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Reality 2019

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Canada perilously close to recession — and there’s more bad news


  • Calgary Herald
  • 15 Mar 2019
  • DAVID ROSENBERG David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave.

There was a ton of excitement over the 56,000 Canadian jobs run-up in February, but the closer you examine the data, the less impressive it becomes.

All the employment in this country is coming out of two sectors — government and the high-tech sector.

Goods-producing employment has declined 23,000 year-to-date and is little higher today than it was in November 2017.

And that 56,000 headline number actually turns to a 131,000 decline once the 0.7-per-cent shrinkage in hours worked is taken into account.

In fact, this was the thirdstraight decline in the hours worked in a row and, over this time, the workweek has dropped at a 4.2-per-cent annual rate, something we have not seen happen since May 2009.

The tale of woe doesn’t end with a sclerotic labour market where the index of aggregate hours worked has stagnated over the past 14 months! Real final demand has contracted now for two straight quarters — if not an official recession, then one rung away on the ladder.

The trade deficit has soared to an all-time high. Productivity growth on a Y-o-Y basis is closer to zero per cent whereas in the U.S. it has accelerated closer to a two-per-cent annual rate.

Order books in the domestic manufacturing industry have made no headway in five years.

Output in this sector has turned negative recently on a Y-o-Y basis, and more broadly in the goods-producing sector too (adding in construction and resources).

The output gap has been re-established, which means the Canadian economy is now operating with spare capacity.

Along with that, inflation in both the consumer and producer sectors has peaked out and rolled over in a discernible way, which will ensure that the Bank of Canada will maintain local interest rates below U.S. levels as far as the eye can see.

It is plain to see that the Canadian economy needs help.

It is perilously close to a recession and there are still lags ahead to be felt in terms of the restraint actions established previously by the Bank of Canada. Housing is in the doldrums and the Canadian consumer is in deleveraging mode. Hopes of there being a quick resolution on the trade file are foolishly optimistic. And the 25-per-cent rebound in oil prices and Alberta-led closing of the Canadian price “discount” are benefits that are now behind us and fully discounted.

Productivity growth is stagnant and running far below the pace in the U.S., and that should be a clear signal to the federal government that tax competitiveness should be the hallmark of the upcoming budget.

And not just the business sector, but households need some income support as well as they tighten their belts and face rising debt-servicing costs — this should not just be a “housing affordability” targeted response but a broader income boost by lessening the tax burden … and finance this by keeping a firmer lid on public spending growth.

Only after a fiscal stimulus boost, and one that addresses both the cyclical and structural impediments that the Canadian economy faces, can one reasonably expect the Canadian dollar to reverse course any time soon.

Until then, trade the loonie from the short side — sell strength and fade the rallies.

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Somebody in the feds was crowing about the job numbers and how the majority were in Ontario....somehow I doubt they would give credit to Fords policies!

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Here's another good JBP video.  Somewhat mis-titled though, should be more like "JBP discusses attitudes toward immigration."  Video is 15 minutes long and appears to be off-topic as the first bit is laying groundwork for some later conclusions/statements about political attitudes toward immigration.

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TD bank predicts loonie may fall to 71 cents US as Canadian dollar's outlook shifts 'considerably'

A combination of a deeper than anticipated slowdown in the economy, the likelihood of Bank of Canada ending its hiking cycle, and oil's divergence from the loonie, will lead the Canadian dollar to weaken further this year, according to analysts.

The loonie has fallen 1.3% against the U.S. dollar in March as prospects for the economy have dimmed

Rajeshni Naidu-Ghelani · CBC News · Posted: Mar 15, 2019 1:41 PM ET | Last Updated: an hour ago
TD Securities forecasts the loonie will spend much of this year in a $1.35-$1.40 (71 cents US) range against the greenback. That's a more than five per cent decline from its current level of 0.75 cents US.  (CBC)

A strong start to the year for the Canadian dollar — rising 3.5 per cent against the greenback in the first two months after a nearly eight per cent drop in value last year — had many wondering if this was the year the loonie would stage a comeback.

But, since the start of March, the Canadian dollar has fallen 1.3 per cent against the U.S. dollar as prospects for the Canadian economy have also dimmed.

Growth domestic product (GDP) contracted 0.1 per cent in January, following a deeper than anticipated slowdown that in the second half of last year.

Strategists at TD Securities say the Canadian economy has a "real problem on its hands," which will lead to broad weakness for the currency going forward.

They predict the loonie will spend much of this year in range where it will cost between $1.35 and $1.40 Canadian to buy one U.S. dollar. Put another way, that means it could dip as low as 71 cents US against the greenback. That's a more than five per cent decline from its current 75-cent level. 

"Prospects for Canadian dollar have shifted considerably to the downside over the medium-term. This comes in the wake of a poor fourth quarter GDP report, and the Bank of Canada returning to the drawing board on what it got wrong," said Mazen Issa, senior foreign exchange strategist at TD securities, in a note on Friday. 

"To put it bluntly, the Canadian dollar has established itself uniquely as a "problem child" in the G10. The positives are hard to find."

Issa thinks the Bank of Canada is now at the end of its tightening cycle after five interest rate hikes since mid-2017. If the central bank does move on rates this year, Issa says it will more likely be a cut.

"This dynamic should keep U.S. dollar - Canadian dollar [cross] elevated via the interest rate differential channel — especially given our view that the Fed has one last hike to deliver," Issa said, suggesting another rate hike from the U.S. Federal Reserve would further strengthen the U.S. dollar.

The probability of an interest rate hike from the Bank of Canada is at zero per cent for the next six months at least, according to trading in investments known as overnight index swaps. 

"As much as the Canadian dollar is a price taker to global factors, the Bank [of Canada] can no longer ignore the fact that final domestic demand has now contracted two quarters in a row (with the fourth quarter registering a paltry -1.5 per cent)," Issa said.

"The last time this happened was in 2015. Then, the economy registered a technical recession and the bank provided "insurance cuts" due to the collapse in oil prices."

Oil and the loonie

But so far this year, the benchmark price of U.S. oil — West Texas Intermediate (WTI) —has jumped almost 29 per cent on the back of production cuts from the Organization of the Petroleum Exporting Countries (OPEC), and Canadian energy producers.

However, Stephen Brown, senior Canada economist at Capital Economics, predicts another drop in oil prices, and slow wage growth are reasons why the loonie will decline to 72 cents US this year.

"We do not expect the rebound in oil prices to be sustained. Due to a combination of weak global demand and a likely pick-up in production in the U.S., we see WTI falling back to $45 US later this year," Brown said.

"Although Alberta's production cuts have proved effective at boosting Canadian oil prices relative to U.S. benchmarks, transporting oil by rail is not financially viable at the current low discounts."

Meanwhile, Bipan Rai, head of North American foreign exchange strategy at CIBC Capital Markets, is also betting on the Canadian dollar to fall further, even though he expects the currency's correlation to oil prices to wane. 

"As we've stated many times in the past, the Canadian dollar - crude oil correlation is hardly stable," Rai said in a note. "We expect the relationship to weaken in the near-term."

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Macron under fire as the 'yellow vests' ransack Champs-Elysees

Laurent Wauquiez renewed his call for a state of emergency. 'Another Saturday of violence which was left to degenerate in the heart of our capital'

Emmanuel Macron, the French president, came under attack yesterday (Sunday) from for failing to prevent “yellow vest” protesters from wrecking Paris’s grandest avenue, the Champs-Elysees.

The centrist president cut short a skiing break in the Pyrenees and flew back to Paris to hold a security meeting but critics said he should never have left the capital as the resurgence of violence was predictable.

Demonstrators smashed nearly every shopfront on the Champs-Elysees, set fire to a bank and burned cars during the 18th consecutive Saturday of protests against Mr Macron’s business-friendly economic reforms.

Laurent Wauquiez, leader of the main Right-wing opposition party, The Republicans, renewed his call for a state of emergency. “Another Saturday of violence which was left to degenerate in the heart of our capital,” Mr Wauquiez tweeted. “It is time to act.”


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