recently introduced the concept of a "deferred prosecution agreement", already used in the US and UK, which allows firms facing such accusations to avoid trial in exchange for paying a large fine and promising not to offend again. A DPA would seem a reasonable option for dealing with SNC-Lavalin, if only because all of the people actually involved in the alleged offenses were fired long ago. However, Attorney General and Justice Minister Jody Wilson-Raybould ("JWR") decided instead to proceed with a prosecution. In early February the Toronto Globe and Mail published a story suggesting that JWR had come under severe pressure from Trudeau and his senior officials to revisit that decision.
Since then the story has never been off the front pages, and Canadians have seen a succession of Parliamentary hearings involving JWR and some of Trudeau's most senior bureaucrats. JWR and another Cabinet Minister, Jane Philpott, have resigned, as has Trudeau's Chief of Staff, Gerry Butts. Butts was almost certainly set up as a sacrificial lamb in the hope of ending the crisis, but that was unsuccessful. The most recent development has been a very vague statement of contrition, far short of an outright apology, from Trudeau himself.
One reason the story is fascinating is that it touches on so many of the fault-lines in Canadian politics and society, particularly in light of the never-ending virtue-signalling practised by Trudeau and his senior ministers.
First, there's the age-old question of Quebec. SNC-Lavalin is a Montreal-based company. A large proportion of its 9000 employees live in la belle Province. Those jobs would be at serious risk if the company lost in court, since that would automatically bar it from bidding on Federal government contracts for ten years. Many Canadians outside Quebec are quick to take offence at the least sign of that Province or its businesses receiving special treatment, which is how the possibility of a DPA for SNC-Lavalin has been spun -- totally unfairly, it should be said. Polls show that fully 60 percent of Canadians want the company to face prosecution, but needless to say that number is far higher outside Quebec and far lower in that Province.
Second, there's the relationship between the Canadian state and its Indigenous citizens. JWR is of indigenous heritage on her father's side, a fact that she chose to stress by signing her resignation letter with her native name -- Puglaas, which means "woman born to noble parents". In her parliamentary testimony she repeatedly noted that her background caused her to see things differently from her non-Indigenous colleagues. This has led to speculation that quite apart from the SNC-Lavalin matter itself, she is dissatisfied with the progress the Trudeau government has made towards its loudly-proclaimed goal of reconciliation with Indigenous communities.
Third, there's the role of women in politics. When Trudeau, a self-proclaimed feminist, became Prime Minister he appointed a Cabinet with 50 percent female members "because it's 2015". The resignations of JWR and Jane Philpott, and the language they used in communicating with Trudeau, suggest that not all of the newly-minted Cabinet Ministers feel they have been treated fairly. It is being suggested that although Trudeau was anxious to take credit for bringing fresh faces and fresh perspectives to the Cabinet table, he still expects them to act as their older (i.e. whiter and male) predecessors would have acted.
If you're familiar with the term "intersectionality", the lively public debate on SNC-Lavalin has brought us a rather provocative example. Sheila Copps was Deputy Prime Minister back in the 1980s and was one of the most vigorous feminists in Canadian public life. Asked to comment on JWR's decision to proceed with a prosecution, Ms Copps responded in distinctly waspish tones that she wondered if JWR would have made the same decision if it had been 9000 Indigenous Canadians that stood to lose their jobs, rather than 9000 Quebecers. It's unlikely that these two will be exchanging birthday cards this year.
The timing of all this is excruciating for Trudeau, who faces a General Election in October. Some political commentators have been recalling Harold Wilson's adage that "a week is a long time in politics", suggesting that the whole affair will be long forgotten by the time Canadians head to the polls. The opposition parties seem determined not to let that happen. Most worrying for Trudeau must be the possibility that women voters will remain appalled at the way JWR has been treated; without strong support from women, Trudeau is fated to be a one-term Prime Minister.
UPDATE March 9: this piece lays out the case against SNC-Lavalin in blistering detail. (Warning: scary Gaddafi picture!)
In essence, the whole affair centres on whether the Trudeau government attempted to interfere in judicial due process for political reasons. SNC-Lavalin, an engineering company, is facing legal action relating to bribery and other offences committed several years ago -- the age of the accusations can be judged from the fact that the son of the late Colonel Gaddafi is a bit player.
Canada recently introduced the concept of a "deferred prosecution agreement", already used in the US and UK, which allows firms facing such accusations to avoid trial in exchange for paying a large fine and promising not to offend again. A DPA would seem a reasonable option for dealing with SNC-Lavalin, if only because all of the people actually involved in the alleged offenses were fired long ago. However, Attorney General and Justice Minister Jody Wilson-Raybould ("JWR") decided instead to proceed with a prosecution. In early February the Toronto Globe and Mail published a story suggesting that JWR had come under severe pressure from Trudeau and his senior officials to revisit that decision.
Since then the story has never been off the front pages, and Canadians have seen a succession of Parliamentary hearings involving JWR and some of Trudeau's most senior bureaucrats. JWR and another Cabinet Minister, Jane Philpott, have resigned, as has Trudeau's Chief of Staff, Gerry Butts. Butts was almost certainly set up as a sacrificial lamb in the hope of ending the crisis, but that was unsuccessful. The most recent development has been a very vague statement of contrition, far short of an outright apology, from Trudeau himself.
One reason the story is fascinating is that it touches on so many of the fault-lines in Canadian politics and society, particularly in light of the never-ending virtue-signalling practised by Trudeau and his senior ministers.
First, there's the age-old question of Quebec. SNC-Lavalin is a Montreal-based company. A large proportion of its 9000 employees live in la belle Province. Those jobs would be at serious risk if the company lost in court, since that would automatically bar it from bidding on Federal government contracts for ten years. Many Canadians outside Quebec are quick to take offence at the least sign of that Province or its businesses receiving special treatment, which is how the possibility of a DPA for SNC-Lavalin has been spun -- totally unfairly, it should be said. Polls show that fully 60 percent of Canadians want the company to face prosecution, but needless to say that number is far higher outside Quebec and far lower in that Province.
Second, there's the relationship between the Canadian state and its Indigenous citizens. JWR is of indigenous heritage on her father's side, a fact that she chose to stress by signing her resignation letter with her native name -- Puglaas, which means "woman born to noble parents". In her parliamentary testimony she repeatedly noted that her background caused her to see things differently from her non-Indigenous colleagues. This has led to speculation that quite apart from the SNC-Lavalin matter itself, she is dissatisfied with the progress the Trudeau government has made towards its loudly-proclaimed goal of reconciliation with Indigenous communities.
Third, there's the role of women in politics. When Trudeau, a self-proclaimed feminist, became Prime Minister he appointed a Cabinet with 50 percent female members "because it's 2015". The resignations of JWR and Jane Philpott, and the language they used in communicating with Trudeau, suggest that not all of the newly-minted Cabinet Ministers feel they have been treated fairly. It is being suggested that although Trudeau was anxious to take credit for bringing fresh faces and fresh perspectives to the Cabinet table, he still expects them to act as their older (i.e. whiter and male) predecessors would have acted.
If you're familiar with the term "intersectionality", the lively public debate on SNC-Lavalin has brought us a rather provocative example. Sheila Copps was Deputy Prime Minister back in the 1980s and was one of the most vigorous feminists in Canadian public life. Asked to comment on JWR's decision to proceed with a prosecution, Ms Copps responded in distinctly waspish tones that she wondered if JWR would have made the same decision if it had been 9000 Indigenous Canadians that stood to lose their jobs, rather than 9000 Quebecers. It's unlikely that these two will be exchanging birthday cards this year.
The timing of all this is excruciating for Trudeau, who faces a General Election in October. Some political commentators have been recalling Harold Wilson's adage that "a week is a long time in politics", suggesting that the whole affair will be long forgotten by the time Canadians head to the polls. The opposition parties seem determined not to let that happen. Most worrying for Trudeau must be the possibility that women voters will remain appalled at the way JWR has been treated; without strong support from women, Trudeau is fated to be a one-term Prime Minister.
UPDATE March 9: this piece lays out the case against SNC-Lavalin in blistering detail. (Warning: scary Gaddafi picture!)
Wednesday 6 March 2019
Bad economics reporting shock horror
Given all that's going on in the world, it was something of a surprise to see this story about the US trade deficit receive top billing on the BBC news website today. Not just the BBC either -- CNN also ran a big story about the record trade deficit that the US posted last year, similarly portraying it as a big blow to Trump and his trade wars.
Far be it from me to defend Trump's economic policies, or anything else he does for that matter, but this is very poor reporting. During the course of my business career I did countless interviews with the media, and realized at a very early stage that very few of the reporters I dealt with had any understanding of business and economics at all. Based on these stories, very little has changed.
Recall that Trump only imposed his tariffs part way through 2018, and only on certain goods from certain countries. Then consider that when tariffs or similar measures are imposed, businesses can't just turn on a dime and switch to domestic suppliers. Even if comparable products can be sourced at home, it takes time to cancel existing contracts and arrange new ones. In many cases it may never be possible to find new suppliers: businesses just have to pay the tariffs and hope they can pass the cost on to their customers. None of this happens overnight, or even within a few months.
It's important to keep in mind that the tariffs don't operate in some kind of a vacuum. The US economy is continuing to grow smartly even as signs of a slowdown elsewhere in the world are multiplying. If the US economy is outpacing its trading partners, it's only to be expected that its trade balance will worsen.
The data released today should not have come as a surprise to anyone who has been paying attention. Trump has been tweeting regularly about how much money the US Treasury is making from his tariffs. He think's it's China that's paying them, when it's actually US consumers, but leave that aside for the moment. If the tariffs had brought trade in the affected goods to a screeching halt, there wouldn't be any additional revenue pouring into the Treasury, would there?
There are other factors that we could look at -- the gyrations in energy prices at a time when the US has re-emerged as a net exporter, the difficulty of unwinding global supply chains, and so on. Very possibly, importers have been increasing shipments out of fear that another round of tariffs may be imposed at any time: that would help explain the major surge in the trade deficit just ahead of year-end. It's safe to predict that Trump's asinine trade policies will eventually lead to a slowdown in the growth of global trade; it's much more risky to assume that they will ever lead to a reduction in the US trade deficit.
UPDATE, 7 March. Not all journalists are alike. Here's an excellent analysis from Slate.
Far be it from me to defend Trump's economic policies, or anything else he does for that matter, but this is very poor reporting. During the course of my business career I did countless interviews with the media, and realized at a very early stage that very few of the reporters I dealt with had any understanding of business and economics at all. Based on these stories, very little has changed.
Recall that Trump only imposed his tariffs part way through 2018, and only on certain goods from certain countries. Then consider that when tariffs or similar measures are imposed, businesses can't just turn on a dime and switch to domestic suppliers. Even if comparable products can be sourced at home, it takes time to cancel existing contracts and arrange new ones. In many cases it may never be possible to find new suppliers: businesses just have to pay the tariffs and hope they can pass the cost on to their customers. None of this happens overnight, or even within a few months.
It's important to keep in mind that the tariffs don't operate in some kind of a vacuum. The US economy is continuing to grow smartly even as signs of a slowdown elsewhere in the world are multiplying. If the US economy is outpacing its trading partners, it's only to be expected that its trade balance will worsen.
The data released today should not have come as a surprise to anyone who has been paying attention. Trump has been tweeting regularly about how much money the US Treasury is making from his tariffs. He think's it's China that's paying them, when it's actually US consumers, but leave that aside for the moment. If the tariffs had brought trade in the affected goods to a screeching halt, there wouldn't be any additional revenue pouring into the Treasury, would there?
There are other factors that we could look at -- the gyrations in energy prices at a time when the US has re-emerged as a net exporter, the difficulty of unwinding global supply chains, and so on. Very possibly, importers have been increasing shipments out of fear that another round of tariffs may be imposed at any time: that would help explain the major surge in the trade deficit just ahead of year-end. It's safe to predict that Trump's asinine trade policies will eventually lead to a slowdown in the growth of global trade; it's much more risky to assume that they will ever lead to a reduction in the US trade deficit.
UPDATE, 7 March. Not all journalists are alike. Here's an excellent analysis from Slate.
Bank of Canada: amid the encircling gloom
In line with the unanimous market expectation, the Bank of Canada today left its target rate unchanged at 1.75 percent. The accompanying press release was unmistakably dovish in tone, to the point where financial markets are now pricing in a small chance of a rate cut at the Bank's next Governing Council meeting in mid-April.
Data released just last week showed that the Canadian economy slowed to a crawl in the final quarter of 2018. Real GDP grew at an annualized rate of only 0.4 percent in the quarter. While the Bank of Canada had been expecting some deceleration during that period, largely due to the travails of the energy sector, the actual outcome was both more severe and more broadly-based than expected.
Energy production, notably oil, was the leading source of weakness in the quarter, but the goods sector generally also performed poorly. Moreover, there was a notable slowdown in consumer spending, business investment and exports. The Bank now expects growth for at least the early part of 2019 to be slower than previously forecast. The energy sector will again be under pressure: the compulsory production cuts mandated by the Alberta Government only kicked in at the start of the year. Though these have already been partially unwound -- thanks in part to some unpredicted consequences -- they will serve to restrict output, and hence also GDP, at least through the first calendar quarter.
The Bank's press release notes that the global growth outlook also appears to be weakening, thanks in part to ongoing trade tensions triggered by the Trump administration. The OECD concurs: this week it published a strikingly gloomy forecast for the global economy. The OECD sees risks not only from trade tensions, primarily between the US and China, but also from the chaotic Brexit process, which has potentially severe implications for both the UK and the EU.
In the circumstances it is no surprise that the Bank of Canada is set to take a wait-and-see attitude. There are some indications that US-China trade talks may soon bear fruit, and it may yet be that a catastrophic no-deal Brexit at the end of this month can be avoided. Even if those uncertainties abate, the Bank will want to be certain that the domestic economy is back on a more solid footing before it even thinks about resuming its tightening cycle. At the very least this suggests no further rate hike is likely this year, though expectations for a rate cut still look unlikely to be met.
Data released just last week showed that the Canadian economy slowed to a crawl in the final quarter of 2018. Real GDP grew at an annualized rate of only 0.4 percent in the quarter. While the Bank of Canada had been expecting some deceleration during that period, largely due to the travails of the energy sector, the actual outcome was both more severe and more broadly-based than expected.
Energy production, notably oil, was the leading source of weakness in the quarter, but the goods sector generally also performed poorly. Moreover, there was a notable slowdown in consumer spending, business investment and exports. The Bank now expects growth for at least the early part of 2019 to be slower than previously forecast. The energy sector will again be under pressure: the compulsory production cuts mandated by the Alberta Government only kicked in at the start of the year. Though these have already been partially unwound -- thanks in part to some unpredicted consequences -- they will serve to restrict output, and hence also GDP, at least through the first calendar quarter.
The Bank's press release notes that the global growth outlook also appears to be weakening, thanks in part to ongoing trade tensions triggered by the Trump administration. The OECD concurs: this week it published a strikingly gloomy forecast for the global economy. The OECD sees risks not only from trade tensions, primarily between the US and China, but also from the chaotic Brexit process, which has potentially severe implications for both the UK and the EU.
In the circumstances it is no surprise that the Bank of Canada is set to take a wait-and-see attitude. There are some indications that US-China trade talks may soon bear fruit, and it may yet be that a catastrophic no-deal Brexit at the end of this month can be avoided. Even if those uncertainties abate, the Bank will want to be certain that the domestic economy is back on a more solid footing before it even thinks about resuming its tightening cycle. At the very least this suggests no further rate hike is likely this year, though expectations for a rate cut still look unlikely to be met.
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