Monday 23 December 2019
But what if they're right?
Finance Minister Bill Morneau is taking his Conservative opponents to task for suggesting that the Canadian economy is at risk of falling into recession. Unveiling his economic and fiscal update earlier this month, Morneau bragged that the economy was in good shape, noting that none of the private sector economists his department talks with was expecting a recession in 2020. I might say, as an erstwhile member of that profession, I take rather less comfort in that consensus than Morneau does. Still, he is undoubtedly right to say that there is not yet much talk of recession among economy-watchers.
Unfortunately for Morneau and the consensus, warning signs keep piling up. The labour market has lost all positive momentum in recent months and recorded a huge setback in November. Recent reports on manufacturing and retail sales have been weak. Now we see one of the broadest indicators starting to flash amber: StatsCan reported this morning that real GDP fell 0.1 percent in October, a result significantly weaker than expectations.
The biggest culprit for the decline was manufacturing, which saw a broad-based 1.4 percent pullback from the previous month. As StatsCan notes, this was the month of the GM strike in the United States, which had a severe spillover effect on Canada. Even granting the likelihood that the impact of the GM strike will be reversed when the November data appear, the fact remains that manufacturing has seen declines in four of the past five months, with both durable and non-durable good affected.
The weakness was not confined to manufacturing. Retail trade fell 1.1 percent in the month, its largest monthly decline in more than three years. Wholesale trade, which had provided a boost to GDP in September, also reversed in October. Construction activity overall was flat in the month, while extractive industries posted only a minimal gain amid continuing declines in oil sands activity in Alberta.
Morneau may be justified in warning the Tories not to talk the economy into a recession by scaring consumers and businesses into curbing their spending. That said, there are now plenty of indications that 2020 will be a tougher year, and there is no doubt that Morneau's fiscal plans do not leave him a lot of leeway if the economy really does start to head into a downturn.
And on that cheery note, may I wish all readers of this blog, wherever and whatever you may be celebrating, a happy Christmas season!
Wednesday 18 December 2019
Canada CPI creeps above target
StatsCan reported this morning that headline CPI rose 2.2 percent year-over-year in November, up from a 1.9 percent pace in each of the three preceding months. Gasoline prices were higher year-on-year in November for the first time since October 2018, and this was the key factor pushing the headline figure above the Bank of Canada's 2 percent target. Lower gasoline prices have in a sense masked the underlying trend in headline CPI for much of the past year: the all-items index excluding gasoline has been above 2 percent throughout this year. In November this aggregate was up 2.3 percent from a year ago, the same pace as in October.
The Bank of Canada's three preferred measures of core inflation also moved higher in the month. The average year-on-year increase in the three measures rose to just under 2.2 percent from 2.1 percent in October. One of the three core measures, CPI-median, now stands 2.4 percent higher than a year ago. This is the broadest of these three rather arcane measures, and the fact that it has moved further above target may start to be a matter of concern for the Bank.
There is nothing in the data to suggest that price pressures are getting out of hand. While the Bank will want to maintain the credibility of its targeting approach, it will also have to take account of the performance of the real economy as it contemplates its next policy move. In this regard, the shocking weakness in employment in November, as well as recently reported falls in retail and manufacturing sales, are likely to push the Bank toward easing some time in early 2020. As always, of course, the Bank's decisions will ultimately be data-dependent.
The Bank of Canada's three preferred measures of core inflation also moved higher in the month. The average year-on-year increase in the three measures rose to just under 2.2 percent from 2.1 percent in October. One of the three core measures, CPI-median, now stands 2.4 percent higher than a year ago. This is the broadest of these three rather arcane measures, and the fact that it has moved further above target may start to be a matter of concern for the Bank.
There is nothing in the data to suggest that price pressures are getting out of hand. While the Bank will want to maintain the credibility of its targeting approach, it will also have to take account of the performance of the real economy as it contemplates its next policy move. In this regard, the shocking weakness in employment in November, as well as recently reported falls in retail and manufacturing sales, are likely to push the Bank toward easing some time in early 2020. As always, of course, the Bank's decisions will ultimately be data-dependent.
Monday 16 December 2019
Canada fiscal update: no plan to return to balance
Some of the recent economic data, especially the startlingly weak November employment report, would seem to indicate that the Canadian economy is at risk of a downturn. Finance Minister Bill Morneau is unconcerned: unveiling the government's economic and fiscal update today, Morneau predicted that the Canadian economy would remain the second-fastest growing in the G7 this year and next. And he unveiled a sharply higher budget deficit for the current year, with only gradual reductions forecast for the five-year planning horizon.
The specific growth forecasts that Morneau is happy about are unimpressive: 1.7 percent this year and 1.6 percent in 2020. It may be true that this will place Canada second in the G7 growth table, but it is remarkable that the domestic economy is unable to keep pace with the economy of the United States, the best-performing economy in the G7 and Canada's largest trading partner by far.
The projected deficit for the current fiscal year (ending in March 2020) is now C$26.6 billion, up from just under $20 billion in the spring budget -- and almost twice as large as the final outcome of $14 billion in the previous fiscal year. To be fair to Morneau, this is not solely the result of a burst of new spending in the wake of the recent election. The government is booking almost $ 5 billion in public service pension costs as a result of persistently low interest rates, as well as $2 billion in costs relating to a new revenue sharing agreement for the Hibernia oil field offshore Newfoundland. The higher spending is only partially offset by a $1.7 billion increase in projected revenues.
As a result of the increased deficit this year, the debt-to-GDP ratio will edge up to 31.0 percent. This remains the lowest of any G7 member, as Morneau never tires of saying. Still, keeping this ratio on a downward track has been something of a shibboleth for this government, and it is mildly surprising to see that goal abandoned, however briefly. The deficit is forecast to edge higher in fiscal 2020-21, reaching $28.1 billion, before starting to decline in subsequent years, reaching a projected $11.6 billion in 2024-25. By that time the debt-to-GDP ratio is forecast to have fallen to 29 percent.
It's impossible for someone of my vintage to look at these projections and not think back to the fiscal dark ages in the 1980s. During that decade, governments regularly produced fiscal projections that showed chunky deficits for the near term, followed by significant improvements in the "out years". The chunky deficits always materialized; the later improvements never did. It was only when Finance Minister Paul Martin, in the early 1990s, effectively shortened the planning horizon to two years, that the government was finally able to control its spending and start reducing the deficit.
Martin's deficit cutting success was hugely assisted by the rapid growth posted by the US economy at the time. Morneau may not turn out to be so lucky, and if things do turn south for the Canadian economy, he may come to regret not giving himself a bit more wriggle room.
The specific growth forecasts that Morneau is happy about are unimpressive: 1.7 percent this year and 1.6 percent in 2020. It may be true that this will place Canada second in the G7 growth table, but it is remarkable that the domestic economy is unable to keep pace with the economy of the United States, the best-performing economy in the G7 and Canada's largest trading partner by far.
The projected deficit for the current fiscal year (ending in March 2020) is now C$26.6 billion, up from just under $20 billion in the spring budget -- and almost twice as large as the final outcome of $14 billion in the previous fiscal year. To be fair to Morneau, this is not solely the result of a burst of new spending in the wake of the recent election. The government is booking almost $ 5 billion in public service pension costs as a result of persistently low interest rates, as well as $2 billion in costs relating to a new revenue sharing agreement for the Hibernia oil field offshore Newfoundland. The higher spending is only partially offset by a $1.7 billion increase in projected revenues.
As a result of the increased deficit this year, the debt-to-GDP ratio will edge up to 31.0 percent. This remains the lowest of any G7 member, as Morneau never tires of saying. Still, keeping this ratio on a downward track has been something of a shibboleth for this government, and it is mildly surprising to see that goal abandoned, however briefly. The deficit is forecast to edge higher in fiscal 2020-21, reaching $28.1 billion, before starting to decline in subsequent years, reaching a projected $11.6 billion in 2024-25. By that time the debt-to-GDP ratio is forecast to have fallen to 29 percent.
It's impossible for someone of my vintage to look at these projections and not think back to the fiscal dark ages in the 1980s. During that decade, governments regularly produced fiscal projections that showed chunky deficits for the near term, followed by significant improvements in the "out years". The chunky deficits always materialized; the later improvements never did. It was only when Finance Minister Paul Martin, in the early 1990s, effectively shortened the planning horizon to two years, that the government was finally able to control its spending and start reducing the deficit.
Martin's deficit cutting success was hugely assisted by the rapid growth posted by the US economy at the time. Morneau may not turn out to be so lucky, and if things do turn south for the Canadian economy, he may come to regret not giving himself a bit more wriggle room.
Saturday 14 December 2019
Was it really Corbyn's fault?
A whole lot of left-leaning commentators are laying the blame for Boris Johnson's massive victory in the UK election at the feet of Labour Party leader Jeremy Corbyn. Here, for example, is Guardian columnist Polly Toynbee going straight for the jugular. I'm not sure that's fair.
A couple of weeks before the Brexit referendum of June 2016, I was in the UK on vacation. We got together with my cousins, who all live in rural areas a couple of hours outside London. I discovered to my horror that they all intended to vote for Brexit, based on the wholly false but widely held belief that the EU was imposing all manner of petty rules and regulations on the UK in a highly undemocratic way. It was clear to me then that if their views were in any way typical of the non-metropolitan electorate, the referendum might, unthinkably, favour Brexit. And so it turned out.
Going into the recent election, a lot of journalists and pro-remain commentators on social media were comforting themselves with the fact that almost all opinion polls were showing a majority of voters in favour of remaining in the EU. Maybe so, but people like my cousins were still vehemently pro-Brexit, with that vehemence only heightened by their perception that the opinion they expressed in the referendum had been ignored and scorned by politicians.
The vote for Brexit in 2016 largely reflected the opinions of voters in smaller cities and rural areas of England. Boris Johnson's strategists rightly divined that those voters still wanted Brexit, and thus focused their efforts on those areas, despite the fact that many of them had voted Labour without fail for many decades. It worked, and on election day we had the remarkable spectacle of hardscrabble former coal-mining areas kicking out Labour incumbents and electing Tories.
Where does Jeremy Corbyn fit into this? It's true that his position on Brexit has never been particularly clear. He may well have voted Leave back in 2016, and his pledge during the election campaign to hold another referendum but not to campaign for either side struck many voters as bizarre. His party's manifesto was a valiant and ambitious attempt to turn the focus of the campaign away from Brexit toward pressing domestic issues, including the health service and income inequality.
Nobody was listening, but what choice did Corbyn have? Coming out strongly against Brexit would have done nothing to win over the former Labour voters who were as determined as ever to ensure that this time, their desire to leave the EU would prevail. Coming out in favour of Brexit would have lost the support of the large number of Labour voters, particularly in an around London, who favoured remain, while almost certainly not winning back much support in pro-leave areas, which would still have seen Johnson as the more reliable path to a swift Brexit.
In short, Corbyn may not have performed well in the election, but it's hard to see how he could have done much better. The Brexiteers turned out en bloc for the Conservatives while remainers divided their votes among the other parties, delivering Johnson a clear path to victory. BoJo should enjoy his triumph while he can; it probably won't be long before people realize that "getting Brexit done" is going to take a lot more than one simple vote.
A couple of weeks before the Brexit referendum of June 2016, I was in the UK on vacation. We got together with my cousins, who all live in rural areas a couple of hours outside London. I discovered to my horror that they all intended to vote for Brexit, based on the wholly false but widely held belief that the EU was imposing all manner of petty rules and regulations on the UK in a highly undemocratic way. It was clear to me then that if their views were in any way typical of the non-metropolitan electorate, the referendum might, unthinkably, favour Brexit. And so it turned out.
Going into the recent election, a lot of journalists and pro-remain commentators on social media were comforting themselves with the fact that almost all opinion polls were showing a majority of voters in favour of remaining in the EU. Maybe so, but people like my cousins were still vehemently pro-Brexit, with that vehemence only heightened by their perception that the opinion they expressed in the referendum had been ignored and scorned by politicians.
The vote for Brexit in 2016 largely reflected the opinions of voters in smaller cities and rural areas of England. Boris Johnson's strategists rightly divined that those voters still wanted Brexit, and thus focused their efforts on those areas, despite the fact that many of them had voted Labour without fail for many decades. It worked, and on election day we had the remarkable spectacle of hardscrabble former coal-mining areas kicking out Labour incumbents and electing Tories.
Where does Jeremy Corbyn fit into this? It's true that his position on Brexit has never been particularly clear. He may well have voted Leave back in 2016, and his pledge during the election campaign to hold another referendum but not to campaign for either side struck many voters as bizarre. His party's manifesto was a valiant and ambitious attempt to turn the focus of the campaign away from Brexit toward pressing domestic issues, including the health service and income inequality.
Nobody was listening, but what choice did Corbyn have? Coming out strongly against Brexit would have done nothing to win over the former Labour voters who were as determined as ever to ensure that this time, their desire to leave the EU would prevail. Coming out in favour of Brexit would have lost the support of the large number of Labour voters, particularly in an around London, who favoured remain, while almost certainly not winning back much support in pro-leave areas, which would still have seen Johnson as the more reliable path to a swift Brexit.
In short, Corbyn may not have performed well in the election, but it's hard to see how he could have done much better. The Brexiteers turned out en bloc for the Conservatives while remainers divided their votes among the other parties, delivering Johnson a clear path to victory. BoJo should enjoy his triumph while he can; it probably won't be long before people realize that "getting Brexit done" is going to take a lot more than one simple vote.
Tuesday 10 December 2019
USMCA? CUSMA? Whatever you call it, it's finally done
It looks as if the long wait for ratification of the new trade deal that is to replace NAFTA is just about over. A signing ceremony is to take place in Mexico City today, with US Trade Representative Robert Lighthizer and Canada's Deputy Prime Minister Chrystia Freeland expected to be in attendance. Both the US and Canada still have to pass the deal through their legislatures, but that now looks like a formality.
Given that the countries cannot even agree on what to call the deal, the slow progress is perhaps not surprising. For the Americans it's USMCA, but Canada prefers CUSMA. However, the delay in proceeding with ratification was caused by much more significant issues. The Democrats in the US House of Representatives were concerned that provisions for workers'rights and the environment might be difficult to enforce in Mexico and refused to bring the deal forward until their concerns were addressed.
If you can cast your mind back to the summer of 2018, when the main round of negotiations came to a head, Canada was largely sidelined as the US and Mexico put the final touches on a deal, which was then presented to Canada almost on a take-it-or-leave it basis. Something similar has happened here again: the final negotiations took place in Mexico City this past weekend with Canada largely a spectator. It's a bit disconcerting to watch, but the apparent conclusion of this saga has to be a good thing, even if it does give Donald Trump an extra bragging point as election season starts to ramp up.
Given that the countries cannot even agree on what to call the deal, the slow progress is perhaps not surprising. For the Americans it's USMCA, but Canada prefers CUSMA. However, the delay in proceeding with ratification was caused by much more significant issues. The Democrats in the US House of Representatives were concerned that provisions for workers'rights and the environment might be difficult to enforce in Mexico and refused to bring the deal forward until their concerns were addressed.
If you can cast your mind back to the summer of 2018, when the main round of negotiations came to a head, Canada was largely sidelined as the US and Mexico put the final touches on a deal, which was then presented to Canada almost on a take-it-or-leave it basis. Something similar has happened here again: the final negotiations took place in Mexico City this past weekend with Canada largely a spectator. It's a bit disconcerting to watch, but the apparent conclusion of this saga has to be a good thing, even if it does give Donald Trump an extra bragging point as election season starts to ramp up.
First D-SIBs
This week in Ottawa, the Federal financial regulator OSFI has increased prudential capital requirements for the country's biggest banks. The so-called D-SIBs (Domestic Systemically Important Banks), which are six in number*, will now have to hold 2.25 percent of additional Tier 1 capital (also called CET1 capital) beyond the amounts required by international regulators, up from a current level of 2.0 percent. This will bring the total CET1 capital requirement to 10.25 percent, starting in April 2020.
In a sense, OSFI's announcement is purely symbolic, in that all six of the D-SIBs already hold significantly more CET1 capital than the new requirement. However, this is the third such increase mandated by OSFI in the past twelve months. The regulator is signalling that it is increasingly concerned over both domestic vulnerabilities (notably high household indebtedness) and global risks, and is warning the banks to be guided accordingly.
Canada's regulators have never stopped bragging about how well the country's financial institutions weathered the financial crisis a decade ago. It looks as if OSFI is determined to make sure that when the next crisis hits, it (and the banks themselves) can maintain that enviable track record.
* Bank of Montreal, Bank of Nova Scotia, Banque Nationale du Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto Dominion Bank. The final two of these institutions are also part of the global "too big to fail" roster.
In a sense, OSFI's announcement is purely symbolic, in that all six of the D-SIBs already hold significantly more CET1 capital than the new requirement. However, this is the third such increase mandated by OSFI in the past twelve months. The regulator is signalling that it is increasingly concerned over both domestic vulnerabilities (notably high household indebtedness) and global risks, and is warning the banks to be guided accordingly.
Canada's regulators have never stopped bragging about how well the country's financial institutions weathered the financial crisis a decade ago. It looks as if OSFI is determined to make sure that when the next crisis hits, it (and the banks themselves) can maintain that enviable track record.
* Bank of Montreal, Bank of Nova Scotia, Banque Nationale du Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto Dominion Bank. The final two of these institutions are also part of the global "too big to fail" roster.
Friday 6 December 2019
Data disaster
There's nothing ambiguous about the Canadian employment data for November. They're terrible. StatsCan reported this morning that employment fell by 71,000 in the month, the worst showing since the depths of the global financial crisis back in 2009. The national unemployment rate jumped a startling 0.4 percentage points to 5.9 percent. So much for my suggestion a month ago that the relative weakness in employment in October would be "largely unwound" in November because of the end of the strike at General Motors. Mea maxima culpa.
There is no consolation to be found in looking behind the headline numbers. Employment fell for the key male age cohort (ages 25-34). It fell in the goods-producing sector, led by declines in manufacturing and resource industries. It fell in the services sector, a development only partly explained by the termination of positions related to the Federal Election in mid-October. It fell in the private sector. It fell for both full-time and part-time work.
It's customary to point out the volatility of the Canadian employment data: the monthly changes in employment are not infrequently smaller than StatsCan's estimate of the standard error in its sampling. Not this time: the standard error for the number of persons employed is 30,100, suggesting that there is little likelihood that the data are providing a misleading picture.
The analyst consensus for today's number was for a 10,000 increase in employment, so this is a spectacular miss. Possibly the tall foreheads on Bay Street were lulled into a false sense of security by the soothing tone of the Bank of Canada's rate announcement earlier in the week. The odds that the Bank will have to join the global easing party in the near future just shortened dramatically -- and Justin Trudeau must be thanking his lucky stars that the fixed election date fell when it did.
The weakness in Canadian employment is particularly jarring when viewed against developments south of the border. US non-farm payrolls jumped 266,000 in November and data for the preceding two months were revised higher. The unemployment rate ticked down to a 50-year low of 3.5 percent. The end of the GM strike accounts for only a small portion of the November increase. The data won't stop Donald Trump from lambasting the Fed if it keeps rates on hold next week, as it surely will, but Trump would do well to count his blessings. If the Fed keeps its powder dry for now, the chances of the US economy remaining strong until election day look remarkably good.
There is no consolation to be found in looking behind the headline numbers. Employment fell for the key male age cohort (ages 25-34). It fell in the goods-producing sector, led by declines in manufacturing and resource industries. It fell in the services sector, a development only partly explained by the termination of positions related to the Federal Election in mid-October. It fell in the private sector. It fell for both full-time and part-time work.
It's customary to point out the volatility of the Canadian employment data: the monthly changes in employment are not infrequently smaller than StatsCan's estimate of the standard error in its sampling. Not this time: the standard error for the number of persons employed is 30,100, suggesting that there is little likelihood that the data are providing a misleading picture.
The analyst consensus for today's number was for a 10,000 increase in employment, so this is a spectacular miss. Possibly the tall foreheads on Bay Street were lulled into a false sense of security by the soothing tone of the Bank of Canada's rate announcement earlier in the week. The odds that the Bank will have to join the global easing party in the near future just shortened dramatically -- and Justin Trudeau must be thanking his lucky stars that the fixed election date fell when it did.
The weakness in Canadian employment is particularly jarring when viewed against developments south of the border. US non-farm payrolls jumped 266,000 in November and data for the preceding two months were revised higher. The unemployment rate ticked down to a 50-year low of 3.5 percent. The end of the GM strike accounts for only a small portion of the November increase. The data won't stop Donald Trump from lambasting the Fed if it keeps rates on hold next week, as it surely will, but Trump would do well to count his blessings. If the Fed keeps its powder dry for now, the chances of the US economy remaining strong until election day look remarkably good.
Wednesday 4 December 2019
If it ain't broke....
As expected, the Bank of Canada kept its overnight rate unchanged at 1.75 percent at the end of its Governing Council meeting today. The press release depicts an economy performing very much in line with the Bank's forecasts. Growth slowed in Q3, but fears of a global slowdown seem to be easing despite the persistence of trade tensions. Inflation hews very close to the 2 percent target, and any increase in headline CPI in the coming months, as past falls in gasoline prices drop out of the calculation, is expected to be temporary.
Unsurprisingly, trade fears seem to represent the greatest source of uncertainty for the Bank. This piece from Slate has a litany of wacky trade moves by Trump in just the past few days -- tariffs on Argentine and Brazilian steel, tariffs on French wine and cheese, contradictory signals on prospects for a trade deal with China. Canada is not directly in the firing line, though given Trump's gossamer-thin skin, Justin Trudeau really should be more careful about getting caught badmouthing him in public gatherings. Getting caught once, at the G7 meeting in Quebec City last year, was bad enough. Doing the same thing again at the NATO summit in London is asking for trouble.
Governor Stephen Poloz is entering the last six months of his tenure, which ends in June next year. Despite the relatively upbeat tone of today's announcement, markets still think the Bank will join its international peers in cutting rates before Poloz moves on. The next rate announcement is set for January 22, when the Bank will also release its updated forecasts. It promises that its rate decisions in the coming months will be based not only on trade and the global outlook, but also its reading of fiscal policy. If the Trudeau government follows through on the fiscal stimulus promised in the recent election campaign, the Bank may see less need to provide additional monetary stimulus.
Unsurprisingly, trade fears seem to represent the greatest source of uncertainty for the Bank. This piece from Slate has a litany of wacky trade moves by Trump in just the past few days -- tariffs on Argentine and Brazilian steel, tariffs on French wine and cheese, contradictory signals on prospects for a trade deal with China. Canada is not directly in the firing line, though given Trump's gossamer-thin skin, Justin Trudeau really should be more careful about getting caught badmouthing him in public gatherings. Getting caught once, at the G7 meeting in Quebec City last year, was bad enough. Doing the same thing again at the NATO summit in London is asking for trouble.
Governor Stephen Poloz is entering the last six months of his tenure, which ends in June next year. Despite the relatively upbeat tone of today's announcement, markets still think the Bank will join its international peers in cutting rates before Poloz moves on. The next rate announcement is set for January 22, when the Bank will also release its updated forecasts. It promises that its rate decisions in the coming months will be based not only on trade and the global outlook, but also its reading of fiscal policy. If the Trudeau government follows through on the fiscal stimulus promised in the recent election campaign, the Bank may see less need to provide additional monetary stimulus.
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