BUCKLE UP, INVESTORS
Facing forces beyond our borders
The latest cut to the Bank of Canada’s benchmark overnight rate was probably a necessary move. But in some ways it was also a troubling one.
After months of assuring the markets that the Canadian economy would rebound after the first quarter, the central bank lowered its estimates of first- half GDP to put us, technically, in a recession ( though it wouldn’t use that word).
Doubly troubling, though, is the bank’s characterization of the missing rebound — you know, the long- awaited pickup in non- energy sectors that was supposed to get us beyond the oil price shock — as “puzzling.” Given that its earlier predictions didn’t pan out, the Bank’s current estimate for a modest return to growth in the second half might look to some like a faint hope.
Triply troubling is that previous intervention — the surprise rate cut, of 25 basis points, in January — hasn’t worked the way it was supposed to.
We’ll see how this one fares, though I suspect there is at least one more to come. Either way, the cuts of 2015 might go down in the record books as a case of pushing on a rope.
The reality is that we are not maitres chez nous. Canada’s economic course, and that of investors, is being influenced, nuanced and/ or diverted by forces over which monetary policy has little or no control. Beyond our borders, unpredictable factors are determining commodity prices and export demand, leading to volatility in our markets. To wit: Greece, Iran and China. When Greek Prime Minister Alexis Tsipras and the troika of Greece’s creditors reached a lastminute deal last week, a few Pollyannas may have hoped the longrunning Hellenic tragicomedy was coming to a close.
Far from it. Even with the Greek parliament’s approval of the “deal” on Wednesday, it’s now clear that we are very far from resolution. The International Monetary Fund — one of Greece’s three creditors — chose Wednesday as a suitable time to release a damning assessment of the tentative agreement, in which it said that there is basically no way Greece will be able to grow itself out of crushing debt or find buyers for government debt anytime soon, without significant debt relief from the troika. That’s something the European Union, led by Germany, has been adamant not to do.
Meanwhile, England is demanding a piece of the pie if it ponies up for the deal. In Germany, the good burghers are growing weary of throwing good money after bad, and the Bundestag will vote on Friday whether to hold its nose and pledge yet more funds for Greece. In Finland, opposition to further bailouts is running high. And though it’s a small player economically ( Finland’s GDP is higher than Greece’s, but not by much), it could theoretically derail approval of the deal from the eurozone, which requires unanimity among its various finance ministers.
Deal or no deal, negotiations will drag on for months and months. As the saga continues, global markets will be frantically trying to price in what it all means.
Also this week, Western powers and Iran reached a deal on nuclear weapons. That sent oil prices down, even though it’s pretty clear it will take months for Iranian crude to have a direct impact on supply. Yet it’s also clear that sooner or later, Iran coming online will only add to a world swimming in petroleum. The country has 10 per cent of the world’s reserves, but accounts for only four per cent of production, and with the opening to foreign investment that will surely grow. And that won’t do anything for crude prices or for the Canadian energy sector in the long term.
Then there’s China. There was some reasonably good economic news there this week, with GDP growth for the second quarter coming in at seven per cent. Chinese stocks, however, have fallen, despite continuing governmentbacked measures to support share prices, including a ban on inside investor sells. This will likely be another source of volatility for months to come, while worries about China’s stalling economic engine undermine global growth and commodities demand.
In the face of all these factors, a 25- basis- point rate cut from Stephen Poloz looks like pretty small potatoes.
This isn’t to be critical of the central bank governor — it’s just that we can hardly expect the limited tools left for monetary intervention to be a cure- all.
What Canada might need to do is embark on a single- minded, dedicated path toward global competitiveness. Monetary policy alone can’t accomplish that: After all, everyone else in the world ( except the United States) is trying to devalue their currency, too.
In the long term, getting Canada on a firmer footing might require more competitive tax and regulatory policies, as well as doing everything we can to encourage foreign investment. Ditching the net benefit test for foreign direct investment would be a good place to start. Of course, with a federal election on the horizon, that is not going to happen.
Investors should prepare themselves for a long and occasionally frightening second half.