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.  

Wednesday, 6 August 2014

Out of ideas

The fiscal policy pursued by Canada's Federal Tory government is an unholy amalgam of ideology and cynicism.  The ideological part is that the government has committed itself to eliminating the budget deficit by 2015, despite the lack of sustainable growth in the economy. The cynicism lies in the fact that once the budget is balanced, the government intends to hand out a yummy platter of tax cuts to middle class voters, in the hope (and expectation) of winning the election that's due in the fall of 2015.

What's remarkable is the extent to which this mean-spirited approach, which has seen long-established social programs eviscerated for the sole purpose of building up the war-chest needed to fund the tax cuts, has now become the default setting for public debate.  No Canadian politician, at any level of government, can hope to get elected without promising to keep taxes down.  That's how Rob Ford got elected Mayor of Toronto four years ago, though it's unlikely that he'll be able to pull off the same trick in a couple of months time, because just about all of his serious rivals are chanting the same mantra.

Even respectable think-tanks are resigned to singing the Tory tune.  A new report from the CD Howe Institute suggests, in effect, that the government should resign itself to the fact that it can't get the economy to grow any faster, and look for palliative measures to help those most affected.  Remarkably, the left-leaning Toronto Star, in an op-ed piece today,  almost seems to endorse this counsel of despair.

The specific suggestions from the CD Howe study are very thin gruel: more attention to skills training, more help for the long-term unemployed (through repayable loans!) and removal of inter-provincial trade barriers.  These are not bad ideas, but they're not particularly new.  More important, they're startlingly unambitious, and depressingly acquiescent in the notion that the big policy levers, especially fiscal policy, have almost no role to play in current circumstances.  If this is to be the tone of the economic policy debate when the election rolls around next year, it's going to be a truly depressing spectacle.

The redoubtable CD Howe was a dominant figure in Canadian federal politics during and after World War 2. He mobilized the private sector to support the war effort and drove the transformation of the Canadian economy from one based almost solely on resources to the more mixed and stable structure which  flourished in the post war years (and which has been enthusiastically dismantled by the current Tory government). It's unthinkable that he would endorse the supine policy approach now being promoted by the Institute that bears his name.  

Friday, 1 August 2014


A couple of weeks drifting down the great rivers of Europe can be quite educational. For instance, who knew that river cruising would be such hard work? It may sound like an excuse for geezers to lounge around getting sozzled, but in truth the daily shore excursions involve endless amounts of walking. When we finally disembarked, I felt like I'd walked all the way from Amsterdam to Budapest.

Or consider these numbers.  There are now almost 300 cruise ships plying these rivers.  At the start of the century there were barely a dozen.  And these things are huge -- most of them 135 meters long -- so the congestion in the major ports is starting to become an issue.  The night we were in Regensburg, a smallish city in Bavaria, ours was one of 25 cruise ships in port!  Then there are the 68 locks to be traversed between the North Sea and Budapest, including a couple where the vertical drop is 81 feet!

All trivia aside, though, a leisurely cruise through Europe provides plenty of time for recording anecdotal impressions of the state of the continent. The well-worn media view is that Europe is stuck in a deep rut: just last week, Jeremy Warner told his readers at the Daily Telegraph that Europe's sluggishness was the sole factor holding back the global economy.  Well, maybe things are still bad in the EU's southern tier, and France seems unable to escape its role as the Europe's current "sick man", but there's more to the story than that.

Germany, for one, seems to be doing just fine. One interesting surprise is that its industrial sector doesn't seem to have suffered the hollowing-out that has affected so many other developed economies. I'm not just talking about VW or BMW or Siemens here: the northern stretches of the Rhine are still alive with industrial activity, much of it directly related to the bustling commerce of the river itself: shipyards, drydocks and such. Just about all of those 300 cruise ships were built in Germany -- what other industrialized country remains competitive in that particular sector?

Then there's eastern Europe.  The big success story here is Poland, but other former communist countries are also transforming rapidly.  Budapest's role as a major imperial capital ended just about a century ago, but it's now recovering much of its former glory. (The politics, alas, is another matter, with neo-fascists aplenty and a level of corruption that, as our tour guide put it, can be seen from outer space). Or consider little Slovakia, home to three car manufacturing plants and a burgeoning high-tech sector.  The unemployment rate in the capital, Bratislava, is only 2 percent.

Not all doom and gloom, in short, and one place where the transformation has been noticed is, of course, Ukraine.  The good folks in Kyiv, Lviv and other cities in the west of that country quite naturally want some of what their near neighbours have -- not for nothing was the main locus of the uprising that began last year christened "Euromaidan".  But there's a problem with Ukraine's push for closer ties with the EU, and I don't just mean Vladimir Putin.  Even as new Ukrainian President Poroshenko rushed to sign a trade deal with the EU, the country's business community was openly alarmed at the prospect of suddenly facing a flood of tariff-free imports from the west.

That unease is even greater in the east of Ukraine, where the separatist struggle is still ongoing.  The Donbass region is the home of most of Ukraine's heavy industry, which has only been kept afloat over the past two decades by the willingness of Russia to continue buying its generally uncompetitive products. If the pro-Russian revolt is defeated -- which looks the way to bet, barring direct military intervention from Moscow -- it seems unlikely that Russia will continue to support those industries.  There's also little sign that Russia will be shipping more gas to Ukraine any time soon -- and winter is just a few months away.  Ukraine may share borders with both Hungary and Slovakia, but it's not going to find it easy to match those countries' economic advances, no matter how much the EU tries to help.


Thursday, 31 July 2014

Re-up/shut up!

The US has swiftly acceded to a request from the Israel Defense Force for a fresh supply of ammunition, to replace what's been fired into Gaza over the past month.  As Haroon Siddiqui of the Toronto Star points out here,  the death toll from the indiscriminate use of these weapons is already more than four times as great as the number of lives lost in the shooting down of Malaysia Airline flight 17 over eastern Ukraine -- and there's no sign that the carnage in Gaza is going to end any time soon.

In the circumstances, isn't it just the tiniest bit hypocritical of the US to keep loudly demanding that the Russians desist from supplying arms to the Ukrainian insurgents?