Forecasting Canada’s economic future is now about risk management, not one-way bets - Financial Post

Economy

Forecasting Canada’s economic future is now about risk management, not one-way bets – Financial Post

Published

4 years ago

January 6, 2020

Harry Miller

In December, I used Montreal-based New Look Vision Group Inc. as an example of the sort of confidence that could explain the unexpected surge in business investment during the third quarter.

But I didn’t mention why chief executive Antoine Amiel was feeling so good.

Unlike, say, the automobile industry, the future burns bright for optometry. Almost everyone acquires presbyopia (farsightedness) by middle age and the population is quickly aging. There’s also a “worldwide crisis of myopia,” Amiel said, because youngsters are spending more time indoors, reducing their exposure to natural light. “Those are fundamentally positive trends for the industry.”

Canada really is the shining star in the demographic game

Antoine Amiel

New Look in November reported its 21st consecutive quarter of comparable store sales growth and its stock price has increased about 40 per cent in five years, more than double the gain achieved by the S&P/TSX Composite Index during the same period.

Things are so bright that New Look, already Canada’s biggest eyewear retailer, is on the hunt of international acquisitions, and in December it purchased a small Florida chain. But the company’s home market will remain its main profit engine because Canada’s population is both aging and growing thanks to surging immigration rates. No other major advanced economy can boast such a combination.

“Canada really is the shining star in the demographic game,” Amiel said.

But befitting a population afflicted with myopia, many of the 2020 outlooks you have read suffer from varying degrees of shortsightedness: They tend to focus on whether the economy will grow moderately faster or somewhat slower. They wonder if stock prices will claw their way to new records, or ease off the peaks achieved in 2019. They debate whether the Bank of Canada will raise interest rates a quarter of a percentage point or not at all.

A better way to think about the year ahead is to contemplate the extent to which a handful of meta-forces will disrupt our best efforts to predict the next 12 months to the tenth decimal point. Many of these calculations are based on how economies have behaved in decades past, and we know that a handful of new phenomena, such as a planet seized by climate change, will have structural implications not seen before. Forecasting the years ahead calls for risk management, not one-way bets.

Demographics is one of those meta-forces, and possibly the most important one for economic growth.

Last year should have been a bad one based on our general understanding of what makes the Canadian economy tick. The Alberta energy industry was in crisis and trade wars choked global demand for exports. The Bank of Nova Scotia’s forecasting team began 2019 thinking that the Bank of Canada would raise interest rates. It flipped midyear, persuaded that the U.S.-China tariff fight would force the central bank to lower borrowing costs. Global economic growth had slowed to its weakest since the Great Recession. What chance did a small, open economy such as ours have in circumstances such as those?

And yet we muddled through, mostly because Canada recruited a small army of economic actors.

The loudest sound of the 2020s may be the ticking of the demographic time bomb

RBC economists

The population grew by almost 210,000 people in the third quarter, the biggest quarterly increase since 1971, according to Bloomberg. Most of the gain was the result of immigration, and the majority of those newcomers found jobs. The jobless rate hovered around the lowest on record since the mid-1970s. About 83 per cent of Canadians aged 25 to 54 are working, the highest percentage on record, according to Statistics Canada.

There’s little reason to expect those trends will reverse. Unlike the United States and Europe, Canadian immigration policy is tilted to receiving more newcomers, not fewer. And there’s lots of work: StatCan’s quarterly surveys of hiring intentions consistently put the number of unfilled positions at far more than 500,000. The shortage of workers partly explains why wages have started to rise after years of stagnation.

Unfortunately, demographics aren’t as unambiguously positive for the broader economy as they are for New Look. “The loudest sound of the 2020s may be the ticking of the demographic time bomb,” economists at Royal Bank of Canada said in a Jan. 3 report that previews the next decade.

Current immigration rates won’t stop Canada from joining the club of “super-aged societies,” as the Royal Bank analysis predicts about a quarter of the population will be seniors in 2030, compared with about 17 per cent currently. Unless those men and women decide to work into their 70s, the economy will fundamentally change. Consumption patterns will shift and demand for government services will increase. The Royal Bank study predicts there will be 1.7 Canadians of working age in 2030 compared with 2.3 in 2010.

“The financial demands of an older population will make it harder for governments to fund key growth priorities like education and skills development, let alone the vote-getting niche initiatives they often advance at election time,” the report said.

Without some kind of catalyst, demographics will reduce Canada’s economic potential. Productivity rates are weak, so the growing population isn’t generating as much wealth as it could. But positive surprises are also possible. Politicians could decide to accept even greater numbers of immigrants. Royal Bank sees opportunities in real estate, from both demand by seniors for retirement housing and the increased supply of property due to the larger homes they will abandon.

The good news is that Canada will confront these challenges from a position of relative strength. Amiel said one of New Look’s greatest challenges is finding workers so it can keep up with demand. “In many provinces of Canada, we are close to full employment for retailers and manufacturers,” he said. “It’s a challenge, but there is a flip side. It’s probably a better thing to have to pay a few dollars more an hour and have plenty of customers than the reverse.”

• Email: kcarmichael@nationalpost.com | Twitter: carmichaelkevin

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Economy

Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg

Published

2 hours ago

April 19, 2024

Harry Miller

Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.

The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.

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IMF Sees OPEC+ Oil Output Lift From July in Saudi Economic Boost – BNN Bloomberg

Published

3 hours ago

April 19, 2024

Harry Miller

(Bloomberg) — The International Monetary Fund expects OPEC and its partners to start increasing oil output gradually from July, a transition that’s set to catapult Saudi Arabia back into the ranks of the world’s fastest-growing economies next year.

“We are assuming the full reversal of cuts is happening at the beginning of 2025,” Amine Mati, the lender’s mission chief to the kingdom, said in an interview in Washington, where the IMF and the World Bank are holding their spring meetings.

The view explains why the IMF is turning more upbeat on Saudi Arabia, whose economy contracted last year as it led the OPEC+ alliance alongside Russia in production cuts that squeezed supplies and pushed up crude prices. In 2022, record crude output propelled Saudi Arabia to the fastest expansion in the Group of 20.

Under the latest outlook unveiled this week, the IMF improved next year’s growth estimate for the world’s biggest crude exporter from 5.5% to 6% — second only to India among major economies in an upswing that would be among the kingdom’s fastest spurts over the past decade.

The fund projects Saudi oil output will reach 10 million barrels per day in early 2025, from what’s now a near three-year low of 9 million barrels. Saudi Arabia says its production capacity is around 12 million barrels a day and it’s rarely pumped as low as today’s levels in the past decade.

Mati said the IMF slightly lowered its forecast for Saudi economic growth this year to 2.6% from 2.7% based on actual figures for 2023 and the extension of production curbs to June. Bloomberg Economics predicts an expansion of 1.1% in 2024 and assumes the output cuts will stay until the end of this year.

Worsening hostilities in the Middle East provide the backdrop to a possible policy shift after oil prices topped $90 a barrel for the first time in months. The Organization of Petroleum Exporting Countries and its allies will gather on June 1 and some analysts expect the group may start to unwind the curbs.

After sacrificing sales volumes to support the oil market, Saudi Arabia may instead opt to pump more as it faces years of fiscal deficits and with crude prices still below what it needs to balance the budget.

Saudi Arabia is spending hundreds of billions of dollars to diversify an economy that still relies on oil and its close derivatives — petrochemicals and plastics — for more than 90% of its exports.

Restrictive US monetary policy won’t necessarily be a drag on Saudi Arabia, which usually moves in lockstep with the Federal Reserve to protect its currency peg to the dollar.

Mati sees a “negligible” impact from potentially slower interest-rate cuts by the Fed, given the structure of the Saudi banks’ balance sheets and the plentiful liquidity in the kingdom thanks to elevated oil prices.

The IMF also expects the “non-oil sector growth momentum to remain strong” for at least the next couple of years, Mati said, driven by the kingdom’s plans to develop industries from manufacturing to logistics.

The kingdom “has undertaken many transformative reforms and is doing a lot of the right actions in terms of the regulatory environment,” Mati said. “But I think it takes time for some of those reforms to materialize.”

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Economy

IMF Boss Says ‘All Eyes’ on US Amid Risks to Global Economy – BNN Bloomberg

Published

13 hours ago

April 18, 2024

Harry Miller

(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.

“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.

The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”

The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.

“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”

Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.

Read More: A Resilient Global Economy Masks Growing Debt and Inequality

Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.

“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”

The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.

China Overcapacity

“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.

“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.

A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.

US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.

Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.

(Updates with additional Georgieva comments from eighth paragraph.)

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