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Blows keep coming for our economy, and the Bank of Canada will be left to clean up the mess – Financial Post

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The Canadian economy is off to a terrible start to 2020 as four years of inept government policy are starting to come home to roost.

Manufacturing sales have posted their fourth consecutive negative reading, retail sales were stagnant to end 2019 and signs are that GDP growth is stalling and may actually be negative when accounted for on a per-capita basis.

We worry that our booming housing market may not be enough to prevent this situation from worsening, with the potential for a recession that could drag interest rates and the loonie lower as well.

And concerns about the coronavirus and its global economic impact couldn’t come at a worse time.

The other broader issue is what it could ultimately do to Canada’s reputation as a place to do business

BMO chief economist Douglas Porter

The problem is that the PMO has for the most part appeared more concerned with other issues, such as securing a UN Security Council seat, than it has on ensuring the economy stays on track.

Instead of nipping anti-pipeline blockades in the bud, they were allowed to rapidly expand and paralyze both the country’s economy and our reputation globally as a secure place to do business. Grain shipments have been halted costing hundreds of millions in lost sales, thousands of rail jobs have been temporarily lost and the lack of propane shipments to the Atlantic provinces have left inventory levels dangerously low.

Douglas Porter, chief economist at BMO, highlights a much more important takeaway: “But the other broader issue is what it could ultimately do to Canada’s reputation as a place to do business, and ultimately that might be the most potentially damaging aspect of this episode.”

The same message was sent this weekend when Teck Resources Ltd. announced it had decided to cancel its $20 billion Frontier oilsands mine citing worries over Canada’s inability to create a framework that “reconciles resource development and climate change.”

Frontier isn’t an isolated incident: It now joins the $100 billion of resource projects that were scrapped from 2017 to 2019, according to the C.D. Howe Institute. Consider for a moment the massive opportunity cost this represents for the country as a whole, simply due to bad policy implemented during a period of volatile energy prices.

For those who say that ramped-up fiscal spending by the Federal Government will help offset some of the damage, don’t forget that Ottawa hiked higher personal tax rates and attacked small business in a bid to raise revenues to cover some of that spending while concurrently having to deal with debt servicing costs.

For example, according to a recent report by the Fraser Institute, “At the federal level, the amount that will be spent on interest payments in 2019-20 ($24.4 billion) is higher than what the government expects to spend on Employment Insurance benefits ($19.3 billion) and the Canada Child Benefit ($24.1 billion).”

In the end, we think it will be left up to the Bank of Canada to deal with this mess. This means they may finally have to give up the hallowed ground they have defended for so long and implement an emergency interest rate cut. With oil prices in the toilet, they may be removing a key support for the Canadian dollar.

For those wondering what the potential impact will be, we recommend having a look at the Australian dollar which until May of last year had a strong correlation with our currency’s relationship to the U.S. dollar. Back then both were at 0.75 but the AUD has since been walloped down to 0.66.

This would be terrible news for Canadian consumers especially since we import so many of our goods from the U.S. But it would be extremely beneficial to our exporters including our resource and manufacturing sectors. It could also add gasoline to our housing market especially considering the government recently loosened mortgage-lending standards.

Either way, a lack of focus on the importance of the Canadian economy and leaving it up to the Bank of Canada to rescue us is not a policy that instills much confidence. And confidence is something all of us Canadians could use a bit more of these days.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

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Euro-Zone Economy Grew Less Than Estimated in Second Quarter – BNN Bloomberg

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The euro-area economy grew slightly less than initially estimated in the second quarter as signs continue to emerge that momentum is unraveling.

Output rose 0.6% from the previous three months between April and June, compared with a preliminary reading of 0.7%, Eurostat said Wednesday. Employment, meanwhile, climbed 0.3% during that period.

While the data still suggest Europe’s economy was on a relatively firm footing coming into the summer, analysts worry that energy shortages will drive record inflation higher still, tipping the continent into a recession. A downturn lasting two quarters is now more likely than not, according to a Bloomberg survey, which puts the probability at 60%.

Inflation is expected to average almost 8% in 2022 — about four times the European Central Bank’s goal. Officials have stressed the importance of reacting forcefully to prevent expectations of higher inflation from becoming entrenched, though some economists question how far interest rates can be lifted if there’s a recession.

©2022 Bloomberg L.P.

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B.C.’s export economy continues to cash in on its Cascadian connections – Business in Vancouver

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It is well known that the United States is British Columbia’s largest export market and number one international commercial partner.

Even if the specific details of export magnitudes are not widely known, most people recognize that being physically adjacent to the world’s largest economy means B.C.’s trade will invariably be tilted to the south. A common language, similar business and legal environments, and previous trade agreements further augment this powerful cross-border trade orientation.

In a typical year, B.C. sends about half of its merchandise exports stateside. In 2021, the share was even higher: 55 per cent. China, a distant second, accounts for 15 to 16 per cent of the province’s international merchandise exports, followed by Japan at around 10 per cent.

Less well known is that the distribution of B.C.’s exports within the U.S. is similarly shaped by geography and the size of the various state economies. In particular, the three West Coast states – Washington, Oregon, and California – collectively absorb 45 to 46 per cent of the province’s U.S.-bound merchandise exports. We estimate that, if services are included, these three states buy more than half of everything the province sells to the giant American market.

When it comes to cross-border trade, geography and size matter – a lot. The I-5 highway, connecting coastal cities from San Diego through California to Portland, Seattle and Vancouver, with arteries extending into northern B.C., has long supported economic activity along the west coast of North America. It has also enabled steady trade growth. The built-up networks of railways, pipelines, electricity transmission lines and seaports and airports – and the sharing of a common time zone – all serve to reinforce the pattern and depth of commerce along the west coast.

Underscoring the point that geography matters, last year B.C. exported $9 billion in goods to next-door Washington state, equal to 30 per cent of U.S.-bound merchandise exports. In fact, exports to Washington state match the value of B.C.’s exports to China, the world’s second largest economy.

The size of the individual state economies is also a key factor shaping cross-border trade. California is the largest economy in the U.S., and one of the biggest in the world. So, it’s not surprising that California ranks as B.C.’s second largest individual state export market, taking nearly 12 per cent of our U.S.-bound goods.

Broadening the picture to include services, California stands out even more, given that it boasts world-class advanced technology and film and entertainment industries. California is also important as a source of international visitors to B.C. When service exports are included, our research suggests that California accounts for about one-fifth of the value of British Columbia’s U.S.- bound exports.

California is unique among the province’s trading partners in that service exports exceed merchandise exports in dollar terms. B.C.’s exports of film and television productions have increased sharply and are now close to $2.5 billion annually; the bulk of this involves business done with California. Also, California accounts for a disproportionate share of B.C.’s exports of scientific, technical and professional services and of technology-based services, and the state is also a leading supplier of international tourists to the province. In total, once tourism activity fully resumes, we project that B.C.’s service exports to California will soon exceed $6 billion, almost twice the value of our merchandise exports to the Golden State.  

In sum, international goods exports to B.C.’s three neighbouring coastal states amounted to almost $14 billion in 2021. With some educated guesswork, and assuming tourism fully recovers, service exports to these three states should soon reach $12 billion annually. Thus, the combined value of goods and services sold to California, Oregon and Washington amounts to almost $26 billion, equal to 55 per cent of B.C.’s total goods and services exports to the United States.    

An updated and more complete look at the direction of provincial exports and the role of the three coastal states in B.C.’s global trade underscores the significance of the “Cascadia” region in shaping the province’s economy. When services are counted, this dynamic U.S. region purchases an eye-popping 30 to 33 per cent of B.C.’s international exports.  And these are not stagnant markets; all three states have diverse, growing economies. This means there is scope to further deepen B.C.’s already substantial commercial ties with our West Coast neighbours.

Jock Finlayson is the Business Council of British Columbia’s senior adviser; Ken Peacock is the council’s senior vice-president and chief economist.

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Chipmakers Are Flashing More Warnings on the Global Economy – BNN Bloomberg

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(Bloomberg) — Mounting concern over semiconductor demand is sending shudders through North Asia’s high-tech exporters, which historically serve as a bellwether for the international economy.

South Korean behemoths Samsung Electronics Co. and SK Hynix Inc. have signaled plans to dial back investment outlays, while across the East China Sea, the world’s biggest contract chipmaker Taiwan Semiconductor Manufacturing Co. indicated a similar expectation.

Fading tech demand highlights a darkening picture as Russia’s war on Ukraine and rising interest rates damp activity. The following charts look at the chip industry and its implications for the world economy.

In recent weeks, major chip manufacturers Micron Technology Inc. Nvidia Corp., Intel Corp. and Advanced Micro Devices Inc. have warned of weaker export orders. 

Gartner Inc. predicts an abrupt end to one of the industry’s biggest boom cycles. The research firm slashed its outlook for revenue growth to just 7.4% in 2022, down from 14% seen three months earlier. Gartner then sees it falling 2.5% in 2023.

Memory chips are among the most vulnerable segments in the $500 billion semiconductor market to global economic performance, and Samsung and SK Hyinx’ sales of dynamic random access memory, or DRAM, a chip that holds bits of data, are central to Korean trade.

Next year, demand for DRAM is likely to rise 8.3%, the weakest bit growth on record, says tech researcher TrendForce Corp., which sees supply climbing 14.1%. Bit growth refers to the amount of memory produced and serves as a key barometer for global market demand.

South Korea’s exports are bolstered when demand outpaces supply in bit growth. But with supply likely to expand at almost twice the pace of demand next year, exports may be headed for a major downturn.

Signs are rising that trade is already starting to deteriorate. Korea’s technology exports slipped in July for the first time in more than two years, with memory chips leading the falls. Semiconductor inventories piled up in June at the fastest pace in more than six years.

Among potential victims will be Samsung, the world’s biggest memory-chip producer and a linchpin of Korea’s trade-reliant economy.

Samsung recorded rapid sales growth when demand was strong relative to supply. As the chip outlook turns gloomy, shares of Samsung have been declining this year, with occasional rebounds on better-than-expected profits.

Samsung and SK Hynix control roughly two thirds of the global memory market, meaning they have the power to narrow the gap between supply and demand. 

Memory is loosely tied to other types of semiconductors, built by firms such as TSMC that produces chips in iPhones, and Nvidia, whose graphics cards are used in everything from games to crypto mining and artificial intelligence. 

The Philadelphia Semiconductor Index, which includes these firms, has ebbed and flowed together with memory demand in recent years.

Korean exports have long correlated with global trade, meaning their decline will add to signs of trouble for a world economy facing headwinds from geopolitical risks to higher borrowing costs.

Micron Technology, the world’s third-largest memory maker, last week issued a warning about deteriorating demand, triggering a selloff in global chip stocks.

Korea’s stock market has been among leading indicators of the country’s trade performance, with investors dumping shares well before exports slump.

“The trend is important for Asia as its economic cycle is very dependent on tech exports,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. “Fewer new orders and the large inventory pile-up mean Asia’s tech sector will see a long destocking cycle and a shrinking profit margin.”

The International Monetary Fund last month downgraded its global growth forecast and said 2023 may be tougher than this year. 

Deutsche Bank AG sees a U.S. recession starting in mid-2023 and Wells Fargo & Co. expects one in early 2023. A Bloomberg Economics model sees a 100% probability of a US recession within the next 24 months.

©2022 Bloomberg L.P.

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