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The Conference Board of Canada is calling the decline in the Canadian dollar the economic story of the year so far, predicting further declines as the Canadian economy underperforms.
The loonie began the day stronger on Thursday, rising to 91.48 US in early trading, up from its close of 91.37 US yesterday. It closed up 0.16 of a cent to 91.53 cents US.
The Canadian currency fell 6.6 per cent in 2013, after trading at par with the greenback in February, and is down more than three per cent since the beginning of the year.
‘Markets are betting that the Canadian economy will continue to underperform’– Glen Hodgson, Conference Board
The Conference Board, an economic and policy think tank, said the falling dollar is a sign of lack of confidence in Canadian growth prospects.
“Arguably more important than the value of the loonie is the signal it sends about the Canadian economy. Markets are betting that the Canadian economy will continue to underperform,” chief economist Glen Hodgson said in a report released today.
“This assessment is consistent with our own forecast, which calls for U.S. gross domestic product to grow by 3.1 per cent in 2014, much better than Canadian growth of 2.3 per cent,” he continued.
Hodgson is not the only economist predicting Canada’s GDP growth will underperform the U.S. Towers Watson’s annual survey of Canada’s top economists and analysts found most believe Canada will lag the U.S. in both economic activity and job creation over the next few years.
Too many plant closures
“With a lower Canadian dollar, there is hope that manufacturing businesses, and certainly the export sector of the economy, can contribute to reducing the unemployment rate in the next few years,” said Janet Rabovsky, Towers Watson director of investment consulting.
“That being said, recent announcements about industrial plant closures in Ontario would indicate that the cycle has not yet turned.”
Hodgson agreed that it is not clear if Canadian exporters will be able to fully capitalize on a weaker dollar because of the loss of capacity in the manufacturing sector since 2008.
There have been deep slashes in export-dependent industries — such as autos and parts — and a shift of much U.S. production to the southern states, so Canadian suppliers may not benefit as quickly as in the past from the U.S. recovery, he said.
He also points to the hit consumers may take from higher prices.
TD chief economist Craig Alexander said the U.S. Fed’s “decision to taper asset purchases has greased the skids under an already depreciating loonie.”
Traders rush back to U.S. dollar
The Fed decided in December to taper its U.S. bond-buying program to $75 billion US a month and as good economic news out of the U.S. continues to roll in, it is expected to continue tapering.
But that has encouraged traders to buy the U.S. dollar, leading to a rush away from the Canadian dollar.
“However, the fundamentals are not Canadian-dollar positive either, and the loonie likely has further to fall,” Alexander said in a research note.
BMO chief economist Doug Porter predicts a falling dollar will actually help boost Canadian GDP in the long-term – as much as 1.5 percentage points over the next two years if the loonie falls to 90 cents or lower.
“There are definitely losers, such as consumers, travellers, utilities, broadcasters, sports teams. But there are also lots of winners. The beleaguered manufacturing and domestic tourism sectors will find the biggest relief from the weaker currency. Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency,” he said.
People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)
Further measures should be considered to encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.
International Monetary Fund
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The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.
The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 percent for the country next year.
Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.
Some analysts have credited the system for providing much-needed confidence in Canada’s housing sector during the 2008–09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.
The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.
“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.
“We suspect the fact that banks may benefit from government-backed insurance on mortgages … it sort of makes it easier for banks to do mortgages than other kinds of lending which, presumably, we think, is going to be more useful for the real economy.”
CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the U.S., particularly prior to the crisis, but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.
“In this case size matters,” he said. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.
The Washington-based financial institution said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”
It cautioned, however, that if any structural changes are made, they should be gradual to avoid unintended consequences.
The IMF report, released Wednesday, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.
In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 percent level to 2.3 next year.
A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, which is projecting Canadian real GDP will grow 1.8 percent in 2013, 2.4 percent in 2014, and 2.6 percent in 2015—assuming strong growth in the United States.
The Bank of Canada forecast holds that the risks are balanced—meaning there is as much chance the projected growth rate will be higher as lower.
But the IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.
“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster-than-expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.
“Protracted weakness in the euro area economic recovery and lower-than-anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added.
On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.
Cardarelli stressed the importance of investing in the energy sector, an industry that he said would have a significant impact on the organization’s economic forecasts in the future.
“We really feel that the system is stressed in terms of the transportation capacity—the ability of moving these resources out of Alberta, British Columbia, and Saskatchewan,” he said at a news conference in Toronto.
Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.
And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.
That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.
With files from The Canadian Press
Canada no longer knows how to sell anything to the world except oil and gas.
Okay, that’s an exaggeration, but if things keep going the way they are, it won’t be for long.
StatsCan’s latest numbers on Canada’s trade balance, released Thursday, look positive on the face of it: Exports and imports both grew, and Canada’s trade deficit with the world shrank by more than half, to $435 million.
But dig a little deeper into the data, and what you see is a story of two different export sectors. As BMO chief economist Doug Porter put it in a client note Friday morning, “there is energy (doing just fine) and there is everything else (doing anything but fine).”
While energy exports have seen a $63.6-billion surplus for the past 12 months, everything else has seen a $72.9-billion deficit.
Check out this chart of Canada’s trade balance for energy (blue) and everything else (red).
The gap between energy and everything else is translating into a regional divide in Canada — between the booming, oil-reliant West and the plodding economy of the rest of the country.
“The rapid pace of oilsands development is creating economic risks and regional disparities that need to be addressed,” the left-leaning Pembina Institute said in a report released this week.
The report said the “overwhelming majority” of economic benefits from the oilsands boom “are limited to Alberta. Other provinces will benefit less: even the United States would gain more employment opportunities from the oilsands than the rest of Canada if oilsands development goes ahead as projected.”
Bringing more jobs to the oilsands wouldn’t work as a solution; the oil, gas and mining sector employs 225,000 people, compared to 1.5 million jobs in manufacturing. Booming oil exports simply can’t replace stagnating factory exports. (Incidentally, jobs in oil, gas and mining actually fell by about 0.2 per cent over the past year.)
In a report this week, BMO’s Porter called Canada’s stagnating export sector the country’s biggest economic challenge.
“Since 2000, Canadian exports have suffered through their own version of the lost decade, with volumes essentially unchanged over that spell,” Porter wrote.
“To put that in perspective, the next slowest 13-year stretch for real exports over the past half-century was 42 per cent growth from 1970-83.”
Porter notes that manufacturing employment in Canada — which is heavily dependent on exports — has shrunk by 20 per cent since 2000, even as jobs in the rest of the economy grew by a bit more than 20 per cent.
Nowhere is this more clear than in the auto industry, once one of the major drivers of central Canada’s economy. Vehicle production is down nine per cent this year — and that’s despite a global boom in auto sales
And the worst may be yet to come. Analyst Joe McCabe recently told an auto industry conference he expects car manufacturing to shrink another 28 per cent over the next decade.
So what’s to blame for this? Porter notes that the last 13 years of stagnation coincide with “the long upward march of the loonie,” which bottomed out around 62 cents U.S. in 2002 and steadily climbed to parity by 2008. The rising dollar has made Canadian exports more expensive on the global market.
That “played a key role in undercutting the manufacturing sector in particular,” Porter writes, though he’s cautious not to blame the rising loonie on oil exports — the old “Dutch Disease” debate.
But the Pembina Institute has little doubt Dutch Disease is Canada’s diagnosis.
“Recent analysis suggests that surging commodity prices explain as much as 40 to 75 per cent of the dollar’s rise,” the Pembina Institute said, referring to the loonie’s reputation as a “petro-currency.”
The report urges the government to launch a federal committee to look at the problem and recommend solutions “to ensure a robust, diverse economy that supports economic growth and competitiveness across Canada.”
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