Sunday, 31 August 2014

Please tell me you're not serious!

The current Federal Government in Canada, led by arch-conservative Stephen Harper, is generally unwavering in its advocacy of "free" markets.  Generally, but not always: Harper's Tories have shown a surprising proclivity to intervene in foreign takeovers of Canadian business. It even turned down a couple of big transactions -- the London Stock Exchange's proposed acquisition of the Toronto exchange, and BHP Billiton's planned purchase of Potash Corp. -- on the grounds that they would not have served the national interest.

This might be unexpected behavior for a right-wing government, but hostility toward foreign investment has always been a touchstone for Canadian nationalists -- a grouping which includes, among others, the Maple Leaf-waving folks at the Toronto Star.  Even so, it's hard to credit this totally bizarre column by the paper's business columnist, David Olive, about the merger deal between Burger King and Tim Hortons.  Olive argues that the deal is illegal under Canada's vague and convoluted foreign investment rules, because it will not bring any net economic benefit to Canada. It's not clear how he knows that, but that's not the most amazing thing in the column.  Right at the outset, he describes the deal as "yet another blow to Canadian economic sovereignty"!

Whaaaat? I mean, you can maybe make a case that it's important for the country's leading financial exchange to be locally owned, and you can perhaps say that potash reserves should be developed at a pace determined by Canadians rather than Australians. But to make the same case about a downmarket purveyor of coffee and fast food shows an almost comical lack of perspective.

Canada is already a laughing stock south of the border thanks to the antics of Toronto Mayor Rob Ford.  You can only imagine how much fun the Kimmels and Fallons of the world would have if the government actually tried to block the deal.  That's not going to happen: the Harperites are crowing that the takeover proves that "Canada is open for business".  That's only slightly more true than some of David Olive's assertions -- just ask BHP Billiton or the LSX, neither of whom will be in any rush to commit capital here any time soon.  Still,  it should at least mean that the country avoids an embarrassing international spat over a bunch of coffee shops.  

Monday, 25 August 2014

Baking bad

Recent months have seen a lot of so-called "tax inversion" deals, in which US corporations merge with foreign companies and then relocate their head offices offshore in order to avoid the 35% US corporate income tax rate.  Today we hear of another such deal: Burger King is in merger talks with the Canadian "coffee" chain Tim Hortons.  If the deal goes ahead, the combined company would be headquartered in Canada, where the corporate tax rate is currently 15%.

I don't presume to tell Burger King how to run its business, but may I point out the downside to this deal?  OK, you may save a whole heap of tax, but you end up owning Tim Hortons.  Has any one at Burger King ever tried a Timmy's "coffee"?  A friend once commented that it tasted like water that's been used to wash coffee cups. It's no accident that the most popular brew at Tim's is the "double double", in which unhealthy quantities of cream and sugar are added to the paper cup in the hope of making the contents palatable.

Then there's the food. The chain has moved beyond the range of stodgy donuts that it started out with, and now offers a range of unpalatable breakfast and lunch items.  Sliced bread toasties masquerading as "paninis", dry muffins, things like that.  In trying to expand into the US, Tim's has styled itself as a "cafe and bake shop" rather than a coffee shop, but it's having trouble winning market share.

At a time when older fast food outlets like Burger King and even Mickey D's are losing business to more upscale offerings like Chipotle, it makes no operational sense whatsoever for BK to acquire a mature business that ranks as low on the quality scale as Tim's.  As if to emphasize that the deal is purely tax driven, the companies have already made it clear that if the merger goes ahead, the two businesses will operate separately.  Some consolation there for the BK customer, then: they're not going to force you to drink Tim's coffee.

Sunday, 24 August 2014

See this movie!

Locke is a miniature masterpiece.  It's only 85 minutes long, there's only one character on screen (Ivan Locke, played by Tom Hardy), and essentially only one set: the interior of Locke's BMW.  You won't be able to take your eyes off it.

The storyline is deceptively simple.  Locke breaks away from an important business assignment to look after a personal crisis, the nature of which gradually becomes clear. As he drives in the dark toward London, making and taking an endless succession of phone calls, both his personal and professional lives come unraveled.

It's been quietly mentioned as an Oscar wild card, and I suppose there's always the possibility of a Hollywood remake. But if you wait for that you'll miss Tom Hardy's gentle and melancholy Welsh accent, which adds greatly to the pathos of the unfolding drama.

It's just become available on DVD.  See this movie!

Wednesday, 20 August 2014

UK and US rate hikes: getting closer?

The minutes from the latest meeting of the Bank of England's Monetary Policy Committee (MPC) brought a surprise for financial markets.  Expectations had been that the MPC would once again vote unanimously to keep rates on hold at 0.5%.  Instead, two of the nine members called for an immediate 0.25% rate increase.

Does this mean, as some are suggesting, that a rate increase could now happen before the end of 2014?  That can't be entirely ruled out, but it's still not probable. Between the actual MPC meeting and the release of the minutes, ONS released inflation data for July that showed the year-on-year rise in CPI slipping to 1.6% in July from 1.9% in the previous month. This may not signify any easing in underlying inflation pressures: the improvement was heavily influenced by falling clothing prices, which tell us a lot more about what's happening in Bangladesh and Vietnam than about what may be happening or about to happen in the UK.  Still, it does provide some breathing room for the dovish majority on the MPC.

Looking beyond the CPI numbers themselves, the housing market seems to be slowing,  with a sharp decline in asking prices pointing to weakness in the months ahead;  the Eurozone economy, the UK's biggest trading partner, is still struggling; and there are few signs of wage pressures. In all, it seems likely that the BoE will be comfortable waiting until early 2015 before it seriously contemplates raising rates.  

Meanwhile, the US Federal Reserve released the minutes of the July FOMC meeting earlier today.  Here's the key paragraph:

With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term.

Given the strength in US employment data in recent months,  it's no surprise to find that the FOMC is focusing on the labor market as a key factor in its policy stance.  There are few signs that rising employment is yet putting any upward pressure on wages, but that is clearly the main risk that the FOMC will need to assess going forward.

The last sentence of the quoted paragraph indicates that as with the MPC over in London, at least some members of the FOMC are ready to start tightening policy settings very soon.  Like the BoE, the Fed is unlikely to proceed with an actual rate hike before the end of 2014 -- but it seems improbable that we'll get to the end of Q1/2015 without one or both banks starting to tap on the brakes.

Friday, 15 August 2014


Not just a rounding error, then. With its face completely obscured by egg, Statistics Canada announced this morning that the economy added 42,000 jobs in July, and not the nugatory 200 it reported a couple of weeks ago. Seems a "human error" somewhere inside the agency led to a cohort of folks who were actually working being reported as unemployed.

It's not just StatsCan wearing egg-based makeup today, of course.  All of those commentators, including your humble scribe, who pounced on the original report as evidence of the Canadian economy's worrying underperformance don't come out of this very well, either. At the same time, it's hard to argue that even today's massively revised report offers a lot of comfort. Most of the jobs the economy is creating are part-time, and the overall performance of the Canadian economy in creating jobs is lagging well behind that of the US economy, whereas it normally tracks it closely. There's still every reason to believe that the weakness in Canada is structural rather than cyclical.

StatsCan is promising a full inquiry into the whole shambles in an effort to ensure it never happens again.  Here's a suggestion. In the past I've moaned about one of the more sterile duties of the business economist: "predicting" what the key data releases will be before they actually appear. (How can you call it "predicting" when the actual event has already happened?)  Even so, in the week or so before a key release like the employment data appears, a clear market consensus generally forms about what the number is likely to be. If StatsCan realizes that its number is vastly different from the consensus, which was certainly the case with the July jobs data, that should in and of itself trigger a special review of the data before they are released. You can never eliminate human error, but a procedure like this would reduce the risk of causing significant damage.

Thursday, 14 August 2014

Political sleaze knows no gender

Oh, Canada!  Home of the venal politician!

The antics of Toronto Mayor Rob Ford have provided amusement around the world, but there are plenty of others in the dock.  The Mayor of London, Ontario, Joe Fontana,  was recently forced out of office over a spending scandal: he allegedly used public funds to pay for his son's wedding.  The Mayor of Brampton, Ontario, Susan Fennell,  is facing a police inquiry after allegations of wildly extravagant travel at the expense of the city's taxpayers.  The former Premier of Ontario, Dalton McGuinty, is still under a cloud after cancelling a couple of power plants before the 2011 provincial election in order to secure votes for his party -- an act that cost taxpayers over $ 1 billion.

Sadly, McGuinty seems to be having some success in rebuilding his reputation, though he'll never hold elected office again.  However, Ms Fennell is under intense pressure to quit, and Rob Ford is trailing badly as the endless municipal election campaign wends toward its conclusion at the end of October.

And then there's former Alberta Premier Alison Redford, hounded from office some months ago and now leaving politics altogether after allegations of persistent misuse of public money.  (Travel expenses, once again, are at the heart of the story). Ms Redford is no great loss, but I'm surprised by the number of articles I'm seeing that bemoan the fact that she has, in some sense, "let women down" -- this one, for example.

It's not that long ago that the majority of Canada's Provinces had female heads of government.  Now we're down to two: Kathleen Wynne in Ontario and Christy Clark in BC.  Sexist backlash?  I doubt it -- it's just the way things go in politics.  And it certainly doesn't help the cause of women in politics if writers like Ms Timson appear to hold females in senior positions to a higher standard than men, and accuse them of "letting women down" when they fail to meet those standards.

There are certain character flaws that you need if you plan to be a politician: you have to be ruthless and self-righteous, needy and bossy.  That's what will get you to the top, but it's also what will bring you down.  Ms Redford had all of those qualities in spades, as do Rob Ford, Joe Fontana and Susan Fennell.  Ms Redford certainly let the voters of Alberta down, and let her party down, but she didn't let women down, because her gender played very little part in her rise and fall.

Friday, 8 August 2014

Rounding error

Good news!  Canada's unemployment rate edged down to 7 percent in August!

Bad news! The number of people employed rose by only 200 in the month, well within the rounding error of survey data like this.  The only reason the unemployment rate fell was that the number of people actively looking for work fell.  The labour force participation rate slipped to 65.9 percent, its lowest level since 2001.

The gap between the robust jobs growth in the US and the anemic performance in Canada is becoming more embarrassing by the month, but there's not much that policymakers can do about it. Monetary policy is already about as loose as it can get, prompting mounting fears over a both housing bubble and a rise in inflation. Fiscal policy could certainly take up some of the slack, were it not for the fact that the Harper government is counting on unveiling a raft of tax cuts in nest spring's budget in order to bribe Canadians to re-elect them later in the year.

The economy's problems are primarily structural, not cyclical.  The manufacturing sector, which in past business cycles could have been counted on to expand strongly in response to the kind of US growth we've seen in recent quarters,  has been largely hollowed out by a combination of free trade and an overvalued exchange rate.  Nothing else has emerged to fill the gap.

To the extent that the Harper government is doing anything at all about the economy, it's only making things worse, at least at the margin.  The much-vaunted free trade deal with the EU promises further pain for what's left of the manufacturing sector, and could hurt agriculture too, if the Europeans get their way and obtain greater access to Canadian dairy markets. (We may soon see the downside of the quota system that has cossetted Canadian dairy producers over the years). Agriculture is also set to be hit by the sanctions Russia has just imposed in response to Canada's bizarre megaphone "diplomacy" over the Ukraine crisis.*

Remember when Canada could brag that its economy had weathered the financial crisis better than the rest of the G7? Those days are long gone.

* Reacting to pork producers' concern over the loss of the lucrative Russian market, the government responded that foreign policy could not be determined only by business interests.  No indeed -- it's determined by partisan political considerations, as the Tories troll for the votes of the 1.5 million Canadians of Ukrainian origin.