Promises, promises

It has been clear for some time that the outcome of the Ontario provincial election, to be held on June 2, will depend on which party's extravagant promises the voters choose to believe. Doug Ford's governing Conservatives have been unveiling populist promises on almost a weekly basis since the start of the year. The most blatant bribe: removing the annual fee for renewing your car license plate -- and not just on a going-forward basis: you also got a cheque in the mail for whatever you had paid to renew for the last couple of years.  

On Thursday Provincial Finance Minister Peter Bethlenfalvy tabled the annual Provincial budget. Coming from a government that has stressed fiscal prudence, it's quite a shocker. The Tories are planning a major, multi-year increase in spending, with a focus on infrastructure. The capital spending program will total C$ 158.8 billion over ten years, with major spending on highways, public transit, hospitals and schools.  There will also be tax cuts targeted at seniors and low-income workers, the latter defined as individuals with an annual income below $50,000. 

Predictably, all of this is going to balloon the deficit. The shortfall for the 2021/22 fiscal year, which ended at the start of April, is estimated to have been $ 13.5 billion. Thanks to the economy's robust recovery from the worst of the pandemic, this is way lower than originally expected, and until yesterday the Province's own Financial Accountability Office was projecting a return to budget balance by FY 2023/24. So much for that: Bethlenfalvy's budget calls for a deficit of  $ 19.9 billion for the current fiscal year, falling to $12.3 billion in 2023/24 and continuing to fall gradually through mid-decade. 

Even before the government tabled its own budget, the leftish NDP had already started to unveil its own platform. It promises lower taxes for everyone earning less than $200,000 per year, which is the vast majority of Ontarians. This morning the Liberal leader, Steven DelDuca, was on the breakfast TV circuit making bad jokes and promising to remove sales tax on restaurant-prepared foods costing less than $ 20.  No doubt there will be more tasty treats in store as soon as the Liberals unveil their full platform. 

It's difficult to take any of this too seriously -- and that goes for Bethlenfalvy's budget just as much as the promises of the current opposition parties. The Provincial Legislature has now stood down to allow the election campaign to get started, so the budget is in effect nothing more than the Tories' election platform, and may well amount to nothing at all if Ford and his team are swept from office on June 2. As for the other parties' promises, those will as ever be hostage to the usual post-election wailing about how "the finances are in much worse shape than we thought, so alas we can't deliver all the goodies we promised".

Everyone is fatigued after two years of the pandemic, so it's perhaps no surprise to see the election shaping up this way. But how many of these promises see the light of day after June2 may be quite another matter. 

There's that word again

"Forcefully". When Bank of Canada Governor Tiff Macklem used that word in Washington last week to characterize the Bank's tightening approach, it prompted many commentators to speculate that the Bank might start hiking rates in bigger increments: 75 basis points rather than 50 perhaps.  Speaking today in Ottawa to the House of Commons Finance Committee, Macklem said it again:  "We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed". Under questioning from the committee, Macklem suggested that any move gretaer than 50 basis points would be 

That is unambiguously hawkish, even as it leaves plenty of wriggle room -- after all, Macklem hasn't explicitly defined what he means by "forcefully". The remainder of Macklem's speech gave him the opportunity to explain to the assembled parliamentarians just why forceful action might be needed. For the most part it was a restatement of the views presented earlier this month in the Bank's Monetary Policy Report. Some of the key points:

On growth: "the economy has bounced back remarkably quickly. It has been the fastest and sharpest recovery ever. And now demand is beginning to run ahead of the economy’s productive capacity.....Canada’s unemployment rate is at a record low 5.3%. Job vacancies are elevated, and wage growth has reached pre-pandemic levels..... the Bank forecasts the Canadian economy will grow 4¼% this year, before moderating to 3¼% in 2023 and 2¼% in 2024".

On inflation: "Consumer price index (CPI) inflation in Canada hit a three-decade high of 6.7% in March, well above what we projected in the January MPR.... While most of the factors pushing up inflation come from beyond our borders, with the economy in excess demand, we are facing domestic price pressures too....Our latest outlook is for inflation to average almost 6% in the first half of 2022 and remain well above our 1% to 3% control range throughout this year. We then expect it to ease to about 2½% in the second half of 2023 before returning to the 2% target in 2024".

On interest rates: "With demand starting to run ahead of the economy’s capacity, we need higher rates to bring the economy into balance and cool domestic inflation....if Canadians’ expectations of inflation stay anchored on the 2% target, inflation in Canada will come back down when global inflationary pressures from higher oil prices and clogged supply chains abate.....Two weeks ago, we raised the policy rate to 1%, still well below neutral. This is also below the pre-pandemic policy rate of 1.75%......we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target".

Experience from the days when I used to get paid for writing this stuff suggests that policy hints from the Bank must be taken more seriously when they are made before a domestic audience rather than an international one. If Governor Macklem uses this rhetoric before a group of elected officials, we can be sure he means to follow through. 

Under questioning from the Committee, Macklem suggested that any move greater than 50 basis points would be "very unusual". Then again, so is an inflation rate of 6.7 percent, which Canada recorded in March  The Bank's next rate announcement is due on June 1. Before then, we and the Bank will have a chance to ponder the April CPI data. If those show a further surge, that 75 basis point hike may well be back on the table.  

Is that a threat?

Speaking at the IMF/IBRD/G7/G20 gabfest in Washington DC on Thursday, Bank of Canada Governor Tiff Macklem appeared to suggest that the Bank might choose to raise rates in even larger steps than the 50 basis point hike it implemented earlier this month. Somewhat unusually, there is no official transcript of Macklem's remarks on the Bank's own website, but it's probably safe to assume that the comments recalled by Scotiabank economist Derek Holt are a pretty accurate summary:

Scotiabank economist Derek Holt quoted Macklem as saying he was "not going to rule anything out" in terms of the size of any rate hike. "We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves," Macklem reportedly said.

Macklem also said ongoing supply chain disruptions, the war in Ukraine and spike in COVID-19 cases in China will likely make high inflation linger for longer than anticipated. Earlier this month, the bank said it doesn't expect inflation to get back into the range of between one and three per cent that its targets until the latter half of next year."

He also reiterated how a pause would only be entertained once the policy rate was in the neutral rate range," Holt said, referring to the level where interest rates reach a Goldilocks level where they are neither stimulating the economy, nor holding it back. Most economists think that so called "neutral range" is a bank rate of somewhere between two and three per cent, well above its current level.

This is consistent with the hawkish tone of the Bank's recent rate decision, but arguably goes a little further in making the threat of larger rate hikes more explicit. It is becoming ever clearer that the Bank recognizes it erred in not starting its tightening cycle sooner; Macklem is now trying to reassure markets that it will not let itself fall any further behind the curve. For now, the best guess is that the Bank will continue with the 50 basis point hikes pro tem, but any more of this hawkish rhetoric and those expectations will have to be revised upwards. 

Canadian inflation: more of the same

To the surprise of precisely no-one, Canadian consumer prices continued to rise sharply in March. Data released by Statistics Canada today show that headline CPI (not seasonally adjusted) rose 1.4 percent month-over-month, the largest increase since January 1991. This bumped the year on-year-increase from 5.7 percent in February to 6.7 percent in March, the biggest rise since, you guessed it, January 1991. 

Energy and food prices, probably the two items that most Canadians pay the greatest attention to on a daily basis, continued to lead the way higher. Gasoline prices surged 11.8 percent in the month, bringing the increase in the last two months alone to almost 20 percent and the year-on-year rise to just under 40 percent. Prices for food purchased from stores rose 8.7 percent from a year ago, the biggest rise since 2009. Excluding food and energy, the year-on-year rise in CPI was 4.6 percent, but this offers little solace to policymakers, given that all eight of the major subcomponents tracked by StatsCan rose in the month.  

Nor is there any consolation to be found in the Bank of Canada's three preferred measures of core inflation. All three moved higher in the month. The most badly-behaved of them, CPI-trim, now stands at 4.7 percent, and the mean increase for the three is now close to 3.8 percent. 

There is little relief in sight. Looking just at gasoline, here in Ontario we saw prices at the pump rise more than 10 percent in just four days last week -- and that, ominously, was the week in which StatsCan collected its CPI survey data for April. Higher fuel prices quickly spill over into all kinds of other costs, so the April CPI data, due on May 18, are likely to be ugly.

It's no surprise that the steady rise in inflation is becoming a major political issue, especially with the contest to identify a new leader of the Conservative Party starting to heat up. The apparent leader in that race, the cartoonishly right-wing Pierre Poilievre, has coined the hashtag #justinflation, which leaves little doubt about who he blames for the current situation. It's an absurd accusation, given that price pressures are equally evident all round the world, but it seems to be working politically, even if there is effectively nothing that Justin Trudeau can do about it.

Sad to say, there's not much that the Bank of Canada can do about the underlying causes of inflation either. However, they can and must do whatever it takes to prevent inflation expectations from moving far above the 2 percent inflation target. That implies aggressive rate hikes in the months ahead, and that prospect is starting to lead some economists to speculate about a recession in Canada, possibly as early as 2023.  Happy days!

One hundred and forty!

Apologies to anyone who has clicked on this post assuming from the title that it's about darts. It's actually about the rollout of fourth doses of COVID vaccines in Ontario. If it's darts you want, here's a link.

Anyway, a couple of weeks ago the Province of Ontario announced that fourth doses of vaccines would be available to a fairly broad range of individuals, including indigenous peoples, those over the age of sixty and those with pre-existing medical conditions. Take-up of third doses has been a bit patchy -- only about 55% of eligible Ontarians have received that shot, compared to 85 percent who have had two doses.  So  perhaps it's no surprise to find that the take-up of fourth shots has so far been very slow.

Maybe the conditions for getting that fourth jab have something to do with this. The key requirement is that you have to wait "five months" after your third shot. Since most of those eligible for the fourth dose only started getting their third shots on December 3, this suggests nobody can book a fresh appointment until May 3, so perhaps it's no surprise the phones have not been ringing off the hook.

But wait a second! It turns out the actual wait time after the third shot is 140 days. That's not the same as any five months in the actual calendar, however carefully you select them -- February plus April plus June plus September plus November gives you 148 days. But in any case that would not make a whole lot of difference -- for anyone who got their third shot right on December 3, fourth dose eligibility at the time of writing is still eight days away.

But wait another second! A closer look at the Provincial vaccine portal shows that you can get your fourth shot three months after the third, provided you sign a form for "informed consent", which is a euphemism for "if anything goes wrong, don't blame us".  Not exactly an offer you can't refuse. I believe I'll wait a bit longer for that next shot, especially as there are signs that the latest COVID wave in Ontario may be ebbing. 

Bank of Canada in full tightening mode

With today's policy steps, the Bank of Canada has moved unequivocally into a tightening phase that is likely to continue for some time.  As expected, the Bank raised its overnight rate target by 50 basis points, to 1.0 percent, and for the first time offered some indication of how high it thinks rates might have to go. It also announced the start of quantitative tightening -- it will no longer reinvest the proceeds of its bond holdings as they mature. This shrinking of the Bank's balance sheet is likely to boost interest rates all along the yield curve, reinforcing the impact of the rising cash rate. 

The Bank also introduced its updated Monetary Policy Report, and held a press conference that allowed Governor Tiff Macklem to spell out the Bank's reasoning.  Despite the uncertainty created by the Russian invasion of Ukraine, the tone was unmistakably hawkish. For example:

• As regards growth: "A broad set of indicators suggests that our economy is now moving into excess demand. The labour market shows this clearly. Job growth has been strong, the unemployment rate is at a record low, job vacancies are elevated, and wage growth has reached pre-pandemic levels.....momentum in most major spending components points to strong growth in gross domestic product this year.......the Bank forecasts the Canadian economy will grow 4¼% this year, before moderating to 3¼% in 2023 and 2¼% in 2024."
• As regards inflation: "CPI inflation in Canada hit a three-decade high of 5.7% in February, above what we projected in the January MPR. We now expect inflation to average almost 6% in the first half of 2022 and remain well above our 1% to 3% control range throughout this year. We then expect it to ease to about 2½% in the second half of 2023 before returning to the 2% target in 2024. With inflation broadening and remaining higher for longer, the risk is that Canadians start to think that high inflation will become entrenched."
• As regards interest rates: "The economy can handle higher interest rates, and they are needed.....We also need higher interest rates to keep Canadians’ expectations of inflation anchored on the target, so that as global inflationary pressures from higher oil prices and clogged supply chains abate, inflation in Canada falls back toward the target. We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed."

Governor Macklem spent some time setting out the Bank's view on what might constitute a neutral (i.e. neither expansionary nor contractionary) rate target: "The neutral interest rate isn’t something we can measure directly. We have to estimate it. And our estimate is between 2% and 3%." 

Most market predictions for the cash rate see it somewhere in this range by the end of this year, but Governor Macklem wasn't quite finished. He added that "we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target."

All in all, this marks a full 180-degree turn from the message we have been hearing from the Bank for several years, that it would keep rates below neutral for as long as needed in order to push CPI back up to the target level. The Bank, like its counterpart in Washington, has been slow to admit just how much and how quickly the inflation outlook has changed. Today's actions leave no doubt that they have finally got the message. 

US CPI: nearing the peak?

US inflation data for March, released this morning by the Bureau of Labor Statistics, were just about as bad as expected. Headline CPI shot up by 1.2 percent month-on-month, pushing the yearly rate to 8.5 percent from the 7.9 percent recorded in February.  This is the highest annual rate since December 1981.

As has been the case for the last several months, price increases for energy and food led the way again in March. Gasoline prices rose 18.3 percent from February to March as a result of the Russian invasion of Ukraine. This accounted for half of the monthly rise in the headline figure. Food prices rose 1.0 percent in the month, led once again by the food-at-home (aka groceries) sub-component. Over the past twelve months, the energy price index has risen 32 percent, with food rising 8.8 percent, its fastest pace in more than four decades.

Stripping out these volatile components gives a somewhat less extreme reading, but not one that can provide much solace to policymakers. The annual rise for core CPI was 6.5 percent, still far in excess of the Fed's 2 percent goal. In one mildly encouraging sign, the monthly increase in core CPI slipped to 0.3 percent in March from 0.5 percent in February. However, not too much can be read into this: the slower growth of core CPI entirely reflected a decline in used car prices, not an item that provides much relief for American consumers' finances on a daily basis. Aside from that one item, the remaining subcomponents of the index continue to show broad-based price pressures. 

There are two seemingly contradictory things that can be said about the current situation: there is little that the Federal Reserve can do to address the underlying causes of the spike in prices, and it is way past time for the Fed to do something about inflation. The inflation spike is the result of the ongoing global supply chain issues, severely exacerbated by the Russian invasion. There is nothing the Fed can do about that. 

However, there is a growing risk, as recent Fed speakers have acknowledged, that rising inflation expectations, both for consumers and businesses, will become entrenched, making the Fed's job much harder in the medium term. The latest survey from the New York Fed shows that US consumers expect CPI to rise 6,6 percent in the next twelve months and, arguably more ominously, to average 3.7 percent in the next five years.

It is quite possible that we are at or very near the peak of the current inflation surge.  There has been some pullback in retail gasoline prices, and that should translate into a lower headline CPI reading for April.  That said, the rise in inflation expectations, which the Fed repeatedly fretted about but did little to address, needs a  prompt and strong response, in the form of a 50 basis point rate hike in early May, with the explicit threat of more of the same to come. 

Canada unemployment hits a record low

Briefly noted, Canada's job market continued its remarkable run in March. According to Statistics Canada, the economy added 73,000 jobs in the month, with the increase more than fully accounted for by a rise of 93,000 in full-time employment.  This pushed the unemployment rate down by two ticks to 5.3 percent, the lowest figure ever recorded for this series, which dates back to 1976. In contrast to the US, where employment remains below its pre-pandemic peak,  the Canadian economy has been posting new all-time highs for employment ever since the pre-pandemic level was re-attained in September 2021.

Wage gains are accelerating, reaching 3.4 percent year-on-year in March after a gain of 3.1 percent in February. This remains well below the rise in CPI, which most recently stood at 5.7 percent. Still, there can be no doubt that the Bank of Canada is increasingly concerned by the evidence of unprecedented tightness in the labour market and the potential this brings for wage and cost pressures.  Market expectations for a 50 basis point rate increase when the Bank's Governing Council meets on April 13 seem certain to be fulfilled. 

Canada's Federal Budget: relatively restrained

Governments always try to prepare financial markets and the public in advance for the contents of their budget announcements, in the hope of preventing unduly violent reactions on the actual day. The Canadian Federal Government duly did this ahead of the 2022 budget it tabled on Thursday, but in a slightly unusual way. It made no attempt to dispel widespread speculation that Finance Minister Chrystia Freeland would be spraying money around with a firehose, aiming at social programs, defense and whatever else took her fancy. So when the actual budget proposed a deficit for the coming year of "only" C$ 52.8 billion, it was widely seen as an attempt at restraint and responsibility, exactly as the Government must have hoped. 

To be sure, there is plenty of "new" spending in the budget, amounting to over $50 billion in total, but this is spread over the full five-year budget horizon.  Given that actual spending in the fiscal year just ended (2021/22) was fully $12.5 billion lower than the Government projected just half a year ago, there must be some doubt that this money will all get spent. The appearance of restraint is also helped by the jump in revenues as the economy has emerged from the worst of the pandemic. Led by income taxes, revenues were $24.5 billion higher in FY 2021/22 than previously estimated, and over the five-year forecast horizon, they are expected to be from $10-$15 billion higher than was forecast earlier. 

As usual there are a lot of bits and pieces in the budget, but here are a few of the main themes:

• Housing is a key focus, given the steady rise in home prices in almost all areas of the country. In a nakedly populist move, the Government will ban most purchases of dwellings by foreign buyers for the next two years. There will be a new tax-free savings scheme for first time home buyers, on the lines of the existing registered retirement plans.  Individuals will only be allowed to contribute $8,000 per year to such plans, to a cumulative maximum of $40,000. With the average Toronto-area home now topping $1 billion (and $800,000 nationwide), it is hard to see this program making much difference. Indeed, the skeptical might argue that its main effect will be to boost asking prices by, just guessing here, about $40,000.
• Defense gets a significant cash injection of about $8 billion, spread over five years. A while back, The Economist described Canada's defense policy as "the True North, strong and free-loading". Even with this cash injection, defense spending will only reach 1.5 percent of GDP, against the NATO target of 2 percent. Given Ms Freeland's Ukrainian roots, it is no surprise (and definitely no criticism) to note that $500 million will be given to that country in defense aid.  Considering  Canada's frankly pathetic performance in defense procurement over many years, that contribution may be the only part of the $8 billion that will reliably get spent.
• The "green" economy gets extra funding, in support of the Government's aim of reducing Canada's carbon emissions by 40 percent by 2030. There will be a new incentive program for electric vehicle purchases. Intriguingly and not without risk, the Government seems set to rely on still-embryonic carbon capture technology to help meet its emissions goals: a new investment tax credit will be offered, costing $2.6 billion over five-years.

Reflecting these measures and the myriad other items in the budget, the Government is able to project a steadily declining path for the fiscal deficit through the five-year planning period. The $52.8 billion deficit forecast for FY2022/23 is less than half the previous year's level. It is projected to fall below $40 billion in FY2023/24 and then to less than $10 billion by FY 2026/2027. The debt/GDP ratio is expected to fall from 45.1 percent this year to 41.5 percent by FY2028/2027. Both the dollar deficits and the debt/GDP numbers are lower than previously expected, despite the new spending measures.

In all then, not the orgy of spending that some in the markets and the media had feared. There will be sighs of relief at the Bank of Canada that fiscal policy is not set to make its job much more difficult in the months and years ahead. 

Enough!

Over the past two years I have commented a few times on the work of the Ontario Science Table, a group of experts set up by the Province to provide advice on dealing with COVID. The Table has regularly provided modelling-based forecasts for the pandemic, with results that we can reasonably describe as mixed. More often than not they have significantly over-estimated the severity of each successive wave, though it has to be said that they did rather better in predicting the fifth (aka omicron) surge in cases.  

The head of the Table is one Dr Peter Juni, and from where I am sitting he has done his colleagues, and thereby the government, few favours.  In speaking with the media, Juni always seems to jump straight to the worst case scenario identified by the modelling; not infrequently, he has seemed to go beyond that to scare people with numbers that he almost seems to have pulled out of the air.  

So, Ontario now seems to be in a sixth wave of COVID, not unexpected given that most restrictions on masking, indoor dining and such were removed a few weeks ago. Politicians and most doctors seem reasonably relaxed, or at least willing to see how things play out. After all, Ontario has close to 90 percent of its population double vaxxed, so the risk of severe outcomes is greatly reduced.

Someone who's not even a bit relaxed, however, is Dr Juni. PCR testing data shows a gradually rising case count in Ontario, with about 4200 cases reported in the latest daily data. This is known to be an underestimate, given reduced testing activity, but how much of an underestimate? Well, Dr Juni has been looking at waste-water data, and has reached the conclusion that the actual daily new case count is in a range of 100,000 - 120,000 per day! He asserts that one in twenty people in the Province currently has COVID, which implies that close to 750,000 people are currently stricken. Given that the official case count for the entire two years of the pandemic is about 1.2 million, that's a startling statistic indeed. 

I am not qualified to judge whether Dr Juni is right about this, but I can read numbers too. Scroll through to the bottom of the linked article and you'll see that the latest count of hospitalizations for COVID in Ontario is 1,126, with 159 patients in intensive care. The hospitalization number is rising, but the ICU count has actually fallen slightly in the last couple of days. I'd say that recording such small numbers of really sick people in the face of such a massive overall number of cases should count as good news, but what do I know?

Dr Juni is going to be leaving Canada very soon to take up a position at Oxford University, so this latest scare story may be his swansong. He is evidently a very smart man indeed, but his predilection for headline-grabbing has not always served Ontario well.

It's budget day tomorrow!

Canada's Federal Finance Minister Chrystia Freeland is set to deliver the 2022 budget on Thursday at 4pm Eastern Time.  Freeland has at times sounded more fiscally prudent than Prime Minister Justin Trudeau, but all the advance leaks and rumours suggest that the Government will be pressing ahead with new social spending, partly driven by the terms of its new definitely-not-a-coalition deal with the NDP.

The economy has been growing solidly, which is likely to mean that the expected path of revenues is stronger now than appeared likely when the Government posted its last fiscal update in the Fall of 2021. The surge in global oil prices in the wake of the Russian assault on Ukraine is also providing a windfall for the Federal government, as well as energy-producing provinces such as Alberta and Saskatchewan.  This may make it possible for Freeland to introduce fresh spending measures without ballooning the deficit.

At the same time, with inflation running at a three-decade high and increasing evidence that the economy, especially the labour market, is close to overheating, rhetoric from the Bank of Canada is becoming increasingly strident, not to say panicky. The last thing the Bank needs right now is a Federal fiscal stance that further complicates its task of keeping inflation in check. This article from the Financial Post (NB -- definitely not a pro-Trudeau paper) summarizes the risks as many in the business community see them.  Should be an interesting budget all around.