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Oil remains a pillar of Canada’s economy



Stephen Poloz, the Bank of Canada governor, has been telling us for a while now that he’s skeptical that statistical methods developed for the old economy are telling us everything we need to know about what’s happening here in the new economy.

When he’s in front of a crowd and the subject comes up, Poloz tends to ask everyone who buys stuff on Amazon to put up their hands. Then he informs the audience that none of those purchases are captured in Statistics Canada’s monthly tally of retail sales because that report only monitors retailers with a physical presence in Canada.

This is important because the case that the Canadian economy is in trouble is based on a set of data that is blind to much of the wealth that’s being generated in the digital realm. For example, Bank of Nova Scotia’s real-time forecast of gross domestic product, which is based on historical patterns of high-frequency data, dipped into negative territory after StatCan reported on Jan. 7 that merchandise exports declined in November.

StatCan knows it has some catching up to do, but the testing required to prove new methodology is accurate takes time. To the agency’s credit, it’s been releasing the results of research efforts that show that its high-frequency releases are missing a material chunk of the real economy. Last year, StatCan published an estimate that put the value of investment in “data, databases, and data science” at $40 billion in 2018, or 12 per cent of all non-residential investment. The value of the stock of such investment was as much as $217 billion, or about 70 per cent of the value of bitumen reserves at the end of 2017.

Oil is still a pillar of Canada’s economy, but it’s now data that drives growth. And yet it’s oil and other tangible goods that get all the press.

So how do you track economic growth when there are no gauges attached to the primary engine? You go back to the basics and rely to a far greater degree on your instincts. For Poloz, that means putting more weight on measures that he can reliably count in real-time, and less on those that only tally the value of stuff that matters less today than it did two decades ago.

“The labour market data are telling us more than the GDP data,” Poloz said after a speech at the Federal Reserve Bank of San Francisco in November. “The labour market, that’s easy right? We can ask firms, how many people are working for you? How much are they making? Those are real. The survey part, the household part, of course it’s a survey, but even so, it has stood the test of time.”

The newest data from the “household part” of StatCan’s monitoring of the labour market were released Jan. 10. The numbers were inconsistent with an economy that’s grinding to a halt, suggesting the Bank of Canada’s leaders needn’t panic over weaker merchandise trade when they gather to reset policy later this month.

Extrapolating from the 60,000 households it contacted last month, StatCan estimates that Canada’s economy added about 35,000 positions in December, compared with an outsized drop of more than 70,000 jobs the previous month. The jobless rate was 5.6 per cent, near the lowest on records that date to the mid-1970s.

You might recall Pierre Poilievre, the Opposition finance critic, using the November hiring numbers to support his contention that we were at risk of a “made-in-Canada” recession. “In November, 71,000 Canadians went home and looked their family members in the eye and said, ‘I lost my job,’” he said at a press conference.

Given the volatile nature of the Labour Force Survey (LFS), anyone without an agenda knew that the weaker number likely signalled a slower pace of hiring, not devastation. StatCan prefers its trend measure of hiring, which increased by 1,800 positions, the fewest since November 2015. That’s kind of what you’d expect from a labour market that’s been performing at a high level for a long period of time.

Canadian employers created 320,300 jobs in 2019, the second most since 2007. The labour participation rate of Canadians aged 25 to 54 who are working or seeking employment is around 87 per cent, near the highest on record. The youth participation rate — one of Poloz’s favourite indicators — is around 65 per cent, essentially the highest in a decade. Employment growth must slow because we are running out of people to put to work.

“Canada’s strong LFS out today suggests recent job losses were merely a blip or statistical noise, not a more worrying long-term trend,” said Julia Polk, an economist at ZipRecruiter Inc., which operates a digital jobs marketplace.

Just to be clear, nothing you’ve read here is meant to make you feel great about the economy.

The latest hiring numbers caused Scotiabank’s nowcast of fourth-quarter GDP to reset to a 0.03-per-cent increase from a 0.03-per-cent decrease. Overall, the economy is weaker than most expected it would be. In October, the Bank of Canada predicted GDP would grow at an annual rate of 1.3 per cent over that period.

Canada is benefiting from having a number of different economic engines, but several of them are sputtering. Employment in Alberta was essentially unchanged from December 2018, while in Ontario, there were some 243,000 new positions, the biggest year-over-year increase for the month of December since 1987, according to StatCan.

If GDP growth continues to fall short of the central bank’s estimates, policy makers could be persuaded to respond. But predicting the path of interest rates in the years ahead won’t be as simple as running the numbers through a sophisticated model. Poloz has made clear that the Bank of Canada will be applying a lot of judgement to take into account the rapid growth of the digital economy.

“We don’t assume it,” he said in San Francisco. “We’ve got to wait to see it. Meantime, you act as if it could be happening.”

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



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



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



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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