In my previous post here, "Camp Justin", I stated that the Trudeau Liberals were "promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything." Now the party has released its full election platform, spelling out the full cost of doing more of the same for another four years. It's quite an eye-opener.
Recall that in the 2015 election campaign, Justin Trudeau pledged to run modest deficits to get the economy moving again, with a timetable to restore balance by 2019. He has often stated that he believes it was this pledge that won him that election. That belief is about to be put to the test, because the platform for the October 21 vote calls for much larger deficits, and this time with not even a hint of a plan to get back to balance.
Specifically, the plan calls for new spending -- sorry, "investments" -- of C$ 9.3 billion in 2020-21, rising to $17 billion by the fourth year of the new mandate. The Federal deficit, which was only boosted to $ 14 billion in the last fiscal year by some year-end accounting trickery, is projected to jump to $27 billion in 2010-21, then edge lower to $21 billion by 2024, a projection that requires some frankly heroic assumptions about revenue growth. The Federal debt/GDP ratio is projected to edge down from just below 31 percent currently to just above 30 percent by 2024.
There was a clear case for deficit spending in 2015. The economy was still having trouble gaining traction in the wake of the global financial crisis, and there was little scope for further monetary stimulus. The case for even bigger deficits now is rather weaker. The economy is, in the estimation of the Bank of Canada, operating close to potential, with little slack in the labour market and at least some signs of rising inflationary risks. Trudeau's calculus here is now nakedly political, rather than economic.
Will it work? Even before the full platform was unveiled, the Tories had been seeking to portray Trudeau as a spendthrift. Over the next few days, once the Tories and their ad agency have had a chance to work through the details of the Liberal plan, we can expect a whole lot more attacks along those lines. The contrast with the Tories own fiscal plans, which call for the budget to be returned to balance by 2014, will surely be brought into sharp relief.
One argument the Tories will certainly try to use is that by boosting deficits now, a Liberal government would leave itself no ammunition to fend off the next economic downturn. This does not make a whole lot of sense in today's context. With inflation not really an issue, it must be better to use fiscal and monetary measures to prevent or at least indefinitely delay that downturn, rather than hold off and then have to deal with all the problems that recessions bring. But even if the deficits are not dangerous in themselves -- and they're not -- can voters be persuaded to accept the prospect of several more years of deficit spending when they see that money is being borrowed to finance fripperies like camping "bursaries"? Stay tuned.
Monday 30 September 2019
Friday 27 September 2019
Camp Justin
With the Canadian federal election now less than a month away -- polling day is October 21 -- the main parties are wheeling out a variety of expensive policy proposals that have one thing in common: the parties are very tight-lipped about how they plan to pay for all this largesse. The Conservatives are, predictably enough, promising to cut taxes; the NDP promises to roll out a national pharma-care programme; and the Green Party wants to beef up Canada's efforts to combat climate change.
And the Liberals? Well, for the most part, they're promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything. There are targeted tax cuts (for the amorphous "middle class", of course); a patchwork fill-in-the-gaps pharma-care programme; and a piecemeal approach to climate change centred on a carbon tax that is fiercely opposed by some Provinces.
But there's also this: Justin Trudeau took a ride in a canoe in Northern Ontario this week and then announced his government, if re-elected, would spend $150 million to create "bursaries" to allow 75,000 families to spend a few days camping in a national or provincial park. This is an idea that nobody can love, so it would be no surprise if it gets very little mention for the rest of the campaign. Trudeau already has a reputation among a wide swathe of the electorate as a spendthrift, and this scheme surely serves as proof of that, And even for those (like me) who think the fiscal situation is perfectly manageable, it calls into question Trudeau's sense of priorities. If you want to spend an extra 150 mil' to benefit young people, there are better uses for it: education, medical research, clean water for indigenous communities....
Out on the Campaign trail, Trudeau is behaving as though the whole blackface scandal never happened, and there are signs that he may get away with it. If his aim now is to reset his image as a serious leader of the country, this wacky bursary scheme is a thoroughly weird way to go about it.
And the Liberals? Well, for the most part, they're promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything. There are targeted tax cuts (for the amorphous "middle class", of course); a patchwork fill-in-the-gaps pharma-care programme; and a piecemeal approach to climate change centred on a carbon tax that is fiercely opposed by some Provinces.
But there's also this: Justin Trudeau took a ride in a canoe in Northern Ontario this week and then announced his government, if re-elected, would spend $150 million to create "bursaries" to allow 75,000 families to spend a few days camping in a national or provincial park. This is an idea that nobody can love, so it would be no surprise if it gets very little mention for the rest of the campaign. Trudeau already has a reputation among a wide swathe of the electorate as a spendthrift, and this scheme surely serves as proof of that, And even for those (like me) who think the fiscal situation is perfectly manageable, it calls into question Trudeau's sense of priorities. If you want to spend an extra 150 mil' to benefit young people, there are better uses for it: education, medical research, clean water for indigenous communities....
Out on the Campaign trail, Trudeau is behaving as though the whole blackface scandal never happened, and there are signs that he may get away with it. If his aim now is to reset his image as a serious leader of the country, this wacky bursary scheme is a thoroughly weird way to go about it.
Wednesday 18 September 2019
It's a gas, gas, gas -- again
Once again, the key mover in Canada's consumer price index for August was gasoline. Data released this morning by Statistics Canada showed that headline CPI rose 1.9 percent year-on-year, down from a 2.0 percent rise in July. Gasoline prices were 10.2 percent lower than a year ago, compared to a 6.9 percent decline in July. Recent events in Saudi Arabia may put an end to the weakness in energy prices, but the timing of StatsCan's monthly price surveys likely means that this will not show up until the October report.
To some degree, the fall in energy prices has been concealing a slight deterioration in Canada's underlying inflation outlook. Excluding gasoline, CPI rose 2.4 percent year-on-year in August, the same pace as in July. In a slightly unusual piece of editorializing, the press release noted that "broad-based gains in CPI over the past two quarters have coincided with strength in Canadian labour market conditions". Even so, the Bank of Canada's three preferred measure of core CPI remain well-behaved, rising by almost exactly 2 percent in August, in line with the Bank's target.
All eyes are now on the US Federal Reserve, which is generally expected to announce a 25 basis point cut in the Fed funds target later today. What do today's data tell us about the odds of the Bank of Canada following suit at the end of October? In themselves, the CPI numbers are not enough to alter the Bank's policy stance. However, there are mounting signs that the Trump-led tariff conflicts are taking a toll on the domestic economy.
Yesterday StatsCan reported that Canadian manufacturing sales fell 1.3 percent in July, on the heels of a 1.4 percent fall in June. In real terms, sales fell 1.6 percent in July. If the Fed indeed cuts rates today, there could be upward pressure on the Canadian dollar, which would further undermine the competitiveness of Canadian manufactures. The Bank will look to signal any change in its policy outlook ahead of the October 31 Council meeting, but will have to be cautious about saying anything that could be interpreted as political in advance of the October 21 Federal election.
To some degree, the fall in energy prices has been concealing a slight deterioration in Canada's underlying inflation outlook. Excluding gasoline, CPI rose 2.4 percent year-on-year in August, the same pace as in July. In a slightly unusual piece of editorializing, the press release noted that "broad-based gains in CPI over the past two quarters have coincided with strength in Canadian labour market conditions". Even so, the Bank of Canada's three preferred measure of core CPI remain well-behaved, rising by almost exactly 2 percent in August, in line with the Bank's target.
All eyes are now on the US Federal Reserve, which is generally expected to announce a 25 basis point cut in the Fed funds target later today. What do today's data tell us about the odds of the Bank of Canada following suit at the end of October? In themselves, the CPI numbers are not enough to alter the Bank's policy stance. However, there are mounting signs that the Trump-led tariff conflicts are taking a toll on the domestic economy.
Yesterday StatsCan reported that Canadian manufacturing sales fell 1.3 percent in July, on the heels of a 1.4 percent fall in June. In real terms, sales fell 1.6 percent in July. If the Fed indeed cuts rates today, there could be upward pressure on the Canadian dollar, which would further undermine the competitiveness of Canadian manufactures. The Bank will look to signal any change in its policy outlook ahead of the October 31 Council meeting, but will have to be cautious about saying anything that could be interpreted as political in advance of the October 21 Federal election.
Tuesday 17 September 2019
The reluctant spendthrifts
An emerging theme in the Canadian Federal election campaign that just got underway is fiscal discipline. The Tories are running a TV spot correctly accusing Justin Trudeau of having no plan to return to a balanced budget even in his second term of office, even though he won the 2015 election in part by promising to achieve a zero deficit by this year. Not that the Tories are any better: their leader Andrew Scheer has abandoned a pledge to move quickly to balance the books. He now promises to do so in five years -- which takes us past the next election.
Today the Department of Finance published its Annual Financial Report for the fiscal year 2018-19, which ended in March. The numbers are enlightening, in terms of how they compare to the campaign rhetoric, how they compare to the past, and how they show Canada in the international context.
The final outcome for the fiscal year was a deficit of C$ 14 billion, just a shade below the $14.9 billion estimated on budget day back in March. The thing is, for most of the fiscal year, the government was running at or close to a zero deficit; it was only a big spike in spending for March that pushed the number higher. This happens every year as governments try to book expenditures they have promised to make, even if the actual disbursements don't occur at the time. It would have looked odd for the Trudeau Liberals to be claiming to be using fiscal policy to support the economy if the budget was in fact close to balance.
The relatively favourable outcome reflected faster growth in revenues (up 6.7 percent) than in either program spending (up 4.7 percent) or public debt costs (up 6.3 percent). The notably slow growth in program spending reflects widely-reported difficulties in carrying out some of the Government's pledges, especially in areas such as infrastructure where other levels of government have been slow to provide matching funding. As for public debt charges, these now account for less than 7 percent of all spending, down from more than 30 percent in the fiscal dark ages of the mid-1990s.
Canada's public debt-to-GDP ratio now stands at 30.9 percent. This is the lowest figure for any G7 country and less than half the G7 average, though it should be kept in mind that the average is boosted by the very high indebtedness of Japan and Italy. It should also be kept in mind that Canada's Provinces also have debts of their own, with Ontario a particular deadbeat, so the fiscal situation for the entire public sector is not quite as rosy as today's data suggest.
Justin Trudeau was widely scorned back in 2015 for suggesting that if the economy grew, "the deficit will take care of itself". That line is already being used against him in the current campaign, but the fact is that the numbers prove that to a great extent, he was right. The Tories will still paint him as a spendthrift, but the data say otherwise.
Today the Department of Finance published its Annual Financial Report for the fiscal year 2018-19, which ended in March. The numbers are enlightening, in terms of how they compare to the campaign rhetoric, how they compare to the past, and how they show Canada in the international context.
The final outcome for the fiscal year was a deficit of C$ 14 billion, just a shade below the $14.9 billion estimated on budget day back in March. The thing is, for most of the fiscal year, the government was running at or close to a zero deficit; it was only a big spike in spending for March that pushed the number higher. This happens every year as governments try to book expenditures they have promised to make, even if the actual disbursements don't occur at the time. It would have looked odd for the Trudeau Liberals to be claiming to be using fiscal policy to support the economy if the budget was in fact close to balance.
The relatively favourable outcome reflected faster growth in revenues (up 6.7 percent) than in either program spending (up 4.7 percent) or public debt costs (up 6.3 percent). The notably slow growth in program spending reflects widely-reported difficulties in carrying out some of the Government's pledges, especially in areas such as infrastructure where other levels of government have been slow to provide matching funding. As for public debt charges, these now account for less than 7 percent of all spending, down from more than 30 percent in the fiscal dark ages of the mid-1990s.
Canada's public debt-to-GDP ratio now stands at 30.9 percent. This is the lowest figure for any G7 country and less than half the G7 average, though it should be kept in mind that the average is boosted by the very high indebtedness of Japan and Italy. It should also be kept in mind that Canada's Provinces also have debts of their own, with Ontario a particular deadbeat, so the fiscal situation for the entire public sector is not quite as rosy as today's data suggest.
Justin Trudeau was widely scorned back in 2015 for suggesting that if the economy grew, "the deficit will take care of itself". That line is already being used against him in the current campaign, but the fact is that the numbers prove that to a great extent, he was right. The Tories will still paint him as a spendthrift, but the data say otherwise.
Wednesday 11 September 2019
Do your homework!
I haven't had a rant about the incompetence/laziness of business journalists for a while. Time to correct that. This article from today's Toronto Star, headlined "Toronto leads new housing starts in August", contains a statistical error so blindingly obvious that you would think a grade school student would catch it.
The author is one Michael Lewis*, described as a "business reporter", so this is kind of story is his everyday bread and butter. In case the link fails to get you past the Star's increasingly onerous paywall, here's the offending paragraph:
According to the Canada Mortgage and Housing Corp., Ontario led the increase with seasonally adjusted starts jumping to 81,457, followed by Quebec at 48,772. Toronto was tops in metropolitan areas with 3,131 starts in August, while Montreal placed second with 2,031.
Let's dig into that for a second. Toronto is by far the biggest city in Ontario. According to World Atlas, Ontario's population in 2016 was about 13.5 million, with the City of Toronto accounting for about 2.7 million of that. Note that Lewis refers to the "metropolitan area"; if you add in the various groupings commonly cited -- in increasing order, the Greater Toronto Area (GTA), Greater Toronto-Hamilton Area (GTHA) and Greater Golden Horseshoe (whatever), you can easily come up with a population for the metropolitan area that's more than half of the Provincial total.
But we don't have to do that to spot Lewis's error. Using the numbers he quotes, it seems as if Toronto (population 2.7 million) had 3,131 housing starts in August, while the rest of the Province (population 10.8 million) had over 78,000! You'd think a reporter sitting in a Toronto newsroom and writing about business stories every day might have twigged to the fact that that's wildly implausible.
What happened here is perfectly simple. After using the seasonally adjusted and annualized data for the province, Lewis switched seamlessly, incorrectly and quite possibly unwittingly to the raw monthly numbers when referring to the individual cities. The source data can all be found in the original report from Canada Mortgage and Housing Corporation. In case you actually care, in Table 1 we find that housing starts in Ontario in August totalled 7,316 (not annualized or adjusted), with Toronto accounting for 3,131 of those.
This isn't rocket science. It isn't even economics in any real sense. It's just the sort of fact-checking that's supposedly the job of every journalist. Sadly, as I've often said in the past, if you want accuracy these days, you're probably better off relying on a blogger.
* Not that one!!
The author is one Michael Lewis*, described as a "business reporter", so this is kind of story is his everyday bread and butter. In case the link fails to get you past the Star's increasingly onerous paywall, here's the offending paragraph:
According to the Canada Mortgage and Housing Corp., Ontario led the increase with seasonally adjusted starts jumping to 81,457, followed by Quebec at 48,772. Toronto was tops in metropolitan areas with 3,131 starts in August, while Montreal placed second with 2,031.
Let's dig into that for a second. Toronto is by far the biggest city in Ontario. According to World Atlas, Ontario's population in 2016 was about 13.5 million, with the City of Toronto accounting for about 2.7 million of that. Note that Lewis refers to the "metropolitan area"; if you add in the various groupings commonly cited -- in increasing order, the Greater Toronto Area (GTA), Greater Toronto-Hamilton Area (GTHA) and Greater Golden Horseshoe (whatever), you can easily come up with a population for the metropolitan area that's more than half of the Provincial total.
But we don't have to do that to spot Lewis's error. Using the numbers he quotes, it seems as if Toronto (population 2.7 million) had 3,131 housing starts in August, while the rest of the Province (population 10.8 million) had over 78,000! You'd think a reporter sitting in a Toronto newsroom and writing about business stories every day might have twigged to the fact that that's wildly implausible.
What happened here is perfectly simple. After using the seasonally adjusted and annualized data for the province, Lewis switched seamlessly, incorrectly and quite possibly unwittingly to the raw monthly numbers when referring to the individual cities. The source data can all be found in the original report from Canada Mortgage and Housing Corporation. In case you actually care, in Table 1 we find that housing starts in Ontario in August totalled 7,316 (not annualized or adjusted), with Toronto accounting for 3,131 of those.
This isn't rocket science. It isn't even economics in any real sense. It's just the sort of fact-checking that's supposedly the job of every journalist. Sadly, as I've often said in the past, if you want accuracy these days, you're probably better off relying on a blogger.
* Not that one!!
Friday 6 September 2019
Validation for the Bank of Canada
The US Non-farm Payrolls report for September, released this morning, confirmed that the economy is moving onto a slower growth path. The addition of 130,000 jobs in the month fell short of market expectations. The unemployment rate held steady at 3.7 percent, while year-on-year wages growth stood at 3.7 percent. Average monthly payroll gains this year are significantly lower than in the same period of 2018.
In contrast, the Canadian jobs data was much stronger than than expected, at least at the headline level. The economy added 81,000 jobs in the month, although most of the new positions were part-time in nature. The private sector fully accounted for the job gains. In line with the trend seen since the start of the year, virtually all of the new jobs were in the service sector. This may well reflect uncertainty in the goods-producing sector resulting from the Trump trade wars.
(As an anecdotal aside. just about every restaurant and store in my own little tourist town is clamouring for workers. Considering that the tourist season is set to wind down as the cooler weather approaches, this is quite remarkable).
Over the past twelve months the economy has added 471,000 jobs, the highest figure for any twelve-month period since 2003. Just under two-thirds of the new jobs have been full-time in nature. Importantly, about four in five of the new jobs have been in the private sector, with public sector and self-employment little changed.
No doubt the Bank of Canada had advance knowledge of these numbers when it made its no-change policy decision this week. It appears that the Bank is taking little risk in declining to join in with the global monetary easing trend, at least in the short term.
In contrast, the Canadian jobs data was much stronger than than expected, at least at the headline level. The economy added 81,000 jobs in the month, although most of the new positions were part-time in nature. The private sector fully accounted for the job gains. In line with the trend seen since the start of the year, virtually all of the new jobs were in the service sector. This may well reflect uncertainty in the goods-producing sector resulting from the Trump trade wars.
(As an anecdotal aside. just about every restaurant and store in my own little tourist town is clamouring for workers. Considering that the tourist season is set to wind down as the cooler weather approaches, this is quite remarkable).
Over the past twelve months the economy has added 471,000 jobs, the highest figure for any twelve-month period since 2003. Just under two-thirds of the new jobs have been full-time in nature. Importantly, about four in five of the new jobs have been in the private sector, with public sector and self-employment little changed.
No doubt the Bank of Canada had advance knowledge of these numbers when it made its no-change policy decision this week. It appears that the Bank is taking little risk in declining to join in with the global monetary easing trend, at least in the short term.
Thursday 5 September 2019
Clusterfexit
The notion that history repeats itself first as tragedy, then as farce, originated with Karl Marx. This certainly applies to Brexit, but while the tragic part was very short -- the initial referendum back in 2016 -- the farcical part has now dragged on for more than three years, and only seems to be getting worse.
First the man who triggered the whole fiasco, David Cameron, promptly left the scene in the wake of the referendum. Then the leading candidates to replace him, Boris Johnson and Michael Gove, knifed each other in the back, allowing EU remainer Theresa May to take on the Prime Ministership and attempt to negotiate a deal with the EU. Then May rashly decided to call an early general election in which she managed to squander the Tories' majority in Parliament, leaving her government dependent on a shaky alliance with the Northern Ireland DUP, a throwback to earlier sectarian times. Then, after repeated failures, May managed to obtain a draft departure deal with the EU, only to have it rejected no fewer than three times by the House of Commons. At that point May resigned, eventually to be replaced by Boris Johnson.
Under Johnson's "leadership" events have only become more bizarre. He pledged to leave the EU by October 31 "do or die" -- i.e., deal or no deal. As regards getting a deal, however, his initial position was that he wouldn't even meet with the EU unless it first agreed to his key demand, abandonment of the so-called "backstop" for the Irish border. He subsequently agreed to meet with key leaders like Taoiseach Leo Varadkar, Chancellor Merkel and President Macron, with the main achievement being a picture showing Johnson with a foot on a coffee table at the Elysee Palace.
With the October 31 deadline drawing closer and no sign of progress, Johnson abruptly decided to force the issue. He obtained the Queen's consent to prorogue (suspend) Parliament in early September, aiming to recall it again just two weeks before the Brexit deadline. This was a blatant attempt to make it impossible for Parliament to prevent a no deal Brexit, and Parliament finally got its act together. This week, the House of Commons seized control of the agenda and passed a bill aimed at preventing a no-deal departure on October 31. Johnson then announced his intention to call an election for October 15, but the Commons denied him the two-thirds majority needed to do so. More than twenty of Johnson's own MPs voted against him and were promptly ousted from the party.
It looks like a stalemate. Prorogation is still set to happen next week. The Commons' bill preventing no-deal Brexit is being debated in the House of Lords; with fears of filibuster and amendments from pro-Brexit Tory peers seemingly lifted, it could receive Royal Assent within days. Taking a leaf from Theresa May's book, Tory grandee and arch Brexiteer Jacob Rees-Mogg plans to re-introduce the call for an early election on Monday, the eve of prorogation day.
There is no good way out of this. Even another referendum would be risky: with passions so heightened on all sides, the odds of civil disorder must be alarmingly high. An election is inevitable sooner rather than later, but probably won't settle anything. The Tories are deeply divided and afraid of being outflanked on the right by Nigel Farage's Brexit Party. Labour, led by the EU-skeptical Jeremy Corbyn (who is, whisper the word, an actual socialist), is not much more united. A hung Parliament looks to be the likeliest outcome.
The ultimate irony is that whether the UK leaves the EU with a deal or without one, the issues that have driven the astounding events of the past three years will remain unresolved. The shape of the future economic relationship between the UK and its biggest trading partner will still have to be determined. Marx's view of history may have had only two stages, but if we ever reach the end of the farcical part, a whole new stage will begin. First tragedy, then farce, then exhaustion?
First the man who triggered the whole fiasco, David Cameron, promptly left the scene in the wake of the referendum. Then the leading candidates to replace him, Boris Johnson and Michael Gove, knifed each other in the back, allowing EU remainer Theresa May to take on the Prime Ministership and attempt to negotiate a deal with the EU. Then May rashly decided to call an early general election in which she managed to squander the Tories' majority in Parliament, leaving her government dependent on a shaky alliance with the Northern Ireland DUP, a throwback to earlier sectarian times. Then, after repeated failures, May managed to obtain a draft departure deal with the EU, only to have it rejected no fewer than three times by the House of Commons. At that point May resigned, eventually to be replaced by Boris Johnson.
Under Johnson's "leadership" events have only become more bizarre. He pledged to leave the EU by October 31 "do or die" -- i.e., deal or no deal. As regards getting a deal, however, his initial position was that he wouldn't even meet with the EU unless it first agreed to his key demand, abandonment of the so-called "backstop" for the Irish border. He subsequently agreed to meet with key leaders like Taoiseach Leo Varadkar, Chancellor Merkel and President Macron, with the main achievement being a picture showing Johnson with a foot on a coffee table at the Elysee Palace.
With the October 31 deadline drawing closer and no sign of progress, Johnson abruptly decided to force the issue. He obtained the Queen's consent to prorogue (suspend) Parliament in early September, aiming to recall it again just two weeks before the Brexit deadline. This was a blatant attempt to make it impossible for Parliament to prevent a no deal Brexit, and Parliament finally got its act together. This week, the House of Commons seized control of the agenda and passed a bill aimed at preventing a no-deal departure on October 31. Johnson then announced his intention to call an election for October 15, but the Commons denied him the two-thirds majority needed to do so. More than twenty of Johnson's own MPs voted against him and were promptly ousted from the party.
It looks like a stalemate. Prorogation is still set to happen next week. The Commons' bill preventing no-deal Brexit is being debated in the House of Lords; with fears of filibuster and amendments from pro-Brexit Tory peers seemingly lifted, it could receive Royal Assent within days. Taking a leaf from Theresa May's book, Tory grandee and arch Brexiteer Jacob Rees-Mogg plans to re-introduce the call for an early election on Monday, the eve of prorogation day.
There is no good way out of this. Even another referendum would be risky: with passions so heightened on all sides, the odds of civil disorder must be alarmingly high. An election is inevitable sooner rather than later, but probably won't settle anything. The Tories are deeply divided and afraid of being outflanked on the right by Nigel Farage's Brexit Party. Labour, led by the EU-skeptical Jeremy Corbyn (who is, whisper the word, an actual socialist), is not much more united. A hung Parliament looks to be the likeliest outcome.
The ultimate irony is that whether the UK leaves the EU with a deal or without one, the issues that have driven the astounding events of the past three years will remain unresolved. The shape of the future economic relationship between the UK and its biggest trading partner will still have to be determined. Marx's view of history may have had only two stages, but if we ever reach the end of the farcical part, a whole new stage will begin. First tragedy, then farce, then exhaustion?
Wednesday 4 September 2019
Bank of Canada sets the stage for easing
As expected, the Bank of Canada kept its overnight rate target unchanged at 1.75 percent at today's Governing Council meeting. As the press release notes, "Canada's economy is operating close to potential and inflation is on target". Moreover, growth was higher than the Bank had expected in Q2, and wages have accelerated sharply in recent months, reflecting the tightness in the labour market.
Despite these apparent positives, the Bank is cautious about the outlook, expecting growth to slow in the second half of the year. The reason for this is simple: trade wars initiated by the Trump administration are starting to take a toll on the global growth outlook, which will inevitably have an impact on Canada's very open economy sooner rather than later. The press release makes it clear that these developments will be the key drivers of the Bank's policy decisions in the coming months.
The problem which the Bank of Canada (and other central banks) face is that monetary policy may prove largely ineffective in supporting growth in current circumstances. Even with borrowing costs at rock-bottom levels, businesses will be reluctant to invest as long as the threat of capricious tariffs persists. Fed Chair Jerome Powell voiced this uncertainty in announcing the FOMC's latest policy decision, earning himself a torrent of abuse from Donald Trump for his pains. A rate cut by the Bank of Canada might provide some marginal stimulus by weakening the exchange rate, but there is little likelihood of it fully offsetting the growing impact of tariff wars.
Today's Governing Council meeting was the last before Canada's Federal election. The next opportunity for the Bank to cut rates falls on October 30. Look for Governor Poloz and his colleagues to take every opportunity in the coming weeks to signal their intentions, while avoiding saying anything that might be regarded as overtly political. Markets are pricing in an even chance of a rate cut next month, and a move by the end of the year now looks almost certain, barring a sudden end to the tariff insanity. .
Despite these apparent positives, the Bank is cautious about the outlook, expecting growth to slow in the second half of the year. The reason for this is simple: trade wars initiated by the Trump administration are starting to take a toll on the global growth outlook, which will inevitably have an impact on Canada's very open economy sooner rather than later. The press release makes it clear that these developments will be the key drivers of the Bank's policy decisions in the coming months.
The problem which the Bank of Canada (and other central banks) face is that monetary policy may prove largely ineffective in supporting growth in current circumstances. Even with borrowing costs at rock-bottom levels, businesses will be reluctant to invest as long as the threat of capricious tariffs persists. Fed Chair Jerome Powell voiced this uncertainty in announcing the FOMC's latest policy decision, earning himself a torrent of abuse from Donald Trump for his pains. A rate cut by the Bank of Canada might provide some marginal stimulus by weakening the exchange rate, but there is little likelihood of it fully offsetting the growing impact of tariff wars.
Today's Governing Council meeting was the last before Canada's Federal election. The next opportunity for the Bank to cut rates falls on October 30. Look for Governor Poloz and his colleagues to take every opportunity in the coming weeks to signal their intentions, while avoiding saying anything that might be regarded as overtly political. Markets are pricing in an even chance of a rate cut next month, and a move by the end of the year now looks almost certain, barring a sudden end to the tariff insanity. .
Subscribe to:
Posts (Atom)