Canada’s economy starts to cool after rollicking start to 2023
After robust growth at the start of the year, the Canadian economy is losing momentum this spring as it contends with higher interest rates.
The jump in output in the early stages of 2023, which followed a stagnant fourth quarter of 2022, was thanks in part to unseasonably warm weather and strong labour demand. But the upturn appears to have been short-lived.
Real gross domestic product rose 0.1 per cent in February, after a 0.6-per-cent expansion in January, Statistics Canada said Friday in a report. In a preliminary estimate, the agency said GDP edged lower by 0.1 per cent in March.
All told, the economy is trending toward annualized growth of 2.5 per cent in the first quarter. This pace of growth is much stronger than forecasters had expected at this stage of the economic cycle, but it could be difficult to replicate in the immediate future.
The Bank of Canada has aggressively raised interest rates in a deliberate attempt to slow the economy and bring inflation under control. Its policy rate – now at 4.5 per cent, the highest since late 2007 – is expected to remain at elevated levels for some time.
Most private-sector forecasters believe Canada will enter a mild recession later this year as higher interest rates continue to weigh on economic activity. The outlook is further complicated by the fact that more than 100,000 federal public servants are on strike. The work stoppage has lasted into a second week, with little progress in negotiations.
“The weak end to the first quarter, combined with the negative but temporary impact of the public sector strike on Q2 GDP, increases the risk of a contraction in economic activity during the second quarter,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a note to clients.
“However, the Bank of Canada will look through that volatility, and focus instead on trying to get and keep inflation and inflation expectations under control. While a weakening economy should prevent policymakers pulling the trigger on another interest rate hike, we don’t see cuts forthcoming until early next year.”
Statscan divides the economy into 20 subsectors. In February, 12 of them had increases in GDP. The public sector – which includes education, health care and public administration – rose 0.2 per cent, for a 13th consecutive monthly increase. The strike puts that streak in jeopardy.
Output in the construction industry rose 0.3 per cent in February, matching the increase in finance and insurance.
By contrast, activity in wholesale trade fell 1.3 per cent during the month, while retail trade dropped by 0.5 per cent. According to Statscan’s estimates, those industries continued to decline in March, contributing to the overall contraction in output.
More than one year after the Bank of Canada started to raise interest rates, the economy has shown resilience. Companies are continuing to hire, and the unemployment rate (5 per cent) is just shy of a record low. Many households are continuing to spend freely, undeterred by lofty inflation and rising interest rates.
The Bank of Canada recently upgraded its GDP growth forecast for 2023 to 1.4 per cent from 1 per cent, to account for the early burst in activity.
But the central bank expects growth to be weak through the rest of the year. It can take time – 18 to 24 months – for rate hikes to fully transmit to the economy.
Bank of Canada officials considered raising interest rates this month, but ultimately chose to hold rates steady, according to a summary of deliberations that was published this week.
The annual inflation rate ebbed to 4.3 per cent in March, from a peak of more than 8 per cent in June, 2022. The central bank projects a further deceleration to around 3 per cent by the middle of the year.
Still, Bank of Canada officials have stressed that getting inflation back to their 2-per-cent target could prove challenging. Financial analysts have interpreted the bank’s recent communications as an indication that interest rates will not be lowered this year.
“Higher interest rates are slowing household spending, particularly on big-ticket items. As mortgages are renewed at higher rates, more households will feel the restraining effects of monetary policy,” Bank of Canada Governor Tiff Macklem explained during a recent news conference.
“Business investment is also expected to soften in the year ahead, dampened by weaker demand for Canadian exports and higher financing costs,” he said. “Taking these forces into consideration, we expect Canadian GDP growth to be weak for the rest of this year before beginning to pick up gradually through 2024 and through 2025.”
China’s economy is raising red flags across markets as rebound disappoints
Financial markets have been raising red flags recently about China’s economy, but analysts said Wall Street is missing the big picture.
Growth in the world’s second largest economy accelerated to 4.5% in the first quarter from 2.9% in the fourth quarter following the relaxation of COVID restrictions late last year.
But more recent data have pointed to slowing growth in retail sales as well as drops in home sales, industrial production and fixed-asset investment.
That disappointed investors hoping for a bigger post-COVID rebound and led Wall Street to trim its growth estimates for the full year. Worries about China’s economy have rippled through markets.
Earlier this month, the yuan fell past a psychologically important level of 7 per dollar for the first time this year. The price of copper, once expected to see sizable gains due to high demand from Chinese factories, hit a four-month low in mid-May.
Meanwhile, shares of luxury brands that are reliant on China’s consumer base, have started tumbling on stagnant activity.
Chinese equity markets were not immune to slowing performance, as the CSI 300 index continued to slip this week. At the end of April, declining hopes for added stimulus brought the Shenzhen and Shanghai indices down by $519 billion in one week alone.
The stalling performance prompted Rockefeller International’s Ruchir Sharma to call the rebound narrative a “charade.”
But for one analyst, the growing pessimism around China’s economy could stem more from unrealistically high expectations and Wall Street’s tendency to prioritize immediate metrics over long-term outlooks.
“I feel sorry for these people in some ways, because every time the Chinese release some data, they have to say something about it,” Nicholas Lardy of the Peterson Institute for International Economics told Insider.
Heightened anticipations may be due to China’s response to the 2008 financial crisis, when Beijing infused the economy with massive stimulus and achieved double-digit growth, Pantheon Macroeconomics’ Duncan Wrigley said.
However, it also led to a huge debt hangover that China has worked to resolve for much of the last decade. So while demand is slowing, limiting debt growth is equally prioritized by party leaders, he said.
The country set a more conservative 5% growth target in March, which both analysts see as achievable. Although the country will avoid full-scale stimulus to reach the goal, it has a number of tools to ensure growth keeps ticking upwards.
Despite its aim to limit debt, China could increase the availability of cheap loans to sectors in need, as well as lift the lending quota for the three main policy banks, while allowing them to invest in local projects, Wrigley said.
If this isn’t enough, he noted that the People’s Bank of China could ease financial conditions later in the year, such as decreasing the reserve requirement ratio for banks.
But youth unemployment remains high, while heightened geopolitical risk may deny China’s access to foreign technology.
And private investment, a major source of growth in China, has nearly collapsed in the past 15 months, Lardy said.
This may have to do with stringent regulation of Chinese business, as President Xi Jinping expands the role of the state in the market, dissuading business owners from investing in their firms, he said.
“That’s the one big negative factor that I worry about more than all the other things that we have talked about. Why is private investment so weak?” he said.
Quebec proposes making French mandatory for all economic immigration programs
Quebec Premier Francois Legault has proposed major changes to Quebec’s economic immigration criteria.
Speaking on May 25 with the Minister of Immigration, Francisation and Integration, Christine Frechette and the Minister of the French Language, Jean-François Roberge, Legault says the changes will ensure that nearly 100% of new economic immigrants to Quebec will know French before they arrive in the province by 2026. This is meant to promote Francophone economic immigration in Quebec.
“As we have seen for several years, French is in decline in Quebec,” said Legault. “Since 2018, our government has acted to protect our language, more than other successive governments since the adoption of Bill 101 under the Lévesque government. But if we want to reverse the trend, we must go further. By 2026, our goal is to have almost entirely Francophone economic immigration. We all have a duty, as Quebecers, to speak French, to transmit our culture on a daily basis, and to be proud of it.”
Discover if You Are Eligible for Canadian Immigration
Knowledge of oral French will be required for adults. This is meant to ensure that those who wish to settle in Quebec will be able to communicate in French throughout day-to-day interactions at work and in their communities.
The changes are part of a new permanent immigration program for skilled workers in Quebec. The province says the Skilled Worker Selection Program will “take into account the diverse needs of Quebec.”
Candidates in the program will be evaluated in four categories that have not yet been made clear, but the province says that three of the categories will require that the principal applicant and their accompanying spouse have knowledge of French.
There will also be revisions to existing programs. For example, the work experience requirement will be removed from the Quebec Experience Program for graduate students from a French-language study program.
Family reunification measures include making it mandatory for the guarantor to submit a plan for reception and integration that will support the learning of French for the person they are hosting.
Immigration is a shared responsibility between the federal and provincial governments. Quebec’s agreement is unique from other provinces in that it can select all its economic immigrants. Quebec does not have the authority to select family class sponsorship applicants or those who arrive in Canada as refugees or other humanitarian classes.
For 2023, Quebec has targeted that 65% of newcomers admitted to the province will be economic class.
Increasing immigration numbers in Quebec
The province is also considering raising the number of permanent selection admissions from 50,000 to 60,000 per year by 2027. This is in stark contrast to Legault’s recent comments that there was “no question” of Quebec accepting any rise in the number of newcomers and publicly rejecting the federal Immigration Levels Plan, which has a target of 500,000 permanent residents admitted to Canada each year by the end of 2025.
These changes also follow Quebec’s Immigration Levels Plan for 2023, where it was announced that the province would move away from plans that forecast only the coming year and begin introducing multi-year plans for immigration by 2024.
Why the changes?
Quebec is unique in Canada as it is the only province where French is the official language. The province is fiercely protective of its language, saying it is vital to protecting Quebec’s unique culture and status.
Legault is the leader of the Coalition Avenir Québec (CAQ) and is currently in his second term as Quebec’s premier, having been reelected last October. One of the main pillars of the CAQ party is to protect the French language in Quebec.
Immigration was one of the key issues in the recent election. Throughout his campaign, Legault said that Quebec would allow only 50,000 immigrants per year into the province as it would be difficult to accommodate and integrate more than that into Quebec society. He said that accepting more than that would be “a bit suicidal.”
Regardless, Quebec, like the rest of Canada, is experiencing a labour shortage as the population ages and the birth rate remains low. A report released last March by the Canadian Federation of Independent Business shows that the province could face an annual shortfall of up to nearly 18,000 immigrants, who would be able to fill Quebec’s labour needs.
Lira hits record low, but stocks rise after Erdogan win in Turkey
The Turkish leader won the presidency for a third time after a run-off vote on Sunday.
The Turkish lira has plunged to record lows after the re-election of President Recep Tayyip Erdogan, a sign that currency markets are not confident in the country’s economic future after the longtime leader’s re-election.
The Turkish currency weakened to 20.01 to the dollar on Monday after the high-stakes run-off a day earlier.
But Turkish stocks, on the other hand, rose as Erdogan entered a third decade in power with the benchmark BIST-100 index up 3.5 percent and the banking index rising more than 1 percent.
The lira fell to a record low as the country battles a cost of living crisis and depleted foreign reserves.
On the campaign trail, Erdogan pledged to slash inflation to single digits and boost economic growth, a message he reiterated in his victory speech late on Sunday. But analysts said his economic policies are unorthodox and predicted they will lead to more pain for Turks.
“In our view, Erdogan’s biggest challenge is Turkey’s economy,” Roger Mark, an analyst at the Ninety One investment management firm told the Reuters news agency. “His victory comes against a backdrop of perilous economic imbalances with his heterodox economic model proving increasingly unsustainable”.
Hasnain Malik, head of equity research at Tellimer, an emerging markets research firm, told the agency: “An Erdogan win offers no comfort for any foreign investor.”
“Only the most optimistic would hope that Erdogan now feels sufficiently secure politically to revert to orthodox economic policy,” he said.
Interest rate cuts sought by Erdogan sparked a devaluation of the Turkish lira in late 2021 and sent inflation to a 24-year peak of 85.5 percent last year. The president had argued that higher interest rates cause inflation while central banks around the world were raising rates to reduce price rises.
Turkey’s struggling economy, also reeling after the country’s devastating double earthquakes in February, was a major thorn in Erdogan’s prospect for re-election.
The leader has defended his economic policies, reassuring Turks that investment, production, exports and an eventual current account surplus will drive up Turkey’s gross domestic product.
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