Is the BoC wearing beer goggles?

By Erica Alini - Tuesday, December 4, 2012 at 10:06 AM - 0 Comments

As was unanimously expected, the Bank of Canada is keeping the key interest rate steady at one per cent, it announced today. Not much news there.

More interesting is the discrepancy between the Bank of Canada’s growth projections for late 2012 and early 2013 and almost everyone else’s. Here’s a chart that plots the BoC forecast—as of the October Monetary Policy Report—against those by TD, CIBC, ScotiaBank and BMO:

To be fair, RBC is even more bullish than the BOC. In general, though, the Bank’s projections for the next six months appear to be far more optimistic than the consensus.

The BOC is a well-known bull: it keeps insisting on reminding the market that borrowing costs won’t stay at rock bottom forever, even as other central banks are loath to do so right now. Still, a projected rate of growth of 2.5 per cent between October and December of this year seems exceedingly optimistic after the economy tanked to a dismal 0.6 per cent annualized growth between July and September.

What explains such sunny outlook? In all likelihood, the Bank’s latest forecast is already dated. The text of the interest rate announcement this morning seemed to hint that much when it noted that: “underlying momentum [in the economy] appears slightly softer than previously anticipated.”

The latest available projections from the Bank date back to October. That was before the U.S. presidential election, when most Canadian observers were dismissing the idea that the U.S. might tumble down the fiscal cliff with a confident shrug of the shoulders: “the Americans will sort it out,” was the consensus. A month later, that’s still the consensus—but the continued squabbling in Congress has raised eyebrows among analysts and continues to hold back business investment on both sides of the border.

The MPR was also before eurozone leaders and the IMF delayed granting Greece access to its next tranche of loan money—as if business confidence worldwide need that extra shakeup.

That the BOC’s October forecast already needs an update speaks to how difficult it has become for economists to read the future when the two key risks to the global economy (the eurozone crisis and the fiscal cliff) hinge on closed-door negotiations among politicians.

It’s really about politics, not economics—don’t ask what political scientists’ record is on crystal ball gazing…

We’re number… 15?

By Aaron Wherry - Monday, November 5, 2012 at 1:26 PM - 0 Comments

Kevin Carmichael checks one of the Harper government’s favourite rallying cries.

While a valid bragging point in the aftermath of the financial crisis, Canada no longer is an economic standout among its peers. The International Monetary Fund identifies 35 countries as “advanced economies,” ranging from Australia to the United States. According to the IMF, Canada’s gross domestic product will expand by a little less than 2 per cent in 2013. That bests only European economies coping with the recession in the euro zone. Australia, Estonia, Hong Kong, Iceland, Israel, South Korea, Malta, New Zealand, Norway, Singapore, the Slovak Republic, Sweden, Taiwan, and the U.S. all are forecast by the IMF to outpace Canada next year…

Mr. Flaherty can accurately say that Canada’s growth is projected to be strong compared to a group of recessionary European countries. He can no longer accurately put on positive spin on Canada’s mediocre economic performance by seeking out favourable international comparisons. At best, Canada is in the middle of the pack.

What does a trade deficit mean for GDP? Not much.

By Stephen Gordon - Tuesday, September 11, 2012 at 3:18 PM - 0 Comments

Statistics Canada’s latest release for the international merchandise trade balance shows that the trade deficit widened in July, and this is being interpreted as a sign that GDP growth will come in lower than previously thought. This might seem to be an obvious implication of a widening trade deficit when you decompose GDP into its spending components:

GDP = Consumption spending + Investment + Government spending + Net exports

Everything else being constant, a fall in net exports reduces GDP. But one of the dangers of reasoning from national accounts identities is that everything else isn’t always held constant. Here’s another national accounts identity:

Investment = Saving + Government surplus – Net exports

(I should be using the current account instead of net exports here, but this is close enough for my purposes.) Everything else being constant, a fall in net exports increases investment—and, as you can see in the first accounting identity, investment shows up as a positive contribution to GDP. Saying that Canada’s trade deficit widened is the same thing as saying that foreigners increased their flow of savings into Canada—and investment spending is financed out of savings.

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The China crisis

By Charlie Gillis and Chris Sorensen - Thursday, May 3, 2012 at 9:33 AM - 0 Comments

HeyItsWilliam/Flickr

Stringer/Reuters

Of the 80 or more television shows Chinese authorities have banned in recent years, the most devoutly missed may be a soap opera called Wo Ju, whose popularity was eclipsed only by its underwear-bunching effect on Beijing’s censors. Its central plot featured a senior government official named Song, who accepts sexual favours from a property-hungry young woman while he brazenly manipulates his city’s real estate market. Song gets his mistress pregnant, is arrested for corruption and ultimately dies in a car accident. But his comeuppance wasn’t enough for China’s State Administration of Radio, Film and Television. The broadcasting gatekeeper cancelled Wo Ju, saying its “sex, dirty jokes and corruption stories” had a “serious negative influence” on society.

Dissolute behaviour among Communist Party potentates has long been a taboo subject in China. Yet these days, for sheer sensationalism, Wo Ju could scarcely compete with the evening news. For more than a month, China has been transfixed by the downfall of Bo Xilai, a once-formidable party figure whose career has crashed amid accusations of corruption, influence peddling and—most sensationally—an attempt to cover up murder. At the centre of the saga: Bo’s wife, Gu Kailai, who is under investigation in the poisoning death of a British businessman. Desperate to discredit Bo, party leaders announced they’d stripped him of his prestigious position as party chief in Chongqing, while state media dredged up long-suppressed reports of influence peddling and self-enrichment on the part of the powerful couple.

The result, says Cheng Li, a veteran China watcher with the Washington-based Brookings Institute, has been “the greatest challenge to the Communist Party since Tiananmen Square.” For decades, Chinese leaders have dealt with allegations of misconduct behind closed doors, while projecting an air of fatherly control. Now, having acknowledged murder plots and corruption at such a high level, they’ve stirred doubts about stability within the leadership of the regime, says Cheng. “There is a lot of cynicism about the party. In my view, it has lost the moral high ground.” Worse, Bo’s undoing has ignited age-old rivalries within the politburo, between reform-minded liberals represented by Premier Wen Jiabao, and a growing legion of neo-Maoist conservatives led by Bo. Prior to his spectacular downfall, the 62-year-old chieftain was seen by many as a future president of China. Since the party announced his removal on March 15, he has not been seen in public.

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Europe on growth: All together now?

By Gabriela Perdomo - Friday, April 27, 2012 at 3:13 PM - 0 Comments

(Markus Schreiber/AP Photo)

Last week, we wondered whether Chancellor Angela Merkel and other German officials were too stubborn to notice that their push for austerity is choking Europe’s economy. There’s a chance they aren’t.

On Wednesday, European Central Bank President Mario Draghi called for a European “growth compact,” acknowledging that fiscal austerity is “starting to reverberate its contractionary effects.” Merkel agreed with Draghi, though she immediately specified what type of growth she would–or rather wouldn’t–like to see:

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The lost decade of Canadian exports

By Erica Alini - Monday, April 9, 2012 at 3:59 PM - 0 Comments

With the release of Statistics Canada’s annual review of merchandise trade last week and Bank of Canada chief Mark Carney’s remarks at the Kitchener Waterloo Chamber of Commerce days earlier, there’s been a lot of talk about Canadian exports recently–and a number of interesting charts to illustrate where the problem lies.

Carney, for example, turned up this graph to show how, unlike in most previous post-recessionary periods, exports haven’t played a major role in pulling us out of the doldrums this time:

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Can Germany rescue its ailing neighbours?

By Chris Sorensen - Wednesday, February 22, 2012 at 10:30 AM - 0 Comments

Odd Andersen/AFP/Getty Images

Though it’s better known for its caviar service in first class and its swank lounges at Frankfurt International Airport, much of the excitement at Lufthansa last year took place at its comparatively drab cargo operations. The carrier’s hulking MD-11 freighters hauled 18 per cent more tonnes of time-sensitive goods—ranging from German-made luxury car parts to pricey chemicals—in 2011 than the year before, when a previous record was set. Even more impressive is the destination for many of those planes: “China remains the core market for air-freight transportation out of Germany with growth at 26 per cent,” says Florian Pfaff, a manager for Lufthansa Cargo.

Apparently, not everyone is losing jobs to Guangdong province.

Despite the deepening eurozone crisis, Germany is booming. While Ottawa might like to brag about its performance through the Great Recession, the real miracle story belongs to Germany, and its manufacturing and export-driven economy. The country of 82 million has enjoyed GDP growth of three per cent or better for the past two years, while exports topped $1.3 trillion for the first time ever in 2011. Unemployment, meanwhile, is sitting at a 20-year low of 6.7 per cent, compared to Canada’s 7.6 per cent. And although it experienced a run on its banks in 2008, Germany has no housing bubble, boasts a high personal savings rate and slays deficits with near-religious zeal.

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Iceland: a new model for dealing with collapse?

By Chris Sorensen - Thursday, February 16, 2012 at 8:40 AM - 0 Comments

Stian Lysberg Solum/Reuters

As of this week, more than 27,000 Icelanders have signed a petition urging outgoing four-term President Ólafur Grímsson (who famously stood in the way of the U.K. and Netherlands collecting billions owed by one of Iceland’s failed banks) to seek an unusual fifth term in office—not an insignificant number in a country of just 320,000. And why not? Just over three years after Iceland’s economy imploded, the country is already showing early signs of recovery while the U.S. economy stagnates and countries in the EU grapple with painful austerity measures and a mounting debt crisis that threatens to rip the eurozone apart.

The remarkable turn of events in Iceland has, not surprisingly, caused some to wonder whether the country’s unorthodox handling of the 2008 financial crisis—refusing to bail out the banks and jealously guarding and even expanding social programs—represents a model for other countries faced with a similar calamity in the future. The International Monetary Fund, which lent Iceland US$2.1 billion, even co-hosted a conference with the government on the subject in Reykjavik last fall. “The suffering that so many of our citizens are facing is unnecessary,” wrote Nobel prize-winning economist Paul Krugman, who was one of the conference’s invited guests. “If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.” Or does it?

There’s no question that Iceland has come a long way in a very short period of time. GDP is up three per cent, unemployment is below seven per cent (though still high by Iceland’s standards) and, last year, the government returned to the international financial markets with a US$1-billion sale of sovereign bonds. It’s a far cry from just over three years ago when normally peaceful Icelanders were rioting in the streets—the end result of efforts to remake the island’s economy into one that was built on financial wizardry instead of fisheries. Privatized in 2000, Iceland’s banks relied on their somewhat unknown, though not necessarily bad, reputation and high interest rates to sell foreign bonds, and were then tapped for loans by ambitious local businessmen who bought huge stakes in overseas assets. As the industry took off, Icelanders flocked to work in Reykjavik’s outsized financial district and drove Land Rovers through the streets. Several banks also began offering savings accounts to foreign depositors, a move that would later come back to haunt the tiny country. By the time the credit crunch hit, Iceland’s three largest banks held debts worth a staggering 10 times the GDP. The fallout wasn’t pretty.

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Drummond report crushes Ontarians’ morale–and the table

By Erica Alini - Wednesday, February 15, 2012 at 5:16 PM - 0 Comments

You might as well call him Dr. No–as in, no full-day kindergarten, no more small class sizes, no pay increases for doctors, and so on.

Don Drummond, a former TD economist and chair of Ontario’s commission on public-service reform, has unveiled his much-anticipated report on how to restore the fiscal health of Canada’s largest province. Drummond’s two-volume, 532-page tome crushed Ontarians’ morale on Wednesday–as well as the table onto which Ontario Provincial Police officers unloaded copies of the report during the media lock-up this morning, according to the Toronto Star.

Drummond has predicted that Ontario’s deficit will balloon to $30.2 billion in the next seven years, unless the province manages to contain total yearly spending increases to 0.8 per cent. Nearly a third of his suggested cuts concern healthcare–unsurprising, given that public spending there has been growing at an eye-popping average annual rate of 6.3 per cent over the past five years.

But it’s not just doctors who are up in arms against the Drummond report. There’s enough in there to make just about anybody mad: The document, in fact, recommends raising the retirement age for teachers; scrapping a new 30 per cent Ontario tuition grant for undergraduate students (unless the budget for post-secondary education can be otherwise contained to 1.5 per cent annual growth); axing a 10 per cent rebate on electrical bills; closing one of the two head offices of the Ontario Lottery and Gaming Corporation, as well as shutting two casinos in Niagara Falls.

“Ontario faces more severe economic and fiscal challenges than Ontarians realize,” Drummond said. And that, in all likelihood, was the main point of his report: to deliver a shocking wake-up call, as Adam Radwanski noted in The Globe and Mail last weekend.

“Our message will strike many as profoundly gloomy,” Drummond said Wednesday. “It is one that Ontarians have not heard, certainly not in the recent election campaign, but one this commission believes it must deliver.”

As the economy slows down, should austerity pick up speed?

By Erica Alini - Tuesday, January 31, 2012 at 2:01 PM - 0 Comments

Statistics Canada

Canada’s GDP numbers for November came out this morning, and it was a rude awakening. The economy slowed down unexpectedly in November, with output dipping 0.1 per cent, as opposed to the consensus forecast of 0.2 per cent growth. “While it initially appeared that the Canadian economy smoothly decelerated late last year, it now looks like Canada stumbled as it approached the 2011 finish line,” CIBC quipped in a note.

Dragging down overall output was a 2.5 per cent drop in oil and gas extraction activity, possibly due to low oil and gas prices and softening demand for exports. Notably, construction in both the residential and non-residential sector was down 0.3 per cent.

Statistics Canada

The November slowdown is expected to bring down quarterly growth from a projected two per cent annualized expansion. Recession–defined by economists as two consecutive quarters of negative growth–isn’t necessarily upon us. But with Europe teetering on the brink of fiscal disaster, global demand cooling, and the Canadian housing market possibly due for a downturn–which could shave as much as one per cent off of GDP, according to some estimates–is it really time for the Harper government to pull the breaks on public spending?

Another concern is that, with rates already at record lows, there’s little the Bank of Canada can do to soften the impact of deficit cuts with expansionary monetary policy. As Stephen Gordon noted yesterday, there are steep costs associated with introducing austerity at the wrong point of the business cycle.