Though not always seen as his forte, Prime Minister Justin Trudeau does often take big swings on economic narrative, and he did exactly that at a keynote speech this week in Toronto.
Theo Argitis: Trudeau’s big swing on economic narrative sparks both hope and concern
Speaking to the U.S.-Canada Summit — a conference organized by Bank of Montreal and Eurasia Group — Trudeau took the opportunity to outline some of the core thinking and motivations behind his recently released budget, and defend what appears to be a pivot toward a more inward-looking and corporate-heavy set of policy choices, particularly around investment.
While Trudeau and his finance minister, Chrystia Freeland, have a tendency to oversell their decisions as responses to “historic moments,” the current situation does have an element of momentousness to it.
The budget we released last week was all about meeting this moment
Yet some of the other touch points in the speech also reveal just how challenging things will be for Trudeau going forward.
The prime minister took pains, for example, to pitch the costly measures as benefiting all Canadians.
Politically, the Liberals know they will need to convince average Canadians that all this money being allocated to businesses (much of it to foreign corporations) is consistent with their underlying governing philosophy to “choose people every time,” as Trudeau said in concluding his speech.
There are also questions about whether the measures are sufficient to do the job. Trudeau spent much time championing not just the new tax credits but the government’s project-by-project direct involvement in recent investments by large multinational firms such as Volkswagen AG and Nokia Corp.
Then again, at least the government is beginning to think seriously about private investment, an area where it’s struggled to find success these past seven years.
Trudeau characterized his climate measures as an attempt to “crowd in” capital — an apt way of thinking about the problem given how much direct investment our businesses do abroad.
As the world moves away from cheap money, policymakers could become covetous of these monies. That will be especially true as many businesses feel the pull of subsidies south of the border.
But the trend has accelerated, and Biden’s climate transition plan threatens to turn that stream of money going to the U.S. into a flood.
Net direct investment flows between the two countries has favoured the United States to the tune of $320 billion since 2007. About 80 per cent of that “deficit” has come since 2015.
The bulk of these net flows have been driven by Canada’s banks and other financial institutions, which have been keen to grow south of the border. (In manufacturing, for example, Canada continues to draw in U.S. capital.)
Given how much Canadian financial institutions are invested in the United States, it would probably be wise to consider them as critical players in any bid to bring (and keep) capital at home.
Theo Argitis is managing director at Compass Rose Group.
US and Allies Condemn Economic Coercion With Attention on China
(Bloomberg) — The US and five major allies condemned economic coercion and non-market policies regarding trade and investment in a joint declaration that didn’t cite China by name but clearly had Beijing in mind.
The six countries expressed concern about practices that they say “undermine the functioning of and confidence in the rules-based multilateral trading system.”
The message from the US, Australia, Canada, Japan, New Zealand and the UK carries no economic consequences and mirrors one released by Group of Seven nations after a meeting of leaders last month.
A US Trade Representative official, speaking to reporters on condition of anonymity before the statement’s release, said China has been the biggest perpetrator of the behavior condemned in the declaration.
The official mentioned China’s decision to cut off trade with Lithuania in 2021 after that Baltic nation allowed Taiwan to establish a diplomatic office there as an example of the kind of economic coercion that the declaration singles out.
Read More: G-7 Eyes China With New Joint Effort Against Economic Coercion
In response to a reporter’s question, the official rejected any comparison to the US, which has become one of the most prolific purveyors of measures that could be seen as economic coercion, chiefly through financial sanctions and limits on technology exports to countries including China.
US sanctions occurred in accordance with US laws and procedures, and in light of relevant rules and norms, the official said. The declaration makes explicit that it didn’t apply to actions that have “a legitimate public policy objective.”
“These legitimate public policy measures include: health and safety regulations, environmental regulations, trade remedies, national security measures and sanctions, and measures to protect the integrity and stability of financial systems and financial institutions from abuse,” according to the declaration.
Euro zone economy slips into technical recession after German revision
The euro zone economy was in technical recession in the first three months of 2023, data from European statistics agency Eurostat showed on Thursday, after downward revisions of growth in both the first quarter and the final quarter of 2022.
Euro zone gross domestic product (GDP) fell by 0.1 per cent in the first quarter compared with the fourth of 2022 and was 1.0 per cent up from a year earlier, Eurostat said in a statement.
That compared with flash estimates of growth of 0.1 per cent and 1.3 per cent published on May 16. Economists polled by Reuters had forecast on average respectively zero and 1.2 per cent expansion.
The revision was principally due to a second estimate from Germany’s statistics office showing that the euro zone’s largest economy was in recession in early 2023.
The euro zone figure for the fourth quarter of 2022 was also cut to –0.1 per cent from a previous reading of zero. The revisions confirmed that the euro zone was also in a technical recession.
This had been expected towards the end of last year as the euro zone wrestled with high energy and food prices and rising interest rates designed to curb inflation, but initial estimates had suggested the region had avoided this.
Along with Germany, GDP also declined quarter-on-quarter in Greece, Ireland, Lithuania, Malta and the Netherlands.
Eurostat said that household spending stripped 0.1 percentage points, public expenditure 0.3 points and inventory changes 0.4 points from quarterly GDP. Gross fixed capital formation added 0.1 points and while net trade a further 0.7 points as imports declined.
David Rosenberg: Rate hike is nail in the coffin that will bury Canada's debt-heavy economy – Financial Post
The Bank of Canada pulled an RBA and hiked rates on June 7 with the market mostly (call it 60-40) priced for no move and more than 80 per cent of Bay Street economists believing the central bank would hold its fire. This is the same Bank of Canada that surprised the markets at half the meetings in 2022, so it really is back to governor Tiff Macklem’s modus operandi.
The tone was hawkish as the press statement left the potential for another move at the July meeting wide open: the futures market is now priced 70 per cent of the way for another 25 beeper. This even had an impact on United States Federal Reserve pricing: the odds of a rate hike in June are now up to 33 per cent; these odds were at 22 per cent before the Bank of Canada hike. And the odds of a second Fed rate hike in July are now at 18 per cent … these market-based probabilities were sitting at 12 per cent before the Canadian central bank’s announcement.
The yield on the two-year Government of Canada bond soared from 4.36 per cent at the time of the meeting to 4.59 per cent by mid-afternoon (and it was right then that the U.S. Treasury yield curve gapped higher as well).
In its press statement, the Bank of Canada made a big deal of how the economy is doing just fine, even after accounting for population growth. There was an emphasis on how interest-sensitive spending — especially the recent sharp rebound in the housing market — has been resilient in the face of higher borrowing costs. The commentary on stubbornly high inflation was ubiquitous in the statement (“underlying inflation remains stubbornly high”), and the coup de grâce from a forward-looking perspective was “CPI inflation could get stuck materially above the two per cent target.”
Tack on this — “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the two per cent target” — and you can see why the markets think the central bank has at least one more bullet in the chamber. The verbiage of “excess demand in the economy looks to be more persistent than anticipated” was just the cherry on the cake.
The bar has now been raised in terms of what gets the Bank of Canada to stop hiking rates. That is how far we have come in the past two months and change. The 25-basis-point hike took the policy rate up to 4.75 per cent, taking out the 2007 peak and taking it to the highest level since February 2001. Both periods presaged recessions, so the central bank will end up getting the recession it seems to think it needs to crush inflation to the holy grail target of two per cent. And the move off the zero-bound in the past 16 months is the most aggressive monetary tightening we have seen since 1981.
Modern-day John Crow
Indeed, if Fed chair Jay Powell fancies himself as the modern-day Paul Volcker, Tiff Macklem has surpassed even what John Crow managed to achieve in 1989 in terms of such a massive rate hike over such a time frame.
Like the Fed, the Bank of Canada is squarely focused on lagging and contemporaneous indicators. Everything they are staring at was influenced by the crazy-easy policy the central bank pursued one and two years ago. Nothing it does today is going to have an impact on anything until we are well into 2024. And everything the Bank of Canada did last year, and it was significant, will not exert its most biting impact until we are into the summer and beyond.
The lags are important and have yet to play out. The central bank did exercise patience, but not enough. Recession odds have taken a leap forward and putting the final interest rate nail into the coffin will end up burying the debt-heavy Canadian economy, a story we will be reading about later in the summer and fall.
As we have repeatedly said, Canada has been very adept at providing a false glow by publishing decent gross domestic product (GDP) data, but not telling the world that its economy is in secular decline when it comes to per capita GDP, or GDI. This came out loud and clear in the first-quarter productivity data, as real business output per hour worked contracted 0.6 per cent — a tad worse than expected. As in the U.S., companies have overhired relative to their output schedules and order books, but CEOs don’t seem to care, nor do their shareholders.
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This was the fourth consecutive decline in Canadian productivity and the 10th contraction in the past 11 quarters. The year-over-year trend is minus 1.8 per cent, or twice as bad as it is stateside, so as Bay Street economists and the columnists in the media go hog wild with each passing Canadian employment report, maybe they should be asking “what exactly are they being hired to do?”
And get this: the level of productivity was lower in the first quarter of 2023 than it was in the first quarter of 2017. Nice legacy for the Justin Trudeau government. Too bad the only thing the voting public knows is the unemployment rate — “down is good, and up is bad” — and is otherwise clueless about how productivity is the mother’s milk of sustainable economic growth.
Instead, we have had a government more adept at redistributing national income instead of figuring out ways to help the private sector create it.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.
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