Economy
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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Economy
Q&A: This analyst believes minerals for the green economy could spark an N.L. boom larger than oil – CBC.ca
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There has been a major worldwide push to decarbonize economies as much as possible, with many industrial countries committing to strategies to develop alternative sources of energy.
Yet a major forecast points to a growing, not shrinking, demand for oil. The International Energy Agency released its 2023 forecast for oil supply and demand, with indications pointing to an increased demand for oil.
At the same time, the conversion to renewable energy sources has not been happening as quickly as some may like, and that’s in part because of a shortage of what are called critical minerals — nickel, zinc, lithium and copper, to name a few — that can power electric cars, batteries, turbines and other products.
Larry Short, portfolio manager and senior investment advisor at Short Financial, went through the issues with Krissy Holmes during a recent interview on CBC Radio’s St. John’s Morning Show.
His thinking may surprise some people. He believes the mining sector may be in for a boom that could exceed what the province has seen with offshore oil development.
This interview has been edited for length and clarity.
Q: So what is going on? Why is demand for oil expected to grow next year?
A: Largely because China has still been in lockdown during the last eight months. As much as the rest of the world has come out of the COVID crisis, China has not. So, they’ve been battling it by doing major lockdowns. There’s still hundreds of ships off the coast of Shanghai waiting to load and unload.
The reason why we’re still seeing shortages throughout the world is because the manufacturing that China has been trying to do, the products cannot get into the ships.
Electrification — we’ve certainly been talking about that transition in the last number of years. Is there a relation? Is that happening as fast as it should be?
Oh, heavens no, nowhere near it. Based on numbers that we’re still building, 33 per cent of the world’s energy is still coming from coal, for heaven’s sake. In fact, China recently announced a new project using coal, which will actually use more coal than all of Europe is currently using.
We’re not moving forward to reduce carbon emissions largely because we aren’t able to make changes quickly enough due to bottlenecks.
A key one of those bottlenecks is critical minerals. Basically, we’re not mining all of the things that we need to mine in order to make the conversion at a fast enough rate.
Looking at countries like Indonesia, Pakistan, and Bangladesh, with large populations. They all want air conditioning, running water, televisions and automobiles. The world is still trying to keep up with demand for those products and services, meaning that the total energy demand around the world is increasing, while the ability for the world to generate alternate energy is simply not there.
Let’s talk about what this means for Newfoundland and Labrador. Where do we fit in on the supply side here?
We’ve had many people over the years argue that if you just shut down the oil off the coast of Newfoundland, that will contribute to the conversion of the world over to alternative fuels. What we’ve seen in the last little while is 4-million barrels a day being shut down because of the Russia sanctions.
The result has not been a conversion to alternative fuels quickly. There’s actually been an increase in inflation. If anything, that should help people understand that in terms of this transition, the focus has been in the wrong area. The focus has been on the supply of oil, when it has to be on replacing oil entirely by using alternative energy, which requires critical metals.
The one thing that the province of Newfoundland and Labrador has proportionately more than anywhere else on Earth, are all of these critical metals that have to be mined in order to build the electric vehicles.
In terms of the supply, what is the opportunity here for the offshore? What could this mean? Is there the potential for another boom here?
We could definitely see a repeat of the boom. Oil development, any field that has already been found, such as Bay du Nord, will be developed before new exploration takes place, because the world is still not financing new oil projects or new oil exploration projects.
The potential boom in minerals in the province of Newfoundland and Labrador from this is larger than what the oil boom has been.– Larry Short
Again, the reason we’re in this crisis is because the thought was that the world could convert faster than it could. What we’re finding is that everybody has given up on oil at the same time, therefore the supply that we need to even do the conversion, we don’t have.
The second piece is that the potential boom in minerals in the province of Newfoundland and Labrador from this is larger than what the oil boom has been. So, the opportunity here is much greater if we can find a way to help supply the world with all of the metals that are needed in order to do the conversion, because that is where the money is pouring into right now throughout the planet.
The potential for mining could be bigger than the potential for oil for this province? Can you give us a sense of the scale we’re talking about here?
Just to make an electric automobile, you need roughly six times as much metal, most of it being copper, lithium, cobalt, nickel, those things. There’s an article out a short time ago talking about how basically we need to increase the amount of minerals being mined by a factor of a thousand over the next ten years in order to meet the climate goals.
You can see the opportunity for this province. The opportunity there is absolutely huge going forward.
Are you saying that actually leaning in on mining could help to cancel out some of the, for lack of a better word, bad [things that come] with some of the emissions with oil production? Could one cancel out the other?
More than that. The fact is that for a long time, environmentalists have been saying we’ve got to get off oil. This is how the province gets off the oil revenue side.
The key part here is that as a province, we have to find a way to open mines faster than the average of 14 years, because that misses the whole opportunity. But, on the other side as well, if we can find a way to do it ethically, if we can find a way to do it staying inside of environmental standards, then we become one of the leaders in the world. We have that opportunity.
Read more from CBC Newfoundland and Labrador
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In recent days there has been a flurry of other announcements about changes.
Late Friday, the Radio City Rockettes announced they had canceled all of their remaining New York City holiday shows, citing “increasing challenges from the pandemic.” The dance company typically performs multiple shows per day in December. A number of other restaurants and theaters in New York City that rely on big December sales figures are also being forced to temporarily close. But some tourist destinations in Florida are expecting record sales.
Economists and policymakers say it may take weeks for the omicron variant’s full impact to come into view, and the situation is changing rapidly.
Major cities appeared to be the hardest hit so far. Broadway shows including “Hamilton” and “Tina,” about the life of Tina Turner, canceled performances this week because of coronavirus outbreaks and exposure. A Los Angeles theater production of “A Christmas Carol” was canceled Thursday, Friday and Saturday because of a similar outbreak. Some hospitals have canceled elective surgeries to clear space and personnel for covid-19 patients.
Restaurant reservations are declining again, according to the online reservation platform OpenTable, and a growing number of restaurants in New York City are closing because of coronavirus outbreaks among staffers and a lack of workers, according to the New York City Hospitality Alliance. College students and day cares are sending students home to combat outbreaks, but there are signs that people do not plan to stay home for long.
“I know of at least a couple dozen that are shutting down, which is horrible for these restaurants,” said Andrew Rigie, executive director of the NYC Hospitality Alliance. “The holidays are traditionally when many restaurants would earn their profit. This is another gut punch.”
As they have for much of the pandemic, the cancellations are moving through the broader hospitality industry, particularly in large cities. JPMorgan Chase canceled a major in-person health-care conference scheduled to take place in San Francisco next month, and the Cartwright Hotel at Union Square immediately suffered the consequences. Steven Viscio, the hotel’s general manager, compared the conference to the area’s “Super Bowl” in terms of the number of people it would have drawn and the amount of revenue it produces.
The 114-room hotel has roughly 25 employees. Viscio expects housekeeping shifts will stay limited now that the conference is off the book. He was also looking to hire one or two more staff members, but those plans will be delayed.
“Everyone has looked out for each other,” Viscio said. “But it’s still going to be a drain on everybody.”
Since early 2020, the coronavirus moved through the U.S. population in several phases, with covid-19, the disease caused by the virus, killing more than 800,000 people. The virus began its latest surge in recent weeks during a moment when the U.S. economy appeared to have regained its footing, with growth strong and unemployment falling.
But this fragile economy remains vulnerable to sudden shifts in consumer behavior. Some businesses are expecting a strong finish to 2021, while others could be forced to close their doors. The Florida Keys, for example, are preparing for perhaps the busiest holiday season ever, according to the local tourism council.
“The [tourism] numbers for December so far have broken records,” said Andy Newman, spokesman for the Florida Keys tourism council. “To be honest with you, thus far we haven’t seen any significant impact of omicron in terms of cancellations.”
Confirmed U.S. coronavirus infections have increased markedly in the past two weeks. More than 1,200 people die of covid-19 every day. So far, data shows that vaccinations and booster shots protect against severe illness from the variant, but health officials fear a surge in hospitalizations and deaths in areas with low vaccination rates.
Last winter, before vaccines were available, the virus moved with speed and lethality through the United States, particularly as many Americans traveled for the holidays. While millions of Americans are expected to travel in December and January, there are already signs of many people slamming on the brakes.
Lauren Randolph, 36, a recipe developer in Los Angeles, had elaborate Christmas travel plans with her husband, Dan Samiljan, 37. They would fly first to Tennessee to visit her family, then peel off to Kentucky to tour distilleries along the Bourbon Trail between Louisville and Lexington. After that, they planned another flight to Boston to visit family. Over the past few days, they have canceled the trip, getting credit for two out of three flights, canceling a car rental and the distillery tours.
“I have grandparents in their 90s, and we decided it just wasn’t worth the risk,” Randolph said. “The past couple years have made us used to going with the flow. No one was mad — our families are understanding people. Instead, we’re staying home and will see a few friends safely outside.”
For some restaurateurs, another coronavirus surge is mixed news. Ashwin Deshmukh owns a chain of six Williamsburg Pizza restaurants as well as a restaurant-bar called Short Stories in New York.
“People always want pizza, and if they’re not going out, they want it even more,” he said. But of the 18 holiday parties he had on the books for Short Stories, 10 have canceled.
“By Monday things started dropping off,” he said. “It could be a $50,000-to-$80,000 hit.”
Nik Sharma was going to have a holiday party there for his consulting firm Sharma Brands. Sharma canceled the party recently but told Deshmukh to keep the $7,500 deposit.
“On Wednesday night I was at the Knicks-Warriors game,” Sharma said, “and I was on my phone getting texts from people asking if the party was still happening. It’s just not a good look to be throwing a party with numbers rising. What if someone’s grandma ends up in the hospital because of this party?”
Consumer interest in catering (measured as viewing business pages or posting photos or reviews) was down 22 percent on Yelp the week of Dec. 6, compared with the same week in 2020. Food delivery service appears to be back on an upswing, with inquiries and reviews up 13 percent during the same period, compared with a year earlier.
It’s particularly challenging timing for the restaurant industry, which is also dealing with worker shortages and food inflation, said Sean Kennedy, executive vice president of public affairs for the National Restaurant Association. Already, 90,000 restaurants have closed permanently or long-term, with an additional 200,000 restaurants still hoping to get pandemic relief money from the federal government.
“Restaurants can only defy the laws of gravity for so long,” Kennedy said. “We are an industry with roughly 16 days of cash on hand and that operates on 3 to 5 percent profit margins. You can change your business model only so much.”
On Tuesday, Erika Polmar, executive director of the Independent Restaurant Coalition, had 903 new emails from restaurateurs in her inbox, she said, all looking for guidance: Did she think there would be additional federal assistance? Did she know a bankruptcy expert? Could she recommend a credit counselor?
“This is the month that folks are hoping for a bump in sales, and they are seeing it slip away,” she said. “A restaurateur in the Northeast called me. He usually does a lot of holiday parties for pharmaceutical companies. They know more than other people, he said, and they are canceling their holiday parties because they are panicked. Parties make up a big portion of holiday business. This is yet another moment where restaurants have to navigate a crisis — and they have nothing left.”
By many measures, the economy had made tremendous strides before the latest surge. Policymakers at the Federal Reserve project the economy will have grown 5.5 percent by the end of the year. The unemployment rate fell to 4.2 percent in November, and most of the major stock market indexes are on track to finish close to 20 percent higher for the year. Retail sales also rose for the fourth straight month in November, with the expectation that consumer spending will remain strong through the holiday season.
Still, health officials warn that the omicron variant could peak in a massive wave of infections as soon as January, putting pressure on strained health systems already grappling with cases of the delta variant. Plus, some policymakers and economists initially underestimated the risks of the delta variant when it began spreading over the summer, only to backtrack as the wave hindered the economic recovery for months. Consumer confidence also plunged in the late summer as people’s renewed fears of the virus held them back from seeking out jobs or limited school openings and child-care options.
At a news conference Wednesday, Fed Chair Jerome H. Powell said the delta variant slowed hiring and constrained global supply chains. But he added that “wave upon wave, people are learning to live with this.” The more people who get vaccinated, the fewer the economic effects subsequent waves of the virus can have, Powell said.
“I just think at this point, we don’t know much,” Powell said Wednesday. “We’ll know a whole lot more in three weeks, and we’ll know more than that in six weeks.”
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