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|2010 Bank of England note signed by Andrew Bailey, former Chief Cashier of the Bank.|
A few years ago, Peter Stella and Åke Lönnberg conducted a study that classified national banknotes by the signatories on that note’s face. They found some interesting results. Of the world’s 177 banknotes with signatures (10 had no signature whatsoever), the majority (119) were signed by central bank officials only. Just four countries issue notes upon which the sole signature was that of an official in the finance ministry: Singapore, Bhutan, Samoa, and (drum roll) the United States.
Stella and Lönnberg hypothesize that the signature(s) on a banknote indicate the degree to which the issuing central bank’s is financially integrated with its government. The lack of a signature from a nation’s finance ministry might be a symbol of a more independent relationship between the two, the central bank’s balance sheet being somewhat hived off from the government’s balance sheet and vice versa. The presence of a finance minister’s signature would indicate the reverse, that both the treasury and central bank’s balance sheets might be best thought of as one amalgamated entity.
The nature of this arrangement is significant because if something disastrous were to happen to an independent central bank’s financial health, say its assets were destroyed and all hope of profits dashed for eternity, the central banker should not necessarily expect support from his/her government. Lacking in resources, monetary policy could go off the rails. (Why would it go off the rails? Here I go into more detail).
On the other hand, should it be established by law that a government is to backstop its central bank, that same disaster would pose a smaller threat to monetary policy since the nation’s finance minister, his John Hancock affixed to the nation’s notes, would presumably come to the central bank’s rescue.
These ideas are similar to Chris Sims’s classification of type F and type E central banks (alternative link). One of the features of type F banks (like the Fed) is that “there is no doubt that potential central bank balance sheet problems are nothing more than a type of fiscal liability for the treasury.” On the other hand, with type E banks (like the ECB) “it is not obvious that a treasury would automatically see central bank balance sheet problems as its own liability.”
So is it the case that the Federal Reserve is actually more fused with the U.S. Treasury than other central banks are? One reading of the Federal Reserve Act might indicate yes. Section 16.1 stipulates that Federal Reserve notes are ultimately obligations of the US government:
Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.
The language in the above phrase would seem to indicate that should the Fed find itself incapable of exercising monetary policy (Stella and Lönnberg use the term policy insolvency), the US government is obliged to step in and make good on the Fed’s promises, however those promises might be construed. The fact that Treasury Secretary Jacob Lew’s signature appears on all paper notes, as does that of U.S. Treasurer Rosa Gumataotao Rios, can perhaps be taken as an indication of this guarantee.
Bank of Canada notes, on the other hand, are signed by the Governor of the BoC and his deputy. Finance Minister Flaherty’s signature is nowhere in sight. This jives well with a quick reading of the Bank of Canada Act, which stipulates that though notes are a first claim on the assets of the Bank of Canada, the government itself accepts no ultimate obligation to make good on banknotes. In theory, should the Bank of Canada cease to earn a profit from now to eternity, Canadian monetary policy could go haywire—American monetary policy, backstopped by the Treasury, less so.
Other central banks go even further in formalizing this separation. In Lithuania, for instance, the law states that: “The State of Lithuania shall not be liable for the obligations of the Bank of Lithuania, and the Bank of Lithuania shall not be liable for the obligations of the State of Lithuania.” Should Leituvos Bankas hit a rough patch, so will its monetary policy.
Stella and Lönnberg correlate the rise of independent central banking with a movement away from the printing of finance minister signatures on notes. For instance, the sole signature on Euro banknotes is that of the President of the ECB, Mario Draghi. Two of the currencies replaced by the Euro, the Irish punt and the Luxembourg franc, which had carried signatures of finance department officials, no longer exist, symbolic evidence of the Euro project’s dedication to central bank independence.
Sims uses the ECB as an exemplar of type E central banks because “the very fact that there is a host of fiscal authorities that would have to coordinate in order to provide backup were the ECB to develop balance sheet problems suggests that such backup is at least more uncertain than in the US.” For evidence, he points to the fact that the Fed carries just 1.9% of its balance sheet in capital and reserves while the ECB holds 6.7%.
Stella and Lönnberg hint at the prevalence of a “rather singular U.S. view of central bank and treasury relations.” My interpretation of this is that most conversations about central banking are inherently conversations about the the world’s dominant monetary superpower, the Federal Reserve. This is surely evident in the blogosphere, where we mostly talk as-if we were Bernanke, not Carney or Poloz or Ingves (Lars Christensen is a rare counter-example who is fluent in multiple “languages”). In the same way that all Americans only understand English while all foreigners are conversant in English and their native tongue, non-American commentators like me can’t talk solely in terms of our own central bank (in my case the Bank of Canada) lest we fall out of the conversation. The Fed becomes our focal point.
Yet among central banks, the Fed is an odd duck, since the wording in the Federal Reserve Act and the signature on its notes would indicate a more well-integrated financial relationship between central bank and treasury than most. The upshot is that popular conceptions of the central banking nexus will often be wrong as they will be couched in terms of the U.S.’s integrated viewpoint, whereas most of the world’s central banks are not structured in the same way as the U.S. A deterioration of the Fed’s balance sheet would likely be neutral with respect to monetary policy, but for many of the world’s nations this simply isn’t the case.
On a totally unrelated side note, I found it interesting that Bank of England notes stand out as being signed by the Chief cashier of the Bank, not the governor. When the BoE opened its doors for business in 1694, the banknotes it issued were written on blank sheets of paper, often for unusual quantities (standardized round numbers were not introduced till the 1700s). The bank’s directors and its governor, usually well-established bankers who simultaneously ran their family business, were not responsible for the BoE’s day-to-day operations, this being devolved to the bank’s cashiers who were given the repetitive task of signing each note by hand. Even when the ability to print signatures directly on to notes was developed in the 1800s, the practice of affixing the cashier’s signature continued, despite the fact that mechanical process would make it easy for the higher-ranked governor to get his name on each note.
So while Mark Carney’s route from the BoC to the BoE got him a higher salary, more prestige, and posher digs, in one respect his standing has deteriorated: there are no longer millions of bits of paper circulating with his name on them. Chief cashier Chris Salmon has that distinction.
Economists at Citigroup Inc. and Nomura International Plc say the strongest growth since 2007 will prompt the U.K. to lift its benchmark from 0.5 percent as soon as this year. Money-market futures show an increase in early 2015. That’s at least three months before the contracts indicate Federal Reserve Chairman Janet Yellenwill raise the target for the federal funds rate. European Central Bank PresidentMario Draghi and Bank of JapanGovernor Haruhiko Kuroda are forecast to maintain or even ease monetary policy.
“Carney and BOE officials will be looking at the domestic recovery, and if that is strong enough, then they will feel comfortable increasing rates before the Fed,” said Jonathan Ashworth, an economist at Morgan Stanley in London and former U.K. Treasury official. “Tightening by the major developed central banks will be gradual, and they will be aware of what everyone else is doing.”
The BOE will lift rates in the second quarter of 2015 and the Fed will increase in 2016, Morgan Stanley predicts.
This wouldn’t be the first time Carney, 48, has broken from the pack. As governor of the Bank of Canada, he abandoned a “conditional commitment” to keep rates unchanged until July 2010, citing faster-than-expected growth and inflation. He delivered a rate increase in June of that year, putting him ahead of other Group of Seven central bankers.
The risk of being first this time is that the divergence pushes up the U.K.’s currency and bond yields, threatening to choke off its economic upswing.
Acting before the Fed — now led by Yellen, who was sworn in today as chairman — “would require a very big stomach for having sterling rise,” former BOE policy maker Adam Posen said in a Jan. 8 interview.
While all economists surveyed by Bloomberg News predict BOE policy makers will leave their official bank rate unchanged when they meet Feb. 6, Carney may seek to quell expectations for increases when he releases new economic predictions Feb. 12.
Investors pushed up Britain’s borrowing costs as consumer spending powered the economy back from recession. The pound has already climbed to the highest level in more than 2 1/2 years against the dollar, and the extra yield investors demand to hold 10-year U.K. government bonds over similar maturity German bunds widened to 1.13 percentage points last month, the most since 2005 based on closing prices. Both may undermine growth.
“There’s no immediate need” to raise rates, Carney said on Jan. 25 at the annual meeting of theWorld Economic Forum in Davos, Switzerland. He added that any eventual increases will be gradual.
With Britain expanding 1.9 percent in 2013, matching U.S. growth, money managers are switching their focus to when key central banks will start tightening policy.
The Fed, which has a dual mandate of price stability and full employment, said last week it probably will keep its target rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.
Joblessness dropped to 6.7 percent in December from 7 percent the previous month; part of the reason for the decline is Americans who are giving up on finding work. Prices rose at a 1.1 percent annual pace in December, according to the Fed’s preferred inflation gauge.
The BOE focuses on achieving price stability in the medium term by meeting its 2 percent inflation goal. Last month was the first time since November 2009 (UKRPCJYR) that price growth cooled to that level after hitting 5.2 percent in September 2011.
Weak inflation prompted the ECB to cut its benchmark to 0.25 percent in November, and Draghi said in Davos the central bank would be willing to act against deflation or unwarranted tightening in short-term money-market rates. The ECB’s Governing Council meets the same day this week as the BOE.
In Japan, nineteen of 36 economists surveyed by Bloomberg last month see the central bank expanding already unprecedented stimulus in the first half of this year as officials aim to drive Asia’s second-biggest economy out a 15-year deflationary malaise.
The yield difference between U.K. and German 10-year bonds widened one basis point to 1.06 percentage points as of 11 a.m. London time, after reaching 1.13 percentage points on Jan. 28.
The pound slid for a fifth day against the dollar after a purchasing-management survey showed manufacturing growth slowed last month. ING Bank NV economist James Knightley said the report, by Markit Economics, remains “consistent with very strong growth,” with domestic demand and export orders both improving. The U.K. currency fell 0.6 percent to $1.6341 as of 12:48 p.m. London time. It reached $1.6668 on Jan. 24, the highest level since April 2011.
“The market is pricing in that the BOE will raise rates first, and the Fed will follow three to six months after,” said Jamie Searle, a strategist at Citigroup in London. “The ECB, if anything, is going in the other direction. This will build on the policy-rate divergence that we’ve already seen, which will lead to an unprecedented decoupling in bond rates.”
Such a split has drawn criticism from emerging markets, some of which have been roiled in the past month after the Fed’s announcement of a reduction in its monthly bond purchases combined with signs of a slowdown in China to unnerve investors.
“International monetary cooperation has broken down,” India central bank Governor Raghuram Rajan told Bloomberg TV India on Jan. 30. Industrial countries “can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”
There’s precedent for the BOE to take action ahead of the Fed. The Monetary Policy Committee raised its benchmark in November 2003 and again three more times before the U.S. central bank boosted the rate on overnight loans among banks in June 2004 for the first time in four years. That action helped push sterling up about 9 percent against the dollar.
Between 2007 and 2011, policy makers in London lagged behind their American counterparts in cutting rates and adopting emergency policy measures in response to the financial crisis.
“Traditionally, Fed and BOE policy are quite closely synchronized, but if current trends are maintained, then there will be more than enough data and evidence to justify a BOE increase,” said Stuart Green, an economist at Banco Santander SA in London.
U.K. mortgage approvals rose in December to the highest level in almost six years as a revival in the housing market bolstered the economic rebound. Consumer confidence has improved, and Chancellor of the Exchequer George Osborne hailed signs of a manufacturing pickup in a speech last month.
“The BOE should welcome the opportunity to have a small normalization from an emergency policy setting which isn’t really justified anymore,” Green said.
Carney’s credibility is under pressure after official data show the U.K. jobless rate fell to 7.1 percent in the three months through November from 8.4 percent in the quarter through November 2011. That’s on the verge of the 7 percent he and colleagues identified last August as a threshold that would trigger a discussion about higher interest rates — something they initially didn’t anticipate would happen until 2016.
The BOE governor has signaled he will revise forward guidance next week, when economists say the central bank also will increase its growth forecasts. Among Carney’s options: setting a timeframe for low rates, changing the unemployment threshold, following the Fed in releasing policy makers’ rate forecasts or introducing a broader range of variables to inform decisions.
Simon Wells, a former Bank of England economist, isn’t convinced the BOE will act before the Fed. Unlike the U.S., the U.K.’s output still is below its pre-crisis peak, while workers face cuts in inflation-adjusted pay and are professing sensitivity to the cost of living. An election in May 2015 and the stronger pound also pose obstacles
“There is more willingness to give growth a chance,” said Wells, currently chief U.K. economist at HSBC Holdings Plc., who doesn’t expect the central bank to raise rates before the third quarter of next year.
Carney does have more flexibility now that inflation is back to the 2 percent target. The risk is if unemployment keeps declining, price pressures may re-emerge, especially if joblessness is dropping because of sluggish productivity. Output per hour slid in the third quarter and may leave the economy less inflation-proof.
“We do not believe the MPC can ignore the data and delay,” said Philip Rush, an economist at Nomura in London, who forecasts a rate increase in August. “Surging job creation is lowering unemployment without a commensurate supply-side improvement, so spare capacity is being rapidly used up. This is what matters to the BOE.”
To contact the editor responsible for this story: Craig Stirling at email@example.com
Canada’s inflation rate quickened somewhat to 1.2 per cent in December, higher than November’s level but still low by historical standards.
Statistics Canada said Friday the consumer price index was led higher by gasoline, which was 4.7 per cent more expensive at the end of 2013 than it was at the end of 2012.
The loonie reacted mildly positively to the news, trading up about a quarter of a cent to 90.34 cents US.
Six of the eight categories of items that Statistics Canada tracks the price of were higher.
Prices increased in every province except B.C., where they were flat.
Loonie inches higher
If pump prices are stripped out, inflation would have come in at 1.1 per cent.
That’s still within the band of between one and three per cent, where the Bank of Canada likes to see the rate stay, but it has been on the lower end of that range for a while.
In its latest interest rate decision, the central bank said it expects inflation to remain subdued for a while yet.
Canada’s inflation rate averaged 0.9 per cent last year. That’s down from 1.5 per cent in 2012 and the softest rate since during the recession in 2009.
“When we are already below [our inflation] target, as we are today, we care more about downside risks than upside ones,” Bank of Canada governor Stephen Poloz said earlier this week.
That’s the central bank’s way of saying it’s less concerned about prices rising to fast, and instead focused on ensuring the economy doesn’t slip any further into disinflation or even deflation.
There’s a lag time of a few months before the impact of Canada’s lower loonie is likely to show itself in inflation data. So economists are expecting the inflation number to come in on the low end of the central bank’s target range for the next several months.
“The inching up in year-on-year [inflation] should not give the [central bank] very much solace on inflation,” Scotiabank said in a commentary Friday morning.
“We don’t expect annual CPI to remain above 1 per cent for too long,” the bank said.
RBC lowers fixed mortgage rates 2:15
(Note: CBC does not endorse and is not responsible for the content of external links.)
RBC has cut two-, three, four- and five-year fixed mortgage rates by 10 basis points after a slide in Canadian bond yields.
Other Canadian banks will be watching the change and could move Monday to follow.
RBC posted the new rates over the weekend on its website. RBC’s discounted five-year fixed rate is now 3.69 per cent, though it may discount that rate for preferred customers.
Five-year fixed mortgage rates rose industry-wide for much of 2013 with an uptick in August helping to cool the overheated housing market.
The five-year rate is an important measure because it is the rate used to qualify borrowers for CMHC financing and for variable and other fixed-rate terms.
The new rate reflects the lowering of Canadian bond yields by 26 basis points in January, which mirrors the slide in yields on U.S. bonds. Bank borrowing costs rest in part on bond yields.
The Bank of Canada has not changed its key overnight lending rates to the banks – it will announce its latest decision on interest rates on Wednesday.
Bond yields rose when the U.S. Federal Reserve decided in December to taper its bond-buying program to $75-billion US a month, but the market has since absorbed the change. However, further Fed tapering or changes in the U.S. economic outlook could lead to fluctuation in the bond markets later this year.
The small change in rates won’t have much impact on home buyers at a time when rates are so low, says one mortgage broker.
“From a mortgage broker’s perspective and probably from a lot of homeowners’ perspective, the real question is not necessarily interest rates,” said Jason Scott of The Mortgage Group in Edmonton.
“It’s got more to do with what the finance minister and the department of finance will do vis-a-vis making it harder to qualify for a mortgage if they don’t like the fact that rates are low and they’re concerned about a possible housing bubble.”
Finance Minister Jim Flaherty has expressed concern at Canada’srapidly rising housing prices and has taken a series of measures over the last two years to cool them, including demanding higher downpayments and limiting most mortgage terms to 25 years.
The loonie continued its long slide Wednesday, hitting a fresh four-year low against the U.S. dollar.
The Canadian dollar was trading at 92.58 cents after falling more than a cent Tuesday to its lowest close since late 2009.
The slide followed a spate of bad news about Canada’s economy. The Ivey Purchasing Managers Index, a measure of economic activity, came in much lower than expected for last month, at 46.3, compared to 53.7 the month before. A reading below 50 suggests economic contraction.
Canada’s trade deficit numbers also spooked the markets, with Statistics Canada reporting Tuesday that the country’s overall trade deficit with the world grew to $940 million in November as imports rose to $40.7 billion, while exports were unchanged at $39.8 billion.
The deficit came as the results for October were also revised to show a deficit of $908 million compared with an initial report of a surplus of $75 million for the month.
Meanwhile, U.S. economic data has been positive, further pressuring the loonie downwards.
Payroll firm ADP reported the U.S. private sector created 238,000 jobs during December. That data came two days before the release of the U.S. government’s employment report for last month. Economists expect it will show the economy created about 195,000 jobs in total.
International traders are certainly bearish on the Canadian dollar. The Globe and Mail reports the amount of money being placed in bets against the loonie is nearing extremes, with about US$5.5 billion currently invested against it.
Investment bank Goldman Sachs forecast late last year the Canadian dollar could hit 88 cents U.S. in 2014.
Meanwhile, Bank of Canada governor Stephen Poloz doesn’t appear in any hurry to raise the Bank of Canada’s trend-setting rate. In an interview on CBC on Tuesday, he denied he was under international pressure to raise rates.
Federal Finance Minister Jim Flaherty suggested in a recent interview that there would be such pressure as a result of Fed tapering.
Poloz did say that Fed tapering will inevitably put pressure on Canadian bond yields, likely leading to an increase in long-term fixed mortgage rates even if the Bank of Canada does not increase its benchmark rate.
— With files from The Canadian Press
A recent piece in the Financial Post titled “How many times can economists cry wolf about interest rates” caught my interest because I – like many economists in Canada – have been expecting interest rates to eventually start to rise and yet they do not. So when will Canadian interest rates start to go up? My knowledge of money and banking and monetary economics is pretty rudimentary but I’m feeling adventurous in the New Year.
However, money supply growth needs to be considered in the context of the growth of the economy and money demand. Figure 2 presents a more interesting picture by taking the ratio of M2 to GDP for the period 1871 to 2013. From a ratio of just under 0.2 in 1871, the M2 to GDP ratio has grown over time. Recent years have seen it grow to the highest it has ever been. Of course, the period from 1870 to 1930 reflects the growth and development of the modern Canadian financial intermediary sector and monetary sector and the rise in the ratio reflects this. However, the period since 1935 represents the “modern Canadian banking era” in that the Bank of Canada has been in existence during that period.
Figure 3 presents a graph of the trend setting Bank of Canada interest rate and it shows a hump shaped pattern with the lowest interest rates in the period from 1935 to the mid 1950s and since 2009 and the highest rates in the period from the mid 1970s to the early 1990s. On the other hand, since the Second World War, the M2/GDP ratio has shown an approximately u-shaped pattern with lowest M2/GDP ratios in the mid to late 1960s. If the two are juxtaposed as in Figure 3a and taking into account that there is probably a lag between a drop in M2/GDP and the subsequent rise in interest rates, it appears that the peak in interest rates occurs after the low point in the m2/GDP ratio in the late 1960s. If you take the first differences of the M2/GDP ratio and the Bank of Canada rate over the period 1935 to 2013 and plot them against each other (as in Figure 4) and fit a linear trend, you do get a slight inverse relationship. That is, a higher money supply to GDP ratio is correlated with lower interest rates. However, I admit this is a pretty noisy picture. Moreover, this discussion focuses just on Canada and international economic and monetary conditions play a role in the Canadian economy. It would be interesting to see how the performance of Canada’s M2 to GDP ratio over time compares to other countries.
We have been expecting interest rates to rise for several years now because GDP has recovered somewhat from the 2009 financial crisis and the Canadian economy is growing. As a result, one might expect a growing demand for money and credit to fuel rising interest rates. However, money supply – as measured in this case by M2 – is still growing faster than GDP. I think we will see interest rates start to increase provided first that GDP continues to expand and then the M2/GDP ratio starts to drop. However, its not enough that this happens just in Canada – it would also need to happen on a global scale. I don’t think that is going to happen anytime soon. For example, look at Japan.
OTTAWA – Wait until next year.
It’s a familiar refrain for sports teams, but the premise is getting old for Canadians awaiting the return of an economy that can be counted on for jobs, solid incomes and financial security.
As far back as 2010, the Bank of Canada held out the prospect of better times in the year ahead. But unexpected events — whether it was a tsunami in Japan, a debt crisis in Europe, or political shenanigans in Washington — always took the shine off the optimism.
“If you were looking for a theme song for the Canadian economy, it would either be ‘With a Little Help from my Friends,’ or, alternatively, Led Zeppelin’s ‘The Song Remains the Same,’ ” says Craig Alexander, TD Bank’s chief economist.
He says we’re still waiting for a hand-off from consumer-driven growth.
“We are going to eventually get this rotation toward exports and business investment and away from real estate and consumer spending. We said that would happen in 2013. It didn’t happen. Now we’re saying it is going to start next year,” Alexander said.
TD, like the Bank of Canada and a consensus of economists, is estimating growth will rebound to about 2.3 per cent in 2014. That would follow two years of sub-par growth at 1.7 per cent in 2012 and an estimated 1.7 per cent growth this year.
The improvement foreseen for 2014 is not much of a bump and won’t lead to massive job creation and steep income growth. But the difference between 1.7 per cent and 2.3 per cent is important.
The Bank of Canada believes economy has the “potential” to grow about two per cent. At 1.7 per cent, the economy has underachieved its potential whereas, at 2.3 per cent, the economy can eliminate slack and head toward full recovery.
The central bank thinks 2015 will see the gap close further with 2.6 per cent growth, enabling the economy to return to health by the middle or the end of that year.
The other important distinction is the composition of growth.
According to the central bank and others, 2014 will be the year the economy finally enters the zone of what Bank of Canada governor Stephen Poloz calls self-generating, self-sustaining “natural growth.”
That is critical because Canada, for the past three years, has experienced a kind of un-natural recovery.
Yes, it has recouped all it lost during the recession in terms of output and jobs, but a persistently low inflation reading and continuing slack in production capacity suggest something has not been quite right.
Growth was achieved primarily at first because federal and provincial governments pumped tens of billions of dollars into the economy — all of it borrowed.
The Bank of Canada — as well as its U.S. counterpart — has also kept interest rates at or near rock bottom, encouraging businesses and households to borrow money and spend.
Snatch away the stimulus measures and Canada, some say, would most likely still be in recession.
CIBC chief economist Avery Shenfeld there was nothing fundamentally amiss about Canada’s domestic economy before 2008 when the world’s financial system was dealt a severe blow by a meltdown in the U.S. real estate, which spread to banking and other industries.
While Canada’s economy initially emerged from the 2008-9 global recession in relatively good shape, it has limped along more recently amid weakened demand for many of the country’s major exports.
“Part of the reason Canada hasn’t seen the lift in capital business spending is because the rest of the world has disappointed us,” Shenfeld said.
“Interest rates have been low, financing has been available, but unless you are sure the product demand is going to be there, it’s hard to trigger a boom in capital spending. So a brighter global economy could see a return in capital spending in the resource in sector, which is part of that rotation that’s been missing.”
That’s where a little help from our friends, particularly the United States where 75 per cent of exports end up, will go along way to curing Canada’s ills, say analysts.
Optimism for 2014 is tied to how quickly the U.S. recovers and how much that boosts Canadian exports. The Royal Bank is among the most optimistic, pencilling in a 2.6 per cent expansion next year, and 2.7 the year after that, which will more quickly close the output gap and get the Bank of Canada to raise interest rates in 2015.
Exporters will also benefit from a swooning loonie, analysts say, because, by comparison, the U.S. economy will outperform Canada’s. The loonie has already lost about six per cent in value in the past year and now hovers around 94 cents US. By many estimates, it could be at least as low as 90 cents by the end of 2014.
With all these factors in Canada’s favour, it’s a wonder the economy won’t do better. But the Bank of Canada has noted that exporters haven’t kept pace, given the rebound in the United States, so they won’t likely benefit as much in 2014 as they have historically.
Part of the reason, says governor Poloz, is that the country lost about 9,000 exporting companies in the aftermath of the 2008-09 recession.
Alexander, TD’s chief economist, lists other factors: an increase in the number of right-to-work states in the U.S. that have brought down labour costs; a shale oil and gas revolution; and low gas prices that have decreased energy input costs for a lot of U.S. manufacturers.
“And we’ve had really strong productivity growth in the U.S.,” Alexander added. “So U.S. manufacturing is far more competitive than it was before and that makes it much tougher for Canadian exporters.”
The consensus view assumes that the modest pick up in exports, which will lead to companies investing in machinery and equipment in order to become more competitive exporters, won’t be counterbalanced by a retrenchment in the household sector and in housing.
Taking the contrary view, as does David Madani, the chief analyst at Capital Economics, leads one to the conclusion that 2014 won’t be any different from 2012 and 2013 in terms of aggregate economic growth — even if the composition is healthier.
With the housing market overbuilt and household debt at record levels — 164 per cent of annual aftertax income — Madani expects a bad year for the construction industry and a slowdown in consumer spending, which makes up the majority of the economy.
“So you have a situation where weakness in housing and slower household consumption growth is now offsetting the improvement in exports and perhaps business investment,” Madani says.
Rather than improving, Madani thinks the economy will deteriorate further to 1.5 per cent growth, which may cause the Bank of Canada to cut interest rates further and even push Finance Minister Jim Flaherty off his austerity drive — although he admits that’s a long shot.
Madani’s advice. Wait till next year and, by next year, he means 2015 or even 2016. By then there will have been a correction in housing and global demand may be strong enough to make more of a difference to Canada.
By David Ljunggren
OTTAWA (Reuters) – The Canadian economy showed unexpected strength in October, growing for the fourth month in a row and boosting market hopes that the country might finally be shaking off the worst of the great recession.
Statistics Canada said on Monday the economy had grown by 0.3 percent from September. Analysts had forecast a 0.2 percent advance after September’s 0.3 percent increase.
Although Canada regained most of the jobs it lost since 2008 and 2009, growth has been largely sluggish, prompting the Bank of Canada to make clear it will not raise its key interest rate until it sees signs of a firm recovery.
The economy has posted growth every month this year apart from June.
The output of goods-producing industries grew by 0.4 percent in October on higher manufacturing while service industries output climbed by 0.3 percent as almost all major industrial sectors registered growth.
“Canada’s economy is showing sustained strength for the first time since the early days of the recovery,” said BMO Capital Markets economist Sal Guatieri.
The Bank of Canada has said annualized GDP growth in the fourth quarter will be 2.3 percent, down from 2.7 percent in the third. Guatieri, though, said October’s data suggested fourth quarter growth could be around 2.6 percent.
“Importantly, this would mark the first quarter since early 2011 that GDP has posted successive increases above two percent – that is, above potential,” he said in a note to clients.
Manufacturing output grew by 1.3 percent in October while wholesale trade and retail trade advanced by 1.4 percent and 0.3 percent respectively. Construction, as well as mining, quarrying and oil and gas extraction, were unchanged.
The economy grew by 2.7 percent from October 2012, up from September’s 2.4 percent year-on-year advance.
Peter Buchanan of CIBC World Markets said the 0.3 percent increases in both October and September “suggest a fairly decent start for the economy to the fourth quarter.”
The data helped push the Canadian dollar higher and by 9.40 am (1440 GMT) it was at C$1.0601 to the U.S. dollar, or 94.33 U.S. cents, up from Friday’s close of C$1.0648 to the greenback, or 93.91 U.S. cents.
The Bank of Canada is worried about the risks posed by the persistently low inflation, which in November was just 0.9 percent, well below the central bank’s target of 2 percent.
The Bank has kept its key overnight interest rate unchanged at 1 percent since September 2010, citing in part the inflation rate and the underperforming economy.
A Reuters poll of primary dealers late last month showed that most did not expect the bank to raise rates until the second quarter of 2015.
(Reporting by David Ljunggren; Editing by Nick Zieminski)
By Louise Egan
OTTAWA (Reuters) – Canada’s annual inflation rate crept up to 0.9 percent in November from 0.7 percent in October but it remained below the central bank’s target range, ensuring that chronically weak inflation will stay on policymakers’ radar as a top concern.
The Canadian dollar weakened to a 3-1/2-year low against the U.S. dollar after the Statistics Canada inflation report, which confirmed analysts’ expectations that steep discounting by retailers around “Black Friday” would prevent inflation from gaining much momentum in the near term.
A separate report from Statscan on retail sales in October showed unexpected weakness in the sector as purchases of cars declined.
The consumer price index was flat month on month, with the annual CPI rate pushed higher mainly by shelter and food costs, while prices fell for health and personal care as well as for clothing and footwear.
But the annual core CPI, closely watched by the Bank of Canada because it excludes volatile items such as gasoline and food, slipped 0.1 percentage point in the month for an annual rate of 1.1 percent.
Both the total and core inflation rates were slightly below market expectations of 1.0 percent and 1.2 percent, respectively.
“From a policy perspective, (it) helps fuel the growing narrative that the Bank of Canada is becoming increasingly more dovish,” said Mazen Issa, a strategist at TD Securities.
“Certainly the risk that the bank adopts an explicit easing bias in January continues to grow and this report lends further credence to that view,” he said.
Bank of Canada Governor Stephen Poloz told Reuters this week the bank’s stance on monetary policy is neutral, but he acknowledged it is “having trouble explaining” why inflation is so weak, as well as being puzzled by poor exports and business investment in the context of an improving U.S. economy.
The bank first explicitly stated an increased concern about low inflation in its October 23 interest rate decision, when it shifted into a neutral after 18 months of leaning towards rate hikes.
This month, it warned that heightened competition in the retail sector appeared more persistent than anticipated.
More retailers in Canada, including Target Corp (TGT.N: Quote) and Wal-Mart Stores Inc (WMT.N: Quote), have been running Black Friday sales in November even though Canadians celebrate Thanksgiving in October, as they try to keep customers from crossing the border for better deals.
In the United States, this shopping season is expected to be the most competitive since the financial crisis of 2008, with retailers discounting heavily to woo cautious shoppers.
Inflation has been below the Bank of Canada’s 2 percent target for 19 months. For seven of the past 13 months it has been below the 1 to 3 percent range the bank tolerates.
The latest figures suggest inflation will be below the Bank of Canada’s latest estimate of 1.3 percent average CPI in the fourth quarter. The bank will update its forecasts on January 22.
“I do think the real story here is on core inflation, the fact that we’re now just about scraping the very low end of the comfort zone for the Bank of Canada, and I do think it’s largely due to the heavy duty discounting we’re seeing among a number of retailers,” said Doug Porter, chief economist at BMO Capital Markets.
“So it’s a fairly big miss by the bank on core inflation.”
The Canadian dollar weakened after the report to C$1.0700 to the greenback, or 93.46 U.S. cents, from Thursday’s close of C$1.0666, or 93.76 U.S. cents.
RETAIL VOLUMES TO FUEL GROWTH
Retail sales unexpectedly fell by 0.1 percent in October from September as a downturn at car dealerships offset upbeat supermarket sales. Market analysts had forecast a 0.2 percent increase in monthly sales.
The weak reading followed three straight months of gains as four of the 11 retail subsectors declined.
However, in volume terms, retail sales grew 0.2 percent in October.
The data, combined with strong readings in manufacturing and wholesale trade in October, suggest the economy will grow at a healthy clip in the fourth quarter, although below the 2.7 percent annualized growth seen in the third.
Overall sales at motor vehicle and parts dealers fell 1.9 percent. New car sales slid 1.6 percent after a 4.6 percent surge in the previous month. Gasoline station sales fell 1.6 percent.
On the other hand, food and beverage stores registered a 1.7 percent jump in sales.
Total sales excluding the auto sector grew 0.4 percent.
Just weeks after investment bank Goldman Sachs advised clients to bet against the loonie, global currency traders appear to be doing just that.
Bets against the loonie surged by more than a third in one week, the Globe and Mail reports. According to numbers from the U.S. Commodities Futures Trading Commission, there were $5.4 billion in short positions against the Canadian dollar last week, up by $1.5 billion in a week.
That’s the highest number of bets against the loonie since last spring, when short positions against the currency hit an all-time high.
There are numerous reasons analysts expect the loonie to keep falling, chief among them weakness in resource prices. Canada’s dollar generally tracks commodity prices.
In its report, Goldman Sachs noted that Canada has had a trade deficit — which normally means a declining currency — for the past five years. But the country avoided a sinking loonie because of the strength of its financial system, which attracted a lot of foreign investor money.
That foreign investment has now hit the brakes, Goldman Sachs said, and that’s reflected in a declining Canadian dollar.
A weaker dollar could be bad news for cross-border shoppers and people traveling abroad during the holiday season. Some travel companies are already considering slapping a “currency surcharge” on the price of package vacations. Many of these companies’ costs are in U.S. dollars.
But what’s bad news for travelers could be good news for retailers, who can expect to see more shopping at home if prices in the U.S. are higher for Canadians.
The loonie has been on a downward trajectory for much of the year, hitting its high point for 2013 in January, at above $1.01 U.S., before declining to around the 94-cent U.S. mark in recent weeks.