Shoppers at the Toronto Eaton Centre on July 18.Fred Lum/The Globe and Mail
In analyzing the causes of high inflation in Canada, many experts point to interest rates that were too low for too long, along with surging commodity prices.
But Canadians may want to consider another culprit: their neighbours to the south.
In a recent working paper, three researchers at the U.S. Federal Reserve dissect the role of fiscal stimulus in today’s inflation shock. They note that a “generous” response to the pandemic, particularly from the U.S. government, led to an increase in demand for goods that was not matched by supply – and ultimately spilled into other countries.
For Canada, the knock-on effects were sizable. The annual inflation rate in February, 5.7 per cent, was about four percentage points higher than in recent history. Of that “excess inflation,” U.S. fiscal stimulus contributed about 2.3 percentage points, the Fed researchers estimate, pointing out that the impact was much bigger in Canada than elsewhere.
“Canada, a country with strong trade links with the U.S., features a high level of excess inflation related to exposure to foreign fiscal stimulus,” they wrote.
The flare-up in consumer prices is only worsening. Canada’s inflation rate hit 7.7 per cent in May, the highest in almost four decades. Bay Street analysts expect it to be even higher when June figures are published Wednesday. U.S. inflation hit 9.1 per cent in June.
Central bankers are now trying to tame inflation with the quickest pace of monetary policy tightening in decades, notably through a series of interest-rate hikes. The Bank of Canada has raised its key rate to 2.5 per cent from 0.25 per cent in less than five months, and bank officials have signalled that more hikes are coming.
“There is clearly a large component of Canadian inflation that is being driven by the overheated nature of the American economy,” Royce Mendes, head of macro strategy at Desjardins Securities, said in an interview. “The fiscal response was huge, but the delay in reining in monetary stimulus also played a large factor in this as well.”
Like other countries, the U.S. moved quickly to launch pandemic support programs and blunt the financial impact on households. Government spending played a “positive role” during the crisis, the Fed researchers wrote, by supporting a strong economic recovery and likely preventing “worse outcomes.”
The U.S. response was especially large. It spent more than US$5-trillion, or roughly 25 per cent of gross domestic product – proportionally more than most countries.
U.S. stimulus was often paid directly to households. Families could receive three rounds of cheques – regardless of whether their employment was affected by the pandemic. An individual with an annual income of less than US$75,000 could receive US$3,200.
Flush with cash, Americans started loading up on goods, in part because they had fewer options for spending that extra money on services. A speculative mania swept through various asset classes, from stocks to sneakers.
At the same time, businesses couldn’t keep up with demand, with factories and ports often shuttered by public-health measures, leading to supply chain issues that drove up prices.
The Bank of Canada consistently underestimated the inflation threat and said about a fifth of its forecast error was related to global supply chain pressures, including the extent to which people bought goods.
“Instead of weakening as in past downturns, U.S. consumer demand for goods unexpectedly surged well beyond pre-pandemic levels. Supported by fiscal policy measures, U.S. household incomes turned out to be higher than anticipated,” the bank said Wednesday in its monetary policy report.
“Overall, strong foreign demand for tradable goods, such as appliances and furniture, has pushed up prices globally, including for Canadian consumers.”
The Fed researchers outlined three ways fiscal stimulus affects prices. Canadians are paying more for U.S. goods as American companies struggle to keep up with scorching demand. Likewise, Canadians are paying more for productsfrom non-U.S. countries that have seen a boost in American demand. And finally, Americans are ordering more Canadian goods than usual, contributing to the supply-demand imbalance seen at home.
“When we are competing for goods or some services on the global stage, and we’re competing with an extremely strong U.S. economy, we’ll have to pay up to get our fair share of those goods and services,” Mr. Mendes said.
There are, of course, many explanations for the surge in inflation. Rock-bottom mortgage rates fuelled a homebuying boom in Canada, which led to higher housing costs. Commodity prices have also risen sharply, particularly after Russia’s invasion of Ukraine. And supply issues are inextricably tied to public-health measures in other countries, such as recent shutdowns of major cities in China.
Domestic stimulus is another factor, the Fed researchers said. Canada’s fiscal response to the pandemic amounted to roughly 20 per cent of GDP, based on International Monetary Fund estimates from last fall. Government transfers to households spiked in 2020, driving up disposable income and supporting consumption. By June of that year, retail sales in Canada were running above prepandemic levels, despite huge job losses.
Inflation can also be self-fulfilling. For instance, companies may raise prices in anticipation of higher costs.
“I really think that the Bank of Canada is going to have to see a lot of things go right that are outside of its control to return inflation to target without causing a recession,” Mr. Mendes said. Those include an easing of supply chain troubles, lower energy prices and the U.S. economy cooling to a more sustainable position, he said.
“It’s an extremely tough spot for them to be in.”
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TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
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