The federal Liberals’ lack of concern about the economy is bound to catch up with them
Two streams of news are playing out this week: the Liberal government’s economic agenda, and the spread of the Omicron variant of COVID-19. Both have political consequences.
Finance Minister Chrystia Freeland’s midterm report, released Tuesday, made it clear that, for this government, social priorities trump economic concerns.
Stronger-than-expected economic growth (part of it inflation-induced) has lowered the projected deficit for this year, to a still-eye-watering $145-billion. But instead of using the increased revenue to lower that figure, the Liberal government will be increasing spending, including $40-billion over seven years to compensate First Nations children and families for the failures of the child-welfare system.
This comes on top of the Liberal government’s ambitious child-care program, which will permanently increase federal spending by more than $8-billion a year when fully implemented, the equivalent of more than a third of the defence budget for one single program.
The Liberals have increased health care funding to the provinces. They made $78-billion in commitments over five years during the election campaign that will be incorporated into the next full budget. They are offering $5-billion to assist British Columbia in the wake of recent disastrous floods, with more to come.
Even as this government establishes new records in spending and debt, a serious challenge from south of the border threatens the Canadian economy. Alexander Panetta, the CBC’s Washington correspondent, tweeted on Wednesday that he was pressing senators about a proposed provision in the Build Back Better bill that would impose a stiff tariff equivalent on electric vehicles built in Canada for sale in the United States.
When Mr. Panetta asked Sherrod Brown, Democratic senator from Ohio, about a letter Ms. Freeland and International Trade Minister Mary Ng had sent urging senators to drop the restriction, Mr. Brown replied: “I don’t care what Canada thinks.”
If the Senate passes the bill with the EV import restriction in place, the Canadian economy could take a significant hit. And it won’t help that the federal government is threatening to impose retaliatory tariffs in return. Canada cannot win a trade war with the United States, and that trade war will itself damage the economy.
With inflation running at almost 5 per cent, the government this week renewed the Bank of Canada’s mandate to keep it at around 2 per cent. If the inflation rate doesn’t come down soon, governor Tiff Macklem will have no choice but to raise interest rates, which will slow economic growth and cause pain for anyone with a mortgage or other forms of debt.
All this comes amid growing concern within the public service over the Liberals’ lack of interest in generating economic growth, as my colleagues Robert Fife and Steven Chase reported this week.
That lack of concern should come as no surprise. Like his father Pierre, who showed little interest in economic issues, preferring to focus instead on constitutional concerns, the Prime Minister places a low priority on fiscal or monetary policy.
When asked in 2014 whether he would be willing to run deficits as prime minister, he famously replied: “The commitment needs to be a commitment to grow the economy and the budget will balance itself.” On his watch, the budget has never been balanced.
Questioned about rising inflation during the election campaign in August, he said, “You’ll forgive me if I don’t think about monetary policy. You’ll understand that I think about families.”
At some point, voters are going to notice.
Polls have shown over the years that when the economy is the top concern among voters, Conservatives move ahead of the Liberals. But when other concerns push the economy down the list, the Liberals do better.
“Concern about the economy could be the sleeper issue of 2022,” says pollster Nik Nanos of Nanos Research.
“Canadians have seen a Trudeau Liberal government that has spent funds to help Canadians and Canadian enterprises get through the pandemic,” he told me by e-mail, “but there is less of a sense of how it would invest to create jobs and prosperity. Canadians today are more pessimistic about the future than at any time since we have started tracking this.”
The day the economy matters more to voters than the pandemic is a day the Liberals should worry about.
US revises down last quarter's economic growth to 2.6% rate – ABC News
WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.
The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.
The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.
The report suggested that the economy was losing momentum at the end of 2022.
Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.
More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.
Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.
The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.
Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.
The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.
“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”
They added: “We expect a recession to hit in the second half of 2023.”
In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.
Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg
[unable to retrieve full-text content]
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 Bloomberg
Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail
All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?
Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?
Here are some examples of the puzzling behaviour of economic statistics of recent months.
An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.
Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.
Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.
Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.
And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?
And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.
It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.
For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.
As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Pierre Poilievre is neither for nor against the Liberals' industrial strategy. Quite the opposite – The Globe and Mail
As Canadians miss out on benefits, Ottawa promises automatic tax filing is on the way – BNN Bloomberg
US revises down last quarter's economic growth to 2.6% rate – ABC News
Silver investment demand jumped 12% in 2019
Iran anticipates renewed protests amid social media shutdown
Search for life on Mars accelerates as new bodies of water found below planet’s surface
Media16 hours ago
2023 Media Layoff Tracker: Rough Year For Journalism Marked By Increasing Layoffs
News17 hours ago
What is the grocery rebate in federal budget 2023? Key questions, answered
Business15 hours ago
Bank of Canada ‘ready to act’ if financial turmoil spreads
Health17 hours ago
WHO Experts Say Healthy Kids, Teens May Not Need More COVID Shots
Investment18 hours ago
2X Receives Strategic Growth Equity Investment from Recognize
Business18 hours ago
Musk, other tech experts urge halt to further AI developments
Art7 hours ago
Art collector Myriam Ullens killed outside her home in Belgium, allegedly by her stepson – Art Newspaper
Sports16 hours ago
Toronto Maple Leafs vs. Florida Panthers – Game #74 Preview, Projected Lines & TV Info