A Saudi Recession Trigger?

Recessions do not just happen.  They are made.  They spring from the accumulation of a long-period of underlying contributing economic factors, but then along comes a trigger - or two if you are really unlucky - and before you know it there is a recession underway.  We have had a particularly long stretch of economic prosperity in Canada and indeed the United States and the world that has seen rising employment.  However, the last few years have seen turmoil on the trade front and still high public and personal debt levels which have been sustainable only because of continuing record low interest rates.

Despite the threat of rising interest rates, they have remained low and this appears to have encouraged consumers to continue taking on personal debt.  Indeed, consumers in Canada have been maintaining their standard of living by extending their credit not just for mortgages but also for all kinds of other things - if there is an expenditure, there is a monthly payment plan for it.  And of course, governments have also enjoyed the bounty of low rates by taking on more debt despite the good economic times.

Now, debt is a tool and Canadians have also been managing to build equity given the rise in housing prices but the question is if there is simply too much debt.  This piece in the Globe and Mail points out debt situations that apparently are common in a lot of Canadian suburban areas though the more interesting question is really how a 29 year old making $30,000 a year is able to obtain a $700,000 mortgage. When and if the reckoning comes, Canadian banks will have a lot of explaining to do - especially to the savers who been given low returns and have been financing this debt blowout for the last decade.

Responsible consumers who have taken on debt have nothing to worry about but many consumers have simply taken advantage of really cheap money to leverage themselves to the point where they have very little room to maneuver.  Apparently, nearly 15 percent of household disposable income is going to service household debt.  A loss of employment or an increase in costs - from say a rise in interest rates - will very quickly lead to unsustainable finances for a lot of Canadian households.  Fortunately, interest rates do not look like they are going anywhere soon and with a federal election underway in Canada now - and more importantly - an American election in 2020, one expects government policy to continue favoring low interest rates.

However, the events in Saudi Arabia over the weekend revealed a new trigger of financial stress - rising oil and gasoline prices.  All those suburban households around the world dependent on relatively cheap gasoline for their commute to work and home could face a new source of financial stress if gasoline prices go up. dramatically  Sure, its not a rise in interest rates but it will operate the same way - it will take money away from other things like food and groceries, lead to a rise in the cost of living and divert money away from debt service.

The ten percent spike in oil prices after the attack on Saudi oil facilities is unlikely to be sustained according to venerable sources like the New York Times but then who really knows?  The key here is uncertainty about what comes next.  Can any damage be repaired quickly?  Will there be other attacks?  How was such an attack even possible given the level of security and the amount of military hardware around to ensure that such things do not happen?  This uncertainty is the key issue and should there be another supply disruption, you can count on a more sustained price spike and economic fallout for consumers.  If one especially looks at how North American drivers  have been shifting to driving larger shiny new trucks - financed by debt of course - one can see a pretty severe impact.

However, it looks like for now that oil supplies are still abundant as the disruption occurred during a period of relative surplus.  And of course, there is the U.S. strategic oil reserve.  Nonetheless, watchful waiting is the word.

Demanding Better from Canada's Federal Politicians

Well, it is nearly one week into the Federal Election campaign and the start was less than auspicious for the Liberals given that a campaign bus damaged the official plane on day one.  I was surprised that no pundit noted that it seemed like the left wing of the plane carrying Canada’s self-styled champions of progressive thought was damaged.  But then, media observers were probably too entranced by the plethora of slogans and ads which had already started to crescendo a few days before the call.   Yet, the slogans were for the most part predictable and really rather bland.  The general blandness of indeed the entire election, is coming during a time when Canada’s position in the world is under severe stress and change. How a country with an export to GDP ratio of 30 percent can continue to prosper in a world of tariffs and trade wars is a pressing question.  One was expecting more.

The campaign slogans are remarkably interchangeable.  The federal Liberals are asking us to “Choose Forward” which I am sure means other parties are a backwards choice rather than an exhortation to engage in time travel or perhaps go to an advance poll.  The federal Conservatives are telling us that “It’s time for you to get ahead” which again is a call to vote Conservative as a way of doing materially better rather than proceed to the front of a checkout line or perhaps take early action in setting your clocks back for the fall. 

Keeping to the theme of moving forward and ahead, both the Liberals and Conservatives are facing the Green Party with their “Not Left. Not right. Forward Together” which suggests rival parties are directionally challenged when it comes to deciding where to go.  And of course, there are the New Democrats who want us to know that they are “In it for You” which is a comment on the other parties being focused on themselves rather than a call to attract more candidates of which they are still woefully short.  And who can forget the People’s Party of Canada who are simply “Strong and Free” but based on their polling numbers are not strong and probably do not wish to apply the concept of free to immigration.

These are of course only slogans designed to highlight differences and send subliminal messages.  The Liberals are suggesting that choosing anybody other than them is a step backwards especially when it comes to their much-vaunted promotion of growing the middle class.  I suppose this  is a more charitable interpretation of their message than a more strident “We always know what is best for you” or “We are going to help the middle class whether you like how we do it or not.” 

Meanwhile the Conservatives, seem to be telling us if you want to be middle class, the best way to get ahead is to support them which is probably a more prudent line than “We want to help you help yourself get more”.  As for the New Democrats, well they are middle class boosters too but want to explicitly let you know they are in it for you if you vote for them with the policy prescription being there is no problem that cannot be fixed with more government spending - even if not necessary or counterproductive.  Here, the more accurate reality might be a reverse Walmart ad like “Spend more, Get Less”.

In the end, these official slogans are all interchangeable and designed to sell a message that if stated more bluntly would probably not be seen as a good idea by the in-house advisors.  It would be a fun party game to see how many permutations and combinations can emerge by combining and rearranging these words.  How about, “Not left, Not right, but forward and backwards” or “Forward for a Strong and Free You” or “Time to choose forward to get ahead together while strong and free and realizing what’s in it for you.”   We are truly in a pickle this fall but unless we demand better from our politicians, we will not get anything better.  It can start with better slogans but a better policy debate would be even more useful. 

 

Air Canada’s On Time Record Needs to Improve

I noted in a July post that Air Canada’s service from Toronto to Thunder Bay had been showing some rather erratic performance when it came to on-time arrival.  I monitored performance rather casually for a few weeks later and noticed there were still issues and finally decided to do a more formal monitoring and see what statistics I could come up with.  For the period August 25^th to September 7^th 2019, I noted the scheduled and actual arrival times for the three daily Toronto to Thunder Bay Air Canada flights.  If the flights actually arrived within 15 minutes of their scheduled time, they were deemed to be on time. Otherwise, they were late and the amount of time they were late was also noted. 

The 15-minute window is a pretty standard application of this type of this type of airline performance metric.  If you are looking for a benchmark, Forbes reported on a recent airline performance – the OAG 2019 Punctuality League statistics – and they also use this 15 minute window.  If you are looking for an international benchmark, in the top 20 airlines for on-time performance for all airlines in the report, the top airline was Copa Airlines with a 89.8 percent on time rate (that is arrived within plus or minus 15 minutes of the scheduled arrival nearly 90 percent of the time).  Rounding out the top 20 was Alitalia which was on-time 82.9 percent of the time.   If one only looked at mega airlines, the top 20 ranged from 85.6 percent for LATAM Airlines Group to 66.8 percent for – Air Canada – just below Air China at number 19 with 68.8 percent.  By the way, Westjet had a 76.3 percent on time rate.  Porter did not appear to be included in the report.

Without giving to much away early for the rest of the post, Air Canada’s Toronto to Thunder Bay on time performance during the August 25^th to September 7^th period was pretty abysmal as it did not even meet its low overall on-time performance.  Over this time period, the planes were late 57 percent of the time with an average late arrival of 29 minutes.  You might think that 29 minutes is not so bad – but the time differential ranged from a maximum of 201 minutes (that is 2 hours and 21 minutes late for AC 1512 on September 1^st) to 11 minutes early for AC 1512 the next day.   

 

The accompanying figure plots each flight during this period and at least 8 flights (that is about 20 percent of flights) were at least 50 minutes late.  The only good news is that during this period, there is a slight downward trend in minutes late but there is still a lot of room for improvement.  Keep in mind, aside from the last flight of the day which even if a couple of hours late is able to take off as the first flight the next morning on time – all the late flights coming mean a late flight the other way.  And, this poor performance is during a summer period where there is relatively good weather.  One can only imagine what this winter is going to be like.

So, there you have it.  Air Canada has work to do period but it would be nice if it could bring up its Thunder Bay run performance to at least its overall standard – which is not great by international standards.

Weighing In on the Transitional Housing Project

There has been a fair amount of debate on the proposed transitional housing project in the neighborhood across John Street adjacent to ours.  When the project was initially proposed, my wife and I were fine with it but as the issue has progressed we have come to the conclusion that if it goes ahead, it needs to return to what was originally proposed in terms of both scale and scope. So, the following was sent today via email to the Mayor and Council of the City of Thunder Bay.

Dear Thunder Bay City Councillors:

We are writing to express our concerns regarding the proposed transitional housing project at 105 Junot.  This has become a difficult issue to discuss as any criticism of the project immediately seems to lead to one being labelled as insensitive or worse. Yet, this is not a constructive way to counter appropriately voiced concerns as there are legitimate issues regarding the project.  While there is an urgent need in Thunder Bay for additional shelter and transitional housing for the homeless and those with mental health and addiction issues, what is being proposed requires more thought.  The time for reflection on the project is now, given that the land required apparently needs a zoning change to allow the multi-unit transitional residence to be constructed.  

The original proposal was for a 20-bed unit but the scale of the project has nearly tripled to 58 beds.  If this project had stayed at 20-beds, we would not be writing this letter.  The purpose of transitional housing is temporary assistance for those who are homeless and have addictions and provides an environment with support on a scale that facilitates individual attention.  For example, a recently funded 9-bed transitional housing project in Kitchener will provide 24-hour on site medical and healing supports and services.  In Sioux Lookout, a 20-unit transitional housing development opened last year.  In Thunder Bay, the announced Lodge on Dawson is 30 beds with staff on-site 24-hours, 7 days per week providing services and supports. 

 We have a real concern that once the project obtains the rezoning, the scale of the expanded project may be increased yet again.  What is to prevent a project that has already tripled in size to not double or triple yet again?  This is no longer community scale supportive transitional housing but a multi-unit residential project being placed in a neighbourhood that is composed of lower density housing and major institutions including several schools.  Moreover, we are still not aware as to the exact details on the types of counselling, services, staffing and supports that will be offered for residents.   The is effectively a large multi-unit apartment project and should really be placed in a denser area such as a downtown core where the homeless and addiction problems are quite obviously severe, there are nearby services being provided for the homeless and the current density of functions and activities better reflects what now seems to be a large apartment complex.

 If there is a need to rezone the land for the proposed project, that means the land was not originally zoned for a large multi-unit residential structure.  The City of Thunder Bay’s planning department wanting denser utilization– hence the increase in scale by the proponents after the original proposal – has stoked this issue.  The original zoning is part of an established land use plan approved by the City of Thunder Bay after a formal process of planning and consultation.  A need for the zoning change means that this is an ad hoc change and not part of a longer-term plan and requires a more formal process of consultation.  Simply having a convenient piece of land available that the City of Thunder Bay desires to build density on without long term planning or consultation is not the best reason for building such a large facility.

 Rushing to rezone a piece of land for a project that appears to be very fluid in both scale and scope of purpose is not good policy and not wise long-term decision making. 

Sincerely,

Livio and Rosanna Di Matteo

Thunder Bay, Ontario

Recession?

There is now a fair amount of talk about recessions and rumours of recessions.  The German Central Bank recently warned that Germany may be about to enter a recession and of course there is all the talk about the inverted yield curve as a signal of recession.  The current disruptions in world trade are a factor in slower growth particularly in China and as talk of recession mounts, one might expect that there will be an effect on investor and consumer expectations that indeed makes a recession a self-fulfilling prophecy.  Indeed, the August 24^thEconomist noted that “The onset of a downturn is as much a matter of mood as of money”.  

The most recent Consensus Forecast Major Economies out of FocusEconomics(September 2019) is not ready to call a recession but notes that: “Growth is set to ease this year, due largely to weaker momentum in developed economies and China.  However, tight labor markets and more accommodative monetary policy should provide some support. A further escalation of trade tensions, particularly between the U.S. and China, is the key downside risk.”  At the same time, the outlook for growth is weaker for Canada and Europe with Canada now expected to see real GDP growth in 2019 of 1.4 percent and the Euro Area 1.1 percent with the U.K. and Japan clocking in at 1.2 and 0.9 percent respectively.  Canada is expected to see continued hits to its exports as well as the effect of pipeline delays and oil production cuts as elements of its slowdown.  The major risk factors for the Canadian economy are U.S.-China trade tensions, volatile energy prices (oil) and continued elevated household debt.  

The irony in all of this gloom is that one of the causes has been the behaviour of U.S. President Donald Trump’s administration in disrupting the world economy via trade disputes.  Interestingly enough, the U.S. is such a large wealthy market that combined with low interest rates and rather large government deficits it is expected to see growth ease but is still expected to come in at about 2.4 percent.  In other words, the rest of the world is being hit much harder that the United States as a result of all the economic disruption.  The ultimate irony is that the United States may escape a recession that its behaviour may indeed have helped trigger it in other parts of the world.