Canada’s growth spurt seen easing ahead of fall fiscal update, Bank of Canada interest rate decision

OTTAWA — It’s not often the Finance Department and the Bank of Canada come so close to bumping heads on major policy announcements — but they will this week.

Both government institutions — linked at the hip, but still staunchly guarding policy independence — are set to reveal their latest economic assessments and forecasts, one day after the other.

And it’s not that current conditions are threatening to go south any time soon. Most forecasters are calling for only mildly lower adjustments in growth patterns over the coming months and into 2018, after fiery — many would say unsustainable — gains in the first half of this year. Interest rates, meanwhile, will likely continue to rise gradually as economic output nears full capacity.

Nor is the federal government’s finances anything to be unduly worried about — notwithstanding major NAFTA rejigging, general discomfort over the direction of the Trump administration and lingering concerns over the impact of tougher mortgage rules on the domestic economy.

Annual budget

In fact, the next annual Liberal budget — date yet to be determined, but probably two or three months into 2018 — is expected to show much less red ink on the fiscal books than previously predicted, thanks in large margin to better-than-anticipated revenues and over-the-top economic growth so far this year.

We’ll get a better taste of what is to come on Tuesday. That’s when Finance Minister Bill Morneau delivers his government’s fall fiscal update, which could include new measures to close more loopholes for some of Canada’s wealthiest taxpayers.

“We’re not expecting any big shifts in fiscal policy at this point, but we will — at least — get some direction,” said Douglas Porter, chief economist at BMO Capital Markets.

“I think the big news there will be just how much the picture has changed, thanks to the much-better-than-expected growth rate this year, giving Ottawa more flexibility,” he said.

“Our advice would be to use most of that flexibility to bring down the deficit and/or improve the medium-term outlook for growth — in other words, focus on tax relief or infrastructure spending.”

Even so, the economy is starting to come back down to Earth — or, at least, back to sustainable-but-slower growth. Instead of quarterly highs as much of 4.5 per cent that we saw in the first half of 2017, Canada’s growth spurt could ease to around two per cent in the second half of this year.

Economic forecasts

Meanwhile, on Wednesday, the Bank of Canada will lay out its latest economic forecasts in its quarterly Monetary Policy Report, along with an interest rate decision and followed by a news conference in Ottawa.

While many analysts are not anticipating a change in the current one-per-cent lending level, following two increases of a quarter-point — in July and September — the markets will be focused on the central bank’s revised GDP numbers.

Estimates from the previous MPR, published in July, put growth at 2.8 per cent for 2017, followed by two per cent next year and 1.6 per cent in 2019.

Those forecasts were released at the same time as a quarter-point rise to 0.75 per cent in the central bank’s trendsetting lending rate — the first upward move in seven years. That was followed by a hike of equal measure in September, taking the base borrowing cost to one per cent.

Bank Governor Stephen Poloz has since acknowledged there is “no pre-determined path for interest rates from here.”

Indeed, “if the bank needs to ‘monitor’ how the economy is doing with higher rates and other changes in the landscape, we won’t see the next rate hike until the Spring of 2018,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“But other uncertainties are ones that can’t be assessed by pushing a few buttons on the Bank of Canada’s forecast model. There’s no variable in the model for ‘NAFTA ends.’ There’s no button on the computer for ‘new mortgage rules’.”

This week’s back-to-back economic estimates could serve to highlight the debate over who is actually running the show — the Finance Minister or the Bank of Canada governor. It’s an issue that has fired up sporadically for decades.

Most recently, the issue was vocalized by Poloz himself after a prominent private-sector economist claimed late last year that the central bank “had” to raise its 2016 growth forecast, “since the governor’s boss, Minister Morneau, is out touting the benefits of fiscal stimulus.”

When asked to clarify the fiscal-monetary relationship, Poloz told reporters at the time: “The Finance Minister, sorry, is not my boss.… The Bank of Canada is a fully independent policymaker.”

The federal government would argue otherwise.

Regardless of who is supposed to be running what, Poloz and his monetary team are arguably at the policy forefront, given the overriding impact of interest rates on the economy — from food and housing costs, to the level of the Canadian currency and its influence on cross-border trade.

“I think of monetary policy as being more able to affect the economy in the short to medium term,” said Porter at BMO.

“Fiscal policy definitely takes a backseat in trying to steer the economy over the short term. I think the best thing fiscal policy can do is create a healthy background for the economy to flourish — or it can absolutely frustrate that,” he said.

“Generally speaking, it falls on monetary policy to try to fine-tune the economy as much as possible.”

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Amazon receives 238 proposals for its second headquarters

Amazon.com Inc has received 238 proposals from cities and regions across North America vying to host the company’s second headquarters, it said on Monday.

The number of applicants underscores the interest in the contest, which Seattle-based Amazon announced last month. The world’s largest online retailer said it would invest more than US$5 billion and create up to 50,000 jobs for “Amazon HQ2”. The deadline for submitting proposals was Thursday.

Amazon said 54 states, provinces, districts and territories in the United States, Canada and Mexico were represented in the bids.

Some said this month they could offer Amazon billions of dollars in tax breaks if they were chosen. New Jersey proposed US$7 billion in potential credits against state and city taxes if Amazon locates in Newark and sticks to hiring commitments, for instance.

Amazon did not disclose the range of incentives it was offered in the proposals.

Others took different tactics. The mayor of the Atlanta suburb of Stonecrest, Jason Lary, said his city would use 345 acres of industrial land to create a new city called Amazon. Amazon Chief Executive Jeff Bezos would be its mayor for life, Lary said.

Amazon is expected to choose a city that will help it recruit top talent to stay competitive with rivals such as Alphabet Inc’s Google.

The company has said it will make a decision next year.

Liberals Targeting Diabetics With Tax Grab, Conservatives Say

Finance Minister Bill Morneau leaves at the conclusion of a news conference on Parliament Hill on Oct. 19, 2017.

OTTAWA — Health groups joined forces on Sunday with the Conservative opposition to accuse the Liberal government of trying to raise tax revenue on the backs of vulnerable diabetics.

The accusation opened a new front in the ongoing opposition waged war on government taxation policy, amid the backdrop of the conflict-of-interest controversy dogging Finance Minister Bill Morneau over whether he’s properly distanced himself from millions of dollars of private sector assets.

Diabetes Canada was among the groups that joined Conservative politicians to publicly denounce what they say is a clawback of a long-standing disability tax credit to help them manage a disease that can cost the average sufferer $15,000 annually.

His tax department tried to tax the employee discounts of waitresses and cashiers. Now his government is targeting vulnerable people suffering with diabetes with thousands of dollars in tax increases.Tory MP Pierre Poilievre

Conservative finance critic Pierre Poilievre branded it as one more example of an out-of-touch Liberal government that he characterized as unfairly targeting the hardworking middle class people it claims to support.

“His tax department tried to tax the employee discounts of waitresses and cashiers. Now his government is targeting vulnerable people suffering with diabetes with thousands of dollars in tax increases,” Poilievre said on Sunday at a Parliament Hill news conference flanked by fellow Conservative critics, a young diabetic constituent and a top official with a leading diabetes advocacy organization.

In May, the revenue department stopped approving a disability tax credit for people with Type 1 diabetes for those who had previously claimed it, he said.

People who need more than 14 hours per week for insulin therapy, and had a doctor’s certification previously qualified. But other than citing a spike in applications for the benefit, the government offered no explanation for the change during initial interactions earlier this spring, said Kimberley Hanson of Diabetes Canada.

Thousands of claimants from across Canada who had previously been given the $1,500 annual benefit have been rejected in recent months, but Hanson said she can’t get an exact number from Canadian Revenue Agency and has had to file an Access to Information request to find out.

Watch Morneau get testy with reporter:

In recent months, the agency officials and Minister Diane Lebouthillier have for the most part rebuffed their overtures.

“Over the past two months, she’s stopped responding to my messages and answering some of my questions,” Hanson said, referring to one senior department official.

On Saturday, a senior department official reached out to her to reopen dialogue, she said. Poilievre said that only happened because the matter was raised briefly on Friday by the Conservatives during Question Period.

“Applicants are now being denied on the basis that ‘the type of therapy indicated does not meet the 14 hour per week criteria.’ These denials are in contradiction of the certifications provided by licensed medical practitioners and do not appear to be based on evidence,” says an Oct. 3 letter to Lebouthillier, signed by Diabetes Canada, the Canadian Medical Association, the Canadian Nurses Association, the Canadian Society of Endocrinology and Metabolism and two other organizations.

Pierre Poilievre speaks to journalists on Parliament Hill on May 27, 2015.

In an emailed response to The Canadian Press on Sunday evening, a spokesman for Lebouthillier writes that the “concerns brought up by the Juvenile Diabetes Research Foundation, and other groups, are worrisome.”

It says the minister has initiated a “five-point plan” that included numerous consultations with “stakeholders” to better understand how the benefit is administered.

It says she wants the agency to improve its data collection and is planning to hire more nurses to work in processing centers to evaluate the claims.

This would help “to ensure that a medical professional is involved in the reviewing of individual’s applications,” said the emailed statement.

This latest complaint about the government’s tax policy comes after the Liberals were forced to reset proposed tax measures after weeks of vocal opposition from small business owners, doctors, farmers and backbench Liberal MPs.

More from Huffpost Canada:

‘It’s not like I can snap a finger and this disease turns off’

The Canada Revenue Agency was also recently forced to withdraw a notice that targeted employee discounts after it caused an uproar.

“It’s not like I can snap a finger and this disease turns off,” said Madison Ferguson, a constituent of Poilievre’s who first raised it with her MP this summer after her claim was rejected.

She said she has to constantly calculate the effect of what she eats, while monitoring her blood sugar levels as much as four to 10 times a day, using test strips that cost $1.50 to $2 each time.

“It’s quite expensive but it’s needed because without this I wouldn’t be here,” said Ferguson. “So every moment of every day has to be calculated.”

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Retail drop, subdued inflation put Bank of Canada rates on hold

An unexpected decline in retail sales and scant evidence of inflation pressure will give the Bank of Canada little reason to press ahead with a third-straight rate increase next week.

Statistics Canada reported Friday retail sales declined 0.3 per cent in August, versus a median forecast of a 0.5 per cent gain. They also showed that excluding a jump in gasoline, inflation was little changed in September.

The two indicators are the last of any significance before the Bank of Canada’s Oct. 25 rate decision, and suggest no urgency for Governor Stephen Poloz to increase borrowing costs again after two hikes since July. The Canadian dollar fell 0.6 per cent to C$1.2558 after the report. Odds of a rate increase next week fell to about 19 per cent, from 21 per cent yesterday, swaps trading suggests.

“A very slow turn in prices, and what looks like another ho-hum month for GDP augurs for a dovish take on the Bank of Canada on Wednesday next week,” Nick Exarhos, an economist at CIBC Economics, said in a note to investors.

The retail sales number was the big disappointment, and reinforces expectations the nation’s economy is heading for a slowdown after strong growth earlier this year. Monthly retail sales are little changed since touching a 2017 high in May. In volume terms, sales fell 0.7 per cent in August, the biggest decline since March 2016.

Motor vehicle sales were one sector of strength, and the total number also got a boost from higher gasoline prices. But excluding those two sectors, sales were down 1.3 per cent.

Canadian consumer price inflation in September jumped to its highest level since April on gasoline prices, but the gain was less than expected.

Annual inflation accelerated to 1.6 per cent on the higher gas prices, versus economist expectations for 1.7 per cent. Excluding gas, the annual inflation rate was unchanged at 1.1 per cent. The average of the Bank of Canada’s three key core inflation measures was 1.6 per cent, versus 1.57 per cent in August. The core rate is the highest since January

While the inflation rate remains below the central bank’s target, the Bank of Canada has justified this year’s rate hikes by citing quickly vanishing excess capacity in the economy and by claiming the forces keeping inflation subdued are temporary.

Outside of gasoline however, the report showed inflation pressures remain muted in most sectors.

Bloomberg.com

Canada’s inflation is up, but retail sales are down

OTTAWA — Canadian consumer prices picked up their pace last month as the annual inflation rate moved up from very low levels and closer to the Bank of Canada’s ideal target of two per cent, Statistics Canada said Friday.

Higher gasoline prices helped push the annual inflation rate in September to 1.6 per cent, up from 1.4 per cent a month earlier and away from its two-year low of just one per cent in June, the agency said. Excluding gas prices, inflation was 1.1 per cent.

The inflation-targeting central bank scrutinizes inflation ahead of its rate decisions. Its next benchmark rate announcement is scheduled for next Wednesday.

However, only one of the bank’s three preferred measures of core inflation, which seek to look through the noise of more-volatile items, increased last month while the others stayed put.

Statistics Canada also released numbers Friday that showed retail sales contracted 0.3 per cent in August, after increasing 0.4 per cent in July. Retail sales volumes in August recoiled 0.7 per cent.

Excluding sales at gas stations and auto dealers, the report said retail trade was down 1.3 per cent in August. Sales were also down 2.5 per cent at food and beverage stores and 2.4 per cent at furniture and home furnishings stores.

The retail sales data suggests the economy is starting to show signs of slowing down, as widely expected, following its red-hot performance in the first half of the year.

On inflation, the report highlighted gasoline, travel tours and air transportation as the biggest upward contributors to consumer prices. The downward pressure was led by cheaper electricity, women’s clothing furniture.

The report also found that consumer prices rose in seven of the 10 provinces in September.

How can a country find itself half a trillion poorer overnight? Tracking Britain’s missing billions

Some 500 billion pounds has fallen off Britain’s balance sheet, or so a revision to official data appears to show. UK investors were thought to have ramped up spending abroad, giving Britain a cushion of sorts against economic and political turmoil – the net international investment figure turned positive last year for the first time since the financial crisis.

Yet revisions from the Office for National Statistics indicate that was an illusion. Unexpectedly, the stock of foreign investments in the UK still outweighs British investments abroad.

What is the net international investment position?

This measures the amount of money that British investors put into foreign assets, minus the amount foreign investors put into UK assets.

It can include bonds, shares, factories, houses, derivatives and any other investments. As a result, it is particularly difficult to measure. The overall sums are huge, with both numbers at above 10.5 trillion pounds.

How has it performed?

UK-owned assets abroad peaked at 11.4 trillion pounds in late 2008 and have bounced around the 10 trillion pounds to 11 trillion level ever since. Meanwhile, foreign-owned assets in the UK peaked at 11.6 trillion pounds in 2011.

The result is that the net investment position historically has usually been either negative or around zero, with foreign-owned assets in the UK outweighing UK-owned assets abroad. While that may sound like a bad thing, it reflects the attractiveness of UK assets. During the eurozone crisis, for example, Britain was often seen as something of a safe haven by international investors. As a result, Britain was a net receiver of inflows of international investment, giving a net deficit position on this metric.

If foreign investors seek to repatriate or redistribute this investment now that the eurozone economies are picking up – or British investors become particularly keen to put money into the recovering continental economies – then the metric will swing into positive territory. Initial estimates of the international investment position did appear to show something like this happening. The fall in the pound also affected the value of overseas investments. As a result, Britain suddenly had a net “positive” position of just shy of pounds 470 billion for 2016. The new revision eliminates that positive net position, instead revealing a small negative figure.

But where has that gone?

The revised data show that there was indeed a big shift in the position in 2016, but from a much lower base as the entire history of the database has been adjusted. Instead of going from a negative position of 86.4 billion pounds to a positive 468.5 billion pounds, the gap went from minus 437.3 billion pounds to minus 21.3 billion pounds.

In terms of the change to the figure for 2016 alone, there was more foreign investment into the UK and less British investment abroad. One factor was a surge in foreign investment into the UK from large specific deals, such as the 24 billion pounds acquisition of Arm Holdings by the Japanese group SoftBank. Another revision was caused by the ONS refining the way it calculates interest on corporate bonds.

Changes to investment patterns have also had an impact. Increased levels of investment in benchmarked funds have pushed more global money than anticipated into UK stocks. As a result, the net international investment position has fallen.

Is it important?

Yes and no. In the grand scheme of things, a few hundred billion pounds – hard though it may be to believe – is not all that large. British investors hold more than 10.5 trillion pounds of foreign assets, and foreign investors hold more than 10.5 trillion pounds of UK assets.

A small rise in one and fall in the other can produce very large changes in the net balance. The headline figures also refer to the stock of investment rather than flows, so it can be tricky to work out which element of the balance has been caused by “new” investment or asset sales.

That said, the changes can have important effects on asset prices and on the value of the pound.

Take the important example of the UK’s current account balance. The UK runs a substantial trade deficit as Britain imports more than it exports. The gap between the two is plugged by the sale of UK assets to foreign buyers and by borrowing from abroad. Mark Carney, the Bank of England Governor, has dubbed this “the kindness of strangers.” If foreign investment dried up then it would cause the pound to fall, with the effect of pricing UK goods into the global market, and forcing up the cost of imports. In this sense, a sudden fall in investments in the UK, which would be represented by that sharp rise in the net international investment position, could be worrying.

Now that the numbers indicate a small negative position, we can see that strangers are indeed still being kind to the UK.

On the other hand, ownership of foreign assets can be useful for Britain. Foreign assets provide diversification, as well as a flow of net income from abroad – something that is welcome at a time of sterling depreciation. So a sharp rise in net investment could be worrying.

Will this last?

The numbers do show only a very small negative position for last year.

If that points to a slowing in foreign investment into the UK, or even a reversal, then it could be a problem.

Analysts believe there was a move to pull money out of the UK until the Bank of England began talking up the prospect of an interest rate rise.

That encouraged funds to flow back into the UK, which in turn helped to boost the value of sterling. But a trend of flows out of the country could have worrying implications, given the size of the current account deficit.

How healthy are other economic indicators?

The net international investment position is only one sign of Britain’s economic health and how the world views the UK. Another is the value of the pound. This can be seen as the sum of all the bets on the UK economy’s future growth prospects. Investors put money into a country when they think it is likely to do well and they anticipate a higher return, pushing a currency up, and pull it when an economy performs less well.

Sterling dived after the Brexit vote but has suffered many ups and downs since – for instance rising in September when the Bank indicated it could raise interest rates soon.

The current account, which measures goods and services imported and exported, is also worth keeping an eye on. The UK has a substantial deficit as imports of goods far outweigh exports. The surplus in services trade is of a smaller scale than the deficit in goods, leaving the country with a deficit overall. Analysts had anticipated this deficit would shrink following the Brexit vote as the weaker pound made imports more expensive and exports more competitive. There are few signs of this taking place as yet, however, in a blow to hopes the UK would use the weaker pound to rebalance its economy. Monthly imports of goods and services hit a record high of 55.8 billion pounds in July, while exports stood at 50.2 billion.

The most important indicator of all, gross domestic product, has slowed in recent months. Growth of 0.3 per cent in the first and the second quarters is underwhelming.

However, economists at the EY Item Club – private sector analysts who use the Treasury’s model to calculate growth – expect that a gradual acceleration will take place, slowly but surely improving growth rates over the coming years.