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CP Rail strike could be ‘detrimental’ to Canada’s economy, experts warn – Global News



With CP Rail trains ground to a halt nationwide and thousands of workers starting to march picket lines, the anticipated strike at Canada’s second-largest railroad operator has come at one of the worst times for the country’s economy, experts say.

“The hit to the Canadian economy that this can cause is so detrimental,” Richard Powers, associate professor at the University of Toronto’s Rotman School of Management, told Global News. “I don’t know what else we can face without seeing a real collapse.”


The strike, involving nearly 3,000 engineers, conductors and other train employees, took effect early Sunday morning after a lockout initiated by the Calgary-based railway.

Read more:

CP Rail strike begins after workers locked out by employer, threatening supply chains

Following the lockout, the Teamsters Canada Rail Conference said workers were also on strike, with picketing underway at various Canadian Pacific locations. This is the fifth work stoppage since 1993, according to CP Rail.

There are 26 outstanding issues, including wages, benefits and pensions, currently causing turmoil between the two sides. While both parties are still at the table with federal mediators, significant negotiation is still foreseen. Powers doesn’t see the conflict ending before Friday.

“It appears that there are still a lot of issues yet to discuss and to agree upon. A strike coming at this time, it just adds to the confusion and chaos,” Powers said, noting the clash has come off the heels of the COVID-19 pandemic and Russia’s invasion of Ukraine, which have already drastically impacted the economy not only in Canada but across the world.

For Canadians, everything from agricultural and farm products to fuel and vehicles will be impacted, according to Powers.

“Movement of parts is so important and now you’ve just cut that off,” he said.

Click to play video: 'Reactions pour in from the Prairies as possible CP Rail lockout draws closer'

Reactions pour in from the Prairies as possible CP Rail lockout draws closer

Reactions pour in from the Prairies as possible CP Rail lockout draws closer

According to Dennis Darby, president of the trade association Canadian Manufacturers and Exporters, a survey conducted between Feb. 8 and Feb. 28 found nine out of ten of Canadian manufacturers are facing supply chain issues.

He said Canadian manufacturers have already lost out on an estimated $10.5 billion in sales because of transportation network disruptions and they simply cannot afford another interruption.

“Adding to our concern is the fact that a labour disruption at CP Rail will deal another blow to Canada’s reputation as a good place to do business and as a reliable supply chain partner,” Darby said.

The grain industry, specifically, is anticipated to feel the impact of the strike.

“We have those waiting for the crop off the west coast, feed-lot operators waiting for product, processing facilities across the prairies and in eastern Canada in need of canola and cereal grains in order to provide bread for the store shelves. And, we’re seeing inflation increases,” Western Grain Elevator Association spokesperson Wade Sobkowich said last week.

“Everything is coming at us all at once. There are some things we can control and some things we can’t. We should be able to control a work stoppage and yet here we are facing one. This is the last thing we need right now in the grain sector and as an economy here in Canada.”

Sobkowich said roughly half of annual grain crops are exported on CP rail lines. He said average crop size ranges between 30 and 40 million metric tons.

The beef industry could also be affected as CP Rail imports corn for feeding cattle in the nation, Opher Baron, professor and academic director at the University of Toronto’s Rotman School of Business, told Global News.

“They are basically feeding the beef industry in Canada,” he said, noting much of the country’s ground transportation is done on the rails.

Canadians could pay more when buying food, clothes, and more depending how long the strike lasts, according to Baron.

Read more:

Grain shippers sound alarm amid concern over potential CP rail strike

“This strike is not a small pool. It’s potentially a big one. It can have quite a large effect,” he said.

Even in the United States, the CP rail conflict has interrupted fertilizer and other shipments to and from the country.

Canadian Pacific covers much of the U.S. Midwest and is a large shipper of potash and fertilizer for agriculture. It also carries grain from the U.S. to its northern neighbour for domestic use and exports. The railroad serves the Dakotas, Minnesota, Iowa, Illinois, Wisconsin, Missouri and other states, according to a map on its investor website.

Canadian Pacific also operates in New England and upstate New York, spokesman for CP Patrick Waldron said.

CP got 29 per cent of its 2020 freight revenue from cross-border shipments between the U.S. and Canada, its investor website states.

Locked-out workers picket the Canadian Pacific Railway headquarters in Calgary, Alta., Sunday, March 20, 2022.


According to Powers, the federal government needs to be “looking at back to work legislation” to kick start the Canadian economy. However, he added that this type of measure is rarely used in Canada as it is an affront to the collective bargaining process.

“We have to respect the process. Let’s give them a chance. But at the same time, they have to recognize that at some point things have to change,” he said.

— With files from Global News’ Sean Boynton, Connor O’Donovan and The Canadian Press

© 2022 Global News, a division of Corus Entertainment Inc.

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The awkward economic truth: A recession might be just what Canada needs – The Globe and Mail



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Illustration by Eric Chow/The Globe and Mail

This time last year, the R-word was on everyone’s lips – and panic was setting in.

With energy prices soaring and consumers rushing back to restaurants and hotels, annual inflation spiked to 8.1 per cent, forcing central banks to get aggressive with their interest rate hike campaigns. In July, the Bank of Canada went so far as to surprise with a full percentage point rate increase, its largest since 1998. The question wasn’t whether Canada would have a recession, but, rather, just how painful it would be.

The early indicators were pretty grim. Canada’s national home price index dropped 16 per cent from its peak; the S&P 500 Index, a benchmark for U.S. stock market performance, slumped 25 per cent; and the tech sector seized up, leading to tens of thousands of layoffs – and, ultimately, the collapses of Silicon Valley Bank and First Republic Bank.


A year later, the economic outlook is much less gloomy. That recession everyone feared? It never materialized – at least not yet. Unemployment rates in Canada and the United States are sitting near record lows. And earlier this week, Canada reported stronger-than-expected economic growth in the first quarter, fuelled by resilient consumers.

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Governor of the Bank of Canada Tiff Macklem holds a press conference at the Bank of Canada in Ottawa after the release of the 2023 bank’s financial system review on May 18, 2023.PATRICK DOYLE/The Canadian Press

If anything, the economy might still be running too hot, which puts more pressure on the Bank of Canada ahead of its next rate decision on Wednesday. The central bank has kept its policy rate at 4.5 per cent since January, but now it must weigh whether a new hike is needed, even if it increases the chances of tipping the economy into recession.

What no one seems to ask is: What if a recession is a good thing? What if a prolonged economic slump is exactly what Canada needs?

Historically, the economy has gone into recession roughly once a decade because, in simple terms, it overheats and needs a reset. Yet at this point Canada and the U.S. haven’t actually faced a recession in more than a decade. This doesn’t include the COVID-19 pandemic, but that was more like a natural disaster, and the crisis prompted governments to unleash trillions of dollars worth of recovery spending.

Without question, recessions are painful, and they are often felt more acutely by people with lower incomes. There is no sugar-coating that. But usually they aren’t as brutal as the 2008-09 global financial crisis.

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Mark Wiedman, head of of the global client business at BlackRock Inc.Photo illustration by the Globe and Mail

To start, a recession now would help to quash runaway inflation. Moving from 8-per-cent annual price growth to 4 per cent hasn’t been too challenging, but going lower from here will be a grind. The longer that inflation runs hot, the greater the danger that it becomes entrenched, and that’s the really scary part. Chaos ensues when businesses and households can’t predict what their costs will be.

The economy has also been warped by years of cheap debt – a byproduct of ultralow interest rates and the vast sums of money created to facilitate stimulus spending. “Fifteen years of that amount of liquidity, or free money, distorts the financial system,” says Mark Wiedman, of the global client business at BlackRock Inc., the world’s largest asset manager. “It also starts to distort the real economy.”

Inflation for day-to-day goods and services was actually anemic for decades until it finally took off in 2021. But a new study by McKinsey estimates that asset price inflation – price increases of real estate and financial assets such as stocks – created about US$160-trillion in “paper wealth” globally since 2000.

In Canada, much of the paper wealth has accumulated in the housing market. Strong demand, low supply, cheap money and rampant speculation have conspired to drive up prices to eye-watering levels. Canadian households are now the most indebted among the Group of Seven countries, as a percentage of gross domestic product (GDP), largely due to the oversized mortgages they’re paying down.

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A patron fills a shopping bag during a visit to the Daily Bread Food Bank in Toronto in April 2023. Inflation has caused food prices to soar so much that visits to Canadian food banks are at record levels.Fred Lum/The Globe and Mail

The distortions run deep. Plenty of struggling businesses that would have failed in a normal economy have been kept alive by cheap credit. Housing has become one of the hottest investments around, pushing many prospective buyers and renters beyond their breaking points. Food prices have soared so much that visits to Canadian food banks are at record levels, even as Canada enjoys some of the strongest economic growth in the G7.

Policy makers dream of gently smoothing out business cycles, of deftly engineering a soft landing by adjusting interest rates and fiscal policy. But there are limits to how long a country can safely defy gravity.

The tech sector is already reckoning with a radical rethink. Perhaps the whole economy would benefit from a similar reset, so that financial assets stop growing faster than the real economy and GDP is less reliant on government spending. In other words, now might be the time for some very strong medicine.

How a recession could help

Early this year, a group of prominent U.S. economists put out a rather conclusive paper on what it takes to kill runaway inflation. By studying four advanced economies, including Canada’s, since the end of the Second World War, they identified every instance of sky-high price increases and how each ended. The common denominator was rather glaring.

“There is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession,” the paper declared. The researchers included Stephen Cecchetti, the former head of the monetary and economic department at the Bank for International Settlements; Michael Feroli, chief U.S. economist at JP Morgan; and Frederic Mishkin, a former U.S. Federal Reserve governor who has long collaborated on research with former Fed chair Ben Bernanke.

In an interview, Mr. Cecchetti made it very clear: “You need to cool the economy off.”

Because inflation has come down rather quickly over the past six months, falling to annual rates of 4.4 per cent in Canada and 4.9 per cent in the U.S., there are hopes that maybe the historical data don’t hold up any more. The pandemic was such a unique event – technically, the U.S. recession lasted a mere two months – that perhaps current prices really can be managed down without an upheaval.

What’s missing from that argument is that disinflation, or slower price growth, isn’t linear. Hiking rates is a surefire way to get some quick wins, but getting from annual inflation of 4 per cent to 2 per cent – which is where central banks want to be – is much harder to do.

Bank of Canada officials have repeatedly stressed that in order to truly tame inflation, something needs to give in the labour market. At the moment, it’s so tight that wages are rising by around 5 per cent on an annual basis. On the surface, that’s not disastrously high. But because Canada’s productivity growth is so weak, those higher compensation costs are tough to manage. The danger, then, is that consumers will foot the bill via higher prices.

The central bank’s most recent projection is that inflation will fall to around 3 per cent annually by this summer, but the last leg of the inflation battle will be challenging. “I would remind you,” Bank of Canada Governor Tiff Macklem said in April, “that we actually need a period of weak growth.”

The housing market could also benefit from a cooling. The rapid interest rate hikes to date took some froth out of the system, but it’s very possible the drop in home prices will be short-lived. Many local housing markets are heating up again with bidding wars, and rebounding home prices are heaping even more pressure on the rental market, because so many people are priced out of ownership. It’s now common to see rent increases of 20 per cent and 30 per cent when units turn over in mid-sized cities such as Halifax and London, Ont.

The problem is that there simply aren’t enough dwellings being built, particularly rentals, and it’s tough to boost construction in today’s market. “Rental housing is really hard to build right now,” said Brad Jones, senior vice-president of development at Wesgroup Properties Ltd. in Vancouver. Because of higher interest rates, elevated construction costs and a shortage of skilled workers, rental development is “not really viable,” he said.

It’s tempting to blame this scenario on record immigration – Canada’s population grew by more than one million people in 2022, and the 2.7-per-cent annual growth was the most since the late 1950s – but it’s a complicated issue. Business groups have been lobbying for more immigration, because their members are desperate for lower-skilled workers to fill job openings.

An economic downturn could take the heat off the labour market, reduce the desperation for immigration and that could then ease demand for housing. In an economy, everything is connected.

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Many local housing markets are heating up again with bidding wars, and rebounding home prices are heaping even more pressure on the rental market, because so many people are priced out of ownership.Ammar Bowaihl/The Globe and Mail

Of course, some Canadian companies would inevitably fail in a recession – but many economists argue that is not necessarily a bad thing either. As of 2019, about 5.5 per cent of all businesses in Canada were “zombie firms,” according to a landmark study Statistics Canada published earlier this year. Zombies are companies that earn less than the interest payments on their debt for three consecutive years, and are at least 10 years old.

These are not harmless firms, lurching slowly through their markets. They have weaker earnings than healthy rivals. They’re more indebted. They pay their employees less. Worse yet, they hamper the performance of stronger competitors.

“They don’t exist in isolation. They compete for the same resources as healthy companies, whether it’s investment dollars or employees,” said Danny Leung, director of the economic analysis division at Statscan, and one of the paper’s co-authors.

The paper noted that financial support for businesses during COVID-19 – a necessary thing to stave off economic collapse – may have prolonged the lives of companies that were on the brink of closing. Business insolvencies fell sharply during the acute phases of the health crisis.

Insolvencies have started to pick up again as companies struggle with higher interest rates – government data show that more than 2,500 firms that collectively received around $1-billion in federal wage subsidies have become insolvent so far – but a recession could actually be a catalyst for more rapid change.

“During recessions, companies that are barely viable exit, and then that labour, that capital, that entrepreneurial talent, is freed up to move to other places,” said David Williams, vice-president of policy at the Business Council of British Columbia. “That’s the wonderful thing about a market economy, is that it rewards successes and it punishes failures.”

But instead of permitting a downturn, Canada keeps chasing economic growth at all costs – and that includes endless federal deficits. Even though federal debt-to-GDP ratio is projected to fall over time, the GDP we’re striving for papers over some weak economic results. On a per-capita basis, real GDP – which factors in inflation – is about the same today as in 2017, and it isn’t expected to improve over the next few years.

“We are in, essentially, a lost decade for improvements in living standards,” Mr. Williams said.

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Diane Swonk, chief economist at KPMG U.S.Photo illustration by the Globe and Mail

Reality check: Recessions can also be devastating

Diane Swonk has heard the same argument for decades: “What we need is a ‘good’ recession.” When the economy gets hot, business owners start venting about just how hard it is to hire workers, so they pray for something that restores normalcy. The same is true for people priced out of a hot housing market.

“It sounds great in theory, to have a mild recession, to get rid of all these excesses,” says Ms. Swonk, chief economist at KPMG U.S., the accounting and consulting giant. “The reality is, the pain of it is quite stark.”

That’s not to say a downturn would be all bad. She appreciates the frustrations and how a reset could take some pressure off. But recessions can be intractable. “The idea that you can calibrate it so that it is mild and short-lived,” she says, “that’s just way outside of our bounds.”

Ms. Swonk has been around long enough to see entire regions destroyed by a downturn. As the former chief economist at Chicago-based Bank One, which became part of JP Morgan, she’s seen U.S. towns that never recovered from the recession in the early 90s and another after the dotcom crash.

Thousands of jobs with routine tasks – such as cashiers – are culled during recessions as companies seek efficiencies through automation, and those workers struggle to regain employment. Some never do. After the financial crisis, millions of Americans aged 25 to 54 were alienated from the labour market. Their participation rate – the percentage either working or looking for a job – took more than a decade to fully recover.

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Vesna Bulovan, left, and her daughter Jovana, use the self checkout at the Metro grocery store in Toronto. Cashiers are often among those laid off during recessions as companies seek efficiencies through automation.Fred Lum/The Globe and Mail

“Change means that there are going to be some losers and some winners,” says Henry Siu, an economist at the University of British Columbia. “For those specific workers who are no longer able to find employment as a machine operator, as a cashier, or as a forklift driver, clearly this phenomenon sucks.”

At its core, the idea that a recession will cleanse things is tied to renowned Austrian-born economist Joseph Schumpeter’s theory of “creative destruction.” The free market might be messy, he argued in the 1940s, but it delivers growth in the long run. Job losses and corporate bankruptcies are all part of the process.

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Stephen Poloz, former Bank of Canada governor.Photo illustration by the Globe and Mail

It’s a theory former Bank of Canada governor Stephen Poloz knows well. “It all sounds fine on paper,” he says. But Mr. Poloz makes something very clear: “Usually, it’s really rich people who lay this out.” He wonders: “Why is it the responsibility of the regular worker to be unemployed to cause this cleansing?”

Mr. Poloz also stresses that there’s another unique variable in the current business cycle. “The pandemic is a very special case,” he says. “We have to allow for a pause in the natural cleansing process given what we went through.”

Corporate profits may have swelled during the pandemic, but many small business owners barely made it out and are still saddled with tens of thousands of dollars of debt they took on simply to survive. In February, the Canadian Federation of Independent Business – the small business lobby – found that 58 per cent of its members still had pandemic-related debt, at an average of $106,000 each.

But it’s also easy to get lost in the debate. Mr. Cecchetti, the lead researcher on the study of past periods with high inflation, is very sympathetic to all these arguments, but he offers a counterpoint: “We’re never going to be able to avoid all pain for all people at all times,” he says.

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Paul Volcker, former Federal Reserve chairman, in April 2015. In 1979 Volcker raised interest rates aggressively to tame double-digit inflation, sending the U.S. into a recession.BRENDAN SMIALOWSKI/AFP/Getty Images

When inflation was scorching hot in the late 1970s and early 80s, the Federal Reserve learned its lesson. In 1979, then Fed chair Paul Volcker hiked interest rates aggressively to tame double-digit inflation, sending the U.S. into a recession. Facing blowback from politicians, the Fed started to lower rates in 1980.

But this move was premature: Inflation was still far too high, prompting another round of tightening that brought lending rates to around 20 per cent. This time, the U.S. was pushed into a second – and deeper – recession, and the unemployment rate jumped to nearly 11 per cent. It was a bruising period, but once inflation was under control, the economy took off.

Short-term pain for the long-term greater good became the gospel for central bankers.

That’s changed in the past 15 years. Now pain is avoided at all costs. It is hard to pinpoint precisely why, but one credible theory is the financial crisis was so terrifying that it forced policy makers to pull out their bazookas to restore order. Once central bankers and politicians had a whole new set of policy tools available, they got a bit addicted to their power.

“My view on monetary policy is always get in and get out quickly,” says Don Drummond, the former chief economist of Toronto-Dominion Bank, who chaired the Commission on the Reform of Ontario’s Public Services in the aftermath of the 2008-09 crisis.

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The central bank’s most recent projection is that inflation will fall to around 3 per cent annually by this summer, but the last leg of the inflation battle will be challenging.Ammar Bowaihl/The Globe and Mail

Today, central bankers are at the other end of the spectrum. “They’re far too activist,” he says, lamenting that they intervene in the economy through programs such as quantitative easing for much longer than they ever would have before. “That’s a grave danger.”

In defence of central bankers, global economic growth was anemic for many years after 2008-09, so it was hard to reset. And when the pandemic hit, even bigger bazookas were needed to stabilize things.

But at what point does the stimulus drip need to stop? While it props up metrics such as GDP growth, the economy’s foundation doesn’t necessarily get any stronger.

Perhaps the goal for policy makers shouldn’t be to avoid all pain, but to minimize it where they can. If that becomes the target, they might realize this is actually a rather opportune time to let the economy weaken. Corporate bankruptcies remain remarkably low; unemployment is barely noticeable; and the financial system is on much better footing following reforms made after the financial crisis. If a recession hit and everything collapsed from here, maybe this economy was all a charade to begin with.

Of course, that thinking might be ridiculous in the current political climate. Politicians are at each other’s throats and incivility is off the charts. But it is crucial that those in power remember that the economy is always a balancing act.

Canadian Imperial Bank of Commerce chief economist Avery Shenfeld cautions that any cooling-off period would not be “victimless.” But he knows that is only half the picture. ”Others will find that less of their paycheque is then eroded by inflation.” And that’s a major boon.

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Canada's economy outperforms in first quarter, raising pressure on BoC ahead of next week's rate decision – The Globe and Mail



The Canadian economy grew at an annualized rate of 3.1 per cent in the first quarter, outperforming expectations while adding pressure on the Bank of Canada to raise interest rates again, perhaps as early as next week.

After stalling in the fourth quarter of 2022, economic growth rebounded in the opening months of this year, buoyed by strong exports and robust consumer spending. That momentum appears to have continued into April, with a preliminary estimate from Statistics Canada showing stronger-than-expected growth that month despite the economic impact of the federal government workers’ strike.

Bay Street analysts had expected annualized first-quarter growth of 2.5 per cent, while the central bank had pencilled in 2.3-per-cent growth.


‘The stars are aligned’ for a further BoC rate hike: How economists and markets are reacting to today’s surprisingly strong GDP data

The GDP numbers, published by Statscan on Wednesday, are the latest upside surprise for the Canadian economy. Despite eight consecutive interest-rate increases in 2022 and early 2023, consumers have continued to spend, while businesses have continued to hire workers, keeping the unemployment rate near a record low.

This economic resilience is a problem for the Bank of Canada, which is deliberately trying to slow down the economy to bring inflation back under control. Governor Tiff Macklem and his team paused their rate-hike campaign in January, but have said they could raise rates again if economic growth and inflation don’t slow as quickly as expected.

Another rate hike, which could come as early as the monetary-policy decision next Wednesday, would increase the benchmark rate to 4.75 per cent, upping the cost of borrowing money and further pushing up the cost of servicing a mortgage. Interest-rate swaps, which capture market expectations about upcoming rate decisions, see a nearly 40-per-cent chance the central bank will raise rates by a quarter percentage point next week, and a roughly 60-per-cent chance they’ll raise rates by July.

“The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week’s policy decision,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.

“However, given the uncertain backdrop and the possibility that inflation took a big step down in May, the BoC could opt to remain patient for a bit longer and signal that it’s open to hiking in July if the strength persists.”

The annual rate of inflation was 4.4 per cent in April, up a notch from March but well below the four-decade high of 8.1 per cent reached last summer. Central bankers expect inflation to fall to around 3 per cent by this summer, although it could take much longer to get back to the Bank of Canada’s 2-per-cent target.

Canadian households were the engine of economic growth in the first quarter, with consumer spending rising 5.7 per cent on an annualized basis after two quarters of minimal growth. This was up for both goods and services, with notable increases in spending on cars, clothing, food and travel services.

Exports increased 10.1 per cent on an annualized basis, led by cross-border sales of passenger vehicles, metals and agricultural products.

Other parts of the economy, however, showed signs of weakness. Housing investment, which includes new construction, renovations and ownership transfer costs, fell for the fourth consecutive quarter as higher interest rates continued to dampen real estate activity. Meanwhile, businesses cut their investment in machinery and equipment for the third consecutive quarter and pulled back on inventory accumulation.

Much of the first-quarter growth was also front-end loaded. GDP grew 0.7 per cent in January, month to month, before slowing to 0.1 per cent in February and flatlining in March. Statscan’s preliminary estimate for April shows 0.2-per-cent month-to-month GDP growth – stronger than analysts were predicting, but hardly the blistering pace seen in January.

Most economic forecasters, at the central bank and on Bay Street, expect the economy to essentially stall throughout the remainder of 2023, with some predicting a mild recession later this year. Interest rates typically take 18 to 24 months to have a full effect on the economy, and the Bank of Canada only began raising rates 15 months ago.

So far, some of the impact of higher borrowing costs has been blunted by banks letting their customers extend the amortization period on variable-rate mortgages rather than forcing them to pay more each month. But over time, a growing portion of Canadians will need to renew their mortgages at higher rates, leaving them less money for discretionary spending.

“I do expect that we’re going to see these very big interest-rate hikes bite on the consumer side, but it’s a matter of timing,” Dawn Desjardins, chief economist at Deloitte Canada, said in an interview. The key question in the short and medium term is what happens to employment.

“The labour market hasn’t shown any significant signs of fraying. But that doesn’t mean it won’t. Because when you look at business surveys, we’re seeing businesses are a little bit nervous. They’re happy supply chains are better, but of course we have higher costs to finance,” Ms. Desjardins said.

She said that employers appear keen to keep their workers, given how difficult it’s been finding qualified employees. But the pace of hiring will likely ease in the coming months, pushing up the unemployment rate and curbing overall consumer spending.

Household disposable income fell 1 per cent in the first quarter, compared with the previous quarter, the first reduction since the fourth quarter of 2021. Employee compensation rose at a brisk quarterly pace of 1.7 per cent, but this was offset by a decrease in government transfers.

A growing number of economists think the Canadian economy can achieve a “soft landing” – where inflation falls back to the Bank of Canada’s 2-per-cent target without a major economic contraction or a sharp rise in unemployment.

But on this front, the resilience of the economy is a double-edged sword: It’s good for businesses and workers, but it could mean inflation takes longer to fall and it increases the odds of additional rate hikes, implying more pain for mortgage holders.

“In our baseline forecast, the labour market will soften as the economy slows. Wage growth will ease. Businesses will revert to more normal price-setting behaviour. And near-term inflation expectations will come into line with the inflation target,” Mr. Macklem said in a speech last month.

“But there is a risk that these adjustments will take longer or stall, and inflation will get stuck materially above the 2-per-cent target.”

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Europe's problem child no more: After years of misery, the Greek economy is on fire – The Globe and Mail



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Riot police run past a burning building during violent protests in central Athens on Feb. 12, 2012.YANNIS BEHRAKIS/Reuters

Central Athens nearly burned to the ground on the night of Feb. 12, 2012. Anti-austerity protesters and a small army of “anarchists” – violent young men clad in black and wielding pry bars – engaged in street battles with equally savage Greek riot police dressed like Roman gladiators. Some 45 buildings were set ablaze, including the lovely, restored Attikon Cinema, built in 1870.

I covered the riot, my face smeared with Maalox in a futile effort to prevent the tear gas from ravaging my skin. The poisonous white plumes billowed through the air, triggering a panicky stampede out of Syntagma Square. Stun grenades were launched over the terrified crowds. By evening, the area looked like a war zone, a hauntingly surreal one as smoke mingled with flames, making the downtown glow orange. The doors of my hotel were chained shut.

A few months later, I met with then-finance minister Yannis Stournaras. The building that housed his ministry was an ugly, modern affair at the bottom end of Syntagma Square, directly across from parliament. Steel shields, barbed wire and riot police surrounded the building. At one point, as I was taking notes in his upper-floor office, I looked up and noticed bullet holes in the window.

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Bank of Greece governor Yannis Stournaras speaks during a meeting of the bank’s shareholders in Athens on April 1, 2019.ANGELOS TZORTZINIS/AFP/Getty Images

“Some of the people hate me,” he told me, adding that he had recently received a curiously lumpy envelope from which a 9mm cartridge spilled out when he tore it open. “But we must keep our nerve.”

The crisis was so deep that Grexit – Greece’s exit from the euro zone – became a clear and present danger at least twice. The first time came in 2012, when the country’s economy had collapsed; the second in 2015, when the anti-austerity Syriza party was elected; Yanis Varoufakis, the self-described “libertarian Marxist” economist was installed as finance minister; and Greece defaulted on an international loan payment.

Mr. Stournaras kept his nerve. In 2014, he became Governor of the Bank of Greece, a position he will hold for another three years. Today, no one is trying to kill him; it is the economy, not the city centre, that is on fire.

In 2022, gross domestic product (GDP) expanded 5.9 per cent, second only to Ireland among the 20 countries that use the euro. Debt-to-GDP, while still Europe’s highest, at 170 per cent, has shrunk about 40 percentage points since the crisis years, when Greece (barely) survived on bailouts administered by the Troika – the European Central Bank, the European Commission and the International Monetary Fund.

The Troika’s loans-for-austerity demands robbed the country of its economic sovereignty and prolonged the deep recession. Eventually, the tough-love measures brought Greece back from the brink and pushed the economy back into growth, though the process took longer than anyone expected.

The unemployment rate, which peaked at more than 28 per cent in the ugly summer of 2013, was last measured at 10.9 per cent. Foreign direct investment reached a 20-year high in 2022. Tourism has surged to street-crushing levels, and employers cannot find enough skilled workers to keep up with demand for their services and products. Tens of thousands of the half-million mostly young Greeks who fled during the crisis years to find work abroad are coming home.

No wonder New Democracy, the centre-right, tax-cutting party led by Kyriakos Mitsotakis, slaughtered radical-left Syriza in the May 21 election. The talk is of the outright collapse of Syriza, whose leader, Alexis Tsipras, was prime minister from 2015 to 2019 (Greece, now ruled by a caretaker government, will hold a runoff election on June 25, because New Democracy failed to garner 50 per cent of the vote, which would have given it an outright majority).

From his apartment-sized office at the Bank of Greece in late May, I asked Mr. Stournaras if he thought Grexit would happen during the depths of the crisis. “I remember that 80 per cent of analysts and economists said that Greece would never make it in the euro,” he said. “But I thought that Greece would never leave. There was no Plan B. If Greece had left, we would have become like North Korea, totally isolated, incapable of paying our debt with a suddenly devalued currency” (Greece used the ever-decaying drachma until 2001).

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A tourist takes a picture with a smartphone of the ancient Acropolis from the Filoppapou hill in Athens on April 7.LOUISA GOULIAMAKI/AFP/Getty Images

Mr. Stournaras has always had a reputation as an optimist and fully expects Greece to regain its investment-grade credit rating this year – the country’s debt has carried junk status since 2010. But his optimism goes only so far. In his view, Greece has a long way to go before it can be declared a modern, competitive economy.

He noted that the current account (a country’s trade in goods and services with the rest of the world) remains in deep deficit – a hefty 9.7 per cent of GDP last year – and the national investment rate is still about half the European Union average. The overall debt remains dangerously high, and GDP per capita is still well below the level of 2008, the year before the debt-soaked, free-spending economy fell off a cliff. Tax evasion remains rampant, the judiciary is broken, and big industries such as media and construction are oligopolies that block competition and keep prices high. All of which, he said, “discourages investment.”

While the economy remains a work in progress, there is no doubt the worst days already feel like ancient history. Some parts of the economy and government services are flying. The New Democracy government was particularly happy with the digital revolution launched by Kyriakos Pierrakakis, who was minister of digital convergence from 2019 until late May, when the caretaker government was put in place. He was considered one of the young stars of cabinet and, if the rumours are correct, may land as the next finance or foreign affairs minister as a reward for having made government services vastly more efficient.

When he became minister, everything from enrolling for prescription medications to registering a death certificate was largely paper-based, with people lining up for hours at decrepit offices. Inspired by the digital transformations seen in Estonia and the U.S. Department of Homeland Security, Mr. Pierrakakis, with the help of billions of euros from the EU, launched the website, which initially offered 501 digital services. Today, the site lists more than 1,550, including the ability to register a one-person business in several minutes, a process that used to take a miserable five office visits.

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In an interview, Mr. Pierrakakis said that, in 2018, Greek citizens collectively performed 8.8 million digital transactions; last year, the number was 1.2 billion, saving 133 physical office visits per adult. “The Recovery and Resilience Facility of the EU, which is financing the digital and green transformation of the economy, is the intellectual equivalent of the Marshall Plan for us,” he said. “Removing administrative burdens and red tape. This is also about getting young people back.”

Technology is at the heart of Greece’s economic revival. Nikos Papathanasis, the Greek-Canadian University of Toronto engineering graduate who was alternate minister of development and investments until the government stepped down, said foreign investment is soaring, much of it in the tech industry. Microsoft plans to spend about €1-billion to open three data centres and a training site just outside Athens. Google, Amazon and TeamViewer are among the other tech biggies to have placed bets on the Greek turnaround.

Other Greek industries have not been so lucky, though Canada’s Eldorado Gold is pumping hundreds of millions of dollars into its big gold mine in the north. “They have sent a message that Greece is back,” Mr. Papathanasis said.

Unlike Mr. Stournaras, Mr. Papathanasis feared a decade ago that Greece would sink below the Aegean waves. “We were very afraid we would leave the euro zone,” he said. Eventually, the painful austerity measures, plus three bailout programs, restored financial stability. That, plus government incentives for tech investments and the thinning of the bureaucracy, triggered a rise in foreign interest. In 2022, foreign direct investment exceeded €7.2-billion, up from €5.3-billion in 2021, according to the Bank of Greece. During the crisis years, the inflow was almost zero.

Greece is no longer an investment pariah, and some business owners think the pro-business New Democracy party helped resurrect the entrepreneurial mentality, one with a pro-Europe attitude. Danae Bezantakou, the chief executive of Navigator Shipping Consultants – unofficial motto: “Ship Happens” – said previous governments looked at businesses as something to be milked, not as social and economic value creators. “Ten years ago, even five, if you were profitable, that just meant you would pay more taxes,” she said. “The system punished entrepreneurs, like they were doing something bad. This government has changed that mentality. We’re not just starting restaurants and coffee shops here.”

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The Greek and European Union flags wave under the ancient Acropolis hill in Athens on July 5, 2015.Petr David Josek/The Associated Press

Some businesses are doing so well they cannot keep up with demand. Theodorou Group is an Athens company with about 200 employees that provides automation systems, such as packaging and labelling machines, to manufacturers. Chairman Evangelos Theodorou said he is happy that New Democracy and the EU have put Greece back on the investment map, but he thinks the government has overstimulated some business sectors. For instance, it is providing incentives for companies that want to automate. “The government is pumping too much money into parts of the economy,” he said. “Demand for automation exceeds supply. We have to let customers down. They have to wait two years for our systems. They expect more than I can deliver.”

Could the Greek economic revival go off the rails?

George Tzogopoulos, a Greek lecturer at the European Institute in Nice, fears Greece could go back to its undisciplined, free-spending ways now that it has exited its bailout programs, which means the Troika no longer counts every euro that goes out the parliamentary door. “They are no longer putting pressure on Greece, so Greek politicians have the opportunity to spend as much as they like without direct supervision,” he said.

Mr. Stournaras thinks a return to the bad old days is unlikely because New Democracy is aware that spending discipline is required to guarantee enduring financial stability. But he points out that Greece has a decade-long grace period, after which the payments on its high debt will rise by about half, to make the economy more competitive and greener. “We have 10 years to exploit this window of opportunity,” he said. “Our competitiveness is still low.”

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