After eking out only minimal growth in the two preceding quarters, Canada's real GDP surged at a 3.7 percent annualized rate in Q2. This was the strongest performance in two years and comfortably topped the expert consensus expectation. Moreover, GDP grew 0.2 percent in June, a strong "handoff" to Q3 that likely portends another positive showing for the current quarter as a whole.
The headline number would appear to give the Bank of Canada every reason to leave interest rates unchanged at next week's Governing Council meeting, and that is indeed the likeliest outcome. However, the composition of the growth in Q2 will raise a few alarms at the Bank. The strong headline number was entirely the result of the external sector: export volumes rose 3.7 percent in the quarter (NB: not annualized), led by a 5.9 percent jump in energy exports, while import volumes fell by 1 percent.
These robust numbers were offset by some surprising weakness in the domestic economy: final domestic demand actually edged lower in the quarter. Real consumer spending rose only 0.1 percent, an unexpected outcome given the continuing strength in the employment market and the recent surge in wage growth. There have been signs recently that the jobs market is softening; if consumers were already becoming cautious ahead of that softening, as today's report suggests, then consumer spending could become a drag on overall growth for the remainder of the year.*
The second quarter also saw a 1.6 percent decline in business investment, led by a sharp fall in outlays on machinery and equipment. Notably, StatsCan reports a fall of more than 60 percent in spending on aircraft and other transportation equipment, a factor that also contributed to the decline in import volumes. This may well be attributable to the halt in deliveries of the Boeing 737 Max, which three Canadian airlines had been adding to their fleets.
Regardless of the noise in the data, the fact remains that the 3.7 percent growth figure is comfortably the highest in the G7, and almost twice as fast as the growth posted by the US in the same quarter. While Bank of Canada Governor Poloz and his colleagues will keep a wary eye on the external risks to the economy, there is no reason for them to rush into a rate cut just yet.
* The data for June showed some improvement in the consumer sector, but StatsCan attributes this to the Toronto Raptors' NBA playoff success, the very definition of a one-off event (at least until next year!).
Friday 30 August 2019
Wednesday 28 August 2019
This is the way the world ends
That Donald Trump -- such a card! Last week, talking about trade with China, he glanced heavenwards and declared himself "the Chosen One". The White House quickly clarified that he was joking, though he didn't seem to be smiling as he said it. Remarkably, this piece of casual blasphemy has attracted very little criticism from the evangelical "Christians" that make up most of both Trump's electoral base and the Republican caucuses in Congress.
Trump's gag writers have evidently been working overtime, because over the weekend he offered up the obviously humorous suggestion that nuclear bombs might be used to divert hurricanes away from the United States. And today brings the darkest gag of all: The Washington Post reports that Trump has promised presidential pardons to any of his aides who break the law in order to get the border wall built before next year's election.
White House officials have been quick to assert that Trump is "merely joking" when he says such things. Still, there's been plenty of evidence that he interprets his right to grant pardons very widely, including the possibility of pardoning himself -- not, of course, that he's ever done anything wrong. The morning show hosts on CNN were stunned by the WaPo story, pointing out that the right to grant pardons applies only to offenses that have already taken place. Assuring people of pardons in order to encourage them to break the law is sheer lawlessness.
There seems to be a lot of that about. UK Prime Minister Boris Johnson has today confirmed the worst fears of his opponents by announcing a scheme to "prorogue" Parliament early next month and recall it only in mid-October, leaving almost no time for elected politicians to prevent a no-deal Brexit on October 31. Recall that BoJo was elected PM only by the members of his own party, not the electorate at large; that he has a majority of 1 (one) in the House of Commons, a majority that exists only because of an unholy arrangement with the "Democratic" "Unionist" Party of Northern Ireland; and that all public opinion polls now suggest that a majority of the electorate opposes Brexit.
Proroguing Parliament in order to reset the legislative agenda via a new "Throne Speech" is a normal procedure. However, the length of the suspension is usually a matter of days, not weeks, and the timing of this particular prorogation is so egregious that Johnson's denials of any connection with the Brexit deadline are entirely risible.
What happens next? Opposition leader Jeremy Corbyn has already written to ask for a meeting with the Queen, who can (at least in theory) say no to Johnson's plan. A petition against prorogation is already gathering huge numbers of signatures, and street demonstrations are expected to start as early as this evening. A no confidence vote is likely as soon as Parliament returns in early September, and there is every possibility that enough disillusioned Tories will vote with the opposition parties and bring the Government down. Then what? A temporary coalition, as suggested by Corbyn, to seek a further delay in Brexit while a general election is held? Who knows? This is entirely uncharted territory.
This is the way the world ends, or at least the world as we have known it. Not with a bang, nor with a whimper, but with the tearing down of the basic principles of democratic societies by egotistical right-wing populists.
Trump's gag writers have evidently been working overtime, because over the weekend he offered up the obviously humorous suggestion that nuclear bombs might be used to divert hurricanes away from the United States. And today brings the darkest gag of all: The Washington Post reports that Trump has promised presidential pardons to any of his aides who break the law in order to get the border wall built before next year's election.
White House officials have been quick to assert that Trump is "merely joking" when he says such things. Still, there's been plenty of evidence that he interprets his right to grant pardons very widely, including the possibility of pardoning himself -- not, of course, that he's ever done anything wrong. The morning show hosts on CNN were stunned by the WaPo story, pointing out that the right to grant pardons applies only to offenses that have already taken place. Assuring people of pardons in order to encourage them to break the law is sheer lawlessness.
There seems to be a lot of that about. UK Prime Minister Boris Johnson has today confirmed the worst fears of his opponents by announcing a scheme to "prorogue" Parliament early next month and recall it only in mid-October, leaving almost no time for elected politicians to prevent a no-deal Brexit on October 31. Recall that BoJo was elected PM only by the members of his own party, not the electorate at large; that he has a majority of 1 (one) in the House of Commons, a majority that exists only because of an unholy arrangement with the "Democratic" "Unionist" Party of Northern Ireland; and that all public opinion polls now suggest that a majority of the electorate opposes Brexit.
Proroguing Parliament in order to reset the legislative agenda via a new "Throne Speech" is a normal procedure. However, the length of the suspension is usually a matter of days, not weeks, and the timing of this particular prorogation is so egregious that Johnson's denials of any connection with the Brexit deadline are entirely risible.
What happens next? Opposition leader Jeremy Corbyn has already written to ask for a meeting with the Queen, who can (at least in theory) say no to Johnson's plan. A petition against prorogation is already gathering huge numbers of signatures, and street demonstrations are expected to start as early as this evening. A no confidence vote is likely as soon as Parliament returns in early September, and there is every possibility that enough disillusioned Tories will vote with the opposition parties and bring the Government down. Then what? A temporary coalition, as suggested by Corbyn, to seek a further delay in Brexit while a general election is held? Who knows? This is entirely uncharted territory.
This is the way the world ends, or at least the world as we have known it. Not with a bang, nor with a whimper, but with the tearing down of the basic principles of democratic societies by egotistical right-wing populists.
Wednesday 21 August 2019
Will he or won't he?
Bank of Canada Governor Stephen Poloz, that is. Despite the Bank's generally upbeat view of the economic outlook, in recent weeks markets have begun to price in a greater probability of a rate cut, possibly as soon as next month. The logic is that if the Federal Reserve is cutting, the Bank will need to match or risk seeing the exchange rate move to an uncompetitive level.
This morning Statistics Canada released its report on consumer prices for July. Headline CPI rose 2 percent year-on-year, the same as in June and exactly in line with the Bank's target. Despite this, rate cut expectations have been tempered somewhat, on the basis that markets had been expecting a slightly lower number. Inasmuch as expectations for a rate cut were largely unrelated to the inflation outlook, this is slightly perverse.
All eight of the sub-indices calculated by StatsCan were higher year-on-year in July but, as has been the case for the past year and more, the key driver of the headline number was the price of gasoline. This rose month-on-month, but remained lower (by almost 7 percent) on an annual basis. This helped offset increases in prices for durable goods and food, as well as a sharp rise in air transportation costs. Anecdotally it appears that gasoline prices have retreated this month, so when StatsCan publishes its August data, it may well be that CPI moves just below the target range.
The bank's three preferred core measure of inflation showed virtually the same annual increases in July as in June. The mean of the three measures remains fractionally above the 2 percent target.
The Bank's next interest rate announcement is scheduled for two weeks from now, on September 4. With Labour Day out of the way, campaigning for the October Federal election will be getting into full swing. Although the Bank has changed its policy settings ahead of elections in the past, it would likely prefer not to do so. An external shock, such as another Fed rate cut, could force the Bank's hand, but in the absence of a sudden shift in Gov. Poloz's rhetoric, no rate cut is likely until the end of October, when the election will be safely out of the way.
This morning Statistics Canada released its report on consumer prices for July. Headline CPI rose 2 percent year-on-year, the same as in June and exactly in line with the Bank's target. Despite this, rate cut expectations have been tempered somewhat, on the basis that markets had been expecting a slightly lower number. Inasmuch as expectations for a rate cut were largely unrelated to the inflation outlook, this is slightly perverse.
All eight of the sub-indices calculated by StatsCan were higher year-on-year in July but, as has been the case for the past year and more, the key driver of the headline number was the price of gasoline. This rose month-on-month, but remained lower (by almost 7 percent) on an annual basis. This helped offset increases in prices for durable goods and food, as well as a sharp rise in air transportation costs. Anecdotally it appears that gasoline prices have retreated this month, so when StatsCan publishes its August data, it may well be that CPI moves just below the target range.
The bank's three preferred core measure of inflation showed virtually the same annual increases in July as in June. The mean of the three measures remains fractionally above the 2 percent target.
The Bank's next interest rate announcement is scheduled for two weeks from now, on September 4. With Labour Day out of the way, campaigning for the October Federal election will be getting into full swing. Although the Bank has changed its policy settings ahead of elections in the past, it would likely prefer not to do so. An external shock, such as another Fed rate cut, could force the Bank's hand, but in the absence of a sudden shift in Gov. Poloz's rhetoric, no rate cut is likely until the end of October, when the election will be safely out of the way.
Thursday 15 August 2019
Greta Expectations
All power to Greta Thunberg and her environmental activism, but...is the elaborate virtue signalling represented by her current sea voyage to New York really a good look?
It seems to suggest that in order to save the planet, you need super-rich friends with an expensive racing yacht, plus enough time on your hands to spend sixteen days on a journey that can be done in six hours. Remember, from New York she's heading to Chile, and she won't be doing that by boat. It doesn't seem to be the kind of message that will win many converts among ordinary folk.
So, bon voyage and a safe arrival, Ms Thunberg. But if you want to take the people along with you, you're gonna need a bigger boat.
It seems to suggest that in order to save the planet, you need super-rich friends with an expensive racing yacht, plus enough time on your hands to spend sixteen days on a journey that can be done in six hours. Remember, from New York she's heading to Chile, and she won't be doing that by boat. It doesn't seem to be the kind of message that will win many converts among ordinary folk.
So, bon voyage and a safe arrival, Ms Thunberg. But if you want to take the people along with you, you're gonna need a bigger boat.
Wednesday 14 August 2019
Getting scared yet?
All of a sudden the business media are in full-on recession watch -- and not without reason. Just from CNN we learn that growth in China's industrial production has slipped to its slowest pace in seventeen years (though most countries would be very happy with 4.8 percent year-on-year growth); that five major economies, including the UK and Germany, are flirting with recession; and that the US yield curve (2-year vs. 10-year Treasuries) has inverted for the first time since 2007, a development that is generally a harbinger of bad times to come. In response to all this the DJIA plunged 400 points at the open on Wednesday and just kept right on falling.
It's not altogether surprising that a recession may be just around the corner. The global economy has been in expansion mode for the better part of a decade, an usually long time by historical standards. Central banks stopped providing additional stimulus some time ago, and in some cases have begun to tighten very modestly. The boost provided by the Trump tax cuts has faded. On top of all this, the impact of the tariff wars unleashed by Trump is clearly starting to be felt. Global trade is slowing, with both the US and China reporting falls in exports.
It's interesting, then, that Trump appears for now to have backed away from his latest tariff threat against China. Levies on a fresh array of Chinese products, including many consumer electronics items, were set to take effect in September, but many of these have now been delayed until December 15. Even more interesting is the reason Trump offered for the decision: he's doing it for the Christmas season, "just in case" the tariffs might have an effect on US consumers.
Trump has always claimed, quite preposterously, that his previous tariffs have been paid by China, rather than US buyers of Chinese products. White House insiders have gone so far as to say that this is a quasi-religious belief on Trump's part, one from which he can never be dissuaded. In that light, the decision to suspend the latest tariffs "just in case" represents something of an epiphany, though this being Trump, it's unlikely to mark the start of a more consistent trend toward accurate economic thinking.
What we are clearly seeing in recent Trump pronouncements, including this tariff decision and his repeated attacks on the Federal Reserve, is a growing recognition that his re-election chances in 2020 depend more than anything on the strength of the economy. The thinly-veiled racism and anti-immigrant rants may shore up his base, but that will never be enough to get him back into the Oval Office. Bank of America says it now sees a 30 percent chance of a US recession by election day, and many commentators think BofA is altogether too optimistic. If, as Bill Clinton famously said, "it's the economy, stupid", stupid's prospects have just taken a significant turn for the worst.
It's not altogether surprising that a recession may be just around the corner. The global economy has been in expansion mode for the better part of a decade, an usually long time by historical standards. Central banks stopped providing additional stimulus some time ago, and in some cases have begun to tighten very modestly. The boost provided by the Trump tax cuts has faded. On top of all this, the impact of the tariff wars unleashed by Trump is clearly starting to be felt. Global trade is slowing, with both the US and China reporting falls in exports.
It's interesting, then, that Trump appears for now to have backed away from his latest tariff threat against China. Levies on a fresh array of Chinese products, including many consumer electronics items, were set to take effect in September, but many of these have now been delayed until December 15. Even more interesting is the reason Trump offered for the decision: he's doing it for the Christmas season, "just in case" the tariffs might have an effect on US consumers.
Trump has always claimed, quite preposterously, that his previous tariffs have been paid by China, rather than US buyers of Chinese products. White House insiders have gone so far as to say that this is a quasi-religious belief on Trump's part, one from which he can never be dissuaded. In that light, the decision to suspend the latest tariffs "just in case" represents something of an epiphany, though this being Trump, it's unlikely to mark the start of a more consistent trend toward accurate economic thinking.
What we are clearly seeing in recent Trump pronouncements, including this tariff decision and his repeated attacks on the Federal Reserve, is a growing recognition that his re-election chances in 2020 depend more than anything on the strength of the economy. The thinly-veiled racism and anti-immigrant rants may shore up his base, but that will never be enough to get him back into the Oval Office. Bank of America says it now sees a 30 percent chance of a US recession by election day, and many commentators think BofA is altogether too optimistic. If, as Bill Clinton famously said, "it's the economy, stupid", stupid's prospects have just taken a significant turn for the worst.
Friday 9 August 2019
Canada employment data: not good
Labour force data for July, released by Statistics Canada this morning, leave little room for doubt that the jobs market is slowing sharply. The economy shed 24,000 jobs in the month, while the number of people seeking work rose by 11,000. As a result, the national unemployment rate rose by 0.2 percentage points to 5.7 percent. Although the year-on-year gain in employment is still impressive at 353,000, the weaker trend that has emerged in recent months is now unmistakable.
Looking beyond the headlines, there is little consolation to be found in the details of the report. The private sector shed almost 70,000 jobs in the month. This was partly offset by higher employment in public administration, primarily in Ontario, which is downright bizarre given the Ford government's focus on cost-cutting. There was also a reported gain of 27,000 in the ultra-volatile (and frankly suspect) category of self employment. Without that, the headline numbers would have looked very much worse.
This report is likely to heighten market expectations that the Bank of Canada, despite its largely upbeat rhetoric, will have to follow the Fed's lead in cutting rates sooner rather than later. However, there is one aspect of the data that must make the Bank nervous about easing. The growth of hourly earnings has been moving steadily higher in recent months and reached a 10-year high of 4.5 percent in July. If the July employment numbers are a harbinger of greater slack in the jobs market going forward, the upward trend in wage gains may soon go into reverse. If that does not happen, the Bank will have to balance the need to support the economy against worries over allowing inflation to move above target.
Looking beyond the headlines, there is little consolation to be found in the details of the report. The private sector shed almost 70,000 jobs in the month. This was partly offset by higher employment in public administration, primarily in Ontario, which is downright bizarre given the Ford government's focus on cost-cutting. There was also a reported gain of 27,000 in the ultra-volatile (and frankly suspect) category of self employment. Without that, the headline numbers would have looked very much worse.
This report is likely to heighten market expectations that the Bank of Canada, despite its largely upbeat rhetoric, will have to follow the Fed's lead in cutting rates sooner rather than later. However, there is one aspect of the data that must make the Bank nervous about easing. The growth of hourly earnings has been moving steadily higher in recent months and reached a 10-year high of 4.5 percent in July. If the July employment numbers are a harbinger of greater slack in the jobs market going forward, the upward trend in wage gains may soon go into reverse. If that does not happen, the Bank will have to balance the need to support the economy against worries over allowing inflation to move above target.
Tuesday 6 August 2019
Ready for the Trump slump?
I ended my last post here, just a week ago, with this quasi-prediction: If Trump wants the Fed to keep cutting rates, he just has to continue making stupid policy decisions. Looks like a safe bet.
Well, we haven't had to wait long for next stupid policy decisions. At the G-20 summit in Osaka in the far-off days of late June, Donald Trump and his Chinese counterpart President Xi seemed to agree to put their trade wars on hold for three months to allow negotiations to continue, much to the relief of global markets. However, there's no such thing as an agreement when Trump is one of the parties, and late last week he announced further tariffs on Chinese goods to take effect at the start of September.
China responded by briefly allowing the Yuan to trade through the psychologically important Y7/USD level for the first time in a decade -- and Trump immediately responded to that by having his Treasury Department officially designate China as a currency manipulator. That inevitably plunged US equity markets into their worst daily decline so far this year.
Paul Krugman argues in the Washington Post that the decision to label China as a currency manipulator is Trump's and Trump's alone. Indeed, the wording of the Treasury Department's announcement almost seems to hint at that fact, stating that Secretary Mnuchin acted "under the auspices of President Trump". Trump himself had already tweeted on the subject, leaving Mnuchin and his department very little choice in the matter.
If Krugman is correct in his belief that Trump is winging it, more unhinged decisions are on the way, because there is no sign that Trump is wavering in his entirely incorrect core belief that his tariffs are paid by China, and not by US consumers. The impact on US and global growth is already apparent and can only get worse. With interest rates already so low (contrary to what Trump professes to believe), there are limits to what the Fed can do to offset the damage.
And what if China retaliates? It has already imposed tariffs of its own and shelved plans to ramp up imports of agricultural products from the US, and the brief depreciation of the Yuan was clearly intended as a signal that the country will not put up with Trump's shenanigans indefinitely. Only one side in this dispute has a weapon of mass destruction in its arsenal, and it's not the United States. If China were even to hint at the possibility of starting to dump its huge holdings of US Treasury bonds, the impact on global markets and the global economy would be instantaneous and profoundly damaging. How many more of Trump's provocations will it take for that weapon to be unsheathed? .
Well, we haven't had to wait long for next stupid policy decisions. At the G-20 summit in Osaka in the far-off days of late June, Donald Trump and his Chinese counterpart President Xi seemed to agree to put their trade wars on hold for three months to allow negotiations to continue, much to the relief of global markets. However, there's no such thing as an agreement when Trump is one of the parties, and late last week he announced further tariffs on Chinese goods to take effect at the start of September.
China responded by briefly allowing the Yuan to trade through the psychologically important Y7/USD level for the first time in a decade -- and Trump immediately responded to that by having his Treasury Department officially designate China as a currency manipulator. That inevitably plunged US equity markets into their worst daily decline so far this year.
Paul Krugman argues in the Washington Post that the decision to label China as a currency manipulator is Trump's and Trump's alone. Indeed, the wording of the Treasury Department's announcement almost seems to hint at that fact, stating that Secretary Mnuchin acted "under the auspices of President Trump". Trump himself had already tweeted on the subject, leaving Mnuchin and his department very little choice in the matter.
If Krugman is correct in his belief that Trump is winging it, more unhinged decisions are on the way, because there is no sign that Trump is wavering in his entirely incorrect core belief that his tariffs are paid by China, and not by US consumers. The impact on US and global growth is already apparent and can only get worse. With interest rates already so low (contrary to what Trump professes to believe), there are limits to what the Fed can do to offset the damage.
And what if China retaliates? It has already imposed tariffs of its own and shelved plans to ramp up imports of agricultural products from the US, and the brief depreciation of the Yuan was clearly intended as a signal that the country will not put up with Trump's shenanigans indefinitely. Only one side in this dispute has a weapon of mass destruction in its arsenal, and it's not the United States. If China were even to hint at the possibility of starting to dump its huge holdings of US Treasury bonds, the impact on global markets and the global economy would be instantaneous and profoundly damaging. How many more of Trump's provocations will it take for that weapon to be unsheathed? .
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