The Bank of Canada pulled an RBA and hiked rates on June 7 with the market mostly (call it 60-40) priced for no move and more than 80 per cent of Bay Street economists believing the central bank would hold its fire. This is the same Bank of Canada that surprised the markets at half the meetings in 2022, so it really is back to governor Tiff Macklem’s modus operandi.
Economy
David Rosenberg: Rate hike is nail in the coffin that will bury Canada’s debt-heavy economy
The tone was hawkish as the press statement left the potential for another move at the July meeting wide open: the futures market is now priced 70 per cent of the way for another 25 beeper. This even had an impact on United States Federal Reserve pricing: the odds of a rate hike in June are now up to 33 per cent; these odds were at 22 per cent before the Bank of Canada hike. And the odds of a second Fed rate hike in July are now at 18 per cent … these market-based probabilities were sitting at 12 per cent before the Canadian central bank’s announcement.
In its press statement, the Bank of Canada made a big deal of how the economy is doing just fine, even after accounting for population growth. There was an emphasis on how interest-sensitive spending — especially the recent sharp rebound in the housing market — has been resilient in the face of higher borrowing costs. The commentary on stubbornly high inflation was ubiquitous in the statement (“underlying inflation remains stubbornly high”), and the coup de grâce from a forward-looking perspective was “CPI inflation could get stuck materially above the two per cent target.”
Tack on this — “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the two per cent target” — and you can see why the markets think the central bank has at least one more bullet in the chamber. The verbiage of “excess demand in the economy looks to be more persistent than anticipated” was just the cherry on the cake.
Modern-day John Crow
Indeed, if Fed chair Jay Powell fancies himself as the modern-day Paul Volcker, Tiff Macklem has surpassed even what John Crow managed to achieve in 1989 in terms of such a massive rate hike over such a time frame.
The lags are important and have yet to play out. The central bank did exercise patience, but not enough. Recession odds have taken a leap forward and putting the final interest rate nail into the coffin will end up burying the debt-heavy Canadian economy, a story we will be reading about later in the summer and fall.
This was the fourth consecutive decline in Canadian productivity and the 10th contraction in the past 11 quarters. The year-over-year trend is minus 1.8 per cent, or twice as bad as it is stateside, so as Bay Street economists and the columnists in the media go hog wild with each passing Canadian employment report, maybe they should be asking “what exactly are they being hired to do?”
And get this: the level of productivity was lower in the first quarter of 2023 than it was in the first quarter of 2017. Nice legacy for the Justin Trudeau government. Too bad the only thing the voting public knows is the unemployment rate — “down is good, and up is bad” — and is otherwise clueless about how productivity is the mother’s milk of sustainable economic growth.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.
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VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
The Canadian Press. All rights reserved.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.
Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.
The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.
Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”
Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.
Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
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