Sept. 4, 2018
Folks in the market for mortgage financing and car loans, and those determined to pay down credit-card debt in Canada's over-leveraged consumer economy, should brace for higher borrowing rates, sooner than later.
By advanced-economy standards, the Canadian economy is on fire, with expectations of roughly 2 per cent GDP growth for 2018, following up on robust 3.1 per cent growth last year.
One of the most conspicuous results - the one weighing most on employers - is skills shortages and upward pressure on wages.
Canada is no exception to the advanced-economies phenomenon of aging workforces and a paucity of skilled workers.
What those factors point to is potential overheating of the Canadian economy, with abnormally high inflation the result.
At about 3 per cent, inflation already is running a full point higher than central bankers, including the Bank of Canada (BoC), consider acceptable.
That makes further rate hikes inevitable.
There have been five of those already, since the BoC finally ended its post-Great Recession policy of easy money last July.
The market expects at least three more BoC hikes - at the Bank's next rate-setting session in October.
Two more of those hikes are expected in 2019.
Stephen Poloz, the BoC governor, has so far taken a gradual approach to his money-tightening policy.
Poloz isn't convinced that all the slack is gone from a Canadian economy in which there continues to be insufficient job opportunity among youth, women and new Canadians.
There are also potentially debilitating trade tensions to consider.
But the upward drift in potentially ruinous inflation is not tenable. The question now, for Main Street and business borrowers equally, is how many more rate hikes will there be, and of what size.
Canada, open for business
So much for the alarmist consensus that Canada must match U.S. corporate tax cuts of last December to prevent an exodus of foreign direct investment (FDI).
Statistics Canada's report last week that FDI more than doubled in the first half of 2018 makes a mockery of business group demands that Ottawa commit fiscally dubious tax policies of the U.S.
The first-half 144 per cent jump in FDI, to $26.8 billion, over the same period last year, was not spectacular. But it is a comforting return to the six-month average of FDI inflows over the past several years.
The resumed strong pace of FDI also suggests that the trade worries that played a role in last year's comparatively dismal figures has eased, if not disappeared. The FDI is selective, though, in a worrisome way.
There has been an impressive revival of FDI in manufacturing, but the Canadian energy and mining sector has lost a net $8.6 billion in FDI over the past five quarters. Anticipated continued Canadian access to a booming U.S. economy accounts for some of the restored FDI. So does the need for significant capital expenditures at foreign-owned enterprises on upgraded equipment that enhances productivity.
China continues to be a major Canadian investor, despite China's anger over the Trudeau government's rejection earlier this year of a Chinese state takeover of Canadian engineering firm Aecon. Example: State-controlled Weichal Power Co., one of China's biggest makers of diesel engines, recently invested heavily in two Vancouver-based environmental technology firms. Each firm possesses expertise China needs to reduce the conventional air pollution that claims an estimated 4,000 Chinese lives each day - a consideration that overrules whatever angst Beijing feels about the Aecon debacle.
The illusory NAFTA agreement
As negotiations continue this week to achieve a preliminary NAFTA 2.0, U.S. President Donald Trump's premature euphoria over a tentative agreement reached last week owes to his urgency in scoring some kind of "win" on his centrepiece trade agenda prior to this fall's U.S. midterm elections, in which he intends to be a vigorous campaigner. And Mexico's outgoing president, Enrique Pena Nieto, would like a preliminary deal before his populist successor, Andres Manuel Lopez Obrador, a.k.a. AMLO, takes office December 1.
But at this writing, about one-third of the 30 chapters in the agreement remain unresolved. And the U.S. Congress, by statutory limit, will not have sufficient time to review any trade pact Trump gives it this year. Again, by statute, the U.S. and Mexico can't alter the existing North American Free Trade Agreement without an Ottawa review and Parliamentary approval.
Ultimately, AMLO's approval will be needed, too, and that of the Mexican senate and chamber of deputies. And for all of Trump's bluster about a shiny new U.S.-Mexico deal that Canada was left to accept or reject, Trump has Congressional authority to negotiate only a trilateral agreement.
With Canadian commentators describing last week's "breakthrough" as a "U.S.-Mexico NAFTA double-cross" of Canada, and a former Canadian trade diplomat accusing both countries of acting in bad faith by freezing Canada out of the past five weeks' of negotiations (no argument here), Canada will be of strengthened resolve, and barely disguised hostility, as it rejoins the lengthy three-party talks still required to achieve a NAFTA 2.0 with any chance of seeing the light of day.