CANADIAN ECONOMY 2014 AND BEYOND: ISSUES, AND ACTIONS REQUIRED

The Bank of Canada (BoC) gave its latest assessment of Canadian economy in its Monetary Policy Report of 22 January 2014; some of the key points of the Report are:

·       Inflation in Canada has moved further below the 2 per cent target. This is due largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period.

·       The Bank expects inflation to return to the 2 per cent target in two years or so, as the effects of retail competition dissipate and excess capacity is absorbed.

·       The United States will lead the way, helped by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets.

·       In Canada, economic growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment.

·       While we are doing more work to understand the wedge between the level of Canadian exports and that of foreign demand, this remains difficult to explain. We are therefore taking a conservative approach to our forecasts for exports, and assuming the wedge will remain.

·       That said, the U.S. recovery is becoming more broad-based, including higher investment spending by companies, and that, as well as the recent depreciation of the Canadian dollar, should help to boost exports. This, in turn, should lead to stronger business confidence and investment here in Canada.

·       Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

·       Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years or so.

·       Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed.

Basics of Canadian economy:

-     30% of GDP comes from exports
-     >60% from internal consumption

GDP contributors by Sector:

-     ~11% of GDP comes from manufacturing
-     ~8% comes from mining, quarrying and oil or gas extraction
-     ~79% from service sector (including public administration)
-     ~2% comes from agriculture, forestry, fishing and hunting

Some salient issues vis-a-vis Canadian economy:

Ø  As BoC mentioned, the wedge between the level of Canadian exports and that of foreign demand;

Ø  Strength of Canadian Dollar vis-à-vis US Dollar and other major currencies including Korean Won;

Ø  Reluctance on part of big capital owners (companies, individuals) to invest (the reasons need to be understood and addressed – more on this later), hence lack of multiplier effect in the economy;

Ø  Dis-inflation;

Ø  Too much dependence on US economy’s health;

Ø  Sluggishness creeping in China’s GDP growth (hence impacting consumption of goods and therefore import of goods from other countries, including Canada);

Ø  Absence of federal government/manufacturing industry/agriculture/service sector coordination and policy making (there is reasonably good coordination between mining, oil and gas and federal government though);

Ø  Extremely tardy progress on providing finality re: investment/export avenues (e.g., oil export, LNG export);

Ø  Slow turnaround in European Union’s economic health.

Salient list of actions required by Federal/Provincial Governments to infuse more vigor in Canadian economy:

-     Review export items vis-à-vis existing export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements;

-     Review export items vis-à-vis new and potential export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements (look for new regions, like, South America, Africa and untapped Asian regions) and adding new items;

-     Devise policies that encourage manufacturing/production of those products that have export potential in existing and new markets (example, bitumen, natural gas, high-tech items);

-     Have more cohesive and inclusive federal government/manufacturing industry/agriculture/service sector coordination;

-     Promote innovation in the industry in a big way through incentives;

-     Encourage big capital owners to invest – have continual dialogue and make necessary adjustment in policies (conclude reviews quickly, conclude deals with provincial agencies, first nations tribes in an expeditious manner rather than a process that takes forever to complete, or, sometime, never reaches any conclusion);

-     New investments would result in more employment and hence have multiplier effect of higher consumption;

-     Subtly encourage consumption (not necessarily in housing sector but other areas which won’t load the national debt situation)

-     BoC may consider lowering interest rate and/or engage in some sort of quantitative easing;

-     Stimulus spending should be kept as one of many options of last resort;

-     Create an optimistic environment rather than that of impending gloom and doom (one of the key requirements would be that the political parties would need to talk less in inflammatory and fear mongering tone, less recriminations and uttering nonsense)

Summary:

Other countries too are facing similar situations as Canada faces and, therefore, they too are considering many of the abovementioned strategies and actions. Therefore, the window of opportunity is short and there is lot of competition out there. If Canada wants to maintain its pre-eminent position within the G-7 nations and international comity at large, Canada would have to act quickly and decisively both at Federal and provincial levels in a coordinated manner without the political ideologies inhibiting such coordination. There are already signs of wear and tear at some aspects of social support and quality of life which Canada is famous for and proud of; if Canada does not act soon, things would get worsened and some damage may be irreparable.

CANADIAN ECONOMY 2014 AND BEYOND: DARK CLOUDS LOOM AS POLITICIANS AND CORPORATE HONCHOS EXCEL IN INCOMPETENCE

Canada’s economy lost 45,900 jobs in December 2013 and the unemployment rate rose to 7.2% from 6.9%. The employment data released by Statistics Canada on 10 Jan 2014 was the weakest since March 2013. The report also showed hiring in 2013 was the slowest since 2009.

The worst part of the news is that all in all, 60,000 full-time jobs were lost - the monthly drop in full-time work is the largest seen since late 2011. It's the worst showing for jobs overall since March 2013 when Canada lost 54,500 jobs. As one economic analyst put it “the job losses announced on 10 Jan wiped out most of the gains over the last four months.” Further very disturbing aspect was that two major employment centres lost jobs - Ontario lost 39,000 jobs during the month and even Alberta, a source of recent strength, shed 12,000 jobs.

But what did the Canadian federal Finance Minister say about this serious setback? "We sympathize with those Canadians who lost their job last month. This is a reminder that the economic recovery remains fragile and we must stay focused on our plan to grow the economy and keep taxes low to create the environment where job creation can flourish."

What a meaningless stupid statement intended to obfuscate the crass incompetence of the leadership at various levels!! However, the grim situation that Canadian economy finds itself in currently is not due to the current federal leadership – it is the result of collective gross incompetence of the following:

a.      Politicians at federal level (of the three major parties)

b.      Provincial leaderships (British Columbia, Quebec, Ontario)

c.       Corporate leaderships (oil companies, pipeline companies, various manufacturing and commodities’ companies)

The abovementioned people failed the nation and are responsible for beginning of decline in Canadian economy and wellbeing at large (decline in overall health care and senior citizens care, falling educational standards, decline in innovation to name a few) that can become catastrophic if corrective actions are not taken quickly.

And, why are corrective actions required urgently? It is because of the reason that Canadian economy is dependent on (approx. percentages):

-           65% on domestic consumption (which is dependent on people’s purchasing power)
-           30% on exports
-           78% on service sector (which provides the solidity and basis to people’s purchasing power)
-           20% on manufacturing

The above data should intuitively nudge anyone’s common sense to comprehend that if the purchasing power of Canadians keep declining (due to loss of jobs, stagnating economy, lack of new projects, lack of new export avenues/products etc.) there would be potential for serious negative impact on Canada’s overall wellbeing and existence/subsistence as a wealthy, prosperous first world nation.

Let’s see in brief how the factors mentioned at ‘a’, ‘b’, ‘c’ mentioned above failed the nation:

Incompetence of federal politicians

-         The politicians failed to act proactively in ensuring that vital Canadian resources, like, oil and gas find alternate export outlets – the Conservatives woke up much late in the day to the realization that Canada needs alternative outlets for its oil and gas.

-        Finally when the Conservatives started to push for alternatives, the NDP, and to some extent the Liberals, kept damaging Canada’s cause (in regard to alternate avenues for oil and gas) by barking in unison with the fear mongering environmentalists (based on inconclusive aspects of global warming).

-         The self-serving politicians’ canine like in-fighting seriously damaged Canada’s prospects in getting a head start vis-à-vis its competition - the US have already stolen lead over Canada in LNG export. The foreign investors still do not know if the much touted LNG projects in Canada will at all reach the stage of fruition.

-         The federal level politicians failed to act proactively in identifying alternate markets for Canadian products. The head-in-the-sand attitude of federals folks prevented them from realizing that keeping all the eggs in one basket, namely, depending on only US as the export destination was suicidal.

-         The federal level politicians failed to kick on the back sides of the top corporate leadership to show more innovation and initiative in promoting/developing their major projects without hanging on to the coat tails of the politicians (more on this later).

Incompetence of provincial politicians

-         The provincial politicians in BC and Quebec displayed disgusting parochial and dog-in-the-manger attitude towards blocking potential oil and gas projects of Canada (e.g. Northern Gateway pipeline, Kinder Morgan Trans Mountain pipeline, West to East Pipeline, LNG pipelines, and LNG projects).

-         The obstructionist approach of the politicians of BC, Quebec and, to some extent Ontario (who later seemed to be more supportive to West to East pipeline project) caused and are still causing serious delays in decision making of some of the vital projects of national interest. These politicians seem too interested in their own power grabbing shenanigans and seem too willing to overlook what is potentially good for Canada.

Incompetence of corporate leadership

-         The pipeline companies’ leadership failed to be pro-active in engaging with local stakeholders (e.g. First Nations, provincial leadership) in the context of their major pipeline projects. They displayed pathetic propensity to hang by the coat tails of provincial politicians (Alberta) and Federal politicians in taking up the issues which these companies should have tackled themselves;

-         Some of the oil and pipeline companies displayed unfounded overconfidence that politicians would get them the necessary clearances in other countries (e.g. Senators/Congressmen would help out in US).

-         The oil and pipeline companies failed to proactively plan for alternate solutions. They are waking up 5 years late that alternate means of transport is needed to transport bitumen to US. The risk assessment and contingency exercises of these companies have been horribly third rate and complete failure.

-         The corporate leadership of manufacturing companies did little to keep the innovation edge going and/or to find new products and new markets.

-         The corporate leadership of some other commodity producing companies failed to anticipate coming changes in the world markets and were less than adequately prepared to face the challenges of change (e.g. Potash, Fertilizer, Gold, Uranium).

What to do now?

-         Learn the lessons from the above.

-        Get over the self-defeating notion of ‘we-know-the-best’ and ‘frog in the well’ mentality. Go out of Canada, see what alternative stuff is being done out there and bring back the knowledge to adapt the same to Canadian conditions.

-        Politicians of all stripes got to act unitedly in getting policies implemented which are in interest of Canada (and not invest energy in unproductive nonsensical debates stemming from self-aggrandizement fetishes).

-        Fast track projects that can create jobs in thousands, add to Canada’s GDP (all political parties must act unitedly in making them a success).

-        Further heighten the ‘commerce’ focus of the Federal ministries (implemented recently by the Conservatives).

-       Make sure the foreign investors are re-assured of the definitiveness of the proposed projects in Canada and their economic returns.

-        Crank up efforts to find alternate outlets for Canadian products, services (in Asia, Latin America and Africa)

-       Keep investor friendly environment in Canada and in Canadian provinces.

Consequences of not acting soon

-        The window of opportunity for export of Canadian resources would not remain open for ever – if the Canadian politicians, corporate honchos do not act quickly and decisively, Canadians would keep sitting on piles of their natural resources for the rest of their lives and keep sucking their thumbs.

-        The politicians must realize that dog-in-the-manger politics would not only consume the Canadians, the resultant implosion would wipe them out too.

-        Canada’s existence of being a successful, happy, good performing first world country would seriously get compromised.

-        Falling standards could trigger disaffection which could bring about potential serious fractures in the multi-cultural foundation of Canada.

Let’s hope the Canadian politicians and the people would rally round and come together to meet the current challenges.