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Flagging retailers are canary in coal mine for Canada's economy – BNNBloomberg.ca

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Eileen Wilson says she’ll be spending less this year on holiday shopping compared with last year because money is tight and the cost of living has gone up.

The retired Canadian civil servant says she clips coupons to save money on basics and has been checking online every day to get the best deal on video games for her two grandchildren for Christmas.

“I’ve been doing pretty good so far,” Wilson, 76, said during an interview at an Ottawa shopping mall.

Wilson isn’t alone in paring back spending. Retail sales in Canada are on pace for one of their worst years on record for growth, raising red flags about the health of the nation’s consumer. Sluggish spending at malls may only be a sign of things to come for an economy awash in household debt and unable to find other drivers to replace consumption.

Retail receipts for the first nine months of 2019 are up just 1.6 per cent from a year earlier, the slowest pace outside of the last recession since at least 1992. In volume terms, the deceleration is even more pronounced, with real retail sales up just 0.7  per cent this year. Statistics Canada releases October retail sales data on Friday.

The slump has been across the board, from cars to food to clothing, highlighting the broad nature of the slowdown, “which could signal that things may get a bit worse before they get better,” said Jennifer Bartashus, a senior analyst at Bloomberg Intelligence, evident in slowing sales growth at companies such as Loblaw Cos., Canada’s largest grocery retailer and the parent of Joe Fresh clothing stores, and Empire Co., which owns supermarket chain Sobeys Inc.

The malaise in retail is only the most visible symptom of Canada’s strained households, which are showing signs of fatigue as high debt burdens take their toll. Excluding housing, annual growth in total household consumption — everything from the purchase of televisions to spending on health care — has averaged 1.1 per cent in real terms over the past four quarters, the slowest pace outside recession since at least 1962.

More than half of respondents in a recent Equifax Canada survey said they plan to spend less on gifts this holiday season, and 46 per cent said they would limit spending because they’re already carrying too much debt. Canadians owe $1.76 for every $1 of disposable income. They spend a record 15 per cent of disposable income to pay principal and interest on debt.

“We see a customer that is resilient but that is very value-oriented,” Michael LeBlanc, senior adviser at the Retail Council of Canada, said in a phone interview. “That’s nothing new particularly for Canada, but it seems to be more accentuated.”

The squeeze on discretionary income is making Canadians more careful, LeBlanc said, which has actually been good for discount merchants such as Dollarama Inc., whose stock has outperformed other retailers this year.

A tapped-out consumer is adding to broader structural changes, driven by technology, that pose additional challenges. Less money on the table means Canadians are changing the way they shop, driving online sales higher and leading to new trends such as the growth of the rental clothing market.

It could be worse, given the high debt levels. While slowing, consumption in Canada at the very least is still growing and is expected to remain a driver of the nation’s expansion even in its weakened state. Analysts are anticipated real household consumption to grow at about 1.7 per cent annually over the next two years, helped by a recent jump in employment that is fueling sharper-than-expected income gains. That should support spending and help households repair balance sheets. The household savings rate rose to 3.2 per cent in the third quarter, for example, the highest since 2015.

Still, pressure on sales is only increasing. For many retailers, “flat is the new up,” LeBlanc said.

–With assistance from Erik Hertzberg.

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Little fear of rate hikes despite expected economic surge: Bank of Canada – CBC.ca

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What a difference a day makes in the outlook for the Canadian economy.

Earlier this week, some economists were predicting that the Bank of Canada’s Tiff Macklem would cut interest rates again when presenting Wednesday’s Monetary Policy Report.

But while Canada’s chief central banker warned that a resurgence in the effects of the pandemic was sending the economy further down, prospects for a vaccine-led recovery meant Canada would see a sharp return to growth later this year and next.

And while borrowers did not benefit from the “micro-cut” some had predicted — what Macklem carefully described as reducing already low rates “to a lower but still positive number” — perhaps more important for ordinary Canadians was his assurance that the bank-set interest rate would not rise.

Startling transition to growth

And that reassurance came despite the central bank’s outlook of a startling transition from a shrinking economy in the first three months of the year to extraordinarily strong growth of four per cent in 2021 and five per cent next year.

In a previous meeting with reporters at the end of last year, Macklem based his forecast on the assumption that a vaccine would not be widely available until 2022 and that the economy would be scarred by the impact of the virus on jobs and businesses. But this time, there was no talk of scarring.

Low interest rates have helped drive parts of the real estate market to new highs despite the pandemic, and so far, Bank of Canada rates are not expected to rise. There have been worries that a hike in rates that have allowed Canadians to afford large mortgages would lead to a sudden slowdown. (Don Pittis/CBC)

“Certainly the earlier-than-expected arrival of the vaccine is a very positive development,” the Bank of Canada governor said. “But we’re starting off in a deeper hole.”

Some economists have suggested that a strong rebound of the type Macklem and the bank’s Governing Council foresee would lead to a new burst of inflation that would require the bank to raise interest rates. There have been worries, including from the real estate industry, that a hike in the rock-bottom rates that have allowed Canadians to afford large mortgages would lead to a sudden slowdown.

But Macklem offered several reasons why that was unlikely to happen, for a while at least, and probably not until 2023.

For one thing, any decision to reduce stimulus would begin with a slow winding down of the Bank of Canada’s quantitative easing (QE) program. Currently the bank is still going to the market and buying at least $4 billion worth of government bonds every week, effectively releasing that cash into the economy. Macklem expects that to continue.

Another reason why the bank feels it won’t have to raise rates — the same logic for why it can continue QE — is the deep hole Macklem mentioned.

Despite the hundreds of billions of dollars in stimulus money from the Canadian government — plus the $900 billion US COVID-19 relief package already approved south of the border and the $1.9 trillion pandemic plan unveiled by newly installed U.S. President Joe Biden — the battered North American economy has lots of climbing to do.

Still lots of slack in the economy

Economics tells us that inflation does not kick in until the supply of goods, services and labour is used up such that people competing for those things start to bid up the price. But with so many unemployed, buildings empty, lots of raw material and plenty of money available to borrow and invest, the Canadian economy is not likely to reach those capacity limits until 2023, Macklem said.

Inflation numbers out Wednesday showed prices rising at the slowest rate since the financial crisis of 2009, plunging in December to an annual rate of 0.7 per cent — well outside the central bank’s target range of between one and three per cent.

A sign in Toronto’s upscale Yorkdale Shopping Centre on the first day of a renewed coronavirus lockdown on Nov. 23. When businesses start reopening, expect a burst of economic growth. (Carlos Osorio/Reuters)

The Bank of Canada expects that number to bounce back this year to an ostensibly comfortable two per cent, but as Macklem described, that will be deceptive.

“This is expected to be temporary,” he said. “The anticipated increase in inflation reflects the effects of sharp declines in gasoline prices at the onset of the pandemic, and as those base year effects fade, inflation will fall again, pulled down by the significant excess of supply in the economy.”

As well as being an unequal recession, this has been an unusual one in that those who kept their jobs have been building up a savings hoard that some have suggested will be released in a deluge of spending once the lockdowns end — as everyone heads out dancing and partying like in the Roaring Twenties.

Asked if a rush of spending was likely, Macklem once again explained why, even if it happens, a return to the days of the Great Gatsby is unlikely to unleash inflation. As retail experts explained in early December, those who have money to spend have been saving on services while continuing to spend plenty on goods. And even if we spend more on dancing, services do not lend themselves to a burst of excessive consumption.

WATCH | Bank of Canada predicts wealthier households will hold on to savings:

Bank of Canada governor Tiff Macklem spoke with reporters after the quarterly interest rate announcement on Wednesday. 2:21

“If you don’t get a haircut,” Macklem said, gesturing to his own longish style, “when you go back to getting haircuts, you don’t get extra haircuts.”

All that said, Macklem was clear to point out that with so many uncertainties, the bank’s outlook is not a foregone conclusion. The economy could recover faster. “That would be a good thing,” he said. A rising loonie, which would allow Canadians to spend more on imported goods and trips abroad, may slow the recovery as Canadian exports get pricier.

And with an unpredictable and evolving virus, things could stay bad for longer, too, in which case the Bank of Canada has tricks up its sleeve, including micro-cuts, to add a little more stimulus if that turns out to be necessary.

Someday the low interest rate party will be over, but for now, Macklem sees the most likely path as a strong if choppy and protracted recovery and continued rock-bottom borrowing costs until 2023 — or until a full recovery happens.

Follow Don Pittis on Twitter: @don_pittis

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Facing green push on farm, fertilizer makers look to sea for growth

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By Rod Nickel and Victoria Klesty

WINNIPEG, Manitoba/OSLO (Reuters) – Two of the world’s biggest fertilizer producers, CF Industries Holdings Inc and Yara International Asa, are seeking to cash in on the green energy transition by reconfiguring ammonia plants in the United States and Norway to produce clean energy to power ships.

The consumption of oil for transportation is one of the top contributors to global greenhouse gas emissions that cause climate change, and fertilizer producers join a growing list of companies adjusting their business models to profit from a future lower-carbon economy.

By altering the production process for ammonia normally usedfor fertilizer, the companies told Reuters they can producehydrogen for fuel or a form of carbon-free ammonia usedeither as a carrier for hydrogen or as a marine fuel topower cargo and even cruise ships.

The shift may improve their standing with environment-minded investors as fertilizer emissions attract greater government scrutiny in North America and Europe.

But the green fuels are not yet commercial and willrequire significant investment to turn a profit – a realitythat has the world’s largest fertilizer producer, Canada’s Nutrien Ltd, staying out of the space for now. Oslo-based Yara is seeking government subsidies to proceed.

Still, renewable ammonia represents a 6 billion-euro ($7.25 billion) opportunity for fertilizer producers by 2030, according to Citibank, based on 20 million tonnes of annual sales globally for clean power and shipping fuel compared with virtually none now. Global ammonia sales currently amount to 180 million tonnes.

“We absolutely could be known more for being aclean energy company than an ag supplier,” CF ChiefExecutive Tony Will said in an interview, speaking of long-term prospects for the Illinois-based company.

 

‘EVERYBODY IS LOOKING FOR SOLUTIONS’

Fertilizer plants separate hydrogen from natural gas and combine it with nitrogen taken from the air to make ammonia, which farmers inject into soil to maximize crop growth.

Production generates carbon emissions that CF says it can avoid by extracting hydrogen instead from water charged with electricity. It can then combine that hydrogen with nitrogen to make green ammonia, which the marine industry is testing as fuel.

CF is in discussions about selling green ammonia to a Japanese power consortium including Mitsubishi Corp, but buyers will break most of it down to pure hydrogen for use in transportation sectors.

“This is a market that easily can exceed what the total ammonia (fertilizer) market is,” Will said. “We’re going to grow into that over the next 20-25 years.”

Adopting green ammonia or green hydrogen to replace crude oil-based fuel would help the International Maritime Organization (IMO) meet a target to reduce emissions, and is suited to both short- and long-haul vessels.

Methanol and liquefied natural gas (LNG) are other clean alternatives.

“Everybody is looking for solutions and I think the jury is still out,” said Tore Longva, alternative fuels expert at Oslo-based maritime advisor DNV GL. “Of all the fuels, (green ammonia) is probably the one that we are slightly more optimistic on, but it’s by no means a given.”

Ammonia remains toxic and corrosive, requiring special handling on ships, Longva said.

Furthermore, combusting ammonia may produce nitrous oxide, a greenhouse gas, that ships would need to neutralize to prevent emissions, said Faig Abbasov, shipping director for European Federation for Transport and Environment, an umbrella group of non-governmental organizations. Fuel cells are another potential marine use for ammonia and hydrogen.

Still, Abbasov sees ammonia and hydrogen as the greenest and most practical shipping fuel alternatives, and cheaper than methanol.

Development of ammonia and hydrogen for shipping fuel holds decarbonization potential but is at the pilot stage for small vessels, while LNG and methanol are in use on ocean-going ships, an IMO spokeswoman said.

South Korea’s Daewoo Shipbuilding & Marine Engineering, one of the world’s biggest shipbuilders, plans to commercialize super-large container ships powered by ammonia by 2025, a spokesman said.

 

THE PLANS

CF is reconfiguring its Donaldsonville, Louisiana, plant to produce green ammonia. It plans to spend $100 million initially to enable the plant to produce by 2023, about 18,000 tonnes. By 2026, production across its network could reach 450,000 tonnes, and 900,000 tonnes by 2028, Will said.

The hydrogen it will sell may have nearly 10 times the margin of ammonia fertilizer, according to CF, making the 75-year-old farm company’s newest product its most profitable.

Yara is developing a green ammonia project with power company Orsted in the Netherlands and also has green projects running in Australia and Norway.

Unlike CF, Yara is seeking government subsidies because green ammonia costs could be 2-4 times higher than conventional production, said Terje Knutsen, Yara’s head of Farming Solutions.

“The technology behind this is not mature enough today,” he said.

Yara, which aims to cut all CO2 emissions from its 500,000 tonnes-a-year Porsgrunn ammonia plant in Norway, wants funding from the Norwegian government to switch the plant’s production process to electricity by 2026.

Norway already supports hydrogen and green ammonia through a tax exemption on electricity used to produce hydrogen, Minister of Climate and Environment Sveinung Rotevatn said in an email.

“Hydrogen and hydrogen-based solutions, such as ammonia, will be important in reducing greenhouse gas emissions in the future,” Rotevatn said.

Global ammonia production would need to multiply five-fold if it is to replace all oil-based shipping fuel, Abbasov said. But given the abundance of nitrogen in the air, potential supply is almost unlimited if production costs drop, he said.

Nutrien is looking into green ammonia, but sees high costs and insufficient prices as major obstacles, Chief Executive Chuck Magro said.

Industry efforts underway to produce small volumes of green ammonia are largely “window-dressing,” said Nutrien Executive Vice-President, Nitrogen, Raef Sully.

“The reason (for Nutrien) to look at it is to position ourselves for when people are willing to pay,” Sully said.

“The problem is we’re just right at the start of development.”

 

(Reporting by Rod Nickel in Winnipeg, Manitoba and Victoria Klesty in Oslo; additional reporting by Jonathan Saul in London; Editing by Caroline Stauffer and Marguerita Choy)

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Canadian annual inflation rate slows in December amid renewed COVID-19 restrictions

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Canadian annual inflation rate

By Steve Scherer and Julie Gordon

OTTAWA (Reuters) – Canada’s annual inflation rate slowed to 0.7% in December from 1.0% the previous month amid a new round of COVID-19 lockdowns and declining costs of airplane tickets, clothing and footwear, Statistics Canada said on Wednesday.

Headline inflation was below analyst expectations for inflation to remain at November’s 1.0% rate. Consumer prices fell 0.2% on the month, as did the cost of food.

“It’s an unexpected slowdown in inflation,” said Royce Mendes, a senior economist at CIBC Capital Markets. “Looking at the details, I don’t think it much changes the thinking at the Bank of Canada.”

The Bank of Canada left its benchmark interest rate unchanged at 0.25% on Wednesday and reiterated it did not expect inflation to return sustainably to its 2% target until 2023.

However, the central bank said COVID-19 vaccines had helped brighten the outlook.

“The arrival of effective vaccines combined with further fiscal and monetary policy support have boosted the medium-term outlook for growth,” the bank said.

The Canadian dollar was trading 0.8% higher at 1.2635 to the greenback, or 79.15 U.S. cents, after the rate announcement.

Two of the three core measures of inflation fell in December. The common measure, which the Bank says is the best gauge of the economy’s underperformance, was unchanged at 1.8%.

Both Ontario and Quebec, Canada’s most populous provinces, imposed tighter health restrictions in December as the novel coronavirus spread.

Canada reported 4,679 new COVID-19 cases on Tuesday, and has seen more than 18,000 total deaths since the start of the pandemic.

“It should be expected there would be slack in the economy given the persistent shutdowns related to COVID,” said Andrew Kelvin, chief Canada strategist at TD Securities. “It’s nonetheless… a touch more concerning to see the move in the core measures than it is in the headline measures.”

 

(This story fixes garbling in headline.)

 

(Reporting by Julie Gordon and Steve Scherer in Ottawa, additional reporting by Fergal Smith and Jeff Lewis; Editing by Chizu Nomiyama and Bernadette Baum)

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