WASHINGTON — U.S. retail sales barely rose in January as tax increases and higher gasoline prices restrained spending, suggesting a slowdown in the pace of consumer spending early in the first quarter.
The Commerce Department said on Wednesday retail sales edged up 0.1% after an unrevised 0.5% rise in December.
The modest gain, which was in line with economist’s expectations, suggested that households were responding to the expiration of a 2% payroll tax cut on Jan. 1. Taxes also went up for wealthy Americans.
So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, ticked up 0.1% after gaining 0.7% in December.
Consumer spending accounts for about 70% of the U.S. economy and grew at a 2.2% annual rate in the fourth quarter. The pace is expected to slow this quarter as households adjust to smaller paychecks and higher gasoline prices.
Sales were mixed last month, with receipts at auto dealers slipping 0.1% after rising 1.2% in December. Excluding autos, retail sales increased 0.2% last month after advancing 0.3% in December.
Sales at building materials and garden equipment suppliers rose 0.3%, reflecting gains in homebuilding as the housing market recovery shifts into higher gear. Receipts at clothing stores fell 0.3%.
Sales at restaurants and bars were flat, while receipts at sporting goods, hobby, book and music stores rose 0.6%. Sales of electronics and appliances gained 0.2%, while receipts at furniture stores fell 0.2%.
OTTAWA • Financial leaders of the world’s richest countries, including Canada, are talking tough to emerging nations, warning their efforts to shore up domestic economies could lead to a currency war and possibly derail a global recovery.
We . . . reaffirm our longstanding commitment to market-determined exchange rates
The Group of Seven industrialized nations, in a communique Tuesday, cautioned that “excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.”
In an obvious reaction to policy moves by Japan, which have led to a sharply depressed yen, the G7 — of which Japan is a member — said the group should continue to be “oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.”
The G7, which also includes Canada, the United States, Britain, Germany, France and Italy, has called on members of the G20, primary emerging markets but also including China, to do much the same by adopting flexible rates.
“We . . . reaffirm our longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign exchange markets,” the group said.
Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney signed off on the G7 communiqué earlier Tuesday, ahead of a regular G20 policy meeting on Friday and Saturday in Moscow.
“It’s important that we as a G7 [members] go in united and forcefully to the G20 [meeting] to enlarge that commitment as quickly as possible amongst the major emerging economies,” Mr. Carney told the House of Commons finance committee, just hours after the G7 addressed its concerns.
Mr. Carney said some G20 members “entirely ascribe to the flexible exchange rates and are supportive, [while] others have a lot of work to do in the regard.”
“In part, it’s a dysfunctionality of the international monetary system that causes that.”
Mr. Carney, who will leave the Bank of Canada on June 1 to take the top job at the Bank of England, was making one of his last appearances to lawmakers Tuesday in Ottawa.
The strong Canadian dollar has often been blamed for the country’s weakened export market, although the higher loonie does encourage companies to import equipment at a relative discount.
“If we were to try to control the level of our exchange rate, we would have to start to close what is one of the most open and effective capital markets, money markets, in the world, in order to be successful,” Mr. Carney said.
Fred Chartrand/The Canadian Pressank of Canada governor Mark Carney signed off on the G7 communiqué earlier Tuesday.
From a Canadian point of view, there is no question that the Canadian dollar is over-valued
Speaking specifically about Japan, which recently raised its inflation target to 2%, he said there is “some concern that associated with those major very positive developments in macro policy, that Japanese authorities were targeting a certain level of the exchange rate.”
“The crucial point that we make here in Canada, and the Japanese authorities have agreed to acknowledge, is that monetary policy is focused on domestic outcomes. So if you’re focusing on the 2% inflation target, you’re targeting that domestic outcome, not the exchange rate.”
But Craig Alexander, chief economist at TD Economics, said the speculation over currency wars “is completely overblown.”
When the Bank of Japan, the U.S. Federal Reserve and the Bank of England “are all pursuing quantitative easing, all else equal, this will act to put downward pressures on their domestic currencies,” Mr. Alexander said.
“From a Canadian point of view, there is no question that the Canadian dollar is over-valued,” he said. “Just look at Canada’s trade deficit and current account deficit.”
That over-valued loonie is the result of other nations “exerting downward pressure on their currencies,” he said.
PARIS — The Organization for Economic Co-operation and Development says large multinationals are using legal loopholes to avoid paying their fair share of taxes and that global solutions are needed to combat the problem.
The OECD report says many rules designed to protect multinational corporations from being double-taxed go too far and sometimes allow them to pay no taxes at all.
It says such rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies.
The G20 countries commissioned the OECD study, which was released Tuesday ahead of a weekend meeting of finance ministers and central bankers from 20 of the world’s leading economies.
The OECD says the gaps that enable multinationals eliminate or reduce their taxation give them an unfair competitive advantage over smaller businesses.
That hurts investment, growth and employment and can leave average citizens footing a larger chunk of the tax bill, the OECD says.
“These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,” OECD Secretary General Angel Gurria said Tuesday in releasing the study.
“As governments and their citizens are struggling to make ends meet, it is critical that all taxpayers — private and corporate — pay their fair amount of taxes and trust the international tax system is transparent.”
The OECD said the practices multinational enterprises use to reduce tax liabilities have become more aggressive over the last decade.
“Some, based in high-tax regimes, create numerous offshore subsidiaries or shell-companies, each time taking advantage of the tax breaks allowed in that jurisdiction,” it said.
“They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no tax rate.”
The report does not suggest optimal tax rates, since each government decides that on its own.
However, the OECD said that in coming months it will draw up a plan in co-operation with governments and the business community that will further quantify the corporate taxes lost and provide concrete methods and timelines for reinforcing the integrity of the global tax system.
The OECD, with headquarters in Paris, is a global economic policy forum that provides analysis and advice to its 34 member governments and other countries worldwide.
LONDON/TOKYO – Fiscal and monetary policies must not be directed at devaluing currencies, the Group of Seven nations said on Tuesday in a statement aimed at cooling growing international tensions over exchange rates.
The intervention follows a barrage of rhetoric about a currency war, prompted largely by Japan’s new government pressing for an aggressive expansion of monetary policy, which has seen the yen weaken sharply as a result.
Japan said the statement gave it a green light to continue efforts to reflate its economy but a G7 official said it was aimed squarely at Tokyo, prompting the yen to surge.
“The G7 statement signaled concern about excess moves in the yen,” the official said. “The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”
G20 finance ministers and central bankers meet in Moscow on Friday and Saturday. Some have previously pointed out that the United States has adopted similar policies to Japan.
The G7 powers — the United States, Britain, France, Germany, Japan, Canada and Italy — reiterated their commitment to market-determined exchange rates and said they would consult closely to avoid disorderly and volatile market moves which could hurt economic and financial stability.
“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” said the statement, released by Britain which chairs the G8 (G7 plus Russia) forum this year.
Japanese Finance Minister Taro Aso said that recognized Tokyo’s policy steps were not aimed at affecting foreign exchange markets.
“It was meaningful for us as (the G7) properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets,” Aso told reporters.
U.S. and European officials have been concerned about comments from Japanese officials that suggested Tokyo was targeting a specific level for the yen.
But U.S. Treasury official Lael Brainard said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo’s efforts to reinvigorate growth and end deflation.
The dollar traded at 94.28 yen before the comment from the G7 official and plunged to a session low of 93.26 after it.
“Rather than calm the markets, the poorly communicated statement has significantly raised volatility and now we have to wait to see the actual outcome of G20 on the weekend,” said Richard Gilhooly, fixed-income strategist at TD Securities in New York.
Separately, the Swiss National Bank reiterated its determination to keep a lid on the strong franc, rejected charges it was contributing to a currency war, and said it expected the franc to keep weakening.
WORDS NOT ACTION
Last week, France went as far as calling for a medium-term target to be set for the euro out of concern the exchange rate had become too strong. Berlin rejected that suggestion.
French Finance Minister Pierre Moscovici made little headway at a meeting of euro zone finance ministers on Monday although Germany’s finance minister did sound a note of concern.
“There’s no foreign exchange problem in Europe,” Wolfgang Schaeuble told reporters at the end of a European Union finance ministers meeting in Brussels. “There are concerns that there could be something like this in other parts of the world.”
Since late last year, the euro has climbed more than 10 cents from below US$1.27. It has subsided in recent days after European Central Bank chief Mario Draghi indulged in a bit of gentle verbal intervention, saying he would monitor the impact of a strengthening currency.
The U.S. Federal Reserve and Bank of Japan are expanding their balance sheets rapidly by printing money, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year.
All else being equal, that could drive the euro yet higher, the last thing a struggling eurozone economy needs.
Any pain will be just as acute in emerging markets.
As newly minted cash pours into developing economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies.
That could fuel credit and asset price booms that sow the seeds of inflation.
Brazilian Finance Minister Guido Mantega told Reuters last week that the situation could get even worse if Europe joined the currency fray.
“In hospitality and retail, they have more transient workforces. They’ve got part timers and contract workers. They’ve got part-time workers that are students as well,” Cullwick said.
For unskilled and semi-skilled labour, he said, the implications are higher levels of unemployment and lower salary gains.
“You could argue it’s almost two divides,” he said, adding that there’s a “misalignment” for producing specialized skills and trades versus general university programs that are “educating” but not necessarily developing skill sets.
For Quebec, the Conference Board projected salary gains to be below the national average at 2.7%, while projections for Ontario and British Columbia are at 2.5%.
“We don’t have the same boom that’s coming from the resource and energy sectors,” added Allison Cowan, senior research associate of compensation and industrial relations at the Conference Board.
Manufacturing continues to be challenging in Ontario and to some extent in Quebec, Cowan said.
While teachers and health-care workers, such as nurses, can expect salary gains of 2.6%, in line with last year.
Unionized employees in the private sector should see wage increases averaging 2.3% this year, up from 2.1% in 2012, the board said.
Those in the public sector can expect to see their wages rise by an average of 1.6%, down from the 1.8% forecast last summer.
Cullwick said the private sector has been coming out of the 2009 recession while the public sector is “essentially in a financial recession.”
The four Atlantic provinces are expected to see a three% increase in non-union salaries this year, in line with previous estimates, and Manitoba salaries are still expected to rise 3.3% over the coming year.
By contrast, Alberta’s increases are now expected to come in at 3.9%, which is one-tenth of a point better than expected, while the estimate for Saskatchewan has been raised by three-tenths of a point to 4%.
OTTAWA — Bank of Canada governor Mark Carney is warning the Canadian economy would be damaged by a global currency war and that it would do little good to join the manipulators in trying to boost exports.
The outgoing bank governor was speaking to a Canadian parliamentary committee Tuesday after he and Finance Minister Jim Flaherty signed a Group of Seven statement denouncing exchange rate manipulation.
The statement issued in advance of the G20 meeting in Moscow later this week urges nations to set monetary policy to suit domestic conditions, not in an effort to lower the level of their currencies and gain a competitive advantage in export markets.
The statement appeared aimed at Japan, the world’s third largest economy, which set in motion a series of policy actions that have contributed to a 15 per cent devaluation in the yen against the U.S. dollar over the past three months. The U.S. and Europe have also maintained extremely accommodative monetary policies, although Carney called them appropriate given the circumstances in those economies.
But he acknowledged that Canadian exports are a key reason why the economy remains weak and that the strong loonie has not helped. He estimated the appreciation of the currency over the past decade or so was responsible for two-thirds of the loss in Canadian competitiveness.
“If we were to try to control the level of our exchange rate, we would have to start to close what is one of the most open and effective capital markets, money markets, in the world, in order to be successful,” he said.
“And secondly, there would be undoubtedly be a suspicion we weren’t trying to move the exchange rate to equilibrium level but we were trying to gain a competitive advantage.”
Carney said it was “extremely important” that the G7 follow the rules and that emerging nations in the G20, such as China, also move to flexible currencies.
A free-floating currency acts to absorb shocks in the economy, he explained. If the currency is fixed, the economy would need to adjust in other ways, specifically through lower real wages for workers.
The central banker also put some of the blame for Canada’s weaker-than-expected economy in the second half of 2012 to the spread between what eastern Canadians pay for imported oil and what Western producers receive when they ship to the U.S. The spread has risen to as high as $50 a barrel, a record high.
Finance Minister Jim Flaherty recently said the low value received by Western producers has also reduced government revenues, impacting the government’s bottom line.
But Carney said the cause had nothing to do with the drive in the U.S. for energy self-sufficiency. Instead, he said the fault lies in insufficient infrastructure to handle production.
“This is ultimately an issue of pipeline and refining capacity,” he said. “It is not our view that this is an issue of deficient U.S. demand. We see the possibility of American energy security in a few decades, but that’s in a North American context, that includes a substantial increase in exports of Canadian crude to the U.S. market.”
He added that Canada would be in a more advantageous position in terms of demanding higher prices if it were to diversify its markets, a nod to the controversial proposal to build a pipeline to the British Columbia coast in order to sell oil to China.
More generally, Carney said he believes the weakness in the Canadian economy during the latter half of last year was partly due to temporary factors.
Although the final data is not in, the Canadian economy grew only about 0.6 per cent in the third quarter and likely only by about one per cent in the last three months of 2012. That’s about one third what the central bank had anticipated earlier in the year.
But Carney said there had been some positive developments in the past few months as well. External risks are diminishing in Europe and the U.S. economy appears poised for a rebound, particularly in areas that will help the Canada — consumer spending and housing, he said.
But while the export sector may pick up, the Canadian domestic economy is losing steam, particularly in the housing sector, he said, adding that is the reason he believes interest rates will need to stay low for a long time.
For the economy to grow as the Bank of Canada anticipates — by two per cent this year and 2.7% next year — Carney said exports must return to pre-recession levels and business investment must expand.
On the latter front, Carney said he’s disappointed that investment fell off late last year.
The governor took some flack from corporate Canada in 2012 for urging firms to put “dead money” they had stored up to use, but Tuesday he said he was taking nothing back. Asked about the current situation, he said investment levels remain lower than they should be given the strong dollar, which makes purchases of foreign machinery and equipment less expensive, and the “productivity deficit.”
Carney was also pulled in on the issue of Canada’s employment record by NDP and Conservative members who wanted the governor to back their version of reality.
The governor tread a middle ground, acknowledging that Canada’s job creation record has been the best in the G7, but also that there remained “considerable slack” in the labour market.
He noted the unemployment rate at seven per cent is higher than pre-recession levels and that long-term joblessness — those unemployed for six months or longer — is at about 20%, also an elevated level. But he said some of the problem stems from a mismatch in the market, whereby those unemployed don’t have the credentials for the jobs being sought, or are unable to relocate to where the jobs are.
Carney also that eventual interest rate hikes are less imminent than previously thought due to weaker economic growth and inflation.
In his opening statement to the House of Commons finance committee, he repeated the economic outlook released in the Jan. 23 monetary policy report. He was accompanied by Senior Deputy Governor Tiff Macklem.
The shortfall is two-fold through 2012. Growth was less than anticipated, we think it’s coming in under 2%. Also, GDP inflation was lower as well, so nominal GDP growth was materially less
Below is the full text:
Good morning. Tiff and I are pleased to be here with you today to discuss the January Monetary Policy Report, which the Bank recently published.
While the global economic outlook is slightly weaker than the Bank had projected in October MPR, global tail risks have also diminished.
The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and uncertainty related to fiscal negotiations.
Europe remains in recession, with a somewhat more protracted downturn now expected than in October.
Growth in China is improving, though economic activity has slowed further in some other major emerging economies.
Supported by central bank actions and by positive policy developments in Europe, global financial conditions are more stimulative.
Commodity prices have remained at historically elevated levels, though temporary disruptions and persistent transportation bottlenecks have led to a record discount on Canadian heavy crude.
In Canada, the slowdown in the second half of 2012 was more pronounced than the Bank had anticipated, owing to weaker business investment and exports.
Caution about high debt levels has begun to restrain household spending.
The Bank expects economic growth to pick up through 2013.
Business investment and exports are projected to rebound as foreign demand strengthens, uncertainty diminishes and the temporary factors that have weighed on resource sector activity are unwound.
Nonetheless, exports should remain below their pre-recession peak until the second half of 2014, owing to a lower track for foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.
Consumption is expected to grow moderately and residential investment to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.
Relative to the October MPR, Canadian economic activity is expected to be more restrained. Following an estimated 1.9 per cent in 2012, the economy is expected to grow by 2.0 per cent in 2013 and 2.7 per cent in 2014. The Bank now expects the economy to reach full capacity in the second half of 2014, later than anticipated in October.
Core inflation has softened by more than the Bank had expected, with more muted price pressures across a wide range of goods and services, consistent with the unexpected increase in excess capacity.
Total CPI inflation has also been lower than anticipated, reflecting developments in core inflation and weaker-than-projected gasoline prices.
Total CPI inflation is expected to remain around 1 per cent in the near term. It is expected to rise gradually, along with core inflation, to the 2 per cent target in the second half of 2014 as the economy returns to full capacity and inflation expectations remain well-anchored.
Despite the reduction in global tail risks as a result of a series of actions by European and American authorities, the inflation outlook in Canada is still subject to significant risks.
The three main upside risks to inflation in Canada relate to the possibility of stronger-than-expected growth in the U.S. economy, higher Canadian exports and renewed momentum in Canadian residential investment.
The three main downside risks to inflation in Canada relate to the European crisis, more protracted weakness in business investment and exports in Canada, and the possibility that growth in Canadian household spending could be weaker.
Overall, the Bank judges that the risks to the inflation outlook in Canada are roughly balanced over the projection period.
Reflecting all of these factors, the Bank today maintained the target for the overnight rate at 1 per cent.
While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.
With that, Tiff and I would be pleased to take your questions.
OTTAWA — Following the grilling in London last week, outgoing Bank of Canada governor Mark Carney may be in for a second round of tough questioning Tuesday, this time from Canadian MPs.
Canada’s federal finance committee has traditionally tended to be respectful, even deferential, to Bank of Canada governors, but analysts say Tuesday’s two-hour session may see a different tone since it’s the first time the MPs will be speaking with Carney since he announced he’s leaving for the Bank of England in June.
On monetary policy, Carney is likely to be asked why the central bank had been so wide off the mark on its growth forecasts for the second half of 2012, and if the most recent estimate of a 2% advance this year could also be an overshot, given recent underwhelming data.
The governor will also likely be grilled on his decision to depart for a bigger pond while the Canadian economy is still fragile and over reports he was approached to run for the Liberal leadership at the same time he was vacationing with Liberal finance critic Scott Brison.
Few expect the Canadian hearing will be as gruelling as last week’s near four-hour marathon before a panel of British MPs. That session began with the chairman bluntly asking Carney to explain why he at first turned down the Bank of England job, then changed his mind, followed by whether he was worth $1.3-million a year.
It was a “thorough grilling,” said TD Bank chief economist Craig Alexander, but understandable under the circumstances.
The economy in the United Kingdom continues to drag along the bottom — having already suffered through a double-dip recession — and now faces the possibility of the third extended period of contraction.
“So I think it’s only natural you would expect a testimony to the (U.K.) Treasury committee to be a tough event because they are basically evaluating whether this foreign national should be allowed to conduct monetary policy for England,” he said.
Alexander points out that circumstances are far different in Canada, which has enjoyed mostly an expanding economy since the recession, better that average employment growth and a sound banking system.
But Bank of Montreal economist Doug Porter says the circumstances surrounding the hearings are sufficiently distinct from past Carney appearances.
“It might be interesting this time, given the political dimension and the fact that Mr. Carney is leaving in June, so it will be interesting to see if the tone changes,” he said.
“Hopefully the discussion will revolve mostly around the economy. I think there are some concerns here the bank needs to address.”
The Bank of Canada has been at the upper end of the forecast consensus for most of the past year, particularly for the last two quarters of 2012.
Although the bank did a mea culpa in January, last week’s trifecta of bad economic news — outright job losses, lower exports volumes and plummeting housing starts — casts further doubt on the bank’s 2.3% call for the first quarter of this year, and also the two-per-cent forecast for 2013 as a whole.
The economic consensus is down to 1.8% for this year and some, like research firm Capital Economics, now believe growth will average no better than one per cent.
Porter said it is not inconceivable that Carney may admit to a further downgrade in his projections at Tuesday’s meeting.
“That’s where I’d like to see the conversation go. What’s going on here? Is it short-term or have we badly underestimated the potential of the economy?” asked Porter.
Another sour development, to some economists, is the suddenly ice-cold Canadian housing sector. Carney supported the government’s clamp-down on mortgage rules in July to slow down household debt accumulation, particularly on mortgages.
But the correction may be more than Finance Minister Jim Flaherty and Carney bargained for. On Friday, CMHC reported that housing starts collapsed to 160,600 annualized for January, a 19% tumble in one month.
Capital Economics cited the new housing downturn in their revision of gross domestic product growth to one per cent.
“In theory it is possible that… the drop in January’s starts figures could just be statistical noise,” explained chief economist David Madani. “Coupled with the corresponding slump in building permits over the past couple of months, however, it is clear this is no statistical fluke, but rather the start of a severe downward trend.”
Carney could also face question about the impact of falling oil prices on the economy.
Last week, Flaherty told reporters lower commodity prices were starting to have a detrimental impact on government revenues.
According to Bank of Canada research on the deficit between what Canadians pay for oil and what Alberta producers receive, it can be as high as $40 a barrel at times.
OTTAWA — Canadians have taken on debt at a slower pace recently, but record-high personal debt remains a risk to the financial system and if the problem persists the central bank could hike interest rates, a senior Bank of Canada official said on Monday.
The central bank has described the heated housing market and indebted consumers as the biggest domestic threat to the Canadian economy, although there have been signs of cooling. Last month Moody’s Investors Services cut the ratings of six Canadian banks due to these concerns.
Financial system risks associated with household imbalances remain elevated
“The growth of household credit has shown signs of moderating in recent months,” Bank of Canada Deputy Governor Timothy Lane said in the prepared text of a speech he was delivering at Harvard University in Cambridge, Massachusetts.
“The momentum in house price growth, sales of existing homes, and new construction has also moderated. Nonetheless, financial system risks associated with household imbalances remain elevated.”
Lane warned household spending could still regain momentum or, conversely, there could be a sudden weakening.
The government has intervened four times in the mortgage market to discourage excessive borrowing and the banking regulator has also pressed banks to adopt stricter mortgage lending practices.
“If such targeted prudential measures turned out to be insufficient, monetary policy could also be used, within a flexible inflation-targeting framework, as a complementary instrument to address financial imbalances. So far, though, that has not been necessary in Canada,” Lane said.