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Canada's economy has ‘free money lying on the sidewalk’ and nobody is picking it up – National Post

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On the days the Bank of Canada sets policy, my inbox fills with commentary from various economists and sundry currency analysts.

This week’s commentariat included a new addition. Trevin Stratton, chief economist at the Canadian Chamber of Commerce, expressed dismay over the central bank’s revised outlook, which assumes the economy essentially stalled in the fourth quarter, and foresees only lacklustre growth of 1.6 per cent in 2020.

In a shift, Stephen Poloz, governor of the Bank of Canada, told reporters on Jan. 22 that interest-rate cuts might be necessary to offset deflationary pressures. For now, the central bank thinks the economy will pull out of this current soft patch, but the slope of the recovery will be gradual.

And that’s the problem. The central bank also raised its estimate of the economy’s non-inflationary speed limit to two per cent. The gap between that measure and the 2020 outlook suggests that Canada, despite its all-star potential, is performing like a third-liner.

“We have entered an era of low interest rates and sluggish growth as our economy has not been able to build any sustainable momentum,” said Stratton. “This is why the Canadian business community continues to press the government for a national economic strategy that can address our declining competitiveness.”

The biggest of the Big Business lobbies have upped their games over the past couple of months. In November, the Business Council of Canada, which represents the leaders of the country’s largest companies, released a report on what it thinks it will take to get the economy out of third gear. At the end of this month, the Chamber is hosting an “economic summit” in Toronto that will confront what it describes as “monumental transformation.”

Corporate leaders may have discovered what complacency gets you: nothing. Business was a non-entity in last year’s election campaign, meaning every member of Parliament has a mandate to ignore the concerns of the hiring class if he or she desires.

Another reading of Corporate Canada’s newfound urgency is that its members sense that the economy has drifted badly off course. “One month isn’t a trend,” said Goldy Hyder, head of the Business Council of Canada, when Statistics Canada reported a big drop in hiring in November, “but it’s important nonetheless to get ahead of things starting with having an actual economic plan for growth.”

One month wasn’t a trend; hiring rebounded in December.

Still, as the central bank observed, “job creation has slowed,” albeit at levels that are consistent with full employment. Poloz and his deputies also expressed concern over the trajectory of business investment, consumer confidence, and household spending. The momentum that resulted in the addition of more than one million jobs in Justin Trudeau’s first term as prime minister is petering out.

Bottom line: better-than-sluggish growth in 2020 is going to require stimulus of some kind. The question is, who should provide it?

In the fall, the Bank of Canada nudged finance ministers to do it. The Oct. 30 policy statement said officials would be paying particular attention to “fiscal policy developments.” If that was too ambiguous, Poloz told BNN Bloomberg later that day that $5 billion of fiscal stimulus was as good as a quarter-point cut in interest rates. The implication was that the central bank had been doing most of the work for years and that the time had come for others to help out.

Finance Minister Bill Morneau, for one, appears to have taken the hint. With interest rates already very low, the ability of central banks “to be effective in the face of challenges is different than it was in the last real challenge,” he told Bloomberg Television at the World Economic Forum in Davos, Switzerland, referring to the Great Recession. “That’s a reflection back on people like me,” Morneau added. “The world we’re in today is not the same as when rates were at a higher starting point.”

One of the first things Morneau did after the election was propose a modest income-tax cut worth about $6 billion per year once fully implemented. That sounded like it would take some pressure off the central bank, but rules of the thumb don’t always hold up in the real world. Poloz said the tax reduction probably will have only a modest impact on economic growth.

“It’s a targeted tax cut as opposed to a general fiscal stimulus,” he said.

At the same time, reduced spending in Ontario and Alberta will offset increased federal stimulus. The Bank of Canada said “fiscal tightening” in these provinces might partially explain weaker consumer confidence. Morneau probably also is near his limit, as the Parliamentary Budget Officer predicts he will struggle to keep his promise to shrink debt as a percentage of gross domestic product.

“There is zero net incremental fiscal stimulus in Canada,” said Derek Holt, an economist at Bank of Nova Scotia, which has been calling for lower interest rates since the fall. “The onus is on the BoC to step up to the plate if stimulus is needed.”

It might be possible to revive the economy without spending more money or tempting households to taken on more debt.

In the fall of 2018, the Trudeau government promised to ease the regulatory burden, in part by ordering regulators to take the economy into account when setting new rules. But little has happened since, and it’s not obvious that anyone in Ottawa cares. Ryan Greer, a policy director at the Chamber, said the sight of the federal government getting serious about de-regulation would be a “game-changer” for business investment.

The same goes for inter-provincial trade barriers. The International Monetary Fund estimates the free trade within Canada would increase per capita GDP by almost four per cent, massive stimulus that could be paid for with political capital, rather than more debt.

“That’s a huge number,” Poloz said at an event in Vancouver this month. “That’s free money, lying there on the sidewalk and everybody is refusing to pick it up.”

•Email: kcarmichael@postmedia.com | CarmichaelKevin

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Economy

Canadian retail sales slide in April, May as COVID-19 shutdown bites

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december retail sales

Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Economy

Canadian dollar notches a 6-day high

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Canadian dollar

The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Economy

Toronto Stock Exchange higher at open as energy stocks gain

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Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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