Tuesday, 1 September 2015

Canada in recession (or not)

The media are making a huge deal of the fact that Canada's GDP edged down in the second quarter of the year; this is the second straight quarterly decline, so the economy is "officially", as the media love to say, in a "technical recession". Samples of the media coverage can be found here and here.

And yet....at the same time as it released the quarterly figures, Statistics Canada also released monthly data that show real GDP actually increased by 0.5 percent in June.  So although the quarterly data allowed the media to declare a recession, as they had been chomping at the bit to do for the last several days, the real story is that the economy shrank for five months before starting to grow again. Most forecasters, both in government and out, expect that growth at a moderate pace will continue for the remainder of the year.  The recession, in other words, is already over -- indeed, it was over before the media even got to pronounce it as "official".

If you take a look at the actual StatsCan report, you'll see that the weakness in the first half of the year was concentrated in the resource producing sector of the economy, as you would expect. That's unlikely to improve any time soon -- the government of Alberta, the biggest energy-producing province, admitted just this week that the provincial economy there had slipped into recession. However, there are few signs that the rest of the economy is stumbling. Household consumption accelerated smartly in Q2, and there was even a small gain in export volumes.

So where does this leave the Bank of Canada, whose next rate decision is imminent? That export gain in Q2, welcome though it was, must be seen as disappointing, considering the sharp fall in the exchange rate in the last two years. Will the Bank be tempted to cut rates again in hopes of pushing the currency even lower, or will it see the June gain in GDP as reason to stand pat? Stay tuned.

Thursday, 27 August 2015

The protectionist billionaire

A couple of nights ago I happened to catch part of Donald Trump's campaign speech in Iowa -- not a state he's had much cause to visit in the past, I'm guessing.

Amid all the stream-of-consciousness stuff -- how rich he is, how smart he is, how he can't be bought, how real his hair is -- he was spelling out his approach to economics. It's clear that his major influences in this area are not the likes of Keynes or Friedman, but Ross Perot. Remember the failed presidential bid where Perot's catchphrase was the "giant sucking sound" of US businesses hightailing it to Mexico? That's what Trump is peddling.

The Donald's way of making his point was to imagine a conversation between a newly-minted President Trump and the head of Ford Motor Company. Said exec was notionally calling the White House to advise President Trump that Ford was about to outsource more production to Mexico. I wasn't aware that companies were required to do this but hey, I'm Canadian, so what do I know?  Smart, rich, incorruptible President Trump's response is to threaten that if Ford goes ahead, all of the company's products will immediately face a 35 percent tariff., Needless to say, Ford crumples under the threat -- "by 4 o'clock the same day, or next morning at the latest".

Imposition of such a tariff would, of course, violate all of the free trade pacts that the US has entered into in recent years under both Democratic and Republican presidents, though one supposes that minor quibble would not carry much weight with a man who wants to build a 1900-mile wall along the border with Mexico (and have the Mexicans pay for it).  It would also, if applied across the board, massively increase the cost of living in the US, as imports from Mexico or China or wherever dried up, to be replaced by higher cost domestically-made products. The reduction in the standard of living for the kind of angry middle-class voters who seem to be backing Trump would be severe, but that reality gets lost in all the populist blather that makes up most of Trump's speeches.

Earlier this week someone posted a tweet suggesting that the global selloff in stock markets was the result of fears about Trump becoming president. I think it was meant as a joke, but if it ever became truly likely that Trump and his hare-brained economic ideas could end up in the White House, the market reaction would make this week's gyrations look like a mere dress rehearsal.

Monday, 24 August 2015

Lessons not learned

With the global economy sputtering and markets in a state of panic, I thought I'd re-read David Smith's The Age of Instability. Smith is economics editor of the Sunday Times of London. His book was published in 2010* and traces the origins of the financial crisis that began in 2007. By Smith's cut-off date (late 2009) it appeared that the crisis had been contained, but nobody yet realized how hard it would be to get things back to anything like normal.

Five years on, I wanted to see how well Smith's analysis stood up, and whether the lessons taught at such great cost had in fact been learned. I'm not very reassured.

Smith notes that the economic meltdown that began in mid-2007 was unlike any in recent memory. For many decades now, recessions have occurred mainly in response to monetary tightening, as central banks have sought to head off inflationary pressures.  This was emphatically not the case in 2007: monetary policy was loose because central banks did not see any inflationary risks on the horizon.  As Smith argues, this was because they were looking in the wrong places. Consumer price inflation was low because of the flood of cheap products from China and elsewhere, but the flood of liquidity provided by the monetary authorities was in fact creating a series of bubbles in markets for assets, both financial and real estate.

Sound familiar? It should. Almost a decade on, monetary policy is even easier than it was back in 2007,  yet there is still no sign of inflation at the consumer level -- indeed, deflation seems to be a more immediate risk. Despite several years of sluggish economic growth, however, equity markets have soared to new highs this year, and real estate markets in cities from London to New York to Toronto have piled on the gains, all of this in response to the cascade of free money.

What differentiates the situation today from that of 2007, and not in a good way, is that the central banks seem to have few shots left in the locker if things get out of hand. None of the major central banks has removed any of the stimulus that they shovelled into markets after the crisis -- indeed, the Bank of Canada has continued to add to it, in the vain belief that cheap money can cure structural weaknesses. Central banks will argue that the persistence of low inflation mandates that they keep things loose, even though we saw how that panned out back in 2007. It's equally likely that none of the central banks has tightened because they simply don't know how they can safely get themselves out of the corner they've painted themselves into.

David Smith has harsh words for some of the key central bankers who set the stage for the crisis of 2007 and then struggled to deal with it. Alan Greenspan at the Fed stands accused of believing his own press clippings as regards the low level of inflation -- it wasn't the Fed's brilliance, but the flood of cheap imports that kept consumer prices in check -- and of acting as a cheerleader for the plethora of complex derivatives that made the crisis so much more severe.   Mervyn King at the Bank of England comes in for even harsher treatment: his focus on avoiding "moral hazard" when Northern Rock was teetering on the brink of failure evidently made the crisis much worse that in needed to be.

Neither Greenspan nor King is still around -- indeed, the leadership at all of the main central banks has changed. Janet Yellen, who had a ringside seat as things unravelled under Greenspan and Ben Bernanke, is now in charge at the Fed; until a week or two ago she had seemed set to start raising US interest rates very shortly, but in the wake of the market turmoil in recent days, all bets are off. Mark Carney, ex Bank of Canada, is now at the Bank of England, and had also seemed to be moving towards tightening, but again, recent events have almost certainly changed that outlook. The Bank of Japan, Bank of Canada, ECB and RBA all have relatively fresh leadership in place. Time alone will tell if that's a good thing.

There's one certainty here: if flooding markets with basically free money were the way to secure inflation-free prosperity for all, we'd surely have figured that out long before 2007. It very evidently isn't: rather, it seems likely to be a recipe for recurrent crises, with each one potentially more severe than the last. If anyone can figure a way out of this mess, I'm sure Ms Yellen and Messrs Carney, Poloz et al would be very grateful to hear from you.

* You can buy a previously-owned paperback copy from Amazon for 1 penny!     

Thursday, 20 August 2015

Cui bono, Mr Harper and Mr Brady?

I'm going to go out on a very stubby limb here and suggest this may be the only spot where you'll find a discussion of the similarities between the legal difficulties currently facing Mr Stephen Harper, PM, Canada and Mr Tom Brady, QB, New England. The similarity I have in mind is the old legal principle known as "cui bono?", or "who benefits?" When all else is indecisive, who stands or stood to gain from the alleged offence?

Tom Brady is one of the best football players ever; nobody would say Stephen Harper is one of the best polticians ever, and he's a hockey fan to boot. One common thing, though: these days, they're both men who are respected and feared rather than loved: giving a eulogy for a popular former colleague a year or so ago, Harper wryly admitted, "I can't even get my friends to like me".

Brady's legal troubles relate to the so-called Deflategate scandal. Allegedly, during last year's NFL playoffs, his team ensured that the balls he was throwing were inflated less than the league-prescribed minimum. Supposedly this makes them easier to throw and to catch: who knew? The NFL has imposed a 4-game ban on Brady, which he's appealing, and it seems as if the judge is leaning toward overturning or lessening the ban, on the basis that there's no evidence that Brady himself was involved.

What does "cui bono?" tell us here? The e-mails that have been entered into evidence show that the backroom staff at the New England Patriots, the guys who would actually have inflated the footballs, roundly despised Brady, so they had little direct stake in ensuring his success through underhand means. There's zero possibility that they would have done anything nefarious without the person most involved -- Brady -- knowing about it.  For Brady, on the other hand, nearing the end of his career, there was every incentive to do whatever it took to win another Super Bowl and cement his position as the greatest of all time.  Cui bono, then? Brady, obviously.

As for Stephen Harper, his troubles relate to the gaggle of lowlifes he saw fit to appoint to the Canadian Senate a few years ago:  specifically, Senator Mike Duffy, who stands accused of fiddling his expense account. Harper's former chief of staff, Nigel Wright, supposedly on his own initiative paid back Duffy's expenses of some $90,000 without telling Harper. The matter is before the courts at the moment: here's a summary of the latest developments.      

Who has benefited here? Duffy never has admitted any guilt; he took the 90 large under duress, and still finds himself before the court. Wright is out the cash and lost his job. There only seems to be one person on the positive side of the ledger here -- the PM -- and even he may wind up a loser if the evidence creeps any closer to him.

Right now it looks as though Tom Brady will be behind the line of scrimmage, his suspension annulled, when the Pats start their regular season next month. And Stephen Harper? The legal case is liable to wind on into 2016, but it's possible that the issue will weigh heavily with voters when election day rolls around in mid-October

Saturday, 15 August 2015

We're gonna need a bigger model

Regular readers will probably be familiar with my contention that a weak exchange rate is no panacea for the Canadian economy. The manufacturing sector jobs that have been sacrificed to free trade and an oil-based economic strategy aren't coming back. Today's print edition of the Toronto Star leads with a lengthy story saying the same thing; for some odd reason it's not yet on the website*, so you're going to have to be satisfied with my unbiased comments.

Much of the story focuses on an Oakville, Ontario company, Promation, which makes robots used in auto assembly. The company's principal bemoans the fact that the weak Canadian dollar is not bringing the customers back:

"We've been replaced by the Koreans in the US and it's just so hard to get the business back......Nobody will come and talk to me because they are comfortable with the current supply chain". 

That kind of buyer inertia is one issue, particularly affecting smaller companies like Promation. There's another issue for the big multinationals that still account for a lot of the manufacturing sector in Canada -- companies like GM, Ford or Toyota. These companies have very long planning horizons, and they hedge and balance their activities carefully. Once they've decided to move a particular production line out of Canada, they're not going to change their mind just because of a correction in the exchange rate.  And of course, the parts manufacturers are virtually obliged to follow the assemblers because of today's emphasis on just-in-time supply chains.

The Star article quotes a number of business economists.  One comments that it usually takes eighteen months or so for a devaluation to make a perceptible impact on trade patterns -- probably about right -- but warns that in this case it may be more than two years before the benefits are seen. There's no obvious evidence for this, and to be honest it just sounds like someone who doesn't really know why previous experience is not being repeated this time.

The money quote in the article, however, comes from our old friend Stephen Poloz, Governor of the Bank of Canada. It appears he said this back in December, and I'm sorry I didn't pick up on it at the time, as I think it offers definitive proof that Poloz is simply in over his head:

"We've lost share of the US market", he said. "It's not because we do a bad job, but simply because companies that were there before are no longer present, and the model doesn't know that."  

Maybe it doesn't, Mr Governor. But I'm damned sure that you should.

* UPDATE, 18 August: The article has now, belatedly, appeared online, so you can see for yourself whether I was quoting it accurately.

Tuesday, 11 August 2015

The rural "precariat"

The steady replacement of full-time employment by part-time or contract work is one of the most unpleasant features of the modern economy. The so-called "precariat" of workers in jobs that offer little security and no opportunity for forward planning is generally seen as an urban phenomenon. In truth, however, it can also be found in rural areas, albeit in a somewhat different form. The way in which some rural areas are adapting to the new reality may point the way forward for those condemned to live in cities.

Our own area, on the Canadian side of the Niagara frontier, provides a useful example of what can be done as employment patterns change. And as it happens, our short driving vacation this month took us to two other areas facing similar challenges: the Finger Lakes region in New York State, and Prince Edward County (PEC) in eastern Ontario.

Each of these regions has long had a strong agricultural base, with a relatively mild climate particularly suited to soft fruit growing. Niagara also had a long history of metal-bashing, much of it related to the auto industry; there was less of this kind of thing in the Finger Lakes or PEC, though the former was a major supplier of salt to the entire US (from Seneca Lake) and the latter had some significant pulp and paper activities.

Much of this has been swept away. Metal-bashing in Niagara has been decimated. The old-style agriculture is vanishing from all three regions. Niagara and PEC each had as many as forty canneries a couple of decades ago, many of them providing union wages and benefits. Not a single one remains in either place.

What's replacing all those jobs? In a word, booze. The same climate that encouraged the growth of peaches and plums has been found to be ideal for the production of wine. Both Niagara and the Finger Lakes have a hundred or so wineries in operation, and PEC, despite a tougher climate, is not far behind. Distilleries and craft breweries are springing up alongside the wineries.

As the wineries draw in the visitors, so more small businesses are opening up to take advantage of the traffic.  Artisanal cheesemakers; specialty fruit and vegetable growers; organic farmers; restaurants; bed-and-breakfasts (we have over a hundred of those just in our own small town). Summer weekends see endless processions of visitors from nearby big cities looking to take advantage of this new bounty while polishing up their locavore credentials.

Of course, none of this is a substitute for the stable, high wage industries that have left. Wages are much lower, and a lot of the jobs are highly seasonal: even here in Niagara, where the Falls are a year-round attraction, a lot of businesses struggle to make it through the winter months. Even so, the precarious employment now offered at the wineries and elsewhere is better than nothing, especially as there are precious few signs that governments, either in the US or Canada, intend to lift a finger to help.

What's also clear is that the growth of small businesses like wineries beats the do-nothing alternative. The third stop on our round-the-lake tour was Gananoque, on the St Lawrence River. The "Thousand Islands" region may not be a tourist destination on the scale of Niagara Falls, but it's an important attraction. A newspaper report while we were travelling noted that the town of Alexandria Bay, NY was heaving with tourists this year, whereas Gananoque, just across the river, was faring poorly, despite the weak Canadian dollar.

There's a reason for that: Gananoque is a dump.  There's a gaggle of tawdry motels on the edge of town as you come in off the highway. The downtown area is a shabby mess of boarded-up storefronts and takeout joints. The cruise boats come and go hourly from the dock, but aside from a restaurant and tacky gift shop operated by the cruise company, there's nothing around to entice people to part with their cash.  It's evident that most people come into town, take the boat cruise and then hightail it to somewhere more appealing.

Would that we had done the same, but we'd prepaid two nights' hotel. Still, that allowed us some insight into what's wrong with the place. Over dinner we got chatting with two couples who lived locally. They cheerfully admitted that they liked things just as they were, and told us that the locals routinely rose up in arms at any suggestion of new initiatives to improve the town -- although there is, of all things, now a small casino out by the highway. We hadn't been in Gananoque for more than thirty years; three decades from now, if the locals don't wise up, there may not be much of the town left.

Sunday, 2 August 2015

The fix is in

So it's true, dammit!  Prime Minister Stephen Harper has confirmed a week of intense media speculation by announcing the official start of the campaign for Canada's Federal election, to be held on October 19. That's just about eleven weeks away, making this the longest campaign since the days when politicians had to make their way across a vast and thinly-populated country by train and buggy. The minimum duration for an election campaign in Canada is 37 days; this one will be more than twice as long.

Until recently the main beef about the timing of Canadian elections was that they were always called opportunistically by the Prime Minister, when he* judged his party had the best chance of winning.  Liberal Jean Chretien was particularly ruthless and adept at this, calling unusually early elections even when his party already had a clear majority.

In his first term, Stephen Harper introduced legislation setting fixed election dates, in an effort to curb this "abuse". Lo and behold, the next two elections -- both won by Harper's Tories -- were held well before the fixed date, though Harper at least had the excuse that he was running a minority government. This election will be the first that will actually take place on the "fixed" date.

The old-style opportunistic election timing may have been unfair, but as critics always warned, the fixed election date has brought Canada much closer to the US model of virtually continuous campaigning. The official campaign may just be starting now, but in truth electioneering got underway months ago. The Tories have been shamelessly using public funds to advertise their economic achievements (threadbare as these now appear) and using their own money to smear Liberal leader Justin Trudeau. In the meantime Trudeau and NDP leader Tom Mulcair have been criss-crossing the country, glad-handing the voters and kissing babies in full pre-election mode.

Now that the official campaign is on, the Tory ads disguised as public service announcements have to stop. Third-party campaigners such as labour unions and social activist groups, which have been rampimg up the anti-Harper rhetoric,  also have to cease and desist.  From now on it's the parties' own money that will be spent, and the fact that the Tories are much better funded than their rivals is one of the key reasons for Harper's decision to kick things off this early.

Regular readers of this blog will already know who I'm not going to vote for. Who actually gets my support is still up for grabs, but I'll say this: any candidate or canvasser who darkens my door before Labour Day had better be awfully convincing.  


* There's only been one female PM, Kim Campbell, and she didn't last long.