Divergent paths

It's rare to have a day on which both the US Federal Reserve and the Bank of Canada make rate announcements, but today has been such a day.  With the Fed cutting the funds target by a further 25 basis points and the Bank of Canada once again standing pat, the current divergence between the paths of the two central banks is becoming ever more pronounced.

The Fed's decision to cut rates again was fully priced in by the markets.  With the announcement earlier in the day that US GDP growth slowed to an annualized 1.9 percent in Q3, it is arguable that the Fed has fallen a little behind the curve in its easing cycle, a fact which means, alas, that Donald Trump's criticisms of Fed Chair Jerome Powell have at least some validity.

There had been some speculation that today's might be a "hawkish cut" with the Fed altering the wording of its press release to signify that it regards the easing cycle as being at an end. In the event, today's press release varied only slightly from September's, but the changes can be seen as very slightly hawkish.  While the Fed's policy path will remain data-dependent, previous references to acting as needed to sustain the economic expansion have been removed. As with the previous cuts in this cycle, two FOMC members voted to keep rate unchanged. We will doubtless not have to wait long for Trump to take incoherent potshots at Powell and his colleagues. 

Earlier today in Ottawa, the Bank of Canada issued a more detailed than usual release of its own to explain its decision not to cut rates just yet.  Its case for staying on the sidelines rests on the combination of steady growth, which is expected to further narrow the already modest output gap in the next two years, inflation right at the 2 percent target level, and some evidence of rising wage pressures.   

The Bank sees the risks to this baseline forecast coming mainly from "Ongoing trade conflicts and uncertainty (which) are restraining business investment, trade, and global growth."  Strikingly, given the angst in Western Canada in the wake of the recent election, the Bank makes no direct reference to the sorry state of the energy sector, although it does acknowledge the fall in commodity prices generally. 

Interestingly, the last three words of the release are "fiscal policy developments". Justin Trudeau's Liberals promised in their election platform to run significant budget deficits throughout their mandate.  With the Liberals now dependent on the even more deficit-friendly NDP in the new House of Commons, fiscal policy may become a significant source of stimulus in the months ahead.  Governor Stephen Poloz and his team are right to signal that this can and must influence the direction of monetary policy.

With that said, it is hard to see how the Bank will be able to stand aloof from the global easing cycle for much longer.  Canada now has the highest official rate target in the developed world, and the currency is moving higher as funds flow into the country to take advantage. In the meantime there is growing media speculation about an economic slowdown, and not just in the energy sector: both Ford Motor Company and General Motors will shortly be slashing employment in Ontario.  A rate cut during the next three months seems to be a safe bet, most likely when the Bank releases its next updated Monetary Policy Report in late January. 

The stranded Province

The Federal election results paint a picture of a deeply divided Canada.  Solid Liberal red in southern Ontario; the revival of the Bloc Quebecois in la Belle Province; and in the three Prairie Provinces, a sea of Tory blue with the exception of one NDP redoubt in Alberta.  Governing for the next four years, or however long the minority government lasts, is going to be challenging.

If the media are to be believed, the West is up in arms at the results, fearful that its interests will be neglected in Ottawa.  There's talk, especially in Alberta, of a renewed fervour for separation from Canada -- inevitably, this has been dubbed "Wexit".  Albertans need to think long and hard before even considering this.

It should first of all be said that there's no evidence that Justin Trudeau has it in for Alberta. He has tried everything he can to secure the extra pipeline capacity that the Province needs to export its oil, up to and including the purchase of the Trans-Mountain pipeline from its former owner, Kinder-Morgan. Attempts to expedite expansion of that pipeline have been stymied by fierce opposition from the government of British Columbia, as well as by some (but not all) of the Indigenous communities along the route.

The other potential pipeline routes run east and south.  The Energy East plan was intended to supplant imported oil in Quebec and Atlantic Canada, but Quebec is even more fiercely anti-pipeline than BC is.  Expansion of pipelines across the border into the US similarly faces strong opposition in North Dakota and elsewhere; the US, now self-sufficient in oil, has a dwindling interest in helping to solve Alberta's problems.

And that's Alberta's immediate problem in a nutshell.  It lacks ready access either to tidewater or overland export markets.  It's hard to see how poisoning relations with the rest of Canada, and potentially threatening an acrimonious divorce, would alleviate that problem in any way -- rather the reverse, in fact.

In truth, though, the problem is much worse than that. Albertans may not like it, but the world is on a path away from fossil fuels, at an ever-increasing pace.  Investors are already starting to worry about oil wells and related infrastructure becoming "stranded assets" and are marking down share prices in response. Any new pipeline built today will take decades to pay off, and it seems very unlikely that the Alberta oil sector is going to last that long, at least not at anything like its present scale. We may not yet be talking about "the orderly management of decline", but we must surely be well past reckless doubling-down on what looks like a losing bet.

In short, Alberta is both boxed in by its geography and on the wrong side of progress.  That seems like a situation where you would want all the help you can get from your friends and neighbours, rather than trying to barge ahead on your own.  There's much that can be done to make the job easier: this very thoughtful article from the CBC website, written by a professor from the University of Calgary, is a good place to start.

Canada election grab-bag

Canada's Federal Election yesterday (October 21) saw Justin Trudeau's Liberal Party reduced to a minority government, with 157 seats in the House of Commons: 170 are needed for a majority.  If you want to look at the outcome in more detail, here is the CBC's results page.  In the meantime, here are a few thoughts about what just happened.

Trudeau does a Trump.  Although the Liberals emerged as easily the largest party in the House, the Conservatives actually won a noticeably higher share of the popular vote -- 34.3 percent to 33.1 percent. When Donald Trump pulled off a similar feat in 2016, the explanation lay in the workings of the US Electoral College. In Canada the explanation is different: the Conservatives routinely rack up massive majorities in Alberta, boosting their share of the national vote but not helping them to elect enough members to unseat the Liberals, whose vote is more evenly spread across the rest of the country.  To use a term sometimes employed by the psephologists, the Liberal vote is more "efficient" than the Conservative vote.

NDP: half-empty or half-full?  Before the campaign started there were serious questions about whether the left-leaning NDP would be almost wiped out on voting day.  During the campaign its leader, Jagmeet Singh, performed very strongly, with polls showing the party with the support of about 20 percent of the electorate.  On polling day, however, the party's share of the vote was just under 16 percent and it lost a number of seats, especially in Quebec. So: better than was feared at the start of the campaign, but puzzlingly not as good as as expected on the big day. 

The Bloc is back.  The Bloc Quebecois, that is, which seemed to be on its deathbed a year ago but managed to triple its seat count on voting day, to be the third-largest party in the Commons.  There does not seem to be any real revival in Quebecers' appetite for sovereignty.  Rather, the Province's voters appear not to trust Trudeau to look after their interests. The SNC-Lavalin scandal earlier this year likely explains this.  In the rest of Canada there was strong criticism of Trudeau for his attempt to interfere in the legal process, but in Quebec the perception was that he had not tried hard enough to protect jobs and investment.   

All over for Scheer?  Conservative leader Andrew Scheer had a bad campaign. It emerged a few weeks back that he is in fact a dual Canadian and US citizen, something he had not seen fit to disclose before.  There was also a bizarre episode in which he claimed untruthfully to have worked at one time as an insurance agent, in an effort to pad out his strikingly thin resume. The victory in the popular vote may serve to keep him in post for now, but it probably will not take too many mis-steps for the knives to come out.

No coalition. It is unlikely that the Liberals will seek to set up a formal coalition with the NDP.  Trudeau will want to pursue the Trans-mountain pipeline expansion, to which Singh's party is strongly opposed.  Trudeau can rely on the Tories for support on that issue.  On most other issues, the Liberal and NDP positions are similar enough that a Liberal minority can probably survive for quite some time without a formal deal, though this will require Trudeau to temper his customary disdain for the House of Commons.

Welcome back, Doug. The unpopularity of Doug Ford in Ontario, less than eighteen months into his Premiership, is remarkable. He basically went into purdah during the campaign, no doubt at the behest of the Tory party leadership, who were terrified that he might harm the chances of Andrew Scheer. Not that it helped: the Liberals heavily outpolled the Tories in the province, winning every single seat in the City of Toronto.  Ford will no doubt re-emerge at any moment and may find it hard not to take a few potshots at Scheer. 

Bye-bye Bernier. One truly heartening aspect of the results is the abject failure of the People's Party of Canada, led by Maxime Bernier, to make any impact. Bernier set up his populist vanity project after losing the Conservative leadership to Andrew Scheer. Its campaign, to the extent it could be noticed at all, seemed to consist solely of anti-immigrant rhetoric and attacks on Greta Thunberg.  With any luck this will be adieu to Bernier and not just au revoir. He won't be missed. 

It was a relatively short election campaign and it never really caught fire. Some of the leaders, notably Trudeau, have complained that it was mean-spirited, but the rhetoric, Bernier perhaps excepted, pales in comparison with the vitriol routinely heard in Trump's Washington or Brexit Britain. Still, let's hope we won't need a do-over any time soon. 

Scheer nonsense

I know it's the last stages of the Federal election campaign and people are getting tired and querulous.  Still, I can't escape the feeling that Andrew Scheer's Conservatives are genuinely clueless when it comes to fiscal policy.

Throughout the campaign, we've been seeing Tory TV spots arguing that "Justin Trudeau will keep hiking taxes to pay for his endless deficits".  The endless deficits part is sort of true -- Trudeau is not promising any date for a return to balanced budgets -- but the logic of the statement as a whole escapes me. I mean, if Trudeau's Liberals are going to raise taxes, that should reduce the deficit, shouldn't it?

Now Scheer is doubling down on the same argument. Speaking today in Fredericton NB, he warned that a Liberal/NDP coalition (a not-unlikely outcome if the polls can be believed) would hike the Federal portion of the Goods and Services tax by 2 percentage points, cut transfer payments to Provinces (a hot button for a have-not Province like New Brunswick) -- and run a deficit of $40 billion.  There's no evidence for this and Trudeau has promptly denied he has any such plans.  The point is, though, that if a government of any stripe imposed a big hike in sales tax and cut transfer payments at the same time, it would find it almost impossible to rack up a deficit anywhere close to $40 billion.

It appears that Scheer can't make up his mind whether to attack his opponents as tax-and-spenders or as deficit-and-spenders. They're not the same thing, and in conflating them Scheer is coming very close to talking complete nonsense.  Oh well, only three days until voting day, but it's looking very unlikely that we will get a clear-cut result.  That's bad news for Scheer, whose only plausible coalition partner would seem to be the pro-sovereignty Bloc Quebecois.  He wouldn't dare, would he?? 

Canada CPI for September -- more of the same

Statistics Canada reported this morning that Canada's headline consumer price index rose 1.9 percent year-on-year in September, the same pace as in August. Once again the key factor keeping the headline reading just below the Bank of Canada's 2 percent target was the price of gasoline, which was 10 percent lower in September than in the same month last year. Excluding gasoline, the annual increase in CPI stood at 2.4 percent, the same as in August.

On an annual basis, all three of the Bank's preferred measures of core inflation edged up by 0.1 percentage point in September.  The average of these three measures stood at 2.1 percent in the month, up from 2.0 percent in August -- hardly enough to trouble the Bank.

Once the Federal election is out of the way next Monday (21st), the way will be clear for the Bank to adjust its policy settings, if it sees fit, without risking accusations of political interference.  The next Governing Council meeting is on the last day of the month.  There seems no reason for the Bank to make any changes this time: inflation seems well in check, while the recent strong employment data show that the economy is in no need of additional monetary policy support at this time.  The next rate change is almost certain to be a cut, but the Bank will likely remain comfortable lagging the Fed's easing cycle unless the exchange rate starts to strengthen.

 

Time to talk about the economy?

With less than two weeks to go,  Canada's Federal Election campaign has seen remarkably little focus on the economy. Climate change has been a big issue (takeaway: Canadians want something done but they want somebody else to pay), as has the character of the leaders. Jagmeet Singh of the NDP has performed best, and got off one of the best lines in the TV debate when he said that Andrew Scheer and Justin Trudeau were basically arguing over who would be the worst choice for Canada.

There has been some talk about budget deficits, but attempts to portray Justin Trudeau as a profligate spendthrift have had little impact, largely because none of the main parties is promising a swift return to fiscal balance. But about GDP growth, employment, inflation?  Next to nothing, unless you count vague pledges from just about every party to make life "more affordable" for the middle classes.

That may be about to change, because this morning Statistics Canada released an unexpectedly strong employment report for September.  This is the last major piece of economic data before polling day rolls around on the 21st, and given the strength in the numbers, it would be surprising if the Trudeau Liberals don't pounce on this report to boost their case for re-election -- something on the lines of "you really don't want to mess this up, do you?", but maybe more subtly expressed.

The economy added 55,000 jobs in September, compared to a consensus expectation of less than 10,000.  Almost all the jobs were full-time.  The unemployment rate fell to 5.5 percent, just a tick above its all-time low.  Over the past twelve months, the economy has added 456,000 jobs and wages have risen 2.6 percent, above the rate of inflation. The participation rate for the core working age cohort has reached an all-time high of 74.7 percent. 

Not everything about the report was positive, as all of the month's gains represented either public sector jobs or self-employment.  Moreover, fully 41,000 of the new positions were created in the Province of Ontario, though this is unlikely to upset Liberal election strategists, given the pivotal role of that Province, and particularly the Toronto region, in deciding the results of national elections.

Opinion polls show a very close race between the Liberals and the Conservatives, with each having about a third of decided voters across the country.  The NDP and Green Party each have about 10 percent support and the separatist Bloc Quebecois is having a moment in its home province. A hung Parliament and a minority government look like the most probable outcomes, unless Trudeau and his team can use today's data to persuade more of the electorate to vote their pocketbooks.

Shifting the conversation

This article from WIRED is a useful introduction to the work of Mariana Mazzucato, a London-based American economist who is trying to emphasize the role of public sector institutions in fostering technological change.  She has already influenced some of the leading "progressive" Democrats in the US Congress (such as AOC), and has made some important contributions to the Green New Deal. 

As the article relates,  Mazzucato started thinking in depth about this issue while listening to UK PM David Cameron defending his disastrous austerity program after the financial crisis.  Cameron was in effect seeking to get the public sector "out of the way" of private business so as to foster innovation.  The supposed model was Silicon Valley, but Mazzucato recognized that describing the US tech sector as a bastion of unfettered capitalism was entirely false.

The first example she used to illustrate this was the iPhone, where Apple's work mainly consisted of bringing together innovations that had been made elsewhere with the support of public funds.  There are, of course, many other possible examples, ranging from the trivial -- the discovery of Teflon as a by-product of the US space program -- to the profound -- the rapid advance in aviation technology thanks to government support, either direct (as in Europe) or indirect (through US military spending).

The problem as Mazzucato sees it is that while the state (read: taxpayers) is taking much of the risk associated with innovation, private companies are reaping most of the profits.  Moreover, in recent years those companies have been spending those profits not on further research, but on share buybacks, which means of course that further technological progress continues to depend on the willingness and ability of the public to foot the bill.

Mazzucato's work seems to mesh well with that of Thomas Piketty in offering an alternative to the currently dominant free market narrative.  Sadly, after making a huge splash a couple of years ago, Piketty has faded from public view, although he has recently come forth with a colossal new book.  Whether these two original thinkers can make themselves heard in a world where economic conversations are dominated by trade wars and Brexit remains to be seen.