Econ­omy on un­fa­mil­iar foot­ing

The Guardian (Charlottetown) - - BUSINESS - Blake Doyle Blake Doyle is The Guardian’s small busi­ness colum­nist. He can be reached at blake@is­landrecruit­ing.com.

The Bank of Canada and the Fed­eral govern­ment ob­ses­sively mon­i­tor the econ­omy and of­fer poli­cies to sup­port the ef­fi­cient func­tion­ing of a healthy econ­omy. The Bank of Canada, sis­ter in­sti­tu­tion to the Fed­eral Re­serve in the US, uses mon­e­tary pol­icy to en­sure the econ­omy is grow­ing, but not mov­ing too fast or too slowly.

One tool that is com­monly used to im­prove or re­strict ac­cess to cap­i­tal is in­ter­est rates. The Gov­er­nor of the Bank of Canada can in­crease in­ter­est rates to cool off an econ­omy, or de­crease in­ter­est rates to en­cour­age more spend­ing or in­vest­ment.

Presently, econ­omy is locked in an un­prece­dented time of un­sus­tain­ably low in­ter­est rates. For the last 8 years overnight lend­ing rates have not ex­ceeded 3%.

Since July of 2015 the rate has been sus­pended at 0.5%. This has re­sulted in a gen­er­a­tion of con­sumers not hav­ing any fa­mil­iar­ity with “nor­mal” bor­row­ing costs, whereas ear­lier gen­er­a­tions felt the con­stric­tion of 18% - 22% rates, and fear rates could go higher.

There are many rea­sons to main­tain low in­ter­est rates; chief amongst them is to en­cour­age spend­ing. Main­tain­ing such low rates, for such a long pe­riod un­der­scores a gen­eral weak­ness of the econ­omy. Low in­ter­est rates are good for con­sump­tion (buy­ing TV’s, Cars, Homes, car­ry­ing debt). Low rates are also bad for savers or those re­ly­ing on in­vest­ment in­come for re­tire­ment.

So how does a chronic low rate en­vi­ron­ment im­pact PEI? Low in­ter­est rates should spur busi­ness in­vest­ment and en­cour­age con­sumer spend­ing. Based on con­sumer debt lev­els, this has been hap­pen­ing. The re­sult, more eco­nomic ac­tiv­ity, in­creased hir­ing and man­aged wage growth. Un­for­tu­nately th­ese con­se­quences are not be­ing fully re­al­ized.

Scan­ning the provinces eco­nomic num­bers, it would ap­pear that em­ploy­ment rates are de­clin­ing (-1.1% year over year). At the same time, un­em­ploy­ment num­bers are also go­ing down (- 0.2% year over year). Not large move­ments, but if in­dica­tive of a trend we will want to watch to make sure the labour mar­ket is not shrink­ing. If it is em­ploy­ers will have dif­fi­culty find­ing the right skills to ad­dress mar­ket needs.

We can also see that P.E.I. is ex­pe­ri­enc­ing neg­a­tive in­fla­tion. In the pe­riod Jan­uary 2014 to Jan­uary 2015, our CPI (Con­sumer Price In­dex, and mea­sure of in­fla­tion) was neg­a­tive at - 0.6%. On the sur­face this is an alarm­ing sig­nal. De­fla­tion­ary en­vi­ron­ments in­di­cate the price of goods is fall­ing and a dol­lars value to­mor­row will pur­chase more than it can to­day, there­fore peo­ple re­sist spend­ing and in­vest­ing.

In the present sce­nario, our neg­a­tive CPI is driven largely by en­ergy, down -15.5% year to date. If sta­ples such as food, en­ergy or shel­ter ex­pe­ri­ence price de­cline, the short-term re­sult is in­creased pur­chas­ing power. Cit­i­zens have more dis­cre­tionary money and an abil­ity to spend more; hope­fully re­sult­ing in eco­nomic growth, mod­est in­fla­tion and a healthy econ­omy. While en­ergy and shel­ter were down last year, food was up 4 per cent, in real terms four heads of cau­li­flower is equiv­a­lent to a bar­rel of oil.

As the cy­cle of anom­alies con­tin­ues, em­ploy­ment mar­kets will strug­gle to find bal­ance, gov­ern­ments will need to in­vest strate­gi­cally if the econ­omy is to re­gain foot­ing (a dif­fi­cult de­ci­sion when you have no in­come or re­serves), con­sumer con­fi­dence will need to be for­ti­fied and then the stock mar­ket, in­vest­ment, mon­e­tary pol­icy and in­ter­est rates will all re­turn to fa­mil­iar ter­ri­tory.

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