Blows keep coming for economy, and it’ll be left up to BOC to clean up
The Canadian economy is off to a terrible start to 2020 as four years of inept government policy are starting to come home to roost.
Manufacturing sales have posted their fourth consecutive negative reading, retail sales were stagnant to end 2019 and signs are that GDP growth is stalling and may actually be negative when accounted for on a per-capita basis.
We worry that our booming housing market may not be enough to prevent this situation from worsening, with the potential for a recession that could drag interest rates and the loonie lower as well.
And concerns about the coronavirus and its global economic impact couldn’t come at a worse time.
The problem is that the PMO has for the most part appeared more concerned with other issues, such as securing a UN Security Council seat, than it has on ensuring the economy stays on track.
Instead of nipping anti-pipeline blockades in the bud, they were allowed to rapidly expand and paralyze both the country’s economy and our reputation globally as a secure place to do business. Grain shipments have been halted costing hundreds of millions in lost sales, thousands of rail jobs have been temporarily lost and the lack of propane shipments to the Atlantic provinces have left inventory levels dangerously low.
Douglas Porter, chief economist at BMO, highlights a much more important takeaway: “But the other broader issue is what it could ultimately do to Canada’s reputation as a place to do business, and ultimately that might be the most potentially damaging aspect of this episode.”
The same message was sent this weekend when Teck Resources Ltd. announced it had decided to cancel its $20-billion Frontier oilsands mine, citing worries over Canada’s inability to create a framework that “reconciles resource development and climate change.”
Frontier isn’t an isolated incident: It now joins the $100 billion of resource projects that were scrapped from 2017 to
2019, according to the C.D. Howe Institute. Consider for a moment the massive opportunity cost this represents for the country as a whole, simply due to bad policy implemented during a period of volatile energy prices.
For those who say that ramped-up fiscal spending by the federal government will help offset some of the damage, don’t forget that the feds hiked higher personal tax rates and attacked small business in a bid to raise revenues to cover some of that spending while concurrently having to deal with debt servicing costs.
For example, according to a recent report by the Fraser Institute, “At the federal level, the amount that will be spent on interest payments in 2019-20 ($24.4 billion) is higher than what the government expects to spend on Employment Insurance benefits ($19.3 billion) and the Canada Child Benefit ($24.1 billion).”
In the end, we think it will be left up to the Bank of Canada to deal with this mess. This means they may finally have to give up the hallowed ground they have defended for so long and implement an emergency interest rate cut. With oil prices in the toilet, they may be removing a key support for the Canadian dollar.
For those wondering what the potential impact will be, we recommend having a look at the Australian dollar, which until May of last year had a strong correlation with our currency’s relationship to the U.S. dollar.
Back then both were at 0.75 but the AUD has since been walloped down to 0.66.
This would be terrible news for Canadian consumers especially since we import so many of our goods from the U.S. But it would be extremely beneficial to our exporters including our resource and manufacturing sectors.
It could also add gasoline to our housing market especially considering the government recently loosened mortgage-lending standards.
Either way, a lack of focus on the importance of the Canadian economy and leaving it up to the Bank of Canada to rescue us is not a policy that instils much confidence. And confidence is something all of us Canadians could use a bit more of these days.
Financial Post
Martin Pelletier, CFA, is a portfolio manager and OCIO at Trivest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.