How much longer do we have to wait for Canada’s economic engine to get into high gear?

OTTAWA — Canada’s economy is not running at full capacity. That much we know.

Just how much slack exists, and how long it will take to eliminate it, is not as clear. That’s because measuring the so-called “output gap” — the difference between the economy’s potential and its actual performance — can be an elusive pursuit.

Those outside of business circles and economic academia know little or nothing about it — even though the level at which the country can produce items and pay its workers to make that happen affects everyday prices and, ultimately, interest rates.

At the moment, striking that balance — i.e., sustainable growth without ramped-up inflation — appears to be some ways off.

Canadian production remains weak and inconsistent, job and wage growth has been minimal, and the rate of inflation has spent much of the past two years below 2%, the Bank of Canada’s not-too-cold, not-too-hot comfort level. And despite a recent spike in Statistics Canada’s consumer price index — tracked by the central bank — those increases are due to gains in energy costs that are unlikely to persist, say economists.

After a strong start, Canada’s economy now has little to show for all the efforts of policymakers since the 2008-09 downturn to encourage business investment, market growth and hiring.

Five years on, we’re left with bottom-feeding interest rates, over-extended consumers and investment-wary corporations, along with a housing market that is still circling for an soft landing.
Hopes of a sustained recovery remain unfulfilled — perhaps still two years off, maybe longer. As a result, we don’t seem to be getting any nearer to closing the output gap, let alone truly understanding it.
“Measuring the output gap is no easy task,” the Bank of Canada admits in its own briefing documents.

“The challenge is that, unlike actual output, the level of potential output — and hence the output gap — cannot be observed directly, and so cannot be measured precisely.”

Right now, the central bank’s nearest estimate has the economy operating 0.7% below capacity.

In fact, output hasn’t reached the desired strength since the first quarter of 2012, the bank’s data show. Still, that’s better than the minus 2.4%-to-3.6% range calculated during the depths of the recession.

The rule of thumb is that an economy churning at full capacity with existing resources — that includes employees and equipment — is unlikely to put pressure on prices one way or the other. But when demand for goods and services increases above capacity, prices tend to go up. When demand eases, businesses are left with spare capacity and prices begin to fall.

Running on all cylinders would herald the return to a balanced, self-sufficient economy. And that would determine the timing and level of the Bank of Canada’s trendsetting interest rate, which is meant to keep inflation in check — one direction or the other.

Stephen Poloz, the central bank governor, has pushed back the anticipated timetable for closing the output gap three times in the past year, as the global outlook for growth shifted.

His most recent estimate of when the pace of price increases and full production will converge — closing the gap — is around mid-2016. That’s also when the bank’s key lending rate — at 1% since September 2010 — should have already been heading higher.

Many economists see the first rate hike coming in mid-2015, about the same time as the U.S. Federal Reserve — the central bank of our biggest trading partner — is expected to push borrowing costs higher.

Even here, it is not an exact science.
“There’s no hard and fast rule for when interest rates should start going up, based on the output gap,” says Douglas Porter, chief economist at BMO Capital Markets.

“I think the old assumption was that rates should be close to neutral [neither too high, nor too low] when the output gap closes. Suffice it to say, 1% is a long way off from neutral,” Mr. Porter adds.

“I believe that the bank would probably want to be gradually starting to raise rates before the output gap is fully closed…. I think the mistake they do not want to make is to tighten too early.”

Again, how close we are to closing the gap depends on which government agency or global organization is doing the calculating. Along with the Bank of Canada, our own Finance Department and many global agencies — such as the Organization of Economic Development and Co-operation — all monitor this country’s output level. And all arrive at a slightly different end point.

Measuring the output gap is “very much subject to judgment,” says Randall Bartlett, senior economist at TD Economics.
“It’s extremely volatile and it doesn’t seem to be explained by economic fundamentals,” says Mr. Bartlett, who co-authored a 2010 study on the issue while with the Parliamentary Budget Office.

“[But] the more information, the better, I think. It helps market participants. It helps consumers. It helps investors.”

Knowing that higher interest rates will be on the horizon as the output gap narrows should be a cue for companies to begin — if they haven’t already — investing in the tools needed to meet that stronger demand.

Jeff Brownlee, at Canadian Manufacturers & Exporters, says the group’s annual survey of members found 64% plan to invest in machinery and equipment over the next three years.

“[So] the key is to get financing in place first and secured…. The decision is made with a view that the cost of financing will go up a little over time,” he adds.

“Remember, though, when you invest in machinery, this is a long-term process and doesn’t happen overnight. You’re looking anywhere from six to 18 months — if you are lucky.”

Craig McIntosh, executive chairman of Winnipeg-based Acrylon Plastics, said “now that the dollar is returning to a more normal level, around 90 US cents, we will see a significant growth in Canadian manufacturing exports from those companies which have heavily invested in new equipment in order to improve productivity and become more competitive.”

“The results of these expenditures are starting to be seen in the manufacturing sector as the equipment is being implemented,” he says.
“From our experience, we are now able to produce two to three times the output per employee than what we were able to produce 10 years ago.”

Canada’s trade surplus biggest since 2008 as auto sales drive exports to record high

Canada posted the widest merchandise trade surplus in almost six years in July as automobile shipments led exports to a record high.

The surplus grew to $2.58 billion, the largest since October 2008, from $1.83 billion in June, as exports rose to a record, Statistics Canada said Thursday in Ottawa. Motor vehicle and parts shipments jumped 9.7% to $6.9 billion.

Canada needs sustained export gains to encourage businesses to boost investment and carry the world’s 11th largest economy to full output over the next two years, the country’s central bank said yesterday. The Bank of Canada kept its key interest rate at 1% to extend the longest pause since the 1950s saying that increased U.S. demand and a weaker currency aided exports in the second quarter.

“At the mid-point of 2014 we are seeing ongoing growth as Canadian trade continues to increase with both strong demand for Canadian exports and for imports to Canada,” Robin Silvester, Chief Executive Officer of the port of Vancouver, Canada’s largest, said in an Aug. 27 report.

The July surplus exceeded all 18 forecasts in a Bloomberg economist survey with a median of $1.15 billion.

Exports rose 1.4% to a record $45.5 billion in July, Statistics Canada said. Forestry product shipments climbed 3.6% to $3.11 billion. Crude oil and bitumen declined 1.6% to $8.5 billion from June’s record of $8.6 billion.

Weaker Dollar

Calgary-based oil and natural gas producer Vermilion Energy Inc. says its revenues are being aided by rising U.S.-dollar energy prices and the weaker Canadian dollar when it brings the proceeds home to pay local costs.

“This is a pretty good macro environment for the company, you can have relatively strong commodity prices and a weakening Canadian dollar environment,” Anthony Marino, president and chief operating officer of, said on Aug. 27 in an interview at his office.

The July export increase follows the second-quarter gain at a 17.8% annualized pace that led output growth of 3.1%.

Imports fell 0.3% to $43.0 billion, the second monthly decline, Statistics Canada said today.

The volume of exports advanced 1.1% and import volumes rose 0.4%, Statistics Canada said. Volume figures adjust for price changes and can be a better indicator of how trade contributes to economic growth.

Exports make up about one-third of Canada’s economy, with about 75% of the shipments going to the U.S.

U.S. Surplus

Wednesday the Bank of Canada dropped language about “serial disappointment” with global growth, saying that “a solid recovery seems to be back on track” in the U.S. while “the recovery in Europe appears to be faltering as the situation in Ukraine weighs on confidence.”

The surplus with the U.S. widened to $5.1 billion in July from $4.9 billion a month earlier. The deficit with countries other than the U.S. narrowed to $2.6 billion from $3.0 billion.

Statistics Canada also released a draft paper explaining efforts to reduce its revisions to estimated energy shipments. The agency is exploring new sources of data on crude oil and natural gas and improved calculation methods to curb “a pattern of somewhat larger revisions to energy products.” One of the main problems is that some of the data doesn’t arrive in time to be included in monthly trade reports, according to the paper.

Canada GDP grows at fastest pace in almost 3 years as exports surge

OTTAWA — The Canadian economy accelerated more than expected during the second quarter — hitting the fastest pace in almost three years — driven by a long-awaited rebound in exports and increased growth in household spending.

Gross domestic product grew by an annualized 3.1% between April and June, which was the strongest performance since a 6.2% jump in the first quarter of 2012, Statistics Canada said Friday.

Most economists had forecast GDP to increase 2.7% in the second quarter of this year. The federal agency also revised first-quarter economic growth to 0.9% from an original estimate of 1.2%.

The economy is running above the Bank of Canada’s most recent second-quarter forecast of 2.5%, but policymakers are unlikely to alter their neutral stance next week on the direction of their key interest rate. The benchmark level has been idling at 1% since September 2010 and bank governor Stephen Poloz has so far kept his options open — pointing to neither a hike nor a cut in borrowing costs.

Still, Mr. Poloz and Finance Minister Joe Oliver have been encouraging businesses to spend more and expand their markets — particularly given recent positive economic signs in the U.S, the biggest destination for products and service from Canada.

Friday’s GDP report provided some welcome news on that front, with exports jumping 17.8% in the second quarter on an annualized basis, the largest gain since the third quarter of 2011 when shipments surged by 25%. In the first quarter of this year, exports actually declined by an annualized 0.7%.

Imports were also stronger in the first quarter, jumping 11.1%, the biggest gain since 11.9% in the second quarter of 2010.

Household consumption, which has provided the largest boost to the economy since the 2008-09 recession, rose by an annualized 3.8% between April and June — a rate last seen in the second quarter of 2013.

Meanwhile, for June alone, Statistics Canada said GDP was up 0.3% — slightly above forecasts of 0.2% — after an upwardly revised 0.5% rise the previous month. The federal agency had previously estimated the May increase at 0.4%, following an advance of 0.1% in April.

Tablets for Tots

Among kids ages 2 to 12, tablets are fast becoming the go-to digital distraction. Use of the devices in that demo leaped from 38% in 2013 to 48% this year, according to the research firm NPD. And while the features are far richer than those of the Game Boys of yesteryear, many parents’ concerns remain the same: Does my kid really need another device to suck her into her own world–and away from ours?

This appears in the September 8, 2014 issue of TIME.

Wall Street Goes Green

I’ve often heard the wind and solar industries mocked as “hippie energy” or “Obama power.” Mitt Romney once dissed them as “imaginary.” But at this summer’s Renewable Energy Finance Forum (REFF) Wall Street, clean-tech venture capitalist Christian Zabbal offered a new jibe: “bulge brackets.” Zabbal complained that the wind and solar space has become so safe–and so overcrowded with giants like Bank of America, Citigroup and Goldman Sachs–that it’s no longer attractive to cutting-edge investors. …

This appears in the September 8, 2014 issue of TIME.

Detroit: America’s Emerging Market

In August, a year after I wrote a TIME cover story on Detroit’s bankruptcy, I visited Motown again. This time I found myself reporting on a remarkable economic resurgence that could become a model for other beleaguered American communities. Even as Detroit continues to struggle with blight and decline–more than 70,500 properties were foreclosed on in the past four years, and basic public services like streetlights and running water are still spotty in some areas–its downtown is booming, full of bustling restaurants, luxury lofts, edgy boutiques and newly renovated office buildings.

The city struck me as a template for much of the postcrisis U.S. economy–thriftier, more entrepreneurial and nimble. Many emerging-market cities, from Istanbul to Lagos to Mumbai, share similar characteristics, good and bad. The water might be off on Detroit’s perimeter, but migrants are flooding into its center, drawn by lower-cost housing and a creative-hive effect that’s spawned a host of new businesses.

Much of the resurgence has been led by Quicken Loans founder Dan Gilbert, who a few years back decided to relocate his company’s headquarters downtown, moving from the suburbs to take advantage of the city’s postcrisis “skyscraper sales,” as well as the growing desire of young workers to live in urban hubs. “If I wanted to attract kids from Harvard or Georgetown, there was no way it was going to happen in a suburb of Detroit, where you’re going to walk on asphalt 200 yards to your car in the middle of February and have no interaction with anyone in the world except who’s in your building,” says Gilbert, 52.

Since 2010, Gilbert has created 6,500 new jobs downtown, bought up tens of thousands of square feet of cheap real estate and brought in 100 new business and retail tenants, including hot firms like Twitter, as well as a bevy of professional-services firms. Lowe Campbell Ewald, one of General Motors’ advertising agencies, recently moved back downtown after years in the suburbs, citing better client-recruitment possibilities there. Companies of all types are catering to a growing number of young entrepreneurs who are making the most of cheap real estate (Quicken subsidizes rents and mortgages) and local talent (southern Michigan still has one of the nation’s highest concentrations of industrial-product designers) to create new businesses. For instance, there’s Chalkfly, a dotcom that sells office and school supplies online, and Shinola, the cult-hit watch company that advertises $600 timepieces as “made in Detroit.” Their success is already raising rents–per-square-foot rates have doubled in the past four years–and bringing in tony retail brands like Whole Foods.

The question now is how to spread the prosperity. The answer starts with better public transportation. Motown has always been a disaster in this respect. It used to be that nobody wanted to go downtown; now nobody wants to leave. The M-1 Rail, a new public-private streetcar due to be completed in 2016, aims to link neighborhoods. GM, Penske, Quicken and other firms are contributing the majority of its $140 million cost, and the rail will be donated back to the city within a few years. Studies show that a similar project in Portland, Ore., has generated six times its cost in economic development. In the past few months, officials from New Orleans and Miami have visited Detroit to study the project.

Reinventing Detroit’s manufacturing sector is the next step. That means connecting the dots between the public and private sectors, businesses and universities, and large and small firms. Detroit’s old industrial model was top-down: the Big Three dictated terms to thousands of suppliers, who did what they were told. The new model will be more collaborative. Many of the innovations in high-tech materials, telematics and sensors are happening on campuses or at startups, with the aid of groups like the Michigan Economic Development Corp. The University of Michigan has become a test bed for driverless cars. A new federally funded $148 million high-tech manufacturing institute just opened in Detroit’s Corktown neighborhood.

One could imagine the automakers playing a key role in this resurgence by investing more broadly in local innovation, via their own venture-capital arms. Ford, which acquired a local digital-radio technology startup last fall, is beginning to do just that. It would provide a much needed injection of cash into the city’s innovation economy and offer the automakers a new line of business.

Ultimately, it will take all that and more to ensure that Detroit’s downtown rebirth grows into a boom that is more broadly shared.

Statistics Canada jobs blunder that sent the loonie tumbling was ‘isolated incident’

Statistics Canada said the main cause of an incorrect job report earlier this month was a failure by staff to understand that an update to part of its processing methods triggered wider and unanticipated changes in its flagship survey.

“This change was perceived as systems maintenance and the oversight and governance were not commensurate with the potential risk,” said the report commissioned by Chief Statistician Wayne Smith and published Thursday in Ottawa. “Communications among the team, labour analysts and senior management around this particular issue were inadequate.”

The review follows the Aug. 15 correction of the July employment report to show a gain of 41,700 instead of an initial estimate of 200 new positions. Since then, Finance Minister Joe Oliver and Bank of Canada Governor Stephen Poloz have expressed confidence in the agency’s work.

Statistics Canada said Aug. 15 the mistake was an “isolated incident” that was caused when staff failed to run a computer program that was part of a scheduled update to the survey. Canada’s dollar weakened after the initial job report and strengthened when the corrected figures were published.

The first time staff realized there could be a problem was the morning of Aug. 8 after the incorrect figures were published, the report said.

The report makes five recommendations to prevent a repeat of this kind of mistake, in areas of governance, testing protocols, diagnostics, documentation and communication.

European lawmakers threaten to scupper Canada trade deal

BRUSSELS — EU lawmakers are threatening to block a multi-billion dollar trade pact between Canada and the European Union — a blueprint for a much bigger EU-U.S. deal — because it would allow firms to sue governments if they breach the treaty.

The agreement with Canada, a draft of which was seen by Reuters, could increase bilateral trade by one fifth to 26 billion euros ($34 billion).

But European consumer and environmental groups say a mechanism in the accord would allow multinationals to bully the EU’s 28 governments into doing their bidding regardless of environmental, labor and food laws and would set a bad precedent for the planned EU-U.S. trade pact.

The European Parliament must ratify both the Canada and the U.S. pacts. Since elections in May, the rise of nationalist, Eurosceptic parties in the legislature, many of them opposed to globalization, have complicated the EU’s free-trade ambitions.

“The Greens will fight hard to get a majority in the parliament against (the EU-Canada deal),” said Claude Turmes of the Green group, echoing concerns from others in the European Parliament, including the Socialist bloc.

Tiziana Beghin, an EU lawmaker from Italy’s anti-establishment 5-Star Movement who sits on the parliament’s influential trade committee, called the EU-Canada deal an “affront to democracy”.
“Giving corporations the right to sue governments for loss of anticipated profit would be ridiculous if it were not so dangerous,” she told Reuters.

According to the draft accord, the chapter on “Investor-State Dispute Settlement” (ISDS) allows companies to sue either an EU country or Canada in a special court if they think their trade interests have been damaged.

Some member states, including Germany, the EU’s biggest economy, have also expressed opposition to the ISDS.

Canada and the European Commission deny accusations that the ISDS mechanism will give multinationals too much power. They say dispute settlement has been an important part of trade deals since the North American Free Trade Agreement 20 years ago.
Some in business consider it an insurance policy against the impact of laws on their profits or against expropriation.


In the European Parliament, it is not yet clear whether there is enough opposition to block the EU-Canada deal, but the very fact such threats are being made indicates the change in tone from the previous, more business-friendly parliament.

Together with the Socialists’ 191 members, the political groups opposing the agreement could count on 341 votes, just 35 short of a majority.

Passing the accord is likely to depend on centrist parties forming a grand coalition and much will depend on how the Socialists, who say they oppose the dispute mechanism, vote.

In 2012 the EU Parliament flexed its muscles by rejecting an Anti-Counterfeiting Trade Agreement, which would have set global standards for enforcement of intellectual property rights.

Blocking the Canada trade deal would send a very negative signal on the chances of the even more ambitious EU-U.S. accord, which if approved would encompass almost half of the global economy and about a third of world trade.

“This issue is very important since the accord with Canada with the arbitration clause would foreshadow a deal with the United States,” said French far-right leader Marine Le Pen.

Hostility to the dispute settlement panel has united those such as Le Pen, who see it as a threat to national sovereignty, and those worried about the implications for environmental law.

Dutch Green MEP Bas Eickhout said the draft deal would “open the backdoor” for firms to kill off environmental legislation.

The EU and Canada hope to sign the accord — officially known as the Comprehensive Economic and Trade Agreement (CETA) — at an Ottawa summit on Sept. 25-26, officials said. It must still be ratified by both the EU and Canadian parliaments.

© Thomson Reuters 2-14