The newly-minted Doug Ford government in Ontario is breaking all kinds of precedents, but it's been quick to adhere to one tradition. Yesterday, to no-one's surprise, Finance Minister Vic Fedeli announced that the fiscal position the new government inherited was much worse than the outgoing Wynne government had let on.
The Wynne government unleashed a blizzard of spending initiatives in the weeks ahead of June's provincial election, but most of them had long time-fuses and thus had no impact on the near-term fiscal position. Fedeli's revisions to the numbers largely reflect two accounting issues, relating to the treatment of surpluses in public sector pension plans and the former government's so-called Fair Hydro Plan.
Treatment of public sector pensions has been a matter of dispute between the Province and its own Auditor-General for some time. The government liked to count these surpluses as an asset, but the A-G argued that as they did not represent funds that the government could spend, this was incorrect. I'm no accountant, but it seems to me that the A-G has this one right, and Fedeli agrees, so that "asset" is off the books again.
As for the Fair Hydro Plan, the previous government had responded to the outcry over the soaring cost of electricity, largely the result of a botched push for green energy, by extending the amortization period for energy-related assets and borrowing long-term against those assets in order to provide a break to consumers. A break, that is, for today's consumers at the expense of the future consumers who will have to pay back the debt. The wrinkle in the scheme was that the government booked the added debt not on its own balance sheet but on that of the principal power utility, Ontario Power Generation.
The combined effect of removing the pension assets from the balance sheet and putting the Fair Hydro debt onto the Province's books is to increase the deficit projection for this fiscal year by about C$ 5 billion. With a few other changes also taken into account, Fedeli forecasts a deficit for the year of C$15 billion, compared to the C$6.7 billion claimed by the former government.
Now what? One of the odd features of the recent election was that the Ford team won without ever presenting anything remotely resembling a fully-costed fiscal plan. Fedeli can't say circumstances have sadly forced him to tear his plan up, because he never had one in the first place. However, the Ford team did pledge to find "efficiencies" in the Ontario budget amounting to C$6 billion per year, and that plan still seems to be in place.
C$6 billion is about 4 percent of program spending, which doesn't sound unachievable, but there's a catch. Ford pledged to find those savings without firing any public sector employees. In many key areas of the public sector -- education and health care to name but two -- wages and benefits are a huge proportion of total costs, so that seems like an impossible proposition. It's also illogical: if you really can find "efficiencies", it follows that you are finding ways to achieve the same results with fewer resources. That must mean that you will have more employees than you need, and unless you let some of them go, you won't actually achieve any cost savings.
Some time before year-end Fedeli will have to move on from shredding Wynne's fiscal plan and table one of his own. It's likely that a lot of the initiatives hastily announced by Wynne ahead of the election -- expanded day care, high-speed trains and more -- will never see the light of day. Even so, Ontario, already the world's most indebted non-sovereign jurisdiction, is likely to accumulate yet more debt in the Ford government's first (and, please God, last) term in office.
Saturday, 22 September 2018
Friday, 21 September 2018
CPI data lock in Bank of Canada rate hike
As (not so) exclusively predicted here, the year-on-year rise in Canada's headline CPI edged lower in August, falling to 2.8 percent from 3.0 percent in July. The slight deceleration was largely the result of a slowing rate of increase in retail fuel prices, though these remain the largest contributor to the increase in the headline number. Excluding gasoline, the year-on-year rise in CPI for August was 2.2 percent, the same as in July.
Despite the slight moderation in headline inflation, the details of the report make it all but inevitable that the Bank of Canada will move to tighten its policy rate by a further 25 basis points in October. In particular:
So, a rate hike at the Governing Council meeting on October 24 looks just about certain, but with one caveat. The possibly illusory September 30 deadline for Canada to conclude its NAFTA talks with the US is approaching fast, with little sign that a deal is at hand. There are political reasons (notably a Quebec election set for early October) why the Trudeau government might prefer to hold off on announcing a deal until mid-month, but it is unclear whether the US side can accede to that.
If the NAFTA talks fall apart amid recriminations in the next few weeks, if the Canadian dollar takes a hit, and if Trump revives his threat to impose auto tariffs, the Bank might feel it has no choice but to hold back on a rate hike. That's not the most likely scenario, but it's far from an impossible one.
Despite the slight moderation in headline inflation, the details of the report make it all but inevitable that the Bank of Canada will move to tighten its policy rate by a further 25 basis points in October. In particular:
- Although, as noted, the transportation sub-index (which includes gasoline) was the largest contributor to the overall gain, all eight of StatsCan's sub-indices were higher in the month. This suggests that while inflationary pressures remain relatively well-contained, they are widespread and cannot be attributed solely to one-off factors.
- All three of the Bank's core measures now stand at or above the 2 percent target inflation rate. This is the first time this has been the case since 2012. If the Bank wishes financial markets to take these measures seriously, it almost has to respond to this.
So, a rate hike at the Governing Council meeting on October 24 looks just about certain, but with one caveat. The possibly illusory September 30 deadline for Canada to conclude its NAFTA talks with the US is approaching fast, with little sign that a deal is at hand. There are political reasons (notably a Quebec election set for early October) why the Trudeau government might prefer to hold off on announcing a deal until mid-month, but it is unclear whether the US side can accede to that.
If the NAFTA talks fall apart amid recriminations in the next few weeks, if the Canadian dollar takes a hit, and if Trump revives his threat to impose auto tariffs, the Bank might feel it has no choice but to hold back on a rate hike. That's not the most likely scenario, but it's far from an impossible one.
Friday, 14 September 2018
Central banks' balancing act
It's not just the Bank of Canada that is facing unprecedented uncertainty as it contemplates its policy decisions. Both the ECB and the Bank of England are in uncharted territory too. For the Bank of Canada the great unknown is the fate of NAFTA; for policymakers in both London and Frankfurt, it's Brexit.
On Thursday both the ECB and the Bank of England indicated that they were maintaining their current policy stance for the time being, while being careful to acknowledge the risks that lie ahead. In the case of the ECB, that means that the wind-down of the quantitative easing program that began at mid-year will continue. Further, the Bank intends to keep its benchmark rate in negative territory (currently minus 0.4 percent) well into 2019.
While the Eurozone economy may not need the extraordinary stimulus of QE any longer, this is clearly not the time for the ECB to be tightening its more conventional policy settings. GDP growth within the zone is starting to slow. Uncertainties surrounding Brexit, the situation in Turkey and the political turmoil in Italy, all overlaid by the Trump-initiated trade war, make it very likely that business investment will remain weak until the situation becomes clearer. The ECB's job is made somewhat easier by the fact that inflation is under relatively good control; it currently stands at the target level of 2 percent but is expected to ease back in the coming months.
The task facing the ECB may be complicated, but it is as nothing compared to what confronts the Bank of England. The Bank's unanimous decision this week was to maintain its asset purchase program (i.e. QE) at its current level, and also to keep Bank Rate at 0.75 percent. Despite the unanimity, this cannot have been an easy decision. UK CPI has been edging above the Bank's 2 percent target for some time, standing at 2.5 percent in July. There are signs that the economy is moving into a situation of excess demand, and the current 3.0 percent annual rise in wage rates is ominous, particularly in light of the UK's customarily weak productivity performance.
Overshadowing all these factors, of course, is Brexit, with the immutable fixed date for departure now barely half a year away and a deal on future arrangements nowhere in sight. The Bank's press release notes that business uncertainty over the outlook is starting to mount, which is hardly surprising. Bank Governor Mark Carney announced this week that he had agreed to extend his stay at the Bank from a current end-date of June 2019 to January 2020. He celebrated this decision by warning that in the event of a no-deal Brexit, house prices could fall by as much as 35 percent, a pronouncement unlikely to make him popular with the property-obsessed middle class.
Carney seems to have done a good job at the Bank, overcoming early resentment of him as a foreign interloper, as well as sniping from Tory Brexiteers who see him as a spokesman for the so-called Project Fear. The next fifteen months, as he prepares himself for a return to the joys of an Ottawa winter (January, Mark? What are you thinking??) will put to the test his reputation as the leading central banker of his generation.
On Thursday both the ECB and the Bank of England indicated that they were maintaining their current policy stance for the time being, while being careful to acknowledge the risks that lie ahead. In the case of the ECB, that means that the wind-down of the quantitative easing program that began at mid-year will continue. Further, the Bank intends to keep its benchmark rate in negative territory (currently minus 0.4 percent) well into 2019.
While the Eurozone economy may not need the extraordinary stimulus of QE any longer, this is clearly not the time for the ECB to be tightening its more conventional policy settings. GDP growth within the zone is starting to slow. Uncertainties surrounding Brexit, the situation in Turkey and the political turmoil in Italy, all overlaid by the Trump-initiated trade war, make it very likely that business investment will remain weak until the situation becomes clearer. The ECB's job is made somewhat easier by the fact that inflation is under relatively good control; it currently stands at the target level of 2 percent but is expected to ease back in the coming months.
The task facing the ECB may be complicated, but it is as nothing compared to what confronts the Bank of England. The Bank's unanimous decision this week was to maintain its asset purchase program (i.e. QE) at its current level, and also to keep Bank Rate at 0.75 percent. Despite the unanimity, this cannot have been an easy decision. UK CPI has been edging above the Bank's 2 percent target for some time, standing at 2.5 percent in July. There are signs that the economy is moving into a situation of excess demand, and the current 3.0 percent annual rise in wage rates is ominous, particularly in light of the UK's customarily weak productivity performance.
Overshadowing all these factors, of course, is Brexit, with the immutable fixed date for departure now barely half a year away and a deal on future arrangements nowhere in sight. The Bank's press release notes that business uncertainty over the outlook is starting to mount, which is hardly surprising. Bank Governor Mark Carney announced this week that he had agreed to extend his stay at the Bank from a current end-date of June 2019 to January 2020. He celebrated this decision by warning that in the event of a no-deal Brexit, house prices could fall by as much as 35 percent, a pronouncement unlikely to make him popular with the property-obsessed middle class.
Carney seems to have done a good job at the Bank, overcoming early resentment of him as a foreign interloper, as well as sniping from Tory Brexiteers who see him as a spokesman for the so-called Project Fear. The next fifteen months, as he prepares himself for a return to the joys of an Ottawa winter (January, Mark? What are you thinking??) will put to the test his reputation as the leading central banker of his generation.
Friday, 7 September 2018
Not as bad as it looks
Statistics Canada reported this morning that the Canadian economy lost almost 52,000 jobs in August, pushing the national unemployment rate up to 6 percent. The Bank of Canada's Governing Council undoubtedly had a preview of the data when it met this week, and the numbers must have played a role in the decision to keep interest rates on hold for the time being.
Behind the headline, the data are not quite as dire. Full time employment actually rose more than 40,000 in the month, bringing the year-on-year rise in such jobs to 326,000, or 2.2 percent. This was more than offset by the loss of 92,000 part-time positions, with a remarkable 80,000 of those losses reportedly coming in Ontario. To put this full time/part time split into some sort of perspective, the average work week per employee on a national basis stood at 36.1 hours in August 2018, compared to 36.0 in the same month of 2017.
As always, the sheer volatility in Canada's monthly labour force data mean that the numbers need to be treated with caution. Aside from the widely divergent trend in full-time and part time numbers, other oddities in the August figures include the sharp fall in employment reported for Ontario,(where most media reports suggest that labour shortages are becoming more widespread, and a rise in employment in Alberta, where the local economy is supposedly in some trouble. A reported loss of 38,000 public sector jobs in the month also looks dubious.
It is always a good rule when looking at economic data not to put too much weight on the figures for any one month. That is especially true when the numbers are as volatile as the Canadian jobs data seem to be. The fall in employment reported today may well turn out to be a one-off event, but there is one other element of today's report that bears watching from a policy standpoint. The year on year rise in wages, which moved well above 3 percent in the first half of the year, has now slipped for two straight months, standing at 2.9 percent in August. If that trend continues, it gives the Bank of Canada one less thing to worry about.
Behind the headline, the data are not quite as dire. Full time employment actually rose more than 40,000 in the month, bringing the year-on-year rise in such jobs to 326,000, or 2.2 percent. This was more than offset by the loss of 92,000 part-time positions, with a remarkable 80,000 of those losses reportedly coming in Ontario. To put this full time/part time split into some sort of perspective, the average work week per employee on a national basis stood at 36.1 hours in August 2018, compared to 36.0 in the same month of 2017.
As always, the sheer volatility in Canada's monthly labour force data mean that the numbers need to be treated with caution. Aside from the widely divergent trend in full-time and part time numbers, other oddities in the August figures include the sharp fall in employment reported for Ontario,(where most media reports suggest that labour shortages are becoming more widespread, and a rise in employment in Alberta, where the local economy is supposedly in some trouble. A reported loss of 38,000 public sector jobs in the month also looks dubious.
It is always a good rule when looking at economic data not to put too much weight on the figures for any one month. That is especially true when the numbers are as volatile as the Canadian jobs data seem to be. The fall in employment reported today may well turn out to be a one-off event, but there is one other element of today's report that bears watching from a policy standpoint. The year on year rise in wages, which moved well above 3 percent in the first half of the year, has now slipped for two straight months, standing at 2.9 percent in August. If that trend continues, it gives the Bank of Canada one less thing to worry about.
Thursday, 6 September 2018
Bank of Canada: wait till next month
As expected, the Bank of Canada left its policy rate unchanged at 1.5% at this week's Governing Council meeting. However, the tone and wording of the press release leave little room for doubt that the next increase will come in October, with further increases in the pipeline after that.
Despite the fact that headline CPI ticked up to 3 percent in July, the near term inflation outlook is of little concern for the Bank. As the press release points out, core measures of inflation remain close to the 2 percent target. The rise in the headline figure largely reflects a surge in retail fuel prices, an effect that the Bank expects to unwind in the next few months. In fact, the August CPI data, to be released on September 21, may well come in slightly lower than July's.
The economy is growing in line with the Bank's forecasts. GDP growth in Q2, at 2.9 percent, was lower than the Bay Street consensus but almost bang on the Bank's own projections. What is somewhat surprising is the source of that growth. In the face of rising trade tensions with the US, both business investment and exports have been increasing steadily. Merchandise trade data for July, released earlier this week, showed the smallest trade deficit in almost three years. This included the largest goods trade surplus with the United States for any month since 2008, although it is important to recall that the US runs an equally large surplus in its services dealings with Canada.
Not surprisingly, the Bank of Canada is watching the NAFTA negotiations closely as it assesses its policy stance. The July trade numbers showed a decline in exports to the US in categories already hit by Trump's tariffs, including aluminum and steel. If NAFTA negotiations fail and the US follows through on its threat to put tariffs on Canada's auto exports, the impact on trade and the entire economy would be very serious. For now, however, it seems close to certain that the Bank's next 25 bp rate hike will happen in October.
Despite the fact that headline CPI ticked up to 3 percent in July, the near term inflation outlook is of little concern for the Bank. As the press release points out, core measures of inflation remain close to the 2 percent target. The rise in the headline figure largely reflects a surge in retail fuel prices, an effect that the Bank expects to unwind in the next few months. In fact, the August CPI data, to be released on September 21, may well come in slightly lower than July's.
The economy is growing in line with the Bank's forecasts. GDP growth in Q2, at 2.9 percent, was lower than the Bay Street consensus but almost bang on the Bank's own projections. What is somewhat surprising is the source of that growth. In the face of rising trade tensions with the US, both business investment and exports have been increasing steadily. Merchandise trade data for July, released earlier this week, showed the smallest trade deficit in almost three years. This included the largest goods trade surplus with the United States for any month since 2008, although it is important to recall that the US runs an equally large surplus in its services dealings with Canada.
Not surprisingly, the Bank of Canada is watching the NAFTA negotiations closely as it assesses its policy stance. The July trade numbers showed a decline in exports to the US in categories already hit by Trump's tariffs, including aluminum and steel. If NAFTA negotiations fail and the US follows through on its threat to put tariffs on Canada's auto exports, the impact on trade and the entire economy would be very serious. For now, however, it seems close to certain that the Bank's next 25 bp rate hike will happen in October.
Saturday, 1 September 2018
NAFTA: it's a win for Trump either way
I have no idea how the NAFTA renegotiations will go when they resume after the Labour Day weekend. Best guess is that Canada will wind up joining the agreement that the US and Mexico have negotiated, with the highly-protected dairy industry thrown at least part-way under the bus as the price of getting a deal.
There's a theme running through some of the Canadian media commentary this weekend, to the effect that Trump needs Canada to join the revised deal in order to demonstrate his negotiating prowess ahead of the mid-term elections. All that this shows is that almost half way into Trump's mandate, a lot of pundits are no closer to grasping the relationship between Trump and his "base".
If Canada joins the deal, Trump will crow about a "victory" that puts an end to years of Canadian exploitation of US goodwill under the existing NAFTA. If Canada stays out, he will proclaim that he has stood up to an unfair trading partner and denied it any future preferential access to the US market. His base will be happy either way -- that's why Trump has been so clear in his Twitter tirades this weekend that he sees no need to compromise.
It's to be hoped that Canadian negotiators understand this before they head back to the table in DC on Wednesday. They've botched this negotiation comprehensively since day one, but maybe realism and common sense will dawn before it's too late.
There's a theme running through some of the Canadian media commentary this weekend, to the effect that Trump needs Canada to join the revised deal in order to demonstrate his negotiating prowess ahead of the mid-term elections. All that this shows is that almost half way into Trump's mandate, a lot of pundits are no closer to grasping the relationship between Trump and his "base".
If Canada joins the deal, Trump will crow about a "victory" that puts an end to years of Canadian exploitation of US goodwill under the existing NAFTA. If Canada stays out, he will proclaim that he has stood up to an unfair trading partner and denied it any future preferential access to the US market. His base will be happy either way -- that's why Trump has been so clear in his Twitter tirades this weekend that he sees no need to compromise.
It's to be hoped that Canadian negotiators understand this before they head back to the table in DC on Wednesday. They've botched this negotiation comprehensively since day one, but maybe realism and common sense will dawn before it's too late.
Tuesday, 28 August 2018
Feet to the fire
Maybe divide-and-conquer was the plan all along. Maybe Donald Trump is trying to exact revenge for Justin Trudeau's perceived slight after the G-7 summit back in June. Either way, Canada is now in a very tricky place: NAFTA as we have known it for a quarter of a century is on its last legs, and the US and Mexico have agreed on the outlines of a replacement deal that is now being offered to Canada on what amounts to a take-it-or-leave it basis.
The US administration plans to table the deal in Congress this Friday. With the mid-terms approaching, there is no prospect that the deal will actually get passed by the House and the Senate until next year. Rather, the short deadline is for Mexican political purposes, allowing incumbent President Pena Nieto to sign off before his sexenio ends in December and his successor takes over. So by Friday Canada can either sign on to the deal, or reject it and take its chances on negotiating its own bilateral arrangement with the US -- which, lest we forget, accounts for over 70 percent of Canada's exports.
Full details of the accord are not yet available, but there's enough information to suggest that there may be quite a lot in it for Canada. This article lists five key elements of the agreement; we can just consider two items that have loomed large in the negotiations from the outset, but now appear to have been agreed:
Canadian negotiators are now back at work and Foreign Affairs Minister Chrystia Freeland has cut short a trip to Europe in order to join the talks in Washington. Assuming Canada can live with the deal that has been made on autos and the sunset clause, there are two major issues that could stymie attempts to join the deal: dispute resolution and agricultural supply management.
Mexico seems to want a trilateral deal, and despite Trump's tough talk and threats, it seems most of his team wants that too. Whether it can all be squared away by Friday remains to be seen. And whether Canada joins the deal or not, the domestic political ramifications stand to be severe, because the unctuous Trudeau and the abrasive Freeland have comprehensively botched this file from day one.
The US administration plans to table the deal in Congress this Friday. With the mid-terms approaching, there is no prospect that the deal will actually get passed by the House and the Senate until next year. Rather, the short deadline is for Mexican political purposes, allowing incumbent President Pena Nieto to sign off before his sexenio ends in December and his successor takes over. So by Friday Canada can either sign on to the deal, or reject it and take its chances on negotiating its own bilateral arrangement with the US -- which, lest we forget, accounts for over 70 percent of Canada's exports.
Full details of the accord are not yet available, but there's enough information to suggest that there may be quite a lot in it for Canada. This article lists five key elements of the agreement; we can just consider two items that have loomed large in the negotiations from the outset, but now appear to have been agreed:
- On autos and auto parts, the US and Mexico have agreed to boost the percentage of the value of a vehicle that has to be locally made in order to qualify for tariff-free treatment. In addition there is a new and separate percentage of the value of the vehicle that has to be manufactured in plants where workers are paid more than US$ 16/hour. It may seem surprising that Mexico has agreed to this, but early analyses suggest that very few vehicles now made in Mexico would fall foul of the new rules. Since auto wages in Canada are in line with US levels, there seems to be little reason for Canada to balk at this part of the deal.
- The US originally wanted any NAFTA replacement to have a five-year term, after which any of the parties could walk from the deal. What has now been agreed is a sixteen-year initial term, with a review after six years leading to a potential extension back to a sixteen-year life. This appears to represent a major concession by the United States, and should allay Canada's concerns that a short fixed term would make investment decisions impossible.
Canadian negotiators are now back at work and Foreign Affairs Minister Chrystia Freeland has cut short a trip to Europe in order to join the talks in Washington. Assuming Canada can live with the deal that has been made on autos and the sunset clause, there are two major issues that could stymie attempts to join the deal: dispute resolution and agricultural supply management.
- As regards dispute resolution, the US has always been unhappy about any arrangement that offers recourse to a decision-maker outside the US judicial system, whereas Canada (and Mexico) have preferred not to have to take their chances with US courts. It is not yet clear how the US-Mexico agreement handles this.
- Supply management may prove the most vexed issue of all. Trump has regularly railed at Canada's tariffs of "300 percent" on dairy products, and he's only exaggerating slightly -- the highest tariff, on butter, is actually 298 percent. The strongest support for supply management comes from the farming lobby in Quebec; awkwardly enough, there is a provincial election coming there in October. Still, Canada made some concessions on supply management in order to secure the Trans Pacific Partnership (TPP) deal -- which, of course, Trump walked away from. This suggests it may be possible to offer some changes that will satisfy the Americans, and as a side benefit provide relief to Canadians stuck paying exorbitant prices for milk, eggs and cheese.
Mexico seems to want a trilateral deal, and despite Trump's tough talk and threats, it seems most of his team wants that too. Whether it can all be squared away by Friday remains to be seen. And whether Canada joins the deal or not, the domestic political ramifications stand to be severe, because the unctuous Trudeau and the abrasive Freeland have comprehensively botched this file from day one.
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