The Department of Finance in Ottawa reported today that for the first eleven months of the current fiscal year (i.e. April 2018 to February 2019), the Federal Government ran a budget surplus of C$3.1 billion, compared to a deficit of $6 billion in the same period of the prior year. Revenues are growing apace, up more than 8 percent from a year earlier, while program spending has risen less than 5 percent. It seems that reports suggesting that the government was having trouble spending all the money it had budgeted, particularly on infrastructure, were at least partly correct.
At first glance it would seem that the full-year results will be far better than the deficit of $14.9 billion expected on budget day just a few weeks ago. However, the Department of Finance notes that the budget included over $4 billion in one-time measures that will be booked to the current year once the needed legislation has been approved. Further, the usual "year end adjustments" -- Ottawa's notorious "thirteen month" which allows all kinds of accounting tricks to produce the result the government wants to portray -- are expected to result in a final deficit figure that is broadly in line with the budgeted number.
Two conclusions can be drawn here. First, fiscal policy, far from being stimulative, as the government intended it to be, has actually been a modest restraining influence on growth over the past year. Given the hand-wringing at the Bank of Canada and elsewhere over the economy's loss of momentum, this is, to put it mildly, embarrassing. Second, any "adjustments" put in place to boost the year-end deficit figure for this year will almost certainly lead to a direct reduction in the deficit for the year that's just begun, unless the government suddenly and miraculously becomes better at actually spending money.
It will be interesting to see how the Trudeaucrats spin their fiscal achievements when the election campaign heats up. Up till now they've been bragging about how they're investing in economic growth, but it turns out that's not really true. Given the populist turn in electoral sentiment, as seen in elections in Ontario and Alberta, it would seem there might be more votes to be had from promising fiscal rectitude -- something which today's data, bizarrely enough, would allow the Liberals to claim!
Friday 26 April 2019
Wednesday 24 April 2019
Unbiased
As expected, the Bank of Canada kept its target interest rate unchanged at 1.75 percent after today's Governing Council meeting. The Monetary Policy Report (MPR) that was also released today removes the reference to an underlying tightening bias that has been in place for the past two years, suggesting that rates will remain on hold for the foreseeable future.
Governor Stephen Poloz's statement introducing the MPR focused on the headwinds that the economy is now facing. Poloz noted that the growth slowdown experienced in the final months of 2018, not just in Canada but also elsewhere in the world, had been widely expected, given the waning impact of the Trump administration's tax cuts. However, the slowdown has proved more persistent than forecast, a development which Poloz attributes to Trump-inspired trade conflicts, which show no sign of easing.
Turning to headwinds specific to Canada, Poloz noted four distinct areas of uncertainty. First, the outlook for the oil sector remains subdued. While oil prices have shown signs of recovery, there are severe difficulties in moving Western Canadian product to market, given the effective freeze on pipeline construction and the limited availability of rail alternatives. It is not clear that the recent election of a more industry-friendly government in the Province of Alberta will make any difference here.
Second, there are trade issues specific to Canada. There are serious doubts about whether CUSMA, the proposed NAFTA replacement, can make it through the Democrat-held House of Representatives. In the meantime, Canada's export performance remains weak, something Poloz admits the Bank does not entirely understand.
Third, the Bank continues to pay close attention to the housing market. The overheating previously seen in Toronto and Vancouver has abated, but markets in other urban centres are still performing well. If the Toronto and Vancouver markets stabilize and recover, the overall national picture would naturally improve, which would eventually give the Bank more leeway to resume its tightening cycle.
Finally, Poloz noted recent fiscal policy developments. While the Federal budget and budgets in some Provinces continued to provide stimulus, the recent Ontario budget was more restrictive. In effect, Ontario's planned spending cuts fully offset the fiscal boost provided by other governments, leading the Bank to lower its overall growth forecast by 0.2 percentage points.
The Bank still considers that its policy settings remain below a neutral rate, which it estimates at 2.25-3.25 percent. While it does not anticipate a recession, it now sees the need to maintain its current rate stance for as long as may be needed to offset the international and domestic headwinds and get the economy back to a trend rate of growth. Given the diverse range of negative influences Poloz identified today, rates seem set to remain on hold well into 2020.
Governor Stephen Poloz's statement introducing the MPR focused on the headwinds that the economy is now facing. Poloz noted that the growth slowdown experienced in the final months of 2018, not just in Canada but also elsewhere in the world, had been widely expected, given the waning impact of the Trump administration's tax cuts. However, the slowdown has proved more persistent than forecast, a development which Poloz attributes to Trump-inspired trade conflicts, which show no sign of easing.
Turning to headwinds specific to Canada, Poloz noted four distinct areas of uncertainty. First, the outlook for the oil sector remains subdued. While oil prices have shown signs of recovery, there are severe difficulties in moving Western Canadian product to market, given the effective freeze on pipeline construction and the limited availability of rail alternatives. It is not clear that the recent election of a more industry-friendly government in the Province of Alberta will make any difference here.
Second, there are trade issues specific to Canada. There are serious doubts about whether CUSMA, the proposed NAFTA replacement, can make it through the Democrat-held House of Representatives. In the meantime, Canada's export performance remains weak, something Poloz admits the Bank does not entirely understand.
Third, the Bank continues to pay close attention to the housing market. The overheating previously seen in Toronto and Vancouver has abated, but markets in other urban centres are still performing well. If the Toronto and Vancouver markets stabilize and recover, the overall national picture would naturally improve, which would eventually give the Bank more leeway to resume its tightening cycle.
Finally, Poloz noted recent fiscal policy developments. While the Federal budget and budgets in some Provinces continued to provide stimulus, the recent Ontario budget was more restrictive. In effect, Ontario's planned spending cuts fully offset the fiscal boost provided by other governments, leading the Bank to lower its overall growth forecast by 0.2 percentage points.
The Bank still considers that its policy settings remain below a neutral rate, which it estimates at 2.25-3.25 percent. While it does not anticipate a recession, it now sees the need to maintain its current rate stance for as long as may be needed to offset the international and domestic headwinds and get the economy back to a trend rate of growth. Given the diverse range of negative influences Poloz identified today, rates seem set to remain on hold well into 2020.
Tuesday 23 April 2019
A matter of opinion
I usually only buy the Toronto Star when I want to get angry, but once a week there's good reason to trek over to the store and pick it up. On Sundays the Star includes an insert from the New York Times, featuring a selection of book reviews and some of the week's news and op-ed pieces. The contrast in quality between the NYT material and the Star's own stuff is, to put it mildly, very stark.
This past Sunday, however, we were presented with a reminder that even the world's best journalists can get things wrong, particularly when they are working to deadline. The NYT op-ed pieces included two short articles by Roger Cohen, one on Brexit and one on the Notre-Dame fire, that already look badly misguided. Let's take a look.
Regarding Brexit, Cohen argues here that the odds of the split ever actually happening are shrinking fast. The UK is now all but certain to participate in the elections for the EU Parliament next month. Cohen believes that the pro-EU electorate in the UK will turn out "in force", while the pro-Brexit voters will be "more inclined to sulk".
If only that were true. Barring a last-minute Damascene conversion by the Labour Party, pro-Remain voters will have nowhere obvious to turn. Meanwhile the new Brexit Party founded by the bibulous Nigel Farage is leading in the opinion polls and is very likely to attract large numbers of angry Tory voters, The best guess is that Farage and his unlovely crew will create mayhem in Strasbourg for a few months, then the UK will crash out of the EU without a deal come October 31, with the Europeans wondering why they allowed the agony to go on for so long.
Then there's Notre-Dame, which has special significance for Cohen because he once lived and worked in Paris. After some slightly stretched comparisons between the cathedral and the Statue of Liberty, Cohen teases the possibility of "a French coming-together in a determination to rebuild". Again one has to respond, "if only". The prompt response of France's very rich in offering large sums of money to help with reconstruction has only furthered the divisions within the nation that recent "gilets jaunes" protests have brought to international attention. If there's this kind of money to put a roof back over Notre-Dame, how come there's no money to put a roof over the heads of the homeless? The street protests last weekend, while the stones of Notre-Dame were still hot to the touch, were the largest in many weeks.
I'm not trying to pick on Roger Cohen here, and he gets full marks for trying to see the bright side. The fact is that anyone who floats out an opinion for public consumption, from the Pulitzer-winning journalist to the barely-literate blogger, risks looking very foolish as events take an unexpected turn. And if by any chance Roger happens to see this article, he's very welcome to fire right back if my Brexit forecast turns out to be dead wrong.
This past Sunday, however, we were presented with a reminder that even the world's best journalists can get things wrong, particularly when they are working to deadline. The NYT op-ed pieces included two short articles by Roger Cohen, one on Brexit and one on the Notre-Dame fire, that already look badly misguided. Let's take a look.
Regarding Brexit, Cohen argues here that the odds of the split ever actually happening are shrinking fast. The UK is now all but certain to participate in the elections for the EU Parliament next month. Cohen believes that the pro-EU electorate in the UK will turn out "in force", while the pro-Brexit voters will be "more inclined to sulk".
If only that were true. Barring a last-minute Damascene conversion by the Labour Party, pro-Remain voters will have nowhere obvious to turn. Meanwhile the new Brexit Party founded by the bibulous Nigel Farage is leading in the opinion polls and is very likely to attract large numbers of angry Tory voters, The best guess is that Farage and his unlovely crew will create mayhem in Strasbourg for a few months, then the UK will crash out of the EU without a deal come October 31, with the Europeans wondering why they allowed the agony to go on for so long.
Then there's Notre-Dame, which has special significance for Cohen because he once lived and worked in Paris. After some slightly stretched comparisons between the cathedral and the Statue of Liberty, Cohen teases the possibility of "a French coming-together in a determination to rebuild". Again one has to respond, "if only". The prompt response of France's very rich in offering large sums of money to help with reconstruction has only furthered the divisions within the nation that recent "gilets jaunes" protests have brought to international attention. If there's this kind of money to put a roof back over Notre-Dame, how come there's no money to put a roof over the heads of the homeless? The street protests last weekend, while the stones of Notre-Dame were still hot to the touch, were the largest in many weeks.
I'm not trying to pick on Roger Cohen here, and he gets full marks for trying to see the bright side. The fact is that anyone who floats out an opinion for public consumption, from the Pulitzer-winning journalist to the barely-literate blogger, risks looking very foolish as events take an unexpected turn. And if by any chance Roger happens to see this article, he's very welcome to fire right back if my Brexit forecast turns out to be dead wrong.
Wednesday 17 April 2019
Canada CPI edged up in March
Canada's headline inflation rate edged up again in March to stand at 1.9 percent year on year, up from 1.5 percent in February. For the last several months, the story behind the fluctuations in the yearly inflation rate has been the gradual unwinding of last year's sharp fall in gasoline prices, and this was the case once again in April. Gas prices at the pumps are still lower than they were a year ago, but by a much smaller percentage than earlier in the year.
If we leave the gas price movements aside, the inflation story remains relatively uneventful. All eight of the key components were higher year-on-year in March, but there are no particularly worrying signs from the Bank of Canada's point of view. The Bank's favoured core measures of CPI inched higher in the month, to stand precisely at the Bank's 2 percent target level.
Looking forward, it appears that gasoline prices will remain a major driver of CPI trends through the middle of the year. Last year's declines will fall out of the year-on-year calculations entirely, and specialists such as the ubiquitous "Gas Buddy" predict that pump prices will move significantly higher, partly as a result of seasonal factors such as the switch to more refined "summer gasoline". This is likely to push headline CPI above the 2 percent target at least temporarily, but there is little reason to expect that the Bank's core measures will follow suit, so no policy response from the Bank is likely.
If we leave the gas price movements aside, the inflation story remains relatively uneventful. All eight of the key components were higher year-on-year in March, but there are no particularly worrying signs from the Bank of Canada's point of view. The Bank's favoured core measures of CPI inched higher in the month, to stand precisely at the Bank's 2 percent target level.
Looking forward, it appears that gasoline prices will remain a major driver of CPI trends through the middle of the year. Last year's declines will fall out of the year-on-year calculations entirely, and specialists such as the ubiquitous "Gas Buddy" predict that pump prices will move significantly higher, partly as a result of seasonal factors such as the switch to more refined "summer gasoline". This is likely to push headline CPI above the 2 percent target at least temporarily, but there is little reason to expect that the Bank's core measures will follow suit, so no policy response from the Bank is likely.
Sunday 14 April 2019
Doug Ford, fiscal wimp
During last year's Provincial election campaign, Tory leader Doug Ford warned often and loudly about the dire fiscal straits Ontario was in, thanks to the fecklessness of Kathleen Wynne's Liberal government. Once elected, Ford's Finance Minister Vic Fedeli tabled a Fall Fiscal Update that revised the new government's "inherited" fiscal deficit massively higher, using some dubious accounting techniques, and clearly seemed to be setting the stage for a draconian austerity budget.
It's not as if the Tories were wildly exaggerating the Province's fiscal situation. Ontario is the world's most indebted non-sovereign jurisdiction, an unwelcome encomium it inherited from California (which has almost three times the population) a couple of years back. Moody's downgraded the Province's debt rating to Aa2 back in December, and there have been warnings that Ontario's finances are in such poor shape that they could jeopardize the Federal Government's AAA rating.
So when budget day finally rolled around last week, what did we get? Not very much, frankly. There are widespread reductions in spending across the board, but very few of them are particularly drastic. There are even a few new social initiatives of a distinctly progressive nature: dental care for low income seniors, a child care credit. In addition, the day before the budget Ford promised to spend C$ 11 billion on an ambitious (if not yet fully thought-out) plan to improve public transit in Toronto.
The net result: the oh-so-scary fiscal deficit that Ford and Fedeli warned about during campaign season will be eliminated over a full five-year period. This means that Ontario will not return to a balanced budget -- much less start paying down that world-leading debt burden -- until after the next Provincial election. This has not deterred the opposition parties from decrying Ford's heartlessness, but he hasn't given them very much to work with.
Perhaps we shouldn't be surprised. Like their Republican counterparts south of the border, today's Ontario Tories are populist rather than truly conservative. The Republicans have abandoned all pretense of fiscal rectitude under Donald Trump; Ford and his pals haven't gone that far, but it's clear that cutting spending sounds a lot better on the hustings than it does from inside the Premier's office.
We saw the Premier's populist instincts at work from day one of his government -- the pointless "buck-a-beer" initiative, the firing of the "six million dollar man" at the top of Hydro One, and so on. Budget season has brought more in the same vein, with a continuing heavy emphasis on alcohol that's a little surprising, given Ford's late brother Doug's struggle with the demon rum. Ontarians will soon be able to purchase booze at corner stores, and it will be legal to have US-style "tailgate parties" in parking lots before sports events.
Treating the Province's citizens like adults may be welcome, indeed overdue, but it's not what most people were looking for when they voted Tory last June. However, it seems that Ford has quickly figured out that if he wants a second term in office -- and he seems to love the job, or at least the attention that comes with it -- then he needs to be something of a people-pleaser. That will work as long as the economy stays in decent shape; the job will get a lot harder if we run into some tougher times.
It's not as if the Tories were wildly exaggerating the Province's fiscal situation. Ontario is the world's most indebted non-sovereign jurisdiction, an unwelcome encomium it inherited from California (which has almost three times the population) a couple of years back. Moody's downgraded the Province's debt rating to Aa2 back in December, and there have been warnings that Ontario's finances are in such poor shape that they could jeopardize the Federal Government's AAA rating.
So when budget day finally rolled around last week, what did we get? Not very much, frankly. There are widespread reductions in spending across the board, but very few of them are particularly drastic. There are even a few new social initiatives of a distinctly progressive nature: dental care for low income seniors, a child care credit. In addition, the day before the budget Ford promised to spend C$ 11 billion on an ambitious (if not yet fully thought-out) plan to improve public transit in Toronto.
The net result: the oh-so-scary fiscal deficit that Ford and Fedeli warned about during campaign season will be eliminated over a full five-year period. This means that Ontario will not return to a balanced budget -- much less start paying down that world-leading debt burden -- until after the next Provincial election. This has not deterred the opposition parties from decrying Ford's heartlessness, but he hasn't given them very much to work with.
Perhaps we shouldn't be surprised. Like their Republican counterparts south of the border, today's Ontario Tories are populist rather than truly conservative. The Republicans have abandoned all pretense of fiscal rectitude under Donald Trump; Ford and his pals haven't gone that far, but it's clear that cutting spending sounds a lot better on the hustings than it does from inside the Premier's office.
We saw the Premier's populist instincts at work from day one of his government -- the pointless "buck-a-beer" initiative, the firing of the "six million dollar man" at the top of Hydro One, and so on. Budget season has brought more in the same vein, with a continuing heavy emphasis on alcohol that's a little surprising, given Ford's late brother Doug's struggle with the demon rum. Ontarians will soon be able to purchase booze at corner stores, and it will be legal to have US-style "tailgate parties" in parking lots before sports events.
Treating the Province's citizens like adults may be welcome, indeed overdue, but it's not what most people were looking for when they voted Tory last June. However, it seems that Ford has quickly figured out that if he wants a second term in office -- and he seems to love the job, or at least the attention that comes with it -- then he needs to be something of a people-pleaser. That will work as long as the economy stays in decent shape; the job will get a lot harder if we run into some tougher times.
Friday 5 April 2019
A predictable pullback
After a remarkable six-month run that saw the Canadian economy add almost 300,000 jobs, some sort of pullback was just about inevitable. Indeed, some of us can claim to have seen it coming, though the reliably unreliable "Bay Street consensus" was still looking for further gains in the March data. In the event, Statistics Canada this morning reported a loss of 7,200 jobs in the month, with the unemployment rate unchanged at 5.8 percent.
In truth this is an almost insignificant fall, so it is far too soon to suggest that the positive underlying trend has been broken. The monthly decline is well inside the 30,000 standard error that StatsCan estimates for the employment series, and the strong seasonal pattern in Canadian employment, courtesy of the extreme climate, also needs to be kept in mind. Still, given the much slower growth seen in the economy in the final quarter of 2018, it would not be a surprise if gains in employment in the next few months are limited at best.
One way of looking through the seasonality and volatility of the data is to focus on the year-on-year data. These still look strong. Employment grew by 332,000 in the year to March, or 1.8 percent, with 204,000 of the newly-created jobs being full-time positions. Wage gains remain firmly under control, with the annual increase of just under 2,4 percent in March almost identical to February's increase.
Despite some significant regional disparities -- provincial unemployment rate range from 11.5 percent in Newfoundland and Labrador to 4.9 percent in Saskatchewan -- a national jobless rate of 5.8 percent is as close to "full employment" as Canada ever gets. This would normally have the Bank of Canada on full alert for the possible emergence of inflationary pressures, but the continued moderation in wage gains means there is no reason for the Bank to consider further policy tightening any time soon.
In truth this is an almost insignificant fall, so it is far too soon to suggest that the positive underlying trend has been broken. The monthly decline is well inside the 30,000 standard error that StatsCan estimates for the employment series, and the strong seasonal pattern in Canadian employment, courtesy of the extreme climate, also needs to be kept in mind. Still, given the much slower growth seen in the economy in the final quarter of 2018, it would not be a surprise if gains in employment in the next few months are limited at best.
One way of looking through the seasonality and volatility of the data is to focus on the year-on-year data. These still look strong. Employment grew by 332,000 in the year to March, or 1.8 percent, with 204,000 of the newly-created jobs being full-time positions. Wage gains remain firmly under control, with the annual increase of just under 2,4 percent in March almost identical to February's increase.
Despite some significant regional disparities -- provincial unemployment rate range from 11.5 percent in Newfoundland and Labrador to 4.9 percent in Saskatchewan -- a national jobless rate of 5.8 percent is as close to "full employment" as Canada ever gets. This would normally have the Bank of Canada on full alert for the possible emergence of inflationary pressures, but the continued moderation in wage gains means there is no reason for the Bank to consider further policy tightening any time soon.
Tuesday 2 April 2019
Gov. Poloz braves the chill
Bank of Canada Governor Stephen Poloz made the long flight north to Iqaluit, Nunavut on April Fools Day to talk about trade and the economy. The weather was a relatively balmy -10 degrees celsius -- normal is about -15 at this time of the year -- and Poloz's message was similarly moderate.
Poloz explicitly blamed the slowdown in global trade and investment in the second half of 2018 on "the US-led trade war". This was a key factor in the slowing growth experienced by Canada in the final quarter of the year. However, Poloz noted that there were still signs of forward momentum in the domestic economy, most notably in service industries and in the jobs market.
While hoping for an easing in current trade tensions, Poloz noted that there are things Canada can do by itself to keep the economy moving ahead. He drew attention to the persistence of inter-provincial trade barriers, and suggested that lowering these could add $4.5 billion to GDP, and opportunity "too good to pass up" -- though one, given the current level of rancour between the various regions and levels of government, highly unlikely to come to pass any time soon.
Poloz mentioned some of the other headwinds facing the economy: lower oil prices and the problems getting crude to market, the overvaluation of the housing sector and the accompanying sky-high household debt. However, he reiterated the Bank's belief that its current policy settings will help to keep the economy on track. He expressed confidence that the slow growth phase will be temporary, a view bolstered not only by the January and February employment data, but also by the surprising rebound in GDP growth seen in January.
In all, there was nothing in this speech to change the consensus assumption that the Bank will not be looking to hike rates any further for the balance of this year. Equally, there was nothing to support the minority view that the Bank's next rate move may turn out to be a cut. As always, the Bank's stance is data-dependent, and the next key data release is the March employment report, due this Friday (5th).
Poloz explicitly blamed the slowdown in global trade and investment in the second half of 2018 on "the US-led trade war". This was a key factor in the slowing growth experienced by Canada in the final quarter of the year. However, Poloz noted that there were still signs of forward momentum in the domestic economy, most notably in service industries and in the jobs market.
While hoping for an easing in current trade tensions, Poloz noted that there are things Canada can do by itself to keep the economy moving ahead. He drew attention to the persistence of inter-provincial trade barriers, and suggested that lowering these could add $4.5 billion to GDP, and opportunity "too good to pass up" -- though one, given the current level of rancour between the various regions and levels of government, highly unlikely to come to pass any time soon.
Poloz mentioned some of the other headwinds facing the economy: lower oil prices and the problems getting crude to market, the overvaluation of the housing sector and the accompanying sky-high household debt. However, he reiterated the Bank's belief that its current policy settings will help to keep the economy on track. He expressed confidence that the slow growth phase will be temporary, a view bolstered not only by the January and February employment data, but also by the surprising rebound in GDP growth seen in January.
In all, there was nothing in this speech to change the consensus assumption that the Bank will not be looking to hike rates any further for the balance of this year. Equally, there was nothing to support the minority view that the Bank's next rate move may turn out to be a cut. As always, the Bank's stance is data-dependent, and the next key data release is the March employment report, due this Friday (5th).
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