News & Updates

    The Morning Brief - 02.04.19

    Posted by Bruce Carson on Feb 4, 2019 10:36:18 AM

    NATIONAL ISSUES

    Economy—GDP November—Bank of Canada on Wages and Consumer Debt—Trans Mountain Pipeline

     

    GDP November

    Last Thursday Statistics Canada released numbers on November’s GDP and revealed that for the second time in three months the Canadian economy had shrunk. It was down by 0.1% in September, then up 0.3% in October and in November declined 0.1%.

    The main reason for the decline in November was low energy production. There were also declines in manufacturing, construction and finance. The question is whether Canada has now entered the predicted soft patch or is there something larger affecting the economy which will mean lower growth for longer.

    The decline of 0.1% in November matched the median forecast by Bloomberg.

    Avery Shenfeld of CIBC World Markets offered that these numbers would leave the Bank of Canada “decidedly on hold for the next couple of quarters” as far as interest rate hikes are concerned.

    The Bank of Canada had predicted growth in Q4 of 2018 to come in at 1.3% and for Q1 of 2019; it would slow to 0.8%. The economy is expected to rebound after that as the job market picks up and business investment increases.

    As noted, the question is are we in for a prolonged decline or will Q2 of 2019 show increased economic activity? Joe Chidley has an interesting piece in the Financial Post dealing with last week’s U.S. Fed decision to maintain interest rates where they are and what that may say about approaching economic volatility.

    Chidley argues that by the Fed not hiking rates, that may mean the “recovery isn’t as robust as it previously let on.” The Fed back-stopping suggests that the economic cycle may be getting long in the tooth. He cited trade wars, a fractious Europe, issues with China and the uncertainty around Brexit as possible reasons.

    All this to say that any slowdown in the U.S. economy is going to have a negative effect on Canada.

    Looking forward to this fall’s federal election, while there are a number of other leading issues that will sway Canadians’ voting preferences, pocket book issues usually rank near the top. The question “are you better off now than you were four years ago” is a real one.

    The federal government as noted last week has been pumping money into the economy in good times and there is a budget coming in which the prime minister indicates will be the promise of at least some form of partial pharmacare. The Liberals can rest assured that the NDP, with Jagmeet Singh as leader or not, will enter the fall election with numerous spending promises including pharmacare and money for housing.

    The question for Trudeau, Scheer and Singh is, if the economy does not recover in Q2, how large a deficit are they willing to run and for what purpose. All three leaders should have vivid memories of 2008-2009 recession and the amount of money that was required to stimulate the economy. While few are predicting this outcome, the three leaders should be looking at Q2 of 2019 with some trepidation.


    Bank of Canada and Wages and Consumer Debt

    Also connected with the question as to whether Canadians are better off than they were four years ago are the two issues of wages and consumer debt.

    Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins addressed these issues at the end of last week. In a speech to the Greater Toronto Board of Trade she began by saying that disappointing wage gains can only partially be blamed on the oil slump. She said that lower than expected wage gains in a tight job market are puzzling.

    While the oil patch has dragged down the national wage growth numbers, they are actually lower than they should be. Businesses are saying that it is hard to fill jobs while at the same time there is lower demand for routine jobs.

    Wilkins suggests that employers and governments focus on education and training as well as finding ways to encourage labour mobility; go where the jobs are. The Bank of Canada believes that wages will pick up as economic expansion pushes them up. The question is when?

    A month ago Kevin Carmichael attempted to tackle the issue of persistently low wages and suggested that after the 2008 depression employees were reluctant to press for higher wages and employers were concerned about economic stability.

    Wilkins also addressed consumer debt in a CBC interview saying that the Bank is considering the effect that higher interest rates would have on highly indebted Canadians.  She said “we have to be very conscious of the fact that people are highly indebted and that interest rate increases are going to have more of a bite than they may have had in the past.” She added “we’re taking that into account.”

    Rising interest rates as we go through 2019 and wages that may remain stagnant are not a winning combination for a government seeking re-election on a plan to spend its way out of its deficit.


    Trans Mountain Pipeline

    The Parliamentary Budget Officer released a report on Friday that suggested the federal government may have overpaid by $1 billion for the Trans Mountain pipeline. The PBO did add that if the pipeline is built, it will create 8,000 jobs at peak construction.

    The report also points out that if there are further delays in construction, value will go down. With every delay of a year the value diminishes by $700 million. If the expansion is not built the remaining assets would be worth approximately $2 billion.

    The PBO estimated the sale price at time of purchase and it could vary between $3.6 billion and $4.6 billion. This was music to the ears of Finance Minister Morneau who claimed that the government paid the median price of $4.1 billion, forgetting that when he announced the purchase he declared the price to be $4.5billion. He became quite testy when corrected. If he is going to be the government’s main salesperson for its 2019 budget, he better develop more convincing communication skills.

    The PBO commenting on the purchase said “it’s a very risky project to have bought something that nobody else in the private sector wanted to acquire. There are lots of retirement and pension plans that like to buy infrastructure of that nature that generate streams of income.”

    At this stage, while the PBO’s report is instructive, the real issue is that the federal government having purchased this pipeline; will it ever see it built? As the PBO points out once constructed and in operation this pipeline will be a relief for the oil sector in Alberta.

    The latest information is that the report from the NEB dealing with the impact of increased marine traffic will be presented to Natural Resources Minister Sohi on February 22. The report dealing with the results of Indigenous consultations has no deadline for presentation.

    Both reports will have to be presented to cabinet for discussion and comment so it is hard to see construction beginning again until 2020, and then only if the cabinet endorses these reports and there are no legal challenges. Declaring the pipeline to be a work for the general advantage of Canada has been suggested as a solution, but rejected by the government.

    There is also the decision pending from the B.C. Court of Appeal dealing with B.C.’s authority to limit the amount of bitumen crossing the province.

    And then there is the state of the proposed natural gas pipeline which is crucial to the LNG Canada, Kitimat LNG plant. The TransCanada Coastal GasLink pipeline is on hold pending the settlement of a dispute between hereditary chiefs and those elected serving on Band Councils and the pipeline company. Inevitably the courts will have to address this impasse.

    On a week when the Senate Energy and Environment Committee will be begin dealing with Bill C-69; known as the ‘no more pipelines bill,’ a valid question is whether any major project can be built in Canada?


    To Come

    --today, the Lima Group meets in Ottawa to deal with the situation in Venezuela as the Trudeau government once again dips its toe into the murky waters of foreign affairs. Surely this involvement has limited downside for the Trudeau government. 

    --February 5, the Senate Committee on Energy and Environment meets on Bill C-69. First order of business is to be committee travel

    --February 5, international trade numbers for December to be released

    --February 5, State of the Union Address to be delivered

    --February 6, building permit numbers for December to be released

    --February 8, job numbers for January to be released--bc

    Topics: Morning Brief

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