As a pancake

Canada's real GDP was virtually unchanged in August from the previous month, according to data released this morning by Statistics Canada. The outcome was slightly below StatsCan's preliminary estimate of 0.1 percent growth.  With the newly-released preliminary estimate for September also showing next to no change, it seems possible that quarterly GDP figures, due for release on November 30,  will show that the economy was on the brink of an "official" recession in Q2 and Q3. No need (I hope) to repeat that the so-called "official" definition is loved by lazy journalists much more than by hard-working bloggers. 

Monthly GDP numbers are generally quite volatile, so it is remarkable to look at the data tables behind today's release and see the lack of any movement in GDP over the past four months.  After growing 0.2 percent in May, the economy edged lower in June, then posted almost no change at all in real terms in July or August.  Want proof?  Here are the actual numbers, in billions of chained C$:   June 2023: 2081.9 -- July 2023: 2081.8 -- August 2023: 2082.5.

Looking behind those very stable aggregate numbers does offer a couple of clues about what's going on in the economy. Goods producing industries have shown a decline in output in each month since April; the weakest sub-sector here is agriculture and forestry, which suggests that the impact of forest fires continues to influence the data. In contrast, service producing sectors grew marginally in July and August after a small decline in June. The growth in August was led by a strong rise in wholesale trade, which is unlikely to be sustained if the economy is indeed now on a much slower growth track. 

Today's data are entirely consistent with the forecasts published by the Bank of Canada in support of its rate decision last week. Indeed, the year-on-year rise in real GDP for August, at 0.9 percent, exactly matches the Bank's updated prediction for the full calendar year. The Bank's next fixed announcement date is December 6, so it will have access to the full Q3 GDP data when it makes its decision. Barring some unexpected bounce in growth in September, it is very hard to see how there will be any case for a rate hike at that time.

Lastly, a quick heads-up to one Benjamin Reitzes, an economist at Bank of Montreal. In this CBC article he is quoted as saying that the weak showing "will cause recession chatter to ramp up quickly".  I'm not sure where Benjamin hangs out, but all the Canadian media outlets I read have been screaming "recession" for the last eighteen months and more. Like the guys carrying "The end of the world is nigh" placards, they were always going to be right eventually. 

Bank of Canada: another hawkish hold

In line with market expectations, the Bank of Canada today kept its target interest rate unchanged at 5 percent, the second straight meeting with no adjustment in policy. However, as was the case at the previous announcement on September 6, the tone of the press release strongly suggested that the Bank may yet find it necessary to resume tightening, given the persistence of inflationary risks.

The media release is slightly longer than usual and largely reflects the analysis and forecasts provided in the quarterly Monetary Policy Report, also released today.  Some key points, with commentary:

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand...... the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. The shift in the composition of growth could prove significant for the Bank going forward. Given that the US accounts for more than 70 percent of Canada's external trade, a stronger US economy in and of itself adds at the margin to inflation risk in Canada. 

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures..... In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance. The tightness in the labour market is evidently contributing to wage pressures. something the Bank is especially anxious about. There is currently a strike on the economically vital St Lawrence Seaway that has seen the employers complain that the workers are looking for the same kind of wage increases that have recently been won by Canadian auto workers.  The Bank will be very watchful for such signs of a wage-price spiral, something that has been avoided so far. 

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand......Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025. This would certainly represent the softest of soft landings. New monthly GDP data for August, due for release on October 31, are likely to suggest that the economy, having shrunk marginally in Q2, narrowly avoided a technical recession in Q3.

Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates.....Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.....CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025.....the near-term path is higher because of energy prices and ongoing persistence in core inflation.  Recent volatility in monthly CPI data has evidently reinforced the Bank's view that progress back toward the 2 percent target will be slow from this point onwards. The forecast combination of negligible growth and sticky inflation over the next twelve months is a particularly tricky scenario for policymakers. 

The press release concludes with a clear warning:Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.  Despite this, commentary from Bay Street analysts suggests that most believe the tightening cycle is over, which is probably not something the Bank will be happy to see.  The Bank's Governing Council may privately think that they are done with tightening, but they surely don't want markets of the public feeling too confident about that just yet. 

Canada September CPI -- cause for a pause

Canada's headline CPI came in slightly below market expectations in September, with a 0.1 percent monthly decline (not seasonally adjusted) resulting in a year-on-year increase of 3.8 percent, down from 4.0 percent in August. That is still well above the Bank of Canada's 2 percent target, but in light of the Bank's recent rhetoric about the lags with which monetary policy operates, it looks safe to say that the Bank will keep its rate target unchanged at 5.0 percent at its Governing Council meeting on October 25. 

The slowdown in the year-on-year headline figure was broad-based, but the most eye-catching number is the deceleration in grocery price rises. This sub-component rose 5.8 percent in September, down from 6.9 percent in August and little more than half the peak of 11 percent posted a year ago.  So far, and so surprisingly, neither PM Trudeau nor Finance Minister Freeland has tried to claim credit for this.  Their little woodshed chat with the grocery store CEOs last month cannot possibly have affected this latest number, and it still seems possible that the politicians only called that meeting because they knew grocery price inflation was about to slow anyway. 

Looking briefly at the major special aggregates, it appears that CPI ex food rose 3.4 percent in the year to September, while CPI ex food and energy rose 3.2 percent.  All three of the Bank of Canada's preferred measures of core inflation slowed noticeably in the month: their mean value is now down to 4 percent. 

These numbers, though still way above the 2 percent target, suggest that the Bank is on the right track to get there eventually.  Given signs that higher mortgage rates are starting to take a severe toll on the housing market, there is no doubt that the Bank will keep rates unchanged next week.  However, it can be expected to reaffirm its willingness to raise rates again if the slow downward trend in inflation stalls or reverse. 

There is no bottom

Back in July 2019, when Boris Johnson was about to take up residence at 10 Downing Street, the excellent London blogger known as Diamond Geezer wrote that "Britain's worst-ever Prime Minister, who took over from Britain's worst-ever Prime Minister, will shortly be replaced by Britain's worst ever Prime Minister".  It's a good line, but it turns out that DG didn't know the half of it.  The UK has had two more worst-evers since Johnson left the scene, and the Tory party assembly line keeps throwing up ever more unsuitable candidates for the job.

Let's take them in order, starting with those DG was referring to:

First, from 2010 to 2018, was David Cameron.  He began his tenure by imposing austerity in response to the global financial crisis, which was, of course, exactly the wrong policy response.  Then, to appease his right-wing fringe, he promised a referendum om "Brexit".  He never thought the UK would vote to leave the EU and campaigned in a very desultory fashion for a "remain" vote.  When the leave side won the day, Cameron hightailed it out of office.

Cameron was succeeded by Theresa May, the UK's second female PM.  She held office from July 2015 to July 2019.  With the die cast for Brexit, she struggled mightily to appease the party's right wing while negotiating a deal that might actually work.  Two no-confidence votes later, she resigned after a draft agreement with the EU was rejected by Parliament.

Up next was Boris Johnson, who had worked hard behind the scenes to oust Theresa May. Once in office, he managed to ram through a Brexit deal he described as "oven ready", even though it has since proved to be nothing of the sort. He held office from July 2019 to September 2022.  The last two-and-a-half years were dominated by the COVID crisis, which was hardly Johnson's fault but did eventually trigger his demise.  He was ousted after it was shown that he had misled Parliament about a series of boozy parties held by his staff on Government premises while the whole UK was supposedly under a COVID lockdown. 

Here we move beyond DG's little list, to find Liz Truss replacing BoJo.  The less said of her tenure the better, and it's easy not to say much because she was only around for seven weeks.  An ideologically-committed  right-winger who seemed incapable of listening to advice, she nearly wrecked the UK's financial markets and resigned after losing an endurance test against a lettuce.

Next up was the current incumbent, Rishi Sunak, who is just coming up on a full year in office. Sunak is the UK's first Hindu PM, which is doubtless not a bad thing, but also the richest person to hold the office in modern times, which is probably not a good thing. In truth, Sunak has not pulled any of the dumb moves that characterized his predecessors on this list, but he has never won the full support of the more right-wing members of his party, and trails badly in opinion polls despite the lackluster performance of Labour leader Sir Keir Starmer. 

As and when the party decides to oust Sunak -- most likely after he loses a general election late next year -- the most likely replacement is Suella Braverman, current Home Secretary.  The anti-immigration crowd's favourite immigrant, the strident Braverman is the brains, if that's the word, behind the Government's bizarre and probably illegal scheme to relocate illegal migrants to the tiny, landlocked African nation of Rwanda. 

And lurking behind Suella is the worst of them all, the irrepressible, bibulous populist Nigel Farage. Despite not actually being a member of the Tory party, Farage contrived to dominate its recent annual conference, spouting the usual river of bile about...well, mostly about immigrants, actually, as is always the case when someone puts a microphone in front of his leering face.  It's hard to spot anyone worse than Farage looking to take over the party after him, but given the Tories' recent track record in selecting leaders, you wouldn't put it past them to find someone even worse when the time comes. 

RyanAirbnb

In this week's biggest news, we stayed at a hotel for the first time since the pandemic began. Times have certainly changed -- when we made our booking we were amazed to learn that our 3/4 star hotel in a major tourist area did not provide maid service during your stay. Re-use your towels, make your own bed!

I think you can trace this sort of thing back to the impact of low-cost airlines such as Ryanair, Southwest or Allegiant. Low prices, but also rock-bottom customer service, and in the case of Ryanair (I don't know about the others) a sizeable dollop of outright contempt for the paying customer. The ultra-low cost base of these carriers, coupled with people's natural lust for a bargain, has meant that "legacy" or full-service airlines have had to price match as much as they can, which means that service standards have inevitably converged toward the Ryanair level. My own worst-ever flying experience was not on Ryanair (which I have used several times) but on a Toronto-Miami trip with Air Canada's low-cost (not!) "Rouge" division.

If my recent hotel experience is in anyway typical, it seems as if the same sort of thing is happening in the hospitality sector. The rise of Airbnb has persuaded a lot of people to abandon traditional hotels, which in turn has forced those hotels to cut prices and service standards in order to remain competitive. My sister is an avid Airbnb fan; when she and her family came to stay with us a few years ago, we were startled to find that at the end of their stay, they stripped all the bed linen from the beds to be ready for laundry.  Apparently this is standard practice at Airbnb: who knew?

It seems as if the bloom is off the rose at Airbnb. Rapacious "hosts" have pushed prices and fees too high while still offering abysmal service.  Municipalities (with New York in the forefront) have realized that Airbnb is trashing their rental accommodation market and begun a belated crackdown. Airbnb may well have passed its peak, which is a good thing -- it's a global blight.  So far, however, there is no sign of the same happening at Ryanair and its ilk, which seem to go from strength to strength despite concerns over their impact on the climate. .  

Wow, and not necessarily in a good way

Opinion polls in both Canada and the US consistently show that the populace is deeply unhappy with the state of the economy.  The US media seem to make an effort to report economic developments accurately, but the Canadian media have been screaming recession for the better part of eighteen months, and large segments of the online commentariat have moved right on to pronouncing the onset of a full-on depression. The only conclusion we can really reach here is that for most people, inflation is the only economic statistic they really pay attention to, because the data on the real economy tell a very different story -- as today's employment reports underline in the strongest possible terms.

In Canada, StatsCan data show the economy followed the addition of 40,000 jobs in August with a further 64,000 in September, way above market expectations. So far this year, the average monthly rise in employment has been 30,000.  There are some oddities in the data, such as a major swing in educational employment from a sharp fall in August to a strong rise in September, something StatsCan attributes to seasonal adjustment.  Moreover, about 48,000 of the new jobs were part time in nature, though this should be weighed against the fact that over the past twelve months, the economy has added 474,000 full-time jobs.

These numbers are extraordinarily strong, especially in light of data that seem to show the economy almost stagnating in Q2 and Q3.  In one sense, however, they may not be strong enough.  Thanks to very high levels of immigration, the labour force grew by an estimated 72,000 in September, after growing more than 100,000 in August.  Even the remarkable job gains seen in recent months have been insufficient to absorb all of the newly-available workers; the unemployment rate was unchanged at 5.5 percent in September. 

Average hourly earnings rose 5.0 percent from a year ago, in line with the gain seen in the two preceding months.  This is undoubtedly too high for the Bank of Canada's comfort, but it is unlikely that there will be any change in official interest rates in the near term.

In the US, the BLS reported this morning that the economy added 336,000 jobs in September. This was far above market expectations and well above the already robust monthly average of 267,000 positions seen over the past year.  Revisions added a further 119,000 to the job gains posted for July and August.  The unemployment rate was unchanged at 3.8 percent.  Average hourly earnings rose only 0.2 percent in the month, bringing the year-on-year increase to 4.2 percent.  This is too high for the Fed's liking, though it is not quite as far above the inflation target as the corresponding number for Canada.

As is the case in Canada, it seems unlikely that today's data will lead to any shift in Fed policy in the near term, though that did not prevent a fairly panicky (though short-lived) market reaction. However, it seems clear that the Fed, and for that matter the Bank of Canada, will see little reason to contemplate rate cuts as long as the economy is strong enough to create jobs at the rate we are currently seeing.  The selloff in global bonds over the last couple of weeks seems to reflect that reality; it remains to be seen whether people answering calls from opinion pollsters can also be convinced. Probably not, if this CNN article is anything to go by.