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

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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:

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Falling exports bring German economy to standstill in fourth quarter – TheChronicleHerald.ca

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BERLIN (Reuters) – Shrinking exports held back German economic activity in the fourth quarter of last year, detailed data showed on Tuesday, confirming that Europe’s largest economy was stagnating even before the coronavirus outbreak began.

Germany’s export-dependent manufacturers are being hit by a slowing world economy and increased business uncertainty linked to tariff disputes and Britain’s exit from the European Union.

The Federal Statistics Office said exports fell by 0.2% in the fourth quarter from the third, which meant that net trade took off 0.6 percentage points from gross domestic product growth.

The trade outlook remains clouded as the coronavirus epidemic is adding another risk, Ifo President Clemens Fuest said. The Ifo index for export expectations fell in February, with car companies among the most pessimistic, Fuest added.

Gross investment – which includes construction – rose by 2.9% in the last quarter of the year, adding 0.6 percentage points to growth, the statistics office said.

State consumption added 0.1 percentage points to growth while private consumption, which has been a key pillar of support recently, made no contribution.

The Statistics Office confirmed that the German economy grew by 0.6% last year, the weakest expansion rate since the euro zone debt crisis in 2013.

For 2020, the government expects growth to pick up to 1.1%, helped mainly by a higher number of working days in a leap year. Adjusted for calendar effects, Berlin predicts 0.7% growth.

Andrew Kenningham, an analyst from Capital Economics, said the German economy would continue to stagnate during the first half of this year as global demand would remain weak and domestic investment was likely to drop.

The impact of the coronavirus on the German economy through disrupted supply chains or lower demand from China had been small so far, Kenningham noted.

“But the longer the disruption in China continues, the greater the risks. And the possibility of the virus spreading in Europe poses a new downside risk.”

China is Germany’s most important trading partner, with car makers being especially dependent on both Chinese supply chains and demand from China.

(Writing by Madeline Chambers and Michael Nienaber; Editing by Michelle Martin)

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Germany's economy stalled in the fourth quarter – MarketWatch

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Germany’s economy stalled in the fourth quarter as consumption lost steam, Germany’s Federal Statistical Office said Tuesday, confirming a preliminary estimate.

The quarter-on-quarter comparison shows that while consumption was the main driving force of growth in the third quarter, it slowed markedly in the fourth quarter. Household consumption stagnated in the fourth quarter and government consumption rose only 0.3%, Destatis said.

As previously reported, gross domestic product–the broadest measure of goods and services produced in an economy–remained flat at 0.0% compared with the previous quarter. GDP grew 0.4% on year in the fourth quarter on a calendar and price-adjusted basis, Destatis said, confirming the first estimate.

Before last week’s preliminary estimate, weak data for manufacturing orders and industrial production in December had raised fears that the economy had stagnated or even contracted in the fourth quarter.

While foreign trade was another driver of economic growth in the third quarter, it slowed economic activity in the fourth quarter. Destatis said exports were down 0.2% in the quarter, while imports rose 1.3%.

Gross fixed capital formation went up 0.6% in the construction sector due to the mild weather, while it decreased in machinery and equipment by 2.0%.

German GDP grew 0.2% in third quarter and declined 0.2% in the second quarter, after having grown 0.5% in the first quarter.

The German economy grew 0.6% in 2019 on a calendar and price-adjusted basis, Destatis said.

Write to Maria Martinez at maria.martinez@wsj.com


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Blows keep coming for our economy, and the Bank of Canada will be left to clean up the mess – Financial Post

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The Canadian economy is off to a terrible start to 2020 as four years of inept government policy are starting to come home to roost.

Manufacturing sales have posted their fourth consecutive negative reading, retail sales were stagnant to end 2019 and signs are that GDP growth is stalling and may actually be negative when accounted for on a per-capita basis.

We worry that our booming housing market may not be enough to prevent this situation from worsening, with the potential for a recession that could drag interest rates and the loonie lower as well.

And concerns about the coronavirus and its global economic impact couldn’t come at a worse time.

The other broader issue is what it could ultimately do to Canada’s reputation as a place to do business

BMO chief economist Douglas Porter

The problem is that the PMO has for the most part appeared more concerned with other issues, such as securing a UN Security Council seat, than it has on ensuring the economy stays on track.

Instead of nipping anti-pipeline blockades in the bud, they were allowed to rapidly expand and paralyze both the country’s economy and our reputation globally as a secure place to do business. Grain shipments have been halted costing hundreds of millions in lost sales, thousands of rail jobs have been temporarily lost and the lack of propane shipments to the Atlantic provinces have left inventory levels dangerously low.

Douglas Porter, chief economist at BMO, highlights a much more important takeaway: “But the other broader issue is what it could ultimately do to Canada’s reputation as a place to do business, and ultimately that might be the most potentially damaging aspect of this episode.”

The same message was sent this weekend when Teck Resources Ltd. announced it had decided to cancel its $20 billion Frontier oilsands mine citing worries over Canada’s inability to create a framework that “reconciles resource development and climate change.”

Frontier isn’t an isolated incident: It now joins the $100 billion of resource projects that were scrapped from 2017 to 2019, according to the C.D. Howe Institute. Consider for a moment the massive opportunity cost this represents for the country as a whole, simply due to bad policy implemented during a period of volatile energy prices.

For those who say that ramped-up fiscal spending by the Federal Government will help offset some of the damage, don’t forget that Ottawa hiked higher personal tax rates and attacked small business in a bid to raise revenues to cover some of that spending while concurrently having to deal with debt servicing costs.

For example, according to a recent report by the Fraser Institute, “At the federal level, the amount that will be spent on interest payments in 2019-20 ($24.4 billion) is higher than what the government expects to spend on Employment Insurance benefits ($19.3 billion) and the Canada Child Benefit ($24.1 billion).”

In the end, we think it will be left up to the Bank of Canada to deal with this mess. This means they may finally have to give up the hallowed ground they have defended for so long and implement an emergency interest rate cut. With oil prices in the toilet, they may be removing a key support for the Canadian dollar.

For those wondering what the potential impact will be, we recommend having a look at the Australian dollar which until May of last year had a strong correlation with our currency’s relationship to the U.S. dollar. Back then both were at 0.75 but the AUD has since been walloped down to 0.66.

This would be terrible news for Canadian consumers especially since we import so many of our goods from the U.S. But it would be extremely beneficial to our exporters including our resource and manufacturing sectors. It could also add gasoline to our housing market especially considering the government recently loosened mortgage-lending standards.

Either way, a lack of focus on the importance of the Canadian economy and leaving it up to the Bank of Canada to rescue us is not a policy that instills much confidence. And confidence is something all of us Canadians could use a bit more of these days.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

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