Economy on unfamiliar footing
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.