Northern Economist 2.0

Wednesday 6 March 2024

Ranking Recent CMA GDP Growth in Canada

 In the wake of the pandemic, with inflation, lagging productivity growth and a slowing economy, it is sometimes useful to look back on what economic performance was like in the "before time" particularly amongst Canadian urban areas.  Statistics Canada currently provides GDP estimates for Canadian CMAs for the period 2009 to 2020.  While 2020 sees a dip in GDP for everyone, the 2009 to 2019 period provides a snapshot of which parts of the country were growing the fastest prior to the pandemic.  The accompanying figure provides the growth rate in nominal  GDP from 2009 to 2019 for Canada's 36 CMAs and ranks them from highest to lowest. 

The expansion of GDP over ten years across these 36 CMAs averaged 45 percent and ranged from a high of 66 percent for Guelph, Ontario to a low of 16 percent for Saint John, New Brunswick. Three of the top five CMAs are in Ontario - Guelph, Kitchener-Cambridge-Waterloo and Toronto.  At the same time, four of the bottom five CMAs are also in Ontario - Thunder Bay, St. Catharines-Niagara, Peterborough and oddly enough, the Ontario portion of Ottawa.  Western Canadian CMAs in general did quite well with the exception of Victoria and Edmonton which placed in the bottom third.  In northern Ontario, Sudbury fares substantially better than Thunder Bay while in southern Ontario, the worst performers are Peterborough and St. Catharines-Niagara along with London, Windsor and Kingston.  

 


 

What happens as we continue to move forward from the pandemic will be interesting.  Vancouver and Toronto until the pandemic were major areas of GDP growth with their economies also totaling over 600 billion dollars or over one-third of Canada's economy.  If you add in Montreal, these three CMAs account for about half of Canada's economy.  With the run-up in housing prices and rents during the pandemic as well as general labor shortages in pandemics wake, one wonders how successful they will continue to be as urban growth leaders in Canada's economy.


Monday 15 January 2024

Thoughts on Canada's Economic Future

I was invited to make a contribution on Canada's economy and its future by TheFutureEconomy.ca which is an online media outlet "that produces interviews, panels, and op-eds featuring leaders from industry, government, academia and more to define a strong vision for our future economy."  My piece on Canada's economic challenges in coming years was published January 8th and titled:"Childhood's End: Canada's 21st Century Challenges."It was a privilege to be asked to contribute to this site given the range of leaders from across Canada who have also contributed their thoughts.  There is also a nice promotional link with a bio and describing Lakehead University.  The piece starts below and you can link to the site for the remainder:

In the pandemic’s wake, Canada finds itself in a world changed yet again with forces afoot that threaten its standard of living as well as its security and way of life. After nearly 150 years of operating under the umbrellas of relatively benign global superpowers, Canada needs to prepare for a multipolar world with respect to trade and economic growth opportunities that are linked to its foreign policy and defence capabilities. In many respects, Canada’s long adolescence has come to a rude end, and it must now learn to make its way in the world in a more adult fashion. This awakening, however, comes at a time when its economic indicators suggest economic weakness. Canada came to be...

Tuesday 2 January 2024

Reflections on the New Year

 

Happy New Year to all!  One must admit that 2023 has been a bit of a ride regionally, nationally, and internationally.  Regionally, Thunder By and northern Ontario have had a reasonably good year economically though many of the trends affecting the country and the world – the higher cost of living, homelessness and a general angst and anxiety about the future – are also part of life here.  Sometimes, even the nature of “high tech”  21st century crime sometimes makes one wonder if the world has truly been turned upside. 

 

The country’s economy has slowed but there is no recession yet.  If anything, the Bank of Canada is not given enough credit for engineering what to this point has been a soft landing of higher interest rates, slower growth and falling inflation.  As much as people complain about the cost of housing in Canada and the seeming inability to get things done, it also seems to be a feature of other countries such as the USA, the UK and Australia.  Indeed, it is interesting how similar debates around housing issues are occurring in countries around the world.  And of course, there is the international front where a definite challenge is underway from the CRINKs (China, Russia, Iran and North Korea) in three specific theatres  – Middle East, Ukraine and Taiwan – and in the Cyber world to the EU-Anglosphere-Asia/Pacific Western Alliance. 

 

Still, much of the global turmoil seems far removed from Thunder Bay which is still in many respects still somewhat both removed and integrated with life in the rest of province and country.  Air travel is still the quickest and most convenient way to get from here to anywhere but the pre-pandemic age of numerous, cheap, and conveniently scheduled flights connecting Thunder Bay to Toronto and ultimately the world has departed for now.  As much as Thunder Bay is plugged into the modern world, we still seem to wait a long time for things other places seem to get much sooner. After all, we have been waiting for an Ikea and a Costco since at least the mid 1990s.  As my running joke goes, Thunder Bay is probably a great place to wait for the apocalypse.  When the world ends, it will happen at least ten years later in Thunder Bay. 

 

Of course, as much as there seems to be constant change and turmoil, after 33 years of teaching and research and nearly twice that number of years being alive, one achieves a certain serenity from the patterns of constant change.  In many respects, one has seen it all. I reflect that during my career, my teaching has gone from hand-written lecture notes and chalkboards to electronic screens and PowerPoints while my research output was once typed on a manual typewriter after organizing index card cards from research trips to the library where sources were hunted down from a card catalogue. Today, I can surf any number of libraries and digital sources for both data and output on my laptop or iPad from the comfort of my own home. Writing - including blogging - is much faster than it ever was.

 

With all the new technology and social changes, one can sometimes start to feel like a dinosaur but the trick to avoid that fate is of course to maintain a curiosity and enthusiasm for the world around you, to see things in a different light, and to try new things.  After all, despite the gloom, 2024 should be the quintessential Canadian year.  A year of beer as we celebrate the year of 20-2-4s.  What could be more Canadian than that?  To a 2024 of hope and wonder and if things go off the rails, there is always a beer.

 


 

Saturday 18 November 2023

Solving the Homelessness and Housing Crisis

 

As rents soar in Canada and encampments spring up in cities across the country, it is evident that the country faces a housing crisis which to date seems intractable.  Even the recent slowdown in home prices does little to improve the situation given that average housing prices in Canada remain just shy of $700,000 with prices varying across the provinces. Average housing prices in Greater Vancouver are just shy of $1.2 million while Greater Toronto is slightly less at $1.1 million.  And while at an average of $322,000, Thunder Bay seems more affordable compared to Toronto and Vancouver all of these averages mask the variation in prices around the average that realistically means something half decent that you may actually like is always substantially above the average. 

 

However, the housing and homelessness crisis and what has been termed the housing shortage is not really just about the price of an average house.  There are a number of issues here.  First, there is actually not a “shortage” of houses and apartments per se as a glance at any real estate listing in cities shows that there are always houses for sale or apartments for rent.  However, the price or rents of those housing units are well above what individuals are either able or willing to pay especially given the recent rise in interest rates which has increased the cost of home ownership in particular. One could term this a crisis in affordable housing rather than a shortage of housing. Second, there is the issue of homelessness which has manifested itself with rising numbers of people in cities across the country living in tents and encampments.

 

Solving these issues requires a two-prong solution.  First, dealing with affordable housing.  The sudden drive to expand the supply of housing to make it affordable is certainly a potential long-run solution. However, in the end building more $1,000,000 homes in suburbs, which developers like to do because they can make a lot of money, really does not solve that problem. Moreover a $1,000,000 new build home program does not solve the housing affordability problem unless it is done so incompetently by the private sector that they create a glut that drives prices down which seems unlikely.  Developers across the country over the years have learned that you just do not build a couple of hundred homes in a subdivision and then sell them – you build on spec with a large deposit.  Basically, every new home built already has someone lined up for it.

 

The solution to the affordable housing is the building of either rent-geared-to-income housing or the building of standardized-government subsidized housing units (much like the Wartime Homes Program) whose design, construction and sale is also geared to income.  One example of this is the standardized house designs being put forth by the government of British Columbia which could serve as a template for other provinces. This will enable homes to be built more quickly but it could also serve as a model for lower cost housing designs. As for rent -geared-to-income, all new apartment builds should have portions of the building ranging from 10 to 20 percent of rent geared to low and middle incomes with government social housing subsidies providing the incentive to builders. This is preferable to simple erecting mega projects of low-income apartments in neighborhoods that essentially creates clusters of low-income individuals.

 

In a sense, the Ontario government’s current approach to increasing housing supply by providing incentives and powers to municipalities to simply expand housing stock does not follow either of the above approaches.  Take the case of Thunder Bay where the target is to build over 2000 homes by 2031 according to the provincial target but given that the target has been exceeded in 2023 it is now seeking to build (with federal funding of course) 2000 homes over the next three years.  The optics tout this as a success story and the start of a housing boom fueled by mining but the 167 units for 2023 (which exceed the target of 161) is largely driven by projects already planned or underway and 60 of the units (plus another 60 which have started) are apartments being marketed as “luxury” apartments.  It means the rents for the smallest units will easily be over $2000 a month.  This will not be ‘affordable” housing given the cost-of-living crisis that has gripped the nation and its media.  Moreover, the target going forward is ambitious given the past track record of housing starts in Thunder Bay to date which given the cities rate of population growth to date has been modest. 

 

The other housing crisis – homelessness. -will not be solved by new suburban housing developments, neighborhood infill, or luxury apartments.    It is an entirely different problem all together.  The solution here is best modeled on what has been done in Finland where a non-governmental organization (NGO) called No Fixed Abode founded in 1986 reduced the number of homeless in Finland from 20,000 to about 3500 at present. Note that Finland’s population is 5.5 million and there are currently 3500 homeless people estimated.  In Canada, just Hamilton Ontario with a population of 579,000 has an estimated 1,500 homeless.  As well, since 2008 Finland has also embraced another program called Housing First which creates flats in social housing complexes that along with serving as places to live also provide a fixed address for those requiring access to government services and supports.

 

Now, Finland is not Canada and simply grafting another country’s solution to solve your problem can generate all kinds of problems. However, there is something here that needs to be explored.  Some of all the money that is going to be thrown at simply increasing housing stock irrespective of whether or not people can afford it needs to be directed to what I would term Transitional Emergency Housing.  People living on minimum wage or are evicted from apartments and have no place to live need some place to get back on their feet.  Boarding houses with rooms to let used to be a place where people of limited means often ended up til they got back on their feet, but no such places really exist anymore. People who are homeless need to be housed and housed without questions being asked.  Creating a complex or dispersed network of complexes of transitional emergency housing with very small personal units combined with social support such as a community kitchen, social workers and even a nurse practitioner and mental health workers and basic security on site would be one way of dealing with the homelessness crisis. 

 

 


 

Where to locate such complexes?  They need to be built on a scale that reflects their local neighborhood and are close to where many homeless choose to locate because of amenities – often downtown cores.  Most municipalities own land in their downtown cores that could be used for such a purpose. They will not be cheap to operate but realistically what else is the solution?  Simply leaving the problem to grow does not solve the problem.  Throwing money on market rent apartments and suburban subdivisions does not solve homelessness, never mind, really create affordable housing. Using resources in a wise and targeted way is the solution to both housing affordability as well as homelessness. True, perhaps these are the ravings of simple economist who does not fully grasp the complexity or enormity of the problem.  On the other hand, perhaps not.

Friday 17 November 2023

House Prices Are Coming Down

 

The latest house price figures have been released by the Teranet-National Bank House Price Index for major Canadian metropolitan centres in Alberta, British Columbia, New Brunswick, Manitoba, Nova Scotia, Ontario, and Quebec. According to Teranet:

 

After adjusting for seasonal effects, the Teranet-National Bank Composite House Price Index™, which covers the country’s eleven largest CMAs, declined by 0.4% from September to October, the first decrease following five consecutive monthly increases. In October, four of the 11 CMAs included in the index experienced decreases: Toronto (-1.6%), Edmonton (-1.2%), Vancouver (-1.1%) and Ottawa-Gatineau (-1.1%). Conversely, notable increases were recorded in Montreal (+3.7%), Halifax (+1.1%) and Winnipeg (+1.0%). On the other hand, decreases were observed in 11 of the 20 CMAs not included in the composite index for which data are available in October. The biggest monthly decreases were seen in Saint John (-5.3%), Trois-Rivières (-3.3%) and London (-2.5%). Conversely, the biggest increases were in Moncton (+4.6% after a 2.3% drop the previous month), Kingston (+3.8%) and Peterborough (+2.6%).

The month over month figures for October show decline in most centres but the more interesting numbers are the declines from the peak price.  Peak price for most of these cities occurred in Spring of 2022 though Calgary and Saint John appear to have seen peaks in 2023. The accompanying figure shows that no one has seen a price increase since the peak though Sherebrooke, Quebec City, Moncton, Lethbridge, and Calgary appear to be perfectly flat since their peak.   

 


As for the remaining cities, the percent change since peak price range from -2.7 percent for Montreal to -18.6 percent for Brantford.  Thunder Bay is in the company of cities with relatively small declines coming in at -3.6 percent while Sudbury is a bit more coming in at -9 percent.  

Wednesday 8 November 2023

Adam Smith and the Federal Carbon Tax

 

Canada’s modern tax system is really the result of over a century of impromptu tax policy driven by the events of the day.  After all, the modern system was hastily thrown together in about a five-year period from 1916 to 1921 in order to generate revenues for pursuing Canada’s role in the Great War and gave us the personal income tax, the corporate income tax, and the federal sales tax.  The most serious efforts at some type of over-arching and comprehensive tax reform driven by principles, theory and analysis were probably the Royal Commission on Taxation or Carter Commission (1962-1967) and the White Paper on Tax Reform Wilson Reforms (1987).

 

With respect to the Carter Commission, commentators of the day remarked it was “marked by lucidity of analysis, candor in exposing its presuppositions, fairness in the presentation, of alternatives, and modesty in disclaiming infallibility. It is, in short, not a White Paper designed to prop up a debatable fait accompli, but a work of scholarship, culminating in recommendations for action, that frankly acknowledges when it moves beyond the boundaries of objectivity and expertise, rather than seeking to blur or shift these limits” (Bittker).  The Carter Commission stressed simplicity, fairness and balance but opposition to the specific reforms proposed was intense and implementation was generally lacklustre though the current integrated approach to personal and corporate taxation was a long-term result (Norquay). 

 

The Wilson White Paper, despite the view of some that it was to justify a fait accompli, on the other hand was a much more successful effort at tax reform and it implemented the Carter Commission mantra that the base for income taxation be broadened and the rates lowered (Norquay) and created a three-bracket personal income tax system with lower rates than the previous system with many more brackets and higher rates.  Key principles underlying the reforms were fairness, equity, and incentives for work and investment.  However, the Wilson reforms were two pronged and along with income tax reform it also replace the flawed Federal Sales Tax known as the Manufacturer’s Sales Tax (MST) with the new GST.  The benefits of the income tax changes were quickly forgotten when the GST came along several years later with political repercussions for the governing party of the day that are now history.  While the GST was a well-designed tax that broadened the base, it was highly visible replacing the hidden MST which was built into the price of manufactured items and a millstone around the manufacturing sector’s competitiveness. Despite the analysis and principles, the Wilson Reforms ultimately paid a political price though they remain in effect for the most part today.

 

Which brings us to the current federal carbon tax or more specifically the recent federal intervention exempting home heating oil from the federal carbon tax in Atlantic Canada which has generated a wave of dissatisfaction a mare usque ad mare. The basic economic principles behind the current federal carbon tax were generally sound.  Most economists agree that if you want more of anything, you should subsidize it whereas if you want less of anything, you should tax it.  Public finance theory puts forth in the case of activities with negative external effects such as pollution, the Pigouvian tax which raises the cost of the offending activity and therefore internalizes the externality.  Now the federal carbon tax was designed to discourage the use of fossil fuels and help fight climate change and is generally a pretty good example of a Pigouvian tax though with the added twist of rebates primarily to lower incomes to help with the more regressive effects of consumption type taxes.

 

The decision by the Trudeau government to placate Atlantic Canada generally undermines the role of the current carbon tax as a tool against climate change and indeed threatens to unravel the whole thing.  Hell, hath no fury like a taxpayer not exempted from a tax when others are, and the federal government will likely reap a political price for what seems to be a pretty brazen attempt to shore up regional political support.  All of this would have been avoided if the federal government had paid just the least bit of attention to past efforts at tax reform and tax change offered by the Carter Commission or the Wilson Reforms.  Terms like “fairness and balance” or “fairness and equity” come to mind from those past forays into taxation changes.  Perhaps those efforts were too complicated for the current federal government?

 

One can go further back for tax advice, all the way to Adam Smith’s Wealth of Nations where he elucidates quite clearly and simply on what makes a good tax system and provides the four: “Maxims of Taxation.” Namely:

 

I.               The subjects of every state ought to contribute towards the support of government, as nearly as possible, in proportion to their respective abilities. (Equality)

II.              The tax which each individual is bound to pay ought to be certain, and not arbitrary. (Certainty)

III.            Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it. (Convenience of payment).

IV.            Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. (Economy in collection).

 

The Trudeau government’s move to exempt home heating oil in Atlantic Canada but not all sources of home heating wherever they may be in the country adds porosity to the tax that will create a clamour for more exemptions given that many view the current exemption is both unfair and arbitrary.  One can debate whether it takes out of people’s pockets as little as possible.  If fighting climate change is as important as the government claims it is, then this exemption illustrates a retreat from core principles.  In the end, fighting climate change when necessary but not necessarily fighting climate change suggests not a principled government but an opportunistic one. 

 


 

Saturday 7 October 2023

The Recession That Was Not There

 

Yesterday upon the stair,

I saw a recession that was not there,

It was not there again today,

I wish, I wish, it would go away.

 

With apologies to William Hughes Mearns, Antigonish 1899.

 

 

The release of yesterday’s employment numbers by Statistics Canada once again threw a wrench into the ranks of those who have been predicting a recession by revealing a continued resilience to the Canadian economy’s job generation machine.  Total employment in September of 2023 was 20,270,000 – an increase of 0.3 percent over the previous month with 64,000 jobs created.  There were of course both gains and losses across regions and sectors with Quebec and British Columbia seeing the biggest employment increases while Alberta and New Brunswick saw declines. 

 

As well, there were increases in employment in education, transport and warehousing and declines – not surprisingly given the slowing housing market – in finance, insurance, and real estate.   Nationally, the unemployment rate remains unchanged at 5.5 percent.  When one adds to this the fact that the U.S. economy in September added over 300,000 jobs and their national unemployment rate remained unchanged at 3.8 percent, one has to come to the conclusion that the North American economy is still quite robust despite the unprecedented surge in interest rates over the last year. 

 

Despite the ever present and mentioned spectre of recession with numerous forecasts and projections painting dire scenarios it remains that the recession is not here yet unless of course we are planning to redefine the context within what the definition of a recession is.  After all, the most recent GDP release also showed that as of July 2023, the economy was flat, neither up nor down. And one forecaster has said the economy will get “back on its feet” next year after a few negative quarters that will see the unemployment rate hit 5.9 percent followed by an easing of interest rates to the 3 percent range.    If a 5.9 percent unemployment rate is the worst this recession will bring, then one must wonder if a recession has simply become a psychological mindset perpetuated by endless speculation and anxiety of hard times to come. 

 

After all, as the accompanying figure shows, both interest rates and unemployment rates have been much higher during past recessions.  The 1981 and 1991 recessions both had much higher interest and accompanying unemployment rates than anything at present.  And notwithstanding the COVID spike in unemployment, unemployment rates have trended down since the 1990s and remain at close to historic lows bettered only by those of the mid 1960s. I suppose the only remaining case for a recession coming is that in both of those recessions, interest rates spiked and remained high for quite some time before unemployment finally surged.  Still, a forecast of 5.9 percent unemployment because of the current spike in interest rates does not seem like a recession at all when placed in historical context.

 


 

Still, the Bank of Canada’s next interest rate decision has been complicated by this much stronger economic performance and inflation still in the four percent range.  Moreover, with the sudden new instability in the Middle East, one can expect oil and gasoline prices to spike meaning inflation is unlikely to go down anytime soon.  Inflationary pressure is also being fueled by wage increases in the 5 percent range.  Indeed, Statistics Canada reported that incomes in general have been rising particularly in the bottom two income deciles as a result of wage gains for workers as well as increased benefits for retirees. 

 

Indeed, when one factors in all transfers to individuals including not only higher social security benefits and what is essentially a basic income for lower incomes with children via the Child Tax Benefit, it appears that disposable income in the bottom 20 percent has increased 20 percent. And, much of this goes to consumption spending as studies have suggested that lower income deciles have higher marginal propensities to consume and lower propensities to save.  Meanwhile, another Statistics Canada report suggests that the economy is doing better because of rising exports. Given the strength of the U.S. economy, that is not a surprise. Then there is the rising population and its associated demands on the economy.  Put it all together, and one cannot but help conclude that there is still a lot of inflationary stimuli being pumped into the economy.

 

Recession?  At present, the coming recession is a mere spectre, a mythical beast that is conjured up but is not there.

 

Monday 18 September 2023

Immigration and Canada: Some Charts

 I have a piece today in the Globe and Mail outlining the advantages of immigration to Canada but also explaining that it has to be done right.  That is, that we have to keep an eye on productivity and per capita GDP and there needs to be increased investment including infrastructure investment to accommodate the larger population.  In retrospect, one of the things that might have been useful to accompany the piece would have been several charts illustrating some of the statistics quoted.  Using data from Statistics Canada and Historical Statistics of Canada, I have plotted two figures.

Figure 1 plots annual immigration to Canada all the way from 1852 until 2023 (a forecast) and it is indeed a very striking picture showing immigration for 2023 reaching nearly 600,000.  This of course is only immigration and does not include people on temporary work permits, people on student visas, etc...That type of data really cannot be extended back to the 19th century and so this chart tries to make an "apples to apples" comparison.  Nevertheless, there are a lot of people coming into Canada in absolute numbers and indeed the totals are the highest ever and yes it is straining our current infrastructure and capacity to accommodate.  

 


 

However, in relative terms, the current population boom is actually modest if one takes current immigration as a percentage of current population totals and compares it to the past.  It is a legitimate comparison and not some type of statistical "trick." Whereas in 1912 we had approximately 8 million people and were letting in 400,000 immigrants a year, today we are a nation of 40 million people letting in over 500,000 immigrants annually (though one can add to that with temportary residents and visa holders).  Figure 2 presents annual immigration to Canada as a percentage share of annual population and it shows that relatively speaking, the current immigration boom is more modest compared to that of the early twentieth century. 

 


 

 At its peak, the annual immigration flows into Canada topped five percent of the population while today they are at about 1.5 percent and perhaps over  two percent if you want to start including everybody who has been allowed to enter Canada.  Could we do a better job of accommodating the current immigrant influx? Yes, indeed. Is infrastructure being strained? Yes, indeed.  All of that still does not eliminate the fact that in the past, we let in relatively more people given the population and seemed better able to accommodate them.  Not only did we have a larger annual immigrant to population share than the present circa 1912 as mentioned in the Globe piece, but we also did in the early1880s, the late 1920s, and the late 1950s.  A key question still remains as to why we cannot do better in accommodating and managing the current inflow?

 

 




Monday 4 September 2023

Politicians, Federalism and Central Banking

 

Part of the immeasurable majesty of Canada is its federal form of government which on a good day should be about the provision of public goods in a decentralized fashion that tailors them to local preferences but in a cooperative and coordinated fashion.  On a bad day, Canadian federalism is about tiers of government going their merry way enacting measures and policies that impact other levels while jealously guarding their jurisdictions and finger pointing as problems come home to roost.  The housing portfolio is a particularly good example of the latter.

 

For the most part, a federal system is an institutional arrangement that allows regional diversity in an environment whose rules foster both cooperation and competition.  Part of that institutional environment is ongoing political negotiations and discussions as well as lobbying as municipalities interact with provincial/territorial and federal governments, provinces/territories interact with municipalities and the federal government as well as each other and of course the federal government interacts with everyone with an eye to overarching interests.  Along with regional diversity tailored to local preferences, there are also needs to be some national rules or standards that help create a common economic space that affords everyone a larger economic space and the economic benefits thereof.

 

Which brings us to monetary policy and the current trend for politicians to speak their minds and essentially “lobby” the central bank on the eve of a rate announcement.  As most first year economic students eventually learn, the role of the central bank is to promote the economic and financial welfare of Canada via the conduct of monetary policy designed to keep inflation low and stable.  This role includes using the levers of monetary policy, safeguarding the integrity of the financial system, and issuing and managing our currency.  This is a technical process and run by highly trained specialists in economic theory and monetary policy.  When push comes to shove, the federal government of the day ultimately is in charge of our central bank, but it must use that policy sparingly because the stability and effectiveness of our financial system depends on day-to-day operations of the bank being insulated from political flavors of the day.

 

Pity then the current governor of the Bank of Canada who came into the job during the pandemic and has had to unwind oodles of quantitative easing, steer the financial system through the Scylla and Charybdis of first deflation and then inflation, and engineer a soft landing as interest rates rose to deal with inflation – interest rates that when compared to much of nineteenth and twentieth century economic history were ridiculously low and fostered a war on savers by loaning their money out to fund a housing asset surge. Indeed, taking money from savers at rates approaching zero and giving it to people to finance their spending could be considered a form of theft. Rising interest rates are having their intended effect on inflation but they are indeed creating financial pressure on households. 

 

It is not unreasonable for informed business and economic commentators to discuss and critique monetary policy and offer policy advice as media performances in the face of a slowing economy have recently illustrated. However, it is less reasonable when politicians begin to weigh in on what the Bank of Canada should do in interventions that are essentially public lobbying efforts for input into monetary policy engineered for political optics.

 

In recent days, we have seen the premier of British Columbia call of the Bank of Canada in a public letter to halt “further increases” because people are hurting. The Ontario premier has also gotten in on the act with a letter released yesterday calling on the Governor of the Bank of Canada to stop raising interest rates. In their last meeting, the premiers collectively opined that they are not in favour of these rate increases because of the harm they are causing as people renew their mortgages.  And at the federal level, the prime minister himself is trying to assuage monetary pain by stating that these rate increases are bad news for Canadians and shifting some of the blame for high housing costs on the central bank. And who can forget the leader of the opposition who in Herod-like fashion wants to deliver the governor’s head on a political platter.

 

In going after key institutions with attacks motivated by short-term political gain, politicians are essentially undermining important institutions.  They are all bright enough to realize that recent interest rates were abnormally low and that they should not be fueling fantasies that somehow, we are going to revert to 1 percent interest rates.  As a former bank governor recently remarked, though interest rates will eventually come down, it is unlikely we are returning to pre-pandemic interest rates.  Yet, federal, and provincial politicians have become like snakes in the garden of federalism with their calculated crocodile tears of concern for the average Canadians and whispers of consolation while pursuing actions or lack of action that makes problems worse - again, housing comes to mind.  After all, what they are really after is short term political credit if the Bank of Canada holds the line on interest rates and the rocket  fuel of righteous indignation if they don’t.  They are not at all concerned about the long-term consequence of undermining key institutions.

 

After all, if the average Canadian politician were concerned about long-term economic welfare, we would not have half the problems we currently have.

 


 

Thursday 3 August 2023

Recession Anyone?

 

Well, despite the talk of recession and rumours of recession in the wake of Bank Rate increases around the world, to date the economy not just in Canada and also the United States and indeed in many other countries, remains relatively robust.  At the same time, inflation is coming down.  The narrative is only slowly starting to shift to explanations of why the economy is doing so well with a myriad of possible stories, the most entertaining is that what we are having is a “vibecession” in which people continue to spend unabated while externalizing anxiety that a recession is coming with the anxiety being aided and abetted by constant media stories on why interest rate increases will eventually bring a recession.  Or perhaps we are experiencing some type of economic cognitive dissonance in which spending all that pandemic cash makes us uncomfortable, so we project fears of coming recession to assuage our consumer guilt.  Needless to say, interest rates are continuing to rise and at some point there may or may not be a recession.

 

In the interim, any indicator is useful.  Statistics Canada has put out experimental monthly business data (Table 33-10-0279-01) that estimates the total number of active businesses as well as openings and closures for Canada, the provinces and Census Metropolitan Areas.  If there are glimmers of recession in the air, one might expect to see a slowdown in the growth of total active businesses or even a decline is business closures exceed new openings.  Figures 1 and 2 provide charts of some this data (Total active businesses and business closures) for Canada, Ontario, and four Ontario cities (Thunder Bay and Sudbury are included as after all this is Northern Economist).  And, because of the size differences between national level and CMA data, an index is calculated and used with January 2022 numbers set to 100 for all.

 

 


 

 

 


 

Both Canada and Ontario are above where they were in January of 2022 in terms of the total active number of businesses.  Since January 2023, there was a bit of a decline though it was followed by a rebound from March to April of 2023 where the data ends. This pattern appears to also mark Toronto and Hamilton. However, Greater Sudbury has seen a persistent decline since May of 2022 as did Thunder Bay though it was followed by a rebound after February 2023.  Nevertheless, all these geographic entities had more active businesses in April 2023 than at the start in January of 2022.  This suggests that overall, there have been on average more openings than closures. Figure 2 plots an index of business closings and again there are fluctuations but no discernible overall upward trend over the January 2022 to April 2023 period. If anything, there was a rise in business closures from about June 2022 to October 2022 and then a decline in business closures from about October of 2022 to January 2023 with a reversal since. 

 

The Bank of Canada began its current tightening cycle in March of 2022 and within a few months the number of closures began to rise but that was soon reversed.  Overall, there have been healthy amounts of new businesses created that have countered closures explaining why overall, the number of active businesses are up.  This data suggests that any recession if at all is still down the road.  Or, the soft landing that was envisioned is what has been engineered.

Wednesday 5 July 2023

It Really is About Housing Supply and Canada Needs to Get Building

 

The housing shortage, rising prices and rising rents continue to preoccupy Canadian public policy debates and with good reason.  As of June 2023, median rent for a one bedroom apartment in Vancouver stood at $2,700 and $2,400 in Toronto with rent across Canada up 20 percent over pre-pandemic levels.  Meanwhile, average housing prices in Canada reached $729,044 in May of 2023 – the highest they have been since April of 2022.  Since 2000, residential property prices in Canada have essentially doubled – per capita income have not.  

 

Needless to say, the response in the most Serene Kingdom of Canada has been predictable.  In the name of boosting supply, municipalities starting to chase multiple property owners for tax revenues  (who incidentally are probably renting out the properties they own and helping to alleviate the shortage). Then there is the typical passive-aggressive Canadian story about how seniors are not downsizing and are living in homes with empty bedroom but of course “Policy experts and large city mayors are not suggesting that seniors should rent out their rooms en masse to better use the extra space.”

 

There is indeed a supply issue in Canadian housing, but it is not because there are too many multiple owners who are hoarding empty apartments or existing homeowners who do not want to share their spare rooms.  It is because over the long term the supply of new residential construction has fallen behind the rate of population growth so that housing starts per capita are dramatically lower than they were during the 1970s and 1980s.  Incidentally, this era had even higher interest rates and inflation than today and still managed to keep up with construction.  The accompanying figure plots seasonally quarterly total Canadian residential housing starts (units) as well as the per capita index (with 1961=100) [Data Source: Statistics Canada] for the period 1961Q1 to 2023Q1.  The results are quite startling. 

 

 


 

In the first quarter of 1961, total housing starts in Canada were 34,225 units.  In the first quarter of 2023, they were 55,753 – an increase of 63 percent.  The problem is that in 1961Q1 Canada’s population was 18.1 million while in 2023Q1 it was 39.9 million – an increase of 120 percent.  As a result, when the number of starts per capita are converted into an index (with 1961=100) it becomes quite apparent that despite surging population, we are building fewer new units per person despite a slight upward trend in the total number of units. 

 

The most quarterly housing starts ever were actually  in first quarter 2021 at 73,738 with the average quarterly number of starts in 2021 at 68,612.  In 1973, the average number of quarterly housing starts was 66,883.  Total starts at present are not much different than the peak of the early to mid 1970s.  When you look at the per capita index, the overall trend since 1961 is downward but essentially it appears that after the housing bust of the late 1980s, housing starts per capita have stayed flat at about half of what they were in the 1970s.

 

The baby boom and tail of the boom that entered the workforce in the 1969s to early 1980s was a population surge that was accompanied by new and rising per capita housing construction.  The current surge in population is not being accompanied by rising per capita construction but with construction at the historical per capita rates in place since the 1990s.   That is why housing prices are high. Band-aid solutions that attempt to solve the problems by essentially redistributing existing supply is but another sign of a society that seems to find it increasingly hard to build new things and to get things done.  But then, this is the same society that is dealing with inflation by injecting more money into the demand side of the economy. In the end, government policy to fight inflation is still conflicted with higher interest rates to slow down the economy on one hand and stimulus on the other.  It would be more useful if some of that stimulus went to building housing.

Saturday 1 July 2023

Canada 100 Million: The Pros and Cons

 

Canada’s population has been growing dramatically over the last few years as a result of boosting immigration targets designed in part to address an aging population and labour shortages.  A larger Canadian population in the long run has benefits and costs and there has been debate over how quickly and by how much Canadian population should be growing.  For example, the non-profit group Century Initiative, wants to see Canada’s population reach 100 million by the year 2100 and sees benefits to a larger economy and market size as well as more clout when it comes to a global world.  A book by Doug Saunders called Maximum Canada sees a larger Canada as a way to avoid global obscurity. 

 

Of course, as all economic historians know, while more population can be a source of economic growth, there is a distinction between extensive and intensive growth.  That is, if population rises faster than output then per capita income will actually decline.  Then there are the adjustment costs of such a large population influx and Canada at the moment seems particularly hard pressed to increase its social and physical infrastructure – particularly housing and health – in the wake of large population increases.  The result has been a rising cost of living when it comes to housing costs.

 

Economists Mikal Skuterud, Chris Worswick and Matthew Doyle make the point in that increasing Canada’s population while increasing its economic size can also reduce the average person’s standard of living if economic output does not increase faster than population. Rising population without accompanying business investment to raise productivity is a recipe for a lower standard of living and Canada has had a productivity problem for some time now.

 

Moreover, while a larger population may be correlated with increased global clout, in Canada’s case it would also help in today’s turbulent world if the increased size came with a larger share of GDP spent on defense and a couple of aircraft carrier task forces with at least one with Arctic capability.  After all, the Philippines and Ethiopia both have just over 100 million people and they are not exactly throwing their weight around globally.  As in the case of housing and infrastructure investment, Canada has also lagged in its security investment and more people alone will not create the international respect some people think it will.

 

Since 2013, Canada’s population has grown by nearly 5 million people – a 14 percent increase - and is basically now at the 40-million-person mark.  Figure 1 presents the percent growth ranked by economic region – with some artistic license for the regional groupings – and shows that Alberta, British Columbia and Ontario have grown the fastest.  The Territories and Saskatchewan-Manitoba have been next, and the Atlantic Provinces and Quebec have grown the least.  

 


 

 

What this means is that over time, as Figures 2 and 3 illustrate for the period 1991 to 2023, the relative share of the Canadian population living in Alberta, BC and Ontario is growing while the rest is shrinking.  In the case of Quebec, in 1951 it had 29 percent of Canada’s population and by 1991 it was 25 percent and 2023 sees it down to 22 percent which has no doubt raised the hackles of Quebec’s premier.  If one accepts that a growing Canadian population will increase our economic mass and clout in the world, then one also needs to accept that Quebec, the Territories, the Atlantic Region and Saskatoba – will see diminished clout within Canada. 

 


 


 

 

And within provinces, it is likely that some regions will do better than others.  In the case of Ontario – the Greater Toronto-Hamilton Area is where most of the population will concentrate while it is likely given current trends that cities like Thunder Bay or Sudbury will not be that much bigger than at present by 2100.  True, climate change and other shocks make such forecasts subject to considerable uncertainty, but it would take some pretty incredible economic, political, and social forces to put Thunder Bay over one million people by 2100.

 

Needless to say, while a much larger population may assist in growing Canada’s economy and may increase our global weight, the outcome is not assured given our productivity lag.  This is really the crux of the issue.  It is not that Canada would not benefit from being larger and cannot accommodate more people, but it needs to be accompanied by the investment spending needed to expand our infrastructure.  Moreover, increasing our population will also require an effort to deal with the regional anxieties and tensions it will produce within Canada.  There is a role for government here in either helping facilitate and coordinate the necessary investments or get out of the way to let those that can get things done do their thing.  Still, we would not want a future without challenges and opportunities for our descendants.  Happy Canada Day.

Friday 16 June 2023

Recession? What Recession?

 

With the Bank of Canada’s recent rate hike and the expectation that there may be another hike in July, the talk of an economic slowdown and a recession has ramped up.  There is talk and rumor of looming  recession and that has been underway for some time.  At the same time, another view is that we risk moving into a 1970s style economic environment if inflation is not soon brought to heel. Given the lag between tighter monetary policy and the economic slowdown that would bring inflation down, it is possible that any downturn is still up ahead.  At the same time, the evidence to date suggests the economy is not yet slowing down.  Despite higher interest rates, demand is still being fueled by pent up consumer revenge spending, robust population growth – more people means more consumption spending - and residual post-pandemic savings. 

 


 

 

Figures 1 to 3 show that key economic indicators after post-pandemic re-bound and adjustment remain robust.  Figure 1 presents the Canadian City CPI total inflation rate (from FRED) and while it has been coming down it is still over five percent and high by the standards of recent history.  Figure 2 shows quarterly real GDP growth and while recent growth at about 2 percent is down substantially from the pandemic rebound, it is akin to pre-pandemic growth.  There have been no two consecutive quarters of negative real GDP growth – a traditional hallmark of a recession.  And while 2 percent growth is not great, that is more a long-term productivity growth problem than anything to do with rising interest rates and recessions.  And then there is Figure 3 which shows we are currently at the lowest unemployment rate in over a decade – again more a sign of an overheating economy rather than a harbinger of recession.  

 


 

 

 


 

So, it would appear that until there is evidence to the contrary, at least another interest rate increase by the Bank of Canada is in the offing.  The economy is still growing, labor markets are tight, and inflation remains high by historical standards.  The current level of interest rates seems to be compatible with ongoing inflation in the 4 to 5 percent range and is unlikely to bring us to the target 1 to 3 percent range of days of yore.  Keeping inflation at the 4 to 5 percent range is dangerous given that any demand or supply side shock when inflation is already in the 4 to 5 percent range could bring us to double digit inflation – a 1970s style scenario.