News & Updates

    The Morning Brief - 01.29.19

    Posted by Bruce Carson on Jan 29, 2019 7:30:47 AM


    Economy—Bank of Canada Governor Poloz—Finance Minister Morneau—Possible Recession—China Update



    Yesterday’s question period revealed two attacks from the Conservatives and one from the NDP. The Conservatives asked about the government’s handling (they would call it bungling) of Canada’s relationship with China and then moved to two economic issues. The first was set out in the argument that the government had made Canada less affordable for Canadians and the second was that the Trudeau government broke its election promise by not bringing the budget into balance this year as promised.

    The NDP concentrated on the lack of affordable housing, which must be an issue in Burnaby South where NDP leader Jagmeet Singh is running in a by-election. The NDP asked that the 2019 federal budget contain a financial commitment which would translate into affordable housing. The prime minister who was answering these questions reminded the NDP of the Liberals multi-billion dollar, multi-year promise on this issue. He didn’t say that almost all of that money is to flow after the next election, but did claim that it had already helped one million Canadians with housing. This is a number which deserves to be checked.

    All of the above to say that the economy and how the government is dealing with it will be one of, if not the top of the five major issues in the election going forward.

    One question, should Canada move into an era of slowing growth, is whether the government squandered the good times and left nothing in the cupboard to help deal with the tough times. The sub-argument would be that the government in its desire to bulk up social programs has in fact, because its spending was deficit financed the result will be the incongruous situation that those children now receiving the Canada Child Benefit will be the ones paying for it when they begin their working careers.

    Also dealing with this government’s spending, a recent Fraser Institute study, reported by Marie-Danielle Smith, reached the conclusion that Trudeau is on track to spend more per person than any other Canadian prime minister. Only during the 2009 recession was more spent per person.

    The study concludes that in times of economic growth spending slowed but PMs spent in bad times.

    The balanced budget promise was broken by the government but this fact by itself means little to Canadians unless it can be linked to money now being spent to service the ever increasing debt thus limiting the government’s ability to provide or increase the generosity of health and social programs upon which Canadians have come to depend. Lack of a balanced budget should be approached as  a pocket book issue for Canadians.

    The Conservatives argued that for the Liberals to continue to spend at today’s rate, they, if re-elected, will either have to cut back in other areas, such as defence, or increase taxes. As few can see this government curtailing spending, then taxes must go up, making life more unaffordable.

    It’s time to review what others are saying about the future of Canada’s economy.

    Bank of Canada Governor Poloz

    Governor Poloz speaking last week at the World Economic Forum in Davos, and quoted in a report from Bloomberg’s Theo Argitis, said he is keeping a close eye on the housing market, low oil prices and global trade tensions. These are the three determinants of future Bank policy decisions, including interest rates. 

    Future rate hikes are “data dependent.” It will depend on how the economy

    responds to the possible shocks Poloz has described. He said the housing market hasn’t “quite settled down” and he would like to see it stabilize to know “where we stand” and possibly return to raising rates. 

    For Poloz, he would like to see the Bank’s interest rate between 2.5% and 3.5%. Presently it is at 1.75% with the next possible adjustment coming on March 6.

    So from Poloz we know there are at least three issues related to the Canadian economy which give him pause.

    Finance Minister Morneau

    Speaking at the Davos meeting last Friday, Finance Minister Morneau had a different take on Canada’s economic future. He referred to low unemployment and the benefits flowing from the government’s focus on the middle class.

    But he did offer that “there’s both headwinds because of trade, obviously, and oil recovery from the oil price shock which is going to take some time.” But the good news is that “we have trading relationships with two thirds of the world’s economies so we are well positioned in a challenging time.”

    Morneau also doesn’t believe that as a result of the Huawei dispute that China is trying to hurt Canada economically. He said “I can’t really directly say that I’m seeing that.” He recognized that there will be a slowdown in Q4 of 2018 but Canada will be out of it in 2019.

    His overall view is positive. He said “right now, we are continuing to forecast growth this year and into the forecastable future.”

    Forecasting the economy in 2019, leaves us with two views; Moneau’s optimism or the view that a slowdown is on its way, not as bad as in 2008-2009, but a slowdown nevertheless. The political question is whether it will be felt by Canadians before they vote in the upcoming federal election.

    A Pending Recession?

    In a Bloomberg article published a week ago, BCA Research is quoted as concluding that Canada may be in a recession soon without the U.S. being involved. Jim Mylonas, a global macro strategist believes the surge in household debt combined with rising interest rates will push Canada into a recession while the U.S. economy continues to grow.

    With regard to a recession he is quoted as saying “it’s not a matter of if, but when.”

    Expansion in the U.S. may in fact push Canada over the edge because interest rates in the U.S. will continue to rise and it will be hard for the Bank of Canada not to follow. Debt to disposable income rates in Canada rose to 175% at the end September, 2018 as compared to 137% in 2006.

    It is argued that the Canadian housing market is already showing early signs of fatigue and home sales are declining.

    Bloomberg points out that most economists and the Bank of Canada are not calling for a recession anytime soon. Mylonas responds that “if the Bank of Canada is not raising rates in line with the Fed, the reason it is not raising rates is probably bad news.” It means there is weak economic growth and “in that case my thesis for Canada will play out sooner than most think.”

    Whether Mylonas is proven right or not, his conclusions should serve as a counsel of caution to counter the optimistic views of the Minister of Finance.

    Today and tomorrow, the U.S. Fed meets and will likely not raise rates. On January 31, Statistics Canada will release GDP numbers for November and on that date Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, will deliver a speech in Toronto. All of this should be helpful in determining where Canada’s economy is headed and how quickly.

    China Update

    Yesterday the United States charged Meng Wanzhou and Huawei with 13 criminal offences. Late yesterday it was confirmed by Canada’s Justice Department that the U.S. filed a formal extradition request for Meng Wanzhou.

    More on this tomorrow when there is reaction from China to the extradition request.

    To Come

    --today and tomorrow, U.S. Fed meets

    --January 31, GDP numbers for November to be released

    --January 31, Senior Deputy Governor of the Bank of Canada Carolyn Wilkins delivers a speech to the Greater Toronto Board of Trade

    --January 31, CMHC releases its Housing Market Assessment

    --February 4, Lima Group meets in Ottawa to discuss the situation in Venezuela

    --February 5, State of the Union Address in Washington--bc

    Topics: Morning Brief

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