Second quarter sees 1.6 percent annualized decline in Canadian GDP

In contrast to the first quarter when the Canadian economy grew by an annual rate of 2.5 percent the second quarter turned in a dismal performance with a decline of 1.6 percent at an annualized rate.

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This is the worst performance of the Canadian economy in the last seven years according to Statistics Canada. The decline was in large part due to the wildfires in northern Alberta that burned parts of Fort McMurray. The second quarter of 2009 when Canada was in the midst of the global financial crisis was the last time the economy saw such a large drop. However, economists had predicted a drop of around 1.5 percent, not too far off the actual result.

Avery Shenfeld of CIBC Capital Markets said: "It wasn't pretty, but it wasn't expected to be." Exports of goods and services fell by 4.5 percent after a rise of 1.9 percent in the first quarter. The fires near Fort McMurray had forced the shutdown of several oilsands operations. Statistics Canada said that excluding the large drop in crude oil output, the country's GDP would have increased by 0.1 per cent (0.4 per cent annualized). Exports of goods declined 5.5 percent while exports of services rose by a modest 0.6 percent. Exports of aircraft and other transportation equipment actually rose by 5.6 percent. One silver lining in the downturn is that in June GDP rose by 0.6 percent more than the 0.4 percent economists predicted. Mining, quarrying and oil extraction in June had risen by 3.6 percent. Energy product exports fell 7.5 per cent, with crude and bitumen exports declining 9.6 per cent and refined petroleum products down a whopping 19.6 per cent

Shenfeld said: "All told, a quarter we will like to forget, and for the next few months, a more supportive Q3 will help us do just that." The Bank of Canada predicts that growth will pick and also expects that the new child benefit program will boost consumer spending along with increased government spending on infrastructure. The second-quarter result reported Wednesday was worse than forecast by the Bank of Canada in its July monetary policy report. The central bank had predicted that the economy would contract at an annual rate of one percent during the second quarter due to the damage caused by the wildfires. Shenfeld also noted: "The best news [in the GDP report] was that June GDP rebounded ... and less than half of that [growth] came from the rebound in mining/oil/gas, as manufacturing also had a healthy gain."

Other economists were also optimistic about at least some improvement. BMO chief economist, Douglas Porter, said: "We knew for the past four months that today's GDP report was going to be ugly, and it delivered with a capital U. Looking beneath the headline drama, underlying growth continues to stumble along at little more than a one per cent [annual rate] pace, but we continue to expect that to improve in the coming year as the drop in energy investment ebbs."

OECD lowers growth outlook for Canadian economy

The Organization for Economic Co-operation and Development (OECD) has predicted a lower growth rate in Canada. From a 2 percent growth rate predicted earlier, the OECD now predicts a rate of only 1.4 percent.

While the decline was the steepest of any in the countries looked at, it was still a better performance than that of France or even Germany. The OECD warned of significant risks to financial stability that extended across borders. It also pushed politicians to remove the burden of producing stimulus from central banks. While Canada's growth is behind that of the U.S. at 2 percent and the UK at 2.1 percent, it is still better than Italy or Japan, or as mentioned, France and Germany. The U.S. and Germany suffered downgrades of one half percentage point each. In 2017 Germany is now expected to grow by 1.7 percent and the US 2.2 percent in 2017. Canada's growth rate in 2015 was just 1.2 percent, so 2016 is still predicted to be slightly better. The CIBC had predicted Canada's growth at 1.3 percent this year close to the OECD estimate.

The Paris-based OECD also cut the rate of global growth from 3.3 percent to 3.0 percent. This will make global growth this year no better than last, which was the slowest in five years. The OECD urged leaders to use all the levers at hand to stimulate economic growth. The group noted that using monetary policy alone as the sole tool for stimulus did not work well: "Monetary policy cannot work alone. A stronger collective policy response is needed to strengthen demand." The group suggested exactly what the Canadian government plans, more investment in infrastucture projects.

The outlook for China's growth was unchanged at 6.5 percent in 2016 and 6.2 percent in 2017. Among emerging economies, Brazil was doing very poorly, with the economy shrinking by 4 percent this year. One bright spot was India where the outlook was raised from 7.3 to 7.4 this year. However, for next year the growth rate was lowered slightly from 7.4 to 7.3, still greater than Chinese growth.

The OECD singled out Canada and other economies reliant upon commodity exports as showing the worst effects from the global economic slowdown that appears to be underway. Catherine Mann,, the OECD chief economist said: "Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth." Global trade and investment is also weak according to the OECD report.

The low prices of oil and other commodities have hurt the Canadian economy in recent months. Ottawa has responded to the downturn by promising considerable expenditures of new infrastructure projects, a move that will lead to a considerable deficit. Nevertheless, deficit spending is recommended by the OECD and many economists as a way to stimulate the economy. The Bank of Canada forecast is also for 1.4 percent Canadian growth this year but is slightly more optimistic than the OECD with a 2.4 estimate for growth next year.

OECD reduces GDP growth forecast for Canada

The Organization for Economic Co-operation and Development has lowered its forecast for growth in Canada and also globally as new investment remains sluggish, unemployment high, and consumers reluctant to spend.

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The OECD gave the global economy just a B-minus in its report on the global economy released just today. Although OECD chief economist Catherine Mann predicted a global growth rate of 3.8 per cent by 2016 this would still be below the average growth rate before the 2008 financial crisis. The OECD represents 34 developed countries.

The growth rate for Canada this year has been downgraded from 2.2 per cent just this March to 1.5 per cent now. Last November the OECD forecast Canadian growth at 2.5 per cent. With this weaker growth rate, the OECD now predicts that the Bank of Canada will not raise interest rates until early next year rather than the middle of this year as it had earlier predicted. The high personal debt of Canadians could depress consumption and also lead to a decline in purchase of houses resulting in lower investment in the housing area.

While the lower Canadian dollar should stimulate exports, the slowdown in Chinese and U.S. economic growth may lead to lower demand. If oil prices slump again, the situation would be even worse. If oil prices rise and U.S. and Chinese growth accelerates, this will have a positive effect on Canadian growth. The performance of the U.S. economy in the first quarter of this year was dismal as it contracted at an annual rate of 0.7 per cent.

Douglas Porter chief economist at the Bank of Montreal(BMO) remarked that growth was so sluggish people still talked of a "recovery" when we have been expanding for some time since the Great Recession. He said: “I guess technically we are long into the ’expansion’ phase and really shouldn’t be calling it a ’recovery’ any more. However, I suspect most people still feel like we’re still recovering from the financial crisis and its aftermath.”Porter noted unemployment in Canada remained near 7 per cent and many young people could not find jobs. Statistics Canada reported the Canadian economy contracted at an annual rate of 0.6 per cent last quarter. The BMO cut its forecast for growth this year to 1.5 percent, matching that of the OECD. With the exception of recession years. this would be the slowest rate of Canadian growth in 30 years. Porter said in a report: “At the start of 2015, the overarching view on the Canadian growth outlook was that it faced one big negative (lower oil prices), and one big positive (stronger U.S. growth), which were supposed to roughly offset each other. Fully 40 per cent into the year and we have certainly seen the negative at work (business investment plunged 15.5 per cent in Q1), while we are still waiting for the positive to kick in (export volumes have been down over the past two quarters).”

The Royal Bank of Canada(RBC) was slightly more optimistic on Canadian economic growth compared to the OECD and BMO. RBC predicted that the Canadian economy will grow by 1.8 per cent this year and 2.6 per cent next year. However, the bank predicted that investment would be weak particularly in the energy area. Energy companies are slated to slash spending by almost 30 per cent this year. Other sectors may take up some of the slack with exports on the rise due to the weaker Canadian dollar making Canadian goods cheaper in many markets, particularly the U.S.

Canada loses jobs in January

During January, the Canadian economy shed 21,900 jobs after two months of increases. The loss was largest in education and manufacturing jobs.

In spite of the loss of jobs, the unemployment rate in Canada has actually fallen even further to 7%. In December. the rate was at 7.1% which was also a decrease from the month before. These seeming contradictory movements are caused by many Canadians simply no longer seeking jobs and leaving the labor market for various reasons.Statistics Canada reports that 57,500 people stopped looking for jobs. This is over twice as many as there were lost jobs allowing the unemployment rate to decline.

Canadian housing starts also declined from 197,118 in December to 160,577 in January. On the employment front, Ontario and British Columbia registered declining employment while Alberta, Saskatchewan and also New Brunswick had increases. The construction industry was improving with 17,000 jobs added during January.

Doug Porter, the chief economist at BMO Capital Markets, said:"Combined with the steep drop in housing starts as well as the still-wide trade deficit, the jobs report rounds out a day of infamy for Canadian economic stats. To some extent, the drop in jobs appears to be a payback for the surprising strength in the second half of last year, and would normally be little cause for concern. However, with housing softening notably, and consumers and governments not in much mood (or ability) to spend, the economy will need a major helping hand from a stronger U.S. performance in the year ahead to help generate renewed job gains."

Many jobs that were lost were in the public sector which lost 27,000 jobs. Compared with January of 2012, the number of private sector employers was 1.9% higher while the number of public sector and self-employed remained relatively the same. Over an entire year, Statistics Canada reports that employment had increased 1.6% or by 286,000 in full time work. The number of hours worked on average also increased by 1.7%.

Canadian economy slows in third quarter of 2012

In the July-September, third quarter, Canada suffered the largest drop in exports in three years. The economy grew at a 0.6% annual rate compared to 1.7% in the first two quarters.

While Canada has recovered relatively quickly from the recession compared to some other countries, growth has become more sluggish in 2012. and particularly in the last quarter. While the Bank of Canada and many economists had been expecting a slowdown in the third quarter the results were even weaker than expected.

Analysts predicted that even with the slowing economy, the Bank of Canada will still take the position that interest rate hikes may be needed down the road. Michael Gregory, senior economist at BMO Capital Markets said:

"The Bank of Canada bias is very much a long-term bias so it's not going to be changing any time soon. But there is no question the Canadian economy is under-performing a bit here and if this continues past the turn of the year and the whole 'fiscal cliff' in the U.S., we could see a different tone from the Bank of Canada. But it is way too early for that to be happening now."

The Bank has kept the benchmark rate at a low 1% for more than two years now.

The 0.6% growth rate was below a Reuters poll average of 0.9% and the Bank of Canada's forecast of 1%. The U.S. economy did much better during the period at 2.7%. Business investment in Canada actually declined by 0.6% in the third quarter. This is the first decline since 2009 and contrasts with a growth of 1.3% in the first quarter.

Exports were hard hit by the relatively weak growth in the U.S. and problems in Europe. They fell by 2% during the quarter. Consumer spending continues to increase in spite of the high debt load of many Canadians. It grew at the fastest pace in two years rising by almost 4%.

Residential housing construction also declined during the quarter by 4.4%. Tougher mortgage rules may be causing lower demand.

The Bank of Canada is predicting the the fourth quarter will see growth of 2.5% but with these latest figures that may be optimistic. Paul Ferley, an economist at the Royal Bank of Canada said:

"Expectations had been that after a weak third-quarter activity we would bounce back in the fourth quarter. It could still be the case, there were some temporary factors that don't look like they have fully reversed as yet, we may see that in October, but it may limit the rebound in the fourth quarter to something closer to 2 percent."

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Bank of Canada Governor: Europe situation will slow Canada's growth

  The governor of the Bank of Canada Mark Carney claims that the European debt crisis will slow both Canadian growth and global growth. Carney predicted that Canadian growth will be lower by approximately .6 per cent for the year. This will mean the Canadian GDP will be about 10 billion lower than otherwise.
    Carney decided that the Bank's key interest rate would remain at 1 per cent, a very low rate. As well he estimated that the debt crisis in Europe would lower the global growth rate by one per cent and growth in the U.S. economy by .8 per cent.
    As he has done earlier Carney warned about the high level of personal debt in Canada. This runs at about one hundred fifty per cent of personal income. Carney said:"High household debt levels in Canada could lead to a sharper-than-expected deceleration in household spending," "If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy."
     Many think that the bank will not raise interest rates this year as long as the economy is sluggish and inflation low. But some analysts think that by the middle of next year there will be some hikes in the rates. For more see this CBC article.

TD bank cuts Canada growth estimates

   The Toronto Dominion (TD) bank lowered its growth predictions for Canada's economy both in 2012 and 2013. The bank predicts that commodity prices will be weaker in the next two years and exports will grow slower. However at least the prediction is still for positive growth.
    The bank predicts growth of 1.7 per cent in 2012. In September it had predicted growth of 1.9 per cent. In 2013 the growth is now predicted at 2.2 per cent as compared to 2.6 per cent back in September. The European financial crisis and a possible European recession will put a damper on global growth.
    The bank sees unemployment  now at 7.4 per cent to increase to from 7.5 to 8 per cent. The bank also sees high personal and government debt slowing growth. On the European crisis the bank was quite negative. It predicts that Greece will likely default on its debt next year. European banks will be forced into buying bonds of member countries and become a lender of last resort. Progress towards a fiscal union will take years according to the bank. For more see this article.
   

Canada and US economies to grow slowly in 2010

In spite of the relatively modest growth forecasts for next year stock markets in both countries have staged a remarkable comeback from their March 2009 lows. Perhaps they will be due for a correction some time early this year. Most of the growth in profits has been through cutting back costs rather than through increased demand for goods. Soon the government will cut back stimulus money and begin trimming programs to try and bring deficits under control and this could very well stall the recovery.

Canada, U.S. GDP growth in 2010 to be 'tepid': forecast
CBC News
The economies of Canada and the United States will grow about half as much in 2010 as they did in previous recoveries, according to a new forecast released Wednesday.

A group of five prominent Canadian economists, speaking at the Toronto-based Economic Club of Canada, said Canada and the United States will see gross domestic product growth of between 2.5 to three per cent in 2010.

"Not particularly vigorous for the first year following a recession. We normally in Canada and the U.S. after a recession grow by [as much as] five per cent — so somewhat tepid," said Don Drummond, chief economist for TD Financial Group and one of the experts who developed the forecast.

Drummond and the other bank economists — Craig Wright of the Royal Bank of Canada, Scotiabank's Warren Jestin, CIBC's Avery Shenfeld and BMO's Sherry Cooper — presented their predictions to a business audience of approximately 1,200.

Coming out of the darkness
Both economies are recovering after a difficult year in which financial markets seized up, businesses cut jobs and consumers stopped buying, the economists noted.

The experts also said they do not expect American consumers, who are the driving forces of the economy, to begin shopping again with the same unbridled passion as in past years.

"Everybody's view was predicated on the view that U.S. households would resume spending but at a fairly moderate pace relative to previous years," Drummond said.

"Will they spend their brains out again? Maybe they'll go out and buy a lot of things and hence have stronger growth in the short term," he said.

An aging population — intent upon increasing retirement savings — and higher per-capita debt levels likely will place a ceiling on rising consumer spending, the economists noted.

Carney forecasts sluggish growth.

This is from the Star.
It remains to be seen how accurate Carney's forecast will be. Not long ago the government was telling us how the fundamentals are so good and that a deficit was not at all likely. But the economic future is still not very clear at all. Given that demand for resources will be down and costs of oil development in the oil sands probably already is greater than the price in some cases there could be a big slowdown in provinces such as Alberta.


Carney forecasts `sluggish growth'

CHRIS WATTIE/REUTERS
Bank of Canada Governor Mark Carney, in his first public comments since Tuesday’s quarter-point interest rate cut, signalled Oct. 23, 2008, that the central bank would reduce its trend-setting rate again if the global financial crisis worsens.
Other nations headed for a mild recession, central bank chief says
October 24, 2008 Dana FlavelleBusiness Reporter
While the rest of the globe is headed for a ``mild recession,'' Canada is entering a period of ``sluggish growth,'' the governor of the Bank of Canada said yesterday.
In describing Canada's growth prospects, Mark Carney said the central bank looked at the broader definition of recession used by a panel of U.S. economists.
While two quarters of negative growth is the technical or ``shorthand'' way of describing a recession, Carney said the broader definition takes into account factors such as employment growth, not just output.
``For a lot of people that's what a recession is, employment. That's what people feel. It's a bigger set of issues than just this technical question of whether there's two negative quarters,'' Carney asserted.
In his first public commentary since cutting the bank's trend-setting rate by another quarter percentage point on Tuesday, Carney said Canada's financial system was in relatively good shape.
However, he also said the central bank remains on alert for signs that conditions may be worsening and would cut rates again at its Dec. 9 meeting, if warranted.
``Now is not the time to relax. There have been some extraordinary events. We're very focused on ensuring the markets return to a full state of functioning, not just domestically but internationally,'' Carney said, referring to the global credit crisis caused by events largely outside Canada's borders.
The central bank revised its forecast for economic growth downward earlier this week to 0.6 per cent for this year and next year, but predicts growth will rebound by 2010.
Carney defended the bank's decision to limit its latest cut to a quarter point, instead of the half-point cut many investors wanted.
He said the bank had already acted "aggressively" earlier this year and in recent weeks with the result that its trend-setting overnight rate has fallen by half to 2.25 per cent since December 2007.
As well, he said, inflation is projected to slow to an annualized rate of 1 per cent, the low end of the central bank's target range.
Carney declined to be specific about the impact of global events on different regions of the country. However, he noted the recent steep slide in the value of the Canadian dollar against the U.S. greenback will only partly offset the effect of falling global demand for basic commodities, such as oil and metals.
The dollar has dropped 18 per cent in the past four weeks, giving up four years of gains, amid falling interest rates, plunging global demand for oil and a resurgence of the U.S. dollar as a safe haven for investors.
Carney acknowledged regions dependent on manufacturing are likely to feel the effects of slowing U.S. demand for cars and homes.
Employment growth is also likely to slow as the economy slows, he said in response to a question.
But while other parts of the world, such as the United States, are now in recession and growth in Europe and emerging countries is slowing, Canada is in a position of relative strength, the central bank governor stressed.
Carney also endorsed Canada's banking system, saying it hasn't required the kind of multibillion-dollar government bailouts seen in other developed countries.
He said he welcomed measures announced yesterday by Federal Finance Minister Jim Flaherty to backstop interbank loans to ensure Canada's chartered banks remain competitive in global markets with rival banks that have had their government's full support.
Carney said access to credit remains relatively good in Canada and has been improving in recent weeks as other countries took steps to unlock international money flows.
He said the bank is seeing signs that ordinary consumers are able to get loans on reasonable terms.

One last trim: 5% GST kicks in..

While I do not agree with the Liberals that it would be better to cut income taxes than the GST the GST cut pales in comparison with the cut to corporate taxes of 60 billion over 5 years. This cut takes 12 billion a year out of govt. coffers. The GST cut does benefit the wealthy more than the poor but only because the poor spend less per person. However, the tax is relatively less painful to the rich than poor and is in effect regressive. Each pays the same rate regardless of income.
Harper is trying to dampen public expectation for any increased spending on social programs in suggesting that there will be a slowdown in the economy and thus tax revenue. Of course the tax cuts of every type just make the situation worse. What Harper and his crew want.

One last trim: 5% GST kicks in
TheStar.com - Canada - One last trim: 5% GST kicks in

MICHAEL STUPARYK/TORONTO STAR
Prime Minister Stephen Harper and Finance Minister Jim Flaherty remind consumers of the new GST rate. January 01, 2008
Rob Ferguson
Queen's Park Bureau

Canadians woke up today to their last GST cut for some time as the federal government shuns new tax relief and spending plans until economic storm clouds lift, Prime Minister Stephen Harper says.

"We will be extremely cautious in the year to come," Harper pledged yesterday at a Mississauga electronics store where he reminded consumers that the GST would drop one percentage point at midnight to 5 per cent, fulfilling a campaign promise made two years ago.

"We are not going to undertake any long-run spending or tax reduction initiatives unless we believe they are affordable on a long-term basis," added Harper, whose minority government could soon be facing an election.

His approach appears increasingly at odds with the opposition Liberals and New Democrats as the House of Commons prepares to return Jan. 28, with a federal budget due in February or March.

The Liberals want more money earmarked for the "poverty challenge" that is holding back many Canadians and for crumbling infrastructure, such as municipal transit systems, said Markham MP and finance critic John McCallum.

"We'll look at the budget," added McCallum, a former Royal Bank chief economist whose party prefers income tax cuts to trimming the GST. "We may vote against it if it's a bad budget."

The GST cut means Canadians will save "a few dollars off a stereo" but the money could be better put to use helping the poor, or improving funding for municipalities, child care and the environment, said NDP Leader Jack Layton.

New taxes being imposed by the City of Toronto this year on vehicle registrations and real estate transactions are proof "the federal government is not being responsible on the needs of cities," he added.

The Conservatives hold 125 of the Commons' 308 seats. The Liberals have 96, the Bloc Québécois 49 and the NDP 30. There are four independent MPs and four vacancies.

Harper and Finance Minister Jim Flaherty brushed aside criticisms of the cut to the GST that will cost the federal treasury about $6 billion in revenue this year, on top of the $6 billion in relief to consumers when Harper previously trimmed the tax from 7 per cent to 6 per cent in July 2006.

The Prime Minister boasted the lower GST will save consumers "hundreds of dollars per year on day-to-day purchases and hundreds more for a new car or thousands more on a new home."

Critics say the GST cut benefits the wealthy more than the poor, but retailers, hit hard by a surge in the Canadian dollar that has rekindled cross-border shopping, have welcomed the change.

Still, Canadians should not expect the GST, which was brought in by former Progressive Conservative prime minister Brian Mulroney in 1990, to keep falling, Harper cautioned, standing in front of a wall of television sets displaying the 5 per cent GST message.

"We are not anticipating further reductions to the GST. In the future, if we reduce taxes they may be in a different direction."

McCallum accused Harper of sending a confusing message to consumers by combining talk of a tax cut with a warning the economy could be headed for trouble.

"This is clearly a triumph of gimmickry over good public policy to announce the GST cut in a store and tell us the cupboard is bare," said McCallum.

"I think they're trying to downplay expectations and then people will be positively surprised."

With the U.S. economy weakening because of a sub-prime mortgage crisis that is hurting the housing sector – and risks that slower demand south of the border could hurt exports of Canadian-made goods – Harper and Flaherty have been telegraphing that they'll have less room to manoeuvre in the federal budget.

Harper said his plan is to "shelter, as best we can, Canadians from any fallout of global economic problems."

McCallum said the government is overstating the risks because many experts expect the Canadian economy to grow by up to 2.5 per cent this year, which would leave room for spending and tax initiatives.

The warnings from Ottawa suggest it was "reckless" for Harper and Flaherty to announce $60 billion in corporate tax cuts over the next five years in their October mini-budget, Layton charged.

Effective today, the general federal corporate income tax rate falls to 19.5 per cent from the previous rate of 22.12 per cent as part of a plan to lower the rate to 15 per cent by 2012. The small business tax rate today falls to 11 per cent from 12 per cent, one year earlier than originally scheduled.

In other tax changes taking effect today, the Ontario government is eliminating the capital tax for businesses whose major focus is in manufacturing or the resource sector, and increasing the film, television and production tax credit rate to attract more TV and movie production.

Canadian Growth and Productivity

This is interesting in that it shows that wages are not increasing at a rate that one would expect given the surge in employment. Some of the recommendations made in the papers cited would further sabotage safety nets such as EI in the name of reducing rigidities in the movement of labor. Translated it means that if workers starve where they are they will be motivated to move elsewhere.
The author complains that the discourse on productivity does not talk about distribution. Why would it? The aim is to increase productivity with the aim of increasing profits, if labor does not get its "fair" share whatever that is so much the better for capital.


Canadian growth and productivity
Posted by Marc Lee under OECD , productivity

Two Canadian macro articles diverted me from my best laid plans today. Side by side, the two make for some interesting observations on the state of the Canadian economy, as well as some fodder for thinking about what drives investment. The first, a Statscan piece by Phillip Cross, is a demand-led investment story, with most attention on the resource sector, while the second, by Andrew Sharpe of the Centre for the Study of Living Standards, looks to supply-side solutions to improve Canada’s productivity performance.

Statistics Canada’s economic review for 2006 shows in spades how most of the new investment in Canada has been demand-driven, and externally-driven, in particular from our booming resource sectors:

The current boom in commodity prices is now entering its fifth year. … [M]etals took the lead in pushing up prices to record levels last year. So-called ‘blue-collar’ metals such as copper, nickel, zinc and iron ore spearheaded the advance, overshadowing their more illustrious precious metal cousins, such as silver and gold. This reflects higher demand in the rapidly expanding industrial base of developing countries, notably China. … [E]nergy and metals prices were high enough to stimulate more investment in most areas. … Firms continued to pour money into [Alberta oil sands] investments, tripling from $5.2 billion when the current surge in oil prices began in 2003 to a planned $16.1 billion in 2007.

The economic benefit side generally focuses on employment growth, which has been spectacular, especially in the West. Missing from Cross’s analysis, however, is anything to do with real wage gains. In the very same issue of the Canadian Economic Observer, there are some tables that show that, despite the strong employment creation in the labour market, and cries of skill shortages, real wage gains have been weak. Average hourly earnings grew by just 2.4%, slightly higher than inflation, in 2006. The same is true for wage settlements. Yet, we should be seeing stronger upward pressure on wages in accordance with the state of the labour market.

Another missing element from the Cross article is the lack of decent productivity growth in spite of other strong economic indicators. This is where Andrew Sharpe’s article, Lessons for Canada from International Productivity Experience, published in the International Productivity Monitor, comes in. After reviewing our rather dismal productivity performance of late, Sharpe turns to the experience of six countries: The US, UK, Ireland, Australia, Finland, and Sweden.

Unfortunately, rather than take a fresh approach, Sharpe essentially restates the conventional wisdom of supply-side measures widely accepted at senior levels of the Canadian bureaucracy. I find it curious that he takes as a starting point the views of the OECD and McKinsey, both of which proffer ideological views on the issue that are not actually that well-grounded empirically.

The four broad lessons emerging from Sharpe’s analysis are:

deregulation of product and labour markets to promote greater competition (key targets here are telecommunications and milk marketing boards);
greater human capital formation, including faster integration of immigrants with skills, and basic skills formation among the overall population;
adopt new technologies faster, rather than seek to create new technologies through R&D (by expanding federal technology diffusion programs and harmonizing provincial PSTs with the GST);
reduce “institutional rigidities”, such as seasonal EI supports and interprovincial barriers to labour mobility.
I doubt anyone would disagree with (2), except to point out that Canadian governments should be dedicating much more money to education at all levels, starting with early learning programs, through K-12 and post-secondary (an Irish lesson is free post-secondary) and ending with retraining programs that could be greatly enhanced out of the EI surplus.

Item (3) is interesting in that it reinforces the notion of gains from widespread adoption of new technologies, innovations and ideas. As suggested in this post on the benefits of spillovers, this implies weaker, not stronger, intellectual property protection (in contrast, a few statements in Sharpe’s article would appear to blanket endorse stronger IP protection, although these do not figure into his recommendations).

Items (1) and (4), however, I have a problem with. In the context of agreements like TILMA, barriers to inter-provincial labour mobility are often invoked, but while there are some issues in some professional areas, mobility concerns are greatly overstated. I am disappointed that with (4), Sharpe buys into this so easily, alleging in his article:

the role of institutional rigidities in impeding productivity growth and the identification of these rigidities and their removal. Specific rigidities in Canada include … [t]he Employment Insurance (EI) program, which provides income support for the unemployed in seasonal occupations, discourages
to some degree mobility to regions where permanent employment prospects are more promising.

And further recommending:

Reduction in interprovincial barriers to labour mobility in the professions and the trades to allow a greater role for market forces to influence the reallocation of workers from low productivity/low wage to high productivity/high wage jobs, an important source of productivity growth.

Yet, the evidence from Cross’s Statscan article suggests that neither of these “rigidities” seem to be much of a problem:

Four provinces and one territory saw their populations shrink, matching 2005 as the only other year with such widespread declines. The provinces were Newfoundland, Nova Scotia, New Brunswick and Saskatchewan, along with the Northwest Territories (as well, growth was minimal in PEI and Manitoba). Migration to Alberta was the principal reason. In every instance, net outflows to Alberta more than accounted for the drops in population.

Alberta proved to be an increasingly attractive destination for people from all provinces, large or small, rich or poor. Alberta received a net inflow of 57,105 people from other provinces, the largest inter-provincial movement of people to one province on record back to 1972 (easily exceeding the previous mark of 46,133 people moving to Ontario in 1987). The trek west accelerated sharply over the last two years, as word of the Alberta boom spread: after an average net inflow of just 11,000 people in 2003 and 2004, inter-provincial migration accelerated to 34,423 in 2005 before its record-setting performance last year. In the last decade, the net inflow of 285,620 inter-provincial migrants was the equivalent of 10% of Alberta’s overall population in 1996, and nearly half of its growth of 600,600 people.

Sharpe is also enamored with the need to stimulate competition by deregulation (1) to unleash our latent productivity potential. The devil is in the details in these proposals, and it seems to me that Sharpe just takes a knee-jerk “competition is good” approach, when there are many subtleties at the sectoral level. Much of the new competition would come via market access from foreign companies, which may or may not be a good thing from a broader public policy perspective. More competition, as was the case with the Canada-US FTA, may improve productivity on average, somewhat, but this is due to the less productive being driven out of the market. And overall, free trade did not deliver on its promises of closing the Canada-US productivity gap, so why this will now be the case, from a few remaining areas, eludes me.

In the Statscan article, there is another interesting passage that contrasts with Sharpe:

The major financial trend last year was an upsurge in mergers and acquisitions, both in Canada and around the world, often funded by private equity. As a result, foreign direct investment (FDI) in Canada rose to $76 billion last year, second only to the record $99 billion at the peak of the ICT mania in 2000. Only two years ago, FDI in Canada totaled less than $2 billion. Foreign interest centred on our increasingly lucrative mining companies. Several iconic companies closely identified with Canada’s economy were taken over, including Inco, Falconbridge and the venerable Hudson’s Bay Company.

For a rich but middle-power country such as Canada, a broad range of public policy issues are also at stake beyond notions of economic efficiency. Countries need to have the capacity to make trade-offs based on their own democratic institutions, including criteria such as universal access, cultural considerations, social objectives or regional development. Maintaining the flexibility to pursue such options should not be dismissed. Deregulated approaches may act as a barrier to cross-subsidization by utilities, whether under public or private control. For example, government policy may ensure that all regions have access to electricity or telephony at reasonable prices, by charging slightly more in urban areas to cross-subsidize lower prices in rural areas. These activities play a redistributive role that is rooted in issues of equity and access, rather than just economic efficiency. In the absence of such interventions, in many areas of the country market prices may be monopoly prices, or markets may not exist at all.In key areas of the economy, a country can reasonably argue that the public interest necessitates measures to keep out or restrict foreign competitors. Telecommunications, energy, banking and other vital services, though run through the private sector, should not necessarily be forced open to foreign competition. In these areas competition is likely to be limited at best, due to the high upfront costs of entering the market. And in extreme cases, such as that of California in 2003, deregulated competitive markets actually led to a gaming of the system that bilked US$10 billion from ratepayers into the hands of companies like Enron. I’m all for some competitive rivalry but the “deregulation and competition” mantra seems simplistic to me.

The discourse on productivity also consistently misses out on the matter of distribution. Productivity per hour can essentially be thought of as the wages and profits arising to labour and capital, respectively, from the economic activity in question. Recommended measures to boost productivity, especially of the supply-side variant, may succeed in increasing productivity, but there is nothing that says that the gains will be shared equally between capital and labour.

Canadian Economy slowing down

No doubt demand from the US for forestry products has declined. I wonder how much longer consumer spending will increase when debt levels are high.

Economy grows at slowest rate since 2003
Last Updated: Friday, March 2, 2007 | 10:49 AM ET
CBC News
Canada's economy grew at an annualized rate of 1.4 per cent in the last quarter of 2006, marking the weakest quarterly growth in more than three years.

Still, that topped the expectations of market watchers who had been expecting growth of 1.2 per cent.

Higher consumer spending and export growth were the main drivers in the year-end growth, Statistics Canada said Friday.

Fourth-quarter growth was down from the two per cent annualized growth seen in the second and third quarters and 3.8 per cent in the first quarter of 2006.

On a monthly basis, however, the economy showed signs of picking up. December's growth was 0.4 per cent, up from November's 0.3 per cent and October's 0.1 per cent expansion.

"Despite the meek growth, there are certainly grounds for optimism, as all of the weakness was due to inventory cuts, while December’s gain provides a decent hand-off for [first-quarter] growth," said BMO Capital Markets deputy chief economist Douglas Porter.

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He said the bigger issue for the growth outlook is the state of the U.S. economy, which has been producing mixed results lately.

"We look for a weaker average Canadian GDP growth rate for all of 2007 — at 2.3 per cent — although growth should gradually pick up as the year progresses," he said.

For all of last year, Canada's economy expanded by 2.7 per cent, led by the construction, retail and wholesale trades and the finance and insurance sectors. In 2005, the economy grew by 2.9 per cent.

"Consumer spending was the leading contributor to real GDP growth in 2006, advancing 4.1 per cent, its best performance since 1997," Statistics Canada said in a statement.

The energy sector continued to grow in 2006, but its pace of expansion was "much slower" than during the last four years, StatsCan said. But the agency said manufacturing, forestry, and logging were "hard hit" last year.