Economy—Bank of Canada Governor Poloz’s Year End Speech—First Ministers Meetings; A Worthwhile Exercise?
Governor Poloz’s Year End Speech
When the Bank of Canada decided it no longer wanted to set out what it might do with interest rates through forward guidance, it substituted speeches by senior members of the Bank delivered the day after the rate decision with the view that these speeches would help illuminate a path forward or at least set out the Bank’s view of the short term future of the Canadian economy. Last Thursday, Governor Poloz combined his year-end speech with the one he would deliver after an interest rate announcement.
It was an important speech as it demonstrated that the Bank had some understanding and perhaps even empathy with those in Alberta and Saskatchewan suffering because of low oil prices and the rising price differential between the price of a barrel of Western Canadian Select and West Texas Intermediate. The other fiscal headwind raised in the speech was the escalating trade tension between the U.S. and China.
To demonstrate how quickly issues can turn, the price differential is not as wide as it was last week but trade tensions persist between China and the United States, now with Canada being involved as the CFO of Chinese telecom giant Huawei waits in a Vancouver jail for the result of her bail application as she faces extradition to the United States. This has placed Canada in the middle of the trade issues between the U.S. and China as China threatens retaliation against Canada if Canada does not release the Huawei executive. One headwind piles on top of another.
In last Thursday’s speech Poloz said that the oil price issues in western Canada would have a “meaningful impact” on the Canadian economy. The saving grace is that it won’t be as big a hit as was experienced with the price free fall in 2015, so it will not require the Bank to react with interest rate reductions. One reason for the lessoning impact on the economy is that the oil and gas sector is not as big a part of the Canadian economy as it has fallen from over 6% in 2014 to 3.5% at present. In 2009 it made up at least 10% of Canada’ economy.
Kevin Carmichael commenting on this part of the speech said that oil price issues would contribute to the slowing of rate increases “but probably won’t prompt policy makers to veer in a totally new direction.”
Poloz noted that a lot had occurred since the October rate adjustment but the unemployment rate is at a forty year low and inflation is close to target. He said that this is “consistent with an economy operating close to capacity.” However growth is slowing ahead of the fourth quarter. Trade tensions between the U.S. and China are hurting global demand for exports.
Poloz said the “tone of the data has not been good.” Last week Poloz believed that the great risk to the Canadian economy would be blowback from U.S.-China trade war. No doubt the events of the last few days would reinforce this view. Poloz also noted that GDP for October left the economy 1% smaller than anticipated.
Carmichael observed that the Bank could allow the “economy to run hotter for longer because there is less risk of inflation.”
Poloz said he would consult with the oil patch to see how the price differential in prices will affect hiring or investment plans. Poloz did not diminish the shock to the oil patch of low prices and increasing differential. In an acknowledgement that people are hurting he said “one per cent of the economy is 100% of the economy for some people.”
The result of all of this could be interest rates on hold for at least a few months longer as the Bank digests this unexpected bout of turmoil. Poloz is concerned about stagflation and a global slowdown worsened by tariffs. The issue for the Bank is that tariffs trigger the risk of inflation as prices increase.
Beata Caranci, chief economist for TD Bank sees the next hike in rates occurring in March or April. Canadians will get a better idea on January 9, 2019 of the Bank’s thinking as on that date it deals with interest rates and presents its Monetary Policy Report.
The positive out of this speech is that it is clear the Bank understands the challenges faced by those dependent on the oil patch for their livelihood. And while the Bank can’t buy tanker cars, locomotives or build pipelines, it can at least provide some relief by keeping interest rates where they are.
First Ministers Meetings; A Worthwhile Exercise?
It is now a few days since the end of last week’s FMM and the day after finance ministers from across the country met with federal Finance Minister Morneau. The lead into both meetings was problematic. The FMM featured discussions concerning the agenda as oil producing provinces wanted their issues specifically dealt with as did those premiers who oppose the imposition of a federal carbon tax. The finance ministers meeting kicked off on Sunday evening with Minister Morneau setting out the amount of transfer payments including equalization payments provinces would receive. This revelation added a whole new dimension to the meeting as it brought equalization payments into the discussion.
With regard to the FMM, it did produce a joint communique signed by all, saying that premiers “discussed ways to collaborate to help grow the economy.” While the joint statement put the meeting in a positive light most of the commentary was negative as little seemed to be accomplished. Some believed, much like the UN if the parties are still talking they aren’t doing anything else that could be negative. But meetings of the Canadian political family should not be compared to Winston Churchill’s saying “to jaw jaw is always better than to war war.”
The problem is that there seems to be no national vision leading the participants. This gets back to former Prime Minister Mulroney’s discussion of leadership from last week in relation to the development of the oil patch and pipelines. Coming out of the meeting Premier Notley of Alberta felt that the best she was able to do was raise the profile of the issues plaguing the oil and gas industry.
There seemed to be some progress on Bill C-69 which sets out a new environmental review regime for major projects. Premier Moe said that the prime minister committed to work with provinces on regulations but there was no commitment to amend what has become known as “the no more pipelines” bill.
As could be anticipated there was disagreement as to the approach to reducing GHGs as a number of provinces and territories oppose the imposition of a federal carbon tax. Yesterday, the Saskatchewan Court of Appeal determined the list of those entities which are classified as intervenors and this now includes the United Conservative Party of Alberta.
Newcomer Premier Higgs of New Brunswick as well as Notley, Moe and Ford pitched the revival of the Energy East pipeline but were met with a strong ‘no’ from Quebec’s new premier Legault. He said there is “no social licence in Quebec for a pipeline passing through Quebec.” He also said “I’m not embarrassed to refuse dirty energy when we have clean energy.” I suppose a response from Alberta and Saskatchewan could be that Quebec is not embarrassed to receive equalization payments.”
The articulation of a national vision seemed to come yesterday from Alberta’s Finance Minister Joe Ceci who after making the case that Alberta is committed to innovation to reduce the amount of carbon produced per barrel of oil said “we need to start operating as one country, as opposed to many provinces who are looking out for their own individual interests.”
One would hope that this view carries over to the next FMM as without a national vision and purpose, these meetings just become a quarrelsome session from the provinces, joined in by the federal government.
Andrew Coyne had an interesting idea going back to the constitutional conferences of the early 1980s, televise the meetings. It would give Canadians some idea of leadership and broader vision addressing issues across the country. Listening should be the watchword of these meetings, not leaders talking past each other.
The answer as to whether these FMMs are a worthwhile exercise would be a qualified yes, with the hope that even with various political team sweaters on, First Ministers are able to see and articulate measures that serve the greater good, once they have determined what that greater good actually is. This is not to say that the federal government becomes “the headwaiter for the provinces” but it is an argument for collaboration and cooperation across a number of policy areas where cooperation is vital for success.
--today, the inquiry into missing and murdered Indigenous women and girls is meeting throughout this week in Ottawa, its last session of public hearings
--December 13, new housing price index for October to be released
--December 18-19, U.S. Fed meets
--December 18, monthly survey of manufacturing for October to be released
--December 19, CPI numbers for November to be released
--December 21, retail sales numbers for October to be released
--December 21, GDP numbers for October to be released--bc