So what’s up with rising household insolvencies in Canada? In September they saw a 19% spike from a year earlier, the biggest annual gain since 2009. So far this year, there have been 102,023 consumer insolvencies, the second-most for the first nine months of a year in records dating back to 1987. True, the gains come from low levels, but they are accelerating at a pace that’s normally seen in times of economic distress.
“Obviously, this is not the typical cyclical climb in household credit stress,” write CIBC economists Benjamin Tal and Avery Shenfeld in a report this week.
We are not in a recession; unemployment before November was near multi-decade lows. Nor is this an Alberta problem. Ontario saw just as big a spike as this province which is enduring a prolonged downturn. The only provinces that escaped the national increase were Quebec and Saskatchewan.
Tal and Shenfeld say clues to why we are seeing higher insolvencies in what looks like a healthy environment — and a lesson for investors, lenders and monetary policy makers — can be found in the type of debt experiencing rising write-off rates.
Mortgage debt, where arrears have “trended steadily downward,” is not the problem. “It’s the performance of non-mortgage consumer debt that is the canary in the coal mine we need to watch for turning points in the credit cycle,” says their report.
More specifically debt where rates are tied to the prime rate that rose with Bank of Canada hikes in 2018. CIBC says writeoffs are up sharply on both unsecured lines of credits (ULOCs) and secured lines of credit (HELOC), but credit card debt, where rates are not tied to monetary policy, is not seeing this trend.
“Households have been shifting debt from credit cards to lines to save on interest costs but were then squeezed as rate on ULOCs began to climb.”
Tal and Shenfeld say there is a clear trend that increases in delinquencies are coming from interest-rate-sensitive products and much of that increase took place after rate hikes by the Bank of Canada pushed up the prime rate.
The takeaway is that the Canadian “economy, with its legacy of higher household debt, would be more sensitive to interest rate hikes than in the past.”
“If raising the overnight rate to only 1.75% could set off a climb in insolvencies, before any major job losses have been seen, it’s clear that taking rates to anywhere near what was historically neutral, or even where some models might currently put neutral, could prove to be overkill,” the economists conclude.
Here’s what you need to know this morning:
- Bank of England releases interest rate decision
- Ahmed Hussen, Minister of Families, Children and Social Development and Minister responsible for Canada Mortgage and Housing Corporation, Steve Clark, Ontario Minister of Municipal Affairs and Housing and John Tory, Mayor of Toronto, make an announcement in Toronto related to housing in Ontario
- RCMP hold news conference in Edmonton about charges laid in $15-million money-laundering operation linked to illegal online cannabis sales
- Notable earnings: Nike
- Today’s data: Canadian wholesale trade, U.S. existing home sales, current account balance
Women alive today will not see world gender parity in their lifetime, was the conclusion of a report that created a lot of buzz this week. This year’s World Economic Forum’s Global Gender Gap Report calculates that worldwide gender parity is still 99.5 years away, or more than a lifetime for most of us, as the chart by Bloomberg below shows. One of the major battlegrounds for parity is economic participation where the gap widened in 2019 to 57.8% from 58.1% the year before. This gap will take now take 257 years to close, compared to the estimate of 202 years in 2018. Technological advances have hit women with a “triple whammy”, says the WEF. There are more women in the roles hit hardest by automation, not enough of them are entering professions, often technology-driven, where wage growth is greatest and lack of care infrastructure and access to capital limits them from becoming entrepreneurs. “As a result, women in work too often find themselves in middle-low wage categories that have been stagnant since the financial crisis 10 years ago,” the report said.
With files from The Canadian Press, Thomson Reuters and Bloomberg
Little fear of rate hikes despite expected economic surge: Bank of Canada – CBC.ca
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.
“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.
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:
“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
Facing green push on farm, fertilizer makers look to sea for growth
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.
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)
Canadian annual inflation rate slows in December amid renewed COVID-19 restrictions
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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