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    The Morning Brief - 12.06.18

    Posted by Bruce Carson on Dec 6, 2018 1:44:35 PM


    Economy—Bank of Canada and Interest Rates—First Ministers Meeting, Montreal, Thursday Evening and Friday


    Bank of Canada and Interest Rates 

    Yesterday morning the Bank of Canada kept interest rates as they were at 1.75% set at the Bank’s October meeting. In the end there was little surprise that rates were not hiked but that was not the case in October when the conventional wisdom was that the Bank would be moving quickly, depending on the data to that sweet spot of normalcy where rates are neither a headwind nor tailwind for the economy. While at the end of the statement yesterday, the Bank made it clear it was headed in that direction, it may take longer than anticipated to get there.

    The statement which accompanied the announcement regarding interest rates spoke of a global economy where expansion is moderating as expected, with trade conflicts weighing more heavily on global demand. Growth in major economies has slowed except in the United States which is still operating above potential.

    The Bank recognized that oil prices have fallen sharply. There is also uncertainty at the geopolitical level about prospects for global growth and in the U.S. there is the expansion of U.S. shale production affecting oil prices.

    In Canada in relation to oil prices there are transportation constraints and the buildup of inventory as activity in Canada’s energy sector will be materially weakened.

    The economy grew as expected in Q3 but is showing less momentum moving into Q4. Business investment, outside of the oil and gas sector will strengthen with the signing of the USMCA. The new federal tax measures announced in the fall economic update should help encourage business investment and there should be growth in exports with strong foreign demand.

    The Bank seems pleased that the level of household debt is moving lower and regional housing variations seem to be stabilizing. The Bank will continue to monitor the effect of higher interest rates on consumers.

    Inflation is tracking at 2% consistent with the economy operating close to capacity. In October inflation was at 2.4% but is expected to ease in the coming months due to lower gasoline prices. 

    Perhaps the most important part of the Bank’s statement came near the end where it indicated that it still wants interest rates to move into the neutral range in order to achieve the inflation target. The pace of movement to rates between 2.5% to 3.5% area is dependent on a number of factors set out by the Bank. They include the effect of higher rates on consumer debt and housing, global trade policy, persistence of low oil prices, the rate of business investment and the Bank’s assessment of the economy’s capacity.

    Kevin Carmichael commenting on the Bank’s lack of action on rates wrote that “the December 5 pause could be longer than anticipated” as the question is whether the economy will be “materially weakened” because of energy industry’s weakness.

    Carmichael notes that the Bank still wants to return to that neutral range. However it should be noted that a weaker economy will help curb inflation. Headwinds include the Trump trade wars and falling oil prices.

    While non-energy investment is expected to rise in the months ahead, the Bank is certainly more cautious than it was in October. On January 9, the Bank will once again deal with interest rates and present its Monetary Policy Report. Predictions at this time seem to concentrate on the notion of a further rate hike in Q1 of 2019, depending, of course, on data.  

    First Ministers Meeting, Montreal

    Given the squabbling over the agenda coming from the provinces and most of it justified, perhaps the lesson to be learned for a prime minister is not hold a FMM in the last year of the mandate, when the cupboard is virtually bare and the provinces and territories present an unusually united front.

    When former Prime Minister Harper convened a FMM in January, 2009 at the height of the global recession, the premiers were a pretty happy group knowing they would be the direct beneficiaries of most of the spending planned by the Harper government to ward off the worse effects of the depression. Premiers don’t mind listening to federal cabinet ministers drone on when they know at the end of the day they will be leaving with buckets of cash.

    That is not the case on Friday as premiers will not want to sit through Finance Minister Morneau rhyme off his top five statistics while premiers know the economy is beginning to slow. Environment and Climate Change Minister McKenna will be preaching the virtues of the federal carbon tax to a group of mostly non-believers and Intergovernmental Affairs Minister LeBlanc will be talking about tweaking internal trade barriers when the main concern of a number of premiers is the lack of pipelines to tidewater, both east and west, crossing provincial boundaries.

    Premiers also want those tariffs on aluminum and steel lifted but they will discover from Ambassador MacNaughton that with “tariff man” in the White House, such removal may be a year away and only if quotas are substituted. Premiers will want to know what exactly Prime Minister Trudeau is going to do to have the tariffs lifted and when.

    Premiers have also developed common cause in relation to Bill C-69 which has become known among its detractors as the “no-pipelines bill.” They will want to know if the federal government is willing to press pause on this bill, now in the Senate.

    There is now close to unanimity among premiers in opposition to the federal carbon tax. Even Premier Notley, once one of Trudeau’s closest allies is willing to pause it in the out years if there is no pipeline. A few days ago Rex Murphy in a column had a suggestion that may gain traction among some premiers; “shelve the carbon tax until oil is flowing.” He wrote “until there are pipelines (plural) built and oil flowing to international markets there should be no talk of the so-called carbon tax—the energy tax.” He went on to write “until the crazed circumstances of the blockade on Alberta energy is resolved all of the talk of ‘reducing carbon emissions’ and the pretense of meeting our Paris commitments should be shelved. Fix the home front first.”

    Premiers are also sick of being told by Trudeau and his ministers that the federal government spent $4.5 billion to purchase the Trans Mountain pipeline, so oil producing provinces should be happy. What will make them happy will be a constructed pipeline, not the promise of one, some day. What they see is the federal government has purchased a place holder so it can be both for and against pipelines at the same time. 

    Premier Notley wanted the federal government to appeal the Federal Court of Appeal’s decision to the Supreme Court of Canada—didn’t happen. The federal government could have requested a stay of the effect of the decision so it could be determined if construction could proceed in certain areas—didn’t happen. Others wanted the federal government to declare the pipeline a work for the general advantage of Canada—didn’t happen. Premier Notley wants the tanker ban on B.C.’s northern coast removed—didn’t happen. Some premiers along with Conservative Party leader Scheer want the Northern Gateway and Energy East pipeline applications revived by the federal government—won’t happen.

    From removal of the carbon tax to building Energy East (Premier Higgs of NB) to cost sharing the price of locomotives (Notley) to border issues and reimbursing Ontario and Quebec for asylum seeker expenses, to steel and aluminum tariff removal this is rather a grumpy group of premiers. It is a far cry from the group that first met with Trudeau in 2016, when only Saskatchewan’s Brad Wall wasn’t singing from the federal song book.

    The best tactic for the federal government in these circumstances should be to switch from preaching mode to listening mode. To switch from statistics to understanding the human cost of federal policies which have not had equal effect across the country. One of the main criticisms of Trudeau’s father was that he believed all knowledge resided in Ottawa. This is a different time and hopefully the old adages will not come back to haunt this meeting or little will be accomplished.

    To Come

    --today, AFN Chiefs Assembly in Ottawa closes

    --today, OPEC meeting in Vienna

    --today, international trade numbers for October to be released

    --today, FMM begins with dinner in Montreal

    --December 7, FMM in Montreal with Indigenous leaders present for the first two hours

    --December 7, job numbers for November to be released

    --December 10, building permit numbers for October to be released

    --December 13, new housing price index for October to be released

    --December 14, possibly last sitting day for House of Commons before the Christmas break


    The Morning Brief returns on Monday, December 10--bc

    Topics: Morning Brief

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