Northern Economist 2.0

Monday 1 January 2018

Looking Ahead to 2018


Well, it is the New Year and as always it is a time of reflection and looking ahead to see what the New Year might bring for Canada, Ontario, northern Ontario and naturally The Most Serene Kingdom of Thunder Bay where there is always optimism. Of course, 2017 has been a pretty tumultuous year but 2018 is also looking turbulent given the changes poised to take effect as well as events around the globe. However, on the bright side, the global economy is expected to do reasonably well according to Goldman Sachs or then perhaps not if you listen to Morgan Stanley. At least, Canada will not be Venezuela which FocusEconomics expects to be 2018’s most miserable economy though Canada is expected to be in the top ten for nominal GDP.  

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Nevertheless, this year will certainly be a test of the aspiring nature of current economic policy in Ottawa and Queen’s Park.  At the top of the list, the United States will dramatically lower business and personal tax rates effective January 1st.  The last time this happened in the 1980s, Canada countered with the federal tax reforms that lowered rates and broadened the rates.  This time, no such response appears to be coming despite the fact the federal business tax rate in the United States is expected to fall from 35 to 21 percent.  A saving grace is that new US corporate tax rates will match rather than fall below Canadian ones.

If the US economy booms in the wake of its tax cuts, Canada might be expected to benefit from increased trade.  Yet, federal economic leadership is adrift on the trade front given the United States is playing hardball on NAFTA and talks with China and the Asia Pacific are stalled.  The aspirational tone of current trade talks is not bearing fruit given Chinese and American reactions. Indeed, the possibility is high that Trump will pull the plug on NAFTA early in the New Year.

On the plus side, we can take solace in the fact that while the United States is playing hardball on trade, Donald Trump considers Justin Trudeau a “friend”.  One can only imagine our trade talks with the Americans if Donald Trump was dealing with enemies. Perhaps we can look forward to a visit to Canada by President Trump in 2018.

At the federal level, we can also take cheer in the most recent Federal Department of Finance’s long-term projections (a few days before Christmas when no one is paying attention) that the federal budget is now expected to be balanced by 2045 compared to the 2050s as forecast in last year’s long-term forecast.  Given the international situation with North Korea, the United States, Russia, China, and the Mid-East, the world should last so long.  Where is Lester Pearson when you need him?

Added to all this are expected increases in interest rates for 2018 and the tightening of mortgage rules with a new stress test. The stress test will effectively function like an increase in the interest rate for home buyers without the added stress of implementing an actual increase for the Bank of Canada. These changes are anticipated to have a depressive effect on Canadian housing markets especially outside of Toronto and Vancouver.  As for Toronto and Vancouver, being in an economic world of their own, they should only slowdown a bit.

Things are marginally better when moving into Ontario. Ontario’s economy has done relatively well in 2017 though NAFTA talks are inevitably keeping Premier Wynne awake at nights. While Ontario is expected to balance its operating budget, debt will continue to grow based on the forecast capital spending ranging from public transit to high speed rail. Yet, it is also not a done deal that Ontario’s era of deficits is over given what appears to be a ramping up of spending with implications for the future.  Moreover, the increase in the minimum wage and other regulatory changes that are being phased in with respect to employment standards, scheduling, and overtime mark the debut of a massive experiment.  How much change can employers absorb before throwing up their hands and scaling down their operations?

Ontario is also on track to a June election and many of the progressive initiatives of the current Wynne government are designed outflank the NDP given the Conservatives under Patrick Brown have sailed into the centre of the political spectrum with their policies.   The Wynne government’s policies are aspirations for a more socially just Ontario with less weight placed on trade-off between equity and efficiency.  Along with the guaranteed annual income experiment, there is also a new youth pharma care program.  

In the end, all three political parties in Ontario appear to be placing themselves along a centre-left alignment meaning that Ontarians can expect government spending and debt to maintain their current trajectories no matter who wins.   

Of course, more government spending will be seen as good news for northern Ontario given the economic dependence on government. While the resource sector saw some marginal improvements in 2017, the development of the Ring of Fire still appears to be quite distant though 2018 being an election year one can expect to see a number of positive inspiring announcements with respect to its future.  As well, it will be interesting to see if there is any mention of the “success” of the Northern Ontario Growth Plan in the next provincial election campaign.  Any mention of the 25 year plan to boost the economy of northern Ontario that started in 2011 will likely mention the wonderful things yet to come - after all, we have yet to reach the halfway mark.

As for Thunder Bay, its economic engine is government activity as the core sector with subsequent commercial and retail activity an economic multiple of this core.  It is a recipe for stability that works given that the city’s economy has been static in terms of employment for several decades.  Rising public sector salaries and incomes provides a base for municipal taxation and further local public-sector employment and the process will continue until the flow of public money is constricted – which does not appear to be any time soon.

Why tamper with perceived success? This means the current batch of local politicians – provincial and municipal – will all be re-elected come June and October and everyone will go back to sleep.  The northern Ontario economy and Thunder Bay in particular have become a sort of economic Brigadoon – an isolated sleepy region coming magically to robust economic life every 100 years. 

Yet, despite the evidence of slow economic and employment growth from Statistics Canada and the Conference Board, its boosters have often maintained that Thunder Bay is one of the fastest growing cities in Canada and with some of the lowest unemployment rates in the country.  That the low unemployment rates in Thunder Bay's case also mean the labour force has been shrinking faster than employment is apparently not seen as a cause for concern. 

I suppose it depends on what indicators you wish to measure growth with and your interpretation of the evidence. I guess who am I to argue with Thunder Bay’s ruling political class when it comes to the interpretation of economic arguments and indicators. In the end, their attitude towards and understanding of economists is best summarized by the line once made by one city politician:"You want to listen to economists? They record history. They don't make history."

Given the last real boom period in northern Ontario was the resource commodity and baby booms of the 1950s and 1960s, we can expect the regional economy to again awaken circa  2050 – roughly the same time the federal budget is expected to balance again.  By then, perhaps the federal government will carry the public sector spending ball for northern Ontario and give the provincial government and municipalities a rest.

Happy New Year and may God save us all.

Sunday 1 October 2017

Canada's Economy is Going to Cool Off But How Much is Not "Predetermined"


Focus Economics has just released its October 2017 Consensus Forecast for Major Economies and the numbers for Canada bear some consideration in the wake of our recent surge in real GDP growth.  Annualized GDP growth in the second Quarter of 2017 for Canada according to Focus Economics was 3.7 percent – the highest in all the G7-which averaged 2.2 percent.  The world economy grew at 3.2 percent; the United States came in at only 2.2 percent while Germany managed only 0.8 percent.  So, Canada seems to be on a roll.

However, looking ahead at the 3rd and 4th quarters and into 2018, the GDP growth rates start to come down.  Canada’s 3rd quarter of 2017 is forecast at 2.7 percent while the 4th quarter comes in at 2.5.  As for 2018, the 1st quarter is forecast at 2.5 percent, the 2nd at 2.1 and the remaining quarters at only 2 percent each.  Canada is still expected to outperform the G-7, which by the 4th quarter of 2018 is expected to see only 1.8 percent average growth.  However, the gap between Canada and the G-7 narrows considerably.

Part of what is going to cool off the Canadian and G-7 economies is the anticipated rise in interest rates.  The rate for three month T-bills in Canada was at 0.54% in 1st quarter of 2017 but is expected to rise to 1.72 percent by the 4th quarter of 2018.  The average for the G-7 has it going from 0.54% to 1.14% suggesting that rates in Canada are currently expected to rise faster than other G-7 countries.  Over the same period, 10-year bond yields are expected to rise from 1.63% to 2.56% in Canada and from an average of 1.48% to 1.91% in the G-7. 

Of course, these interest rates are all still quite low by historical standards but think of them another way.  From the 1st quarter of 2017 to the 4th quarter of 2018, Canadian T-bill rates are expected to undergo an increase from 0.54% to 1.72% - a percent point increase of 1.18 points but a percentage increase of over 200 percent.  In other words, there is a doubling of debt service costs.  Moreover, this increase is greater than the average for the G-7. 

The coming slowdown in Canadian economic growth is going to be driven by two interest rate effects.  First, the rise in interest rates will affect borrowing and investment by Canadian consumers and businesses.  Second, Canadian interest rates rising faster than the United States and other G-7 countries means that all other things given, the Canadian dollar can also be expected to appreciate relative to other major currencies also affecting our exports. 

In the end, much depends on how quickly Canadian interest rates continue to rise.  Stephen Poloz, the Governor of the Bank of Canada in last week’s address in St. John’s remarked that there was “No predetermined path for interest rates from here” suggesting that future rate increase are by no means preordained.    Of course, this introduces a certain amount of variability into forecasts as well as some uncertainty into the expectations of consumers and businesses.  In the end, what this also means is that the amount of cooling off the Canadian economy may face over the next 18 months is also not predetermined. 

Monday 8 May 2017

Why Northern Ontario Should Worry About an Aging Population

The release by Statistics Canada of  a second series of data from the 2016 Census on age and sex, and type of dwelling shows just how much Canada's population age distribution has changed.  In 1851, 45 percent of Canada population was aged 14 years or less while only 2.5% was 65 years and older. In 2016, only 16.6 percent of the population was aged 14 years or less while 16.9 percent was aged grater than 65 years.  As noted in the release, for the first time Canada's population of seniors outnumbered its children (5.9 million seniors versus 5.8 million aged 14 years or less).  It is truly a new age.

When the results are examined by CMA, it turns out that large urban centers are younger than the national average.  Canada  had 16.9 percent of their population aged 65 years and over and 16.6 percent aged 14 years or less.  In terms of seniors, the largest proportions were in Trois-Rivieres (22.3%), Peterborough (22.2%) and St. Catharines-Niagara (21.8%) while the lowest where in the west: Saskatoon (12.8%), Edmonton (12.3 percent) and Calgary (11%).  As for those aged 14 years and below, the largest proportions were again in the west: Lethbridge (19.1%), Saskatoon (18.9%) and Calgary (18.8%).  The smallest were in Trois-Rivieres (14.3%), Kelowna (14.2%) and Victoria (13.1%).

The two northern Ontario centers of Thunder Bay and Sudbury were generally on the older side with Sudbury coming out slightly younger.  Thunder Bay ranked 8th out of 35 CMAs in the proportion of seniors (19.8%) and 32nd out of 35 in the proportion aged 14 years or less (14.6%).  Sudbury was 12th in the proportion of seniors (18.3%) and 25th in the proportion of children (15.5%). Needless to say, an aging population has implications for future economic growth and these figures suggest that northern Ontario - as represented by Thunder Bay and Sudbury - faces a future of continued slower growth.