CANADA ECONOMICS
INVESTIMENT POSITION
StatCan. 2017-09-14. Canada's international investment position, second quarter 2017
Canada's net international investment position: $271.5 billion, Second quarter 2017
Source(s): CANSIM table 376-0142.
The value of Canada's international financial assets continued to exceed liabilities in the second quarter. The country's net foreign asset position increased by $25.7 billion in the second quarter to $271.5 billion, a fourth consecutive quarterly advance. The increase in the net asset position mainly reflected the stronger performance of foreign stock markets relative to the Canadian stock market. Over the quarter, the US stock market rose 2.6% while the Canadian stock market declined by 2.4%.
Chart 1 Chart 1: Canada's net international investment position
Canada's net international investment position
However, the increase in Canada's net foreign asset position was moderated by the downward effect of an appreciating Canadian dollar against the United States dollar and net borrowings from international financial transactions. Over the quarter, the Canadian dollar gained 2.5% against the US dollar and 3.4% against the Japanese yen, but lost 4.2% against the euro and 1.2% against the British pound. Over half of Canada's international assets and about one-third of Canada's international liabilities are denominated in US dollars.
Chart 2 Chart 2: Contributors to the change in the net international investment position
Contributors to the change in the net international investment position
On a geographical basis, Canada continued to post a net foreign asset position with non-US countries overall and a net foreign debt position with the United States. The net foreign debt position with the United States amounted to $70.9 billion at the end of the second quarter, down from $89.7 billion in the first quarter.
Higher foreign stock prices and investment in foreign equity push Canada's international assets up
Canada's international assets were up $16.2 billion to $4,456.5 billion at the end of the second quarter. The increase mainly resulted from the growth of foreign stock markets and sizable cross-border investment in equity instruments. The downward revaluation effect of the appreciating Canadian dollar moderated the overall increase.
Canadian holdings of foreign equity instruments increased by $34.3 billion to $3,125.0 billion in the second quarter. In addition to higher foreign stock prices, direct investments in the form of equity instruments in foreign affiliates mainly contributed to the advance. At the same time, Canadian holdings of foreign debt instruments were down by $18.1 billion to $1,331.4 billion.
Chart 3 Chart 3: International assets and liabilities
International assets and liabilities
Canada's international liabilities down despite sizable foreign acquisitions of Canadian bonds
Canada's international liabilities decreased by $9.5 billion to $4,185.0 billion in the second quarter. The downward revaluation effects of both lower Canadian equity prices and the appreciating Canadian dollar against the US dollar contributed to the decline in international liabilities. About one-third of Canada's international liabilities are denominated in US dollars.
Foreign holdings of Canadian equity instruments declined by $19.6 billion to $1,797.1 billion at the end of the quarter. Withdrawal of funds resulting from cross-border merger and acquisition transactions, combined with lower stock prices, contributed to the reduction.
At the same time, Canadian debt instruments held by foreign investors, also referred to as Canada's gross external debt, grew by $10.1 billion to $2,387.9 billion. The increase mainly reflected higher foreign holdings of Canadian bonds, led by strong acquisitions. On a sector basis, foreign investors held $918.4 billion of debt instruments issued by Canadian banks, accounting for 38% of Canada's total gross external debt at the end of the second quarter, compared with 26% in 2013. This growth reflected significant new issues of bonds on foreign markets and higher deposits liabilities with non-residents. Over the same period, the share of the government sector declined from 27% to 20%.
Chart 4 Chart 4: Canada's gross external debt by sector
Canada's gross external debt by sector
FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/170914/dq170914a-eng.pdf
NAFTA
The Globe and Mail. 14 Sep 2017. Canada pushing to revamp NAFTA lawsuit provision
ROBERT FIFE
STEVEN CHASE
My view is these are good changes for the overriding reason it improves public confidence in the system. I think Canada should push in that direction in the NAFTA negotiations certainly.
Larry Herman, Toronto international trade lawyer
Canada is pushing for major changes to a NAFTA provision that governs the adjudication of lawsuits filed by North American businesses against governments for damages to their investments – and the United States has yet to reject the idea.
The goal of Foreign Affairs Minister Chrystia Freeland and her negotiating team is to revamp Chapter 11 so it more closely mirrors the investor-state dispute-resolution mechanism that forms part of the 2016 Canada-European Union trade deal, including set rosters of judges to hear these cases rather than ad hoc appointments of independent arbitrators.
Sources with knowledge of the continuing talks between Canada, the United States and Mexico tell The Globe and Mail that the United States has not dismissed the Canadian proposal out of hand. There is a discussion under way, they say, and it’s not stalemated like other subject areas.
Chapter 11 provides for a system where companies from NAFTA member countries can get timely arbitration of lawsuits if they feel their investments have been unfairly damaged by government action. Arbitrators are appointed by the countries involved to weigh the case and make decisions. » Critics have said the arbitration approach is too vulnerable to conflicts of interest faced by the lawyers asked to sit on adjudicating panels.
Ottawa is seeking a system where Canada, the United States and Mexico would establish set lists of judges who would be available to hear investor claims under Chapter 11. Canada also wants language in NAFTA that reinforces member countries’ inherent right to legislate as they see fit in the public interest, including on the environment, health or safety.
The 1989 Canada-U.S. freetrade deal left investor claims to be resolved through existing court processes in both countries. But when NAFTA was negotiated in the early 1990s, the Americans did not trust Mexican courts and insisted on ad hoc trade tribunals to resolve such lawsuits in a timely fashion.
(Chapter 11 is a separate matter from NAFTA renegotiation talks on Chapter 19, which regulates disputes between the three countries on the application of
punitive duties to counter alleged dumping or subsidization of goods. The United States wants to scrap Chapter 19 and Canada has been clear it will walk away from the negotiating table if the Trump administration insists on this. Washington wants these disputes solved by judicial review in domestic courts.)
On another front in the negotiations, sources say Canada and the United States are taking a firm common stand on the enforcement of labour standards in the NAFTA zone. They want a renegotiated NAFTA pact to include penalties if Mexico tries to keep worker wages low by not living up to labour standards set by the three countries.
The stalled Trans-Pacific Partnership trade deal among Pacific Rim countries had labour provisions that called on signatory countries to respect the right to collective bargaining; to ban forced and child labour; and to eliminate discrimination against employees based on gender, race or physical disability.
Better labour rules in Mexico won’t necessarily create a wealth of new jobs in manufacturing in the United States and Canada, but it should help stem the flow of manufacturing businesses to the low-wage country.
Mexico’s political and business leaders have resisted demands to bring wages into line with Canada and U.S. levels, arguing the cost advantage should decrease as Mexico develops economically.
American and Canadian labour leaders say Mexico’s lax labour standards and lower wages have enriched Mexico at the expense of workers north of the Mexican border.
Canada and Mexico agreed to renegotiate NAFTA earlier this year at the insistence of U.S. President Donald Trump, who vowed during his 2015 election campaign to tear up the accord if it wasn’t rewritten to provide a better deal to U.S. workers.
NAFTA renegotiations began in August in Washington. There was a second round in Mexico City earlier this month and a third round is set to take place in Ottawa from Sept. 23 to 27. Hard bargaining on Chapter 11, and on labour and environmental standards, as well as on North American auto-content rules is expected to be the key focus of the Ottawa round.
Canada has been the principal target of Chapter 11 damage claims by U.S. and Mexican investors. Ottawa has been sued nearly 40 times under NAFTA by U.S. firms, many of them over Canadian provincial environmental protection regulations.
The Canadian Centre for Policy Alternatives calculates that Canada has been required to pay out more than $220-million. Mexico has paid out more than $200-million (U.S.) but has faced fewer claims. The United States, by comparison, has not paid out any money to settle claims.
Toronto international trade lawyer Larry Herman said he would support rewriting NAFTA’s Chapter 11 to reflect the process for handling investor claims set up under the CanadaEuropean Union free-trade deal. He said changes including set rosters of judges would help improve the perceived impartiality and transparency of the system.
The Canada-EU deal also creates a fast-track process for dismissing what are judged to be frivolous claims.
“My view is these are good changes for the overriding reason it improves public confidence in the system. I think Canada should push in that direction in the NAFTA negotiations certainly,” Mr. Herman said.
The Globe and Mail. 14 Sep 2017. NAFTA is the wrong venue to govern digital trade
SUSAN ARIEL AARONSON
PATRICK LEBLOND
Diplomats from Canada, Mexico and the United States are thinking about the website where you met your soulmate, and the cloud service where you store your photos. In an increasingly digital economy, policy makers are regulating cross-border information flows more than ever, and North American free-trade agreement talks are no different.
Finding common ground on how to regulate global digital trade is on the agenda, but policy makers have been discouraged by the lack of success at the World Trade Organization, where members have been trying for years to update the agreement to include e-commerce without success. If Canada, Mexico and the United States want to see progress in governing digital trade, they’ll need to work not just within their own continent, but across oceans.
In recent NAFTA talks, they decided to build on the binding provisions in the Trans-Pacific Partnership. The TPP was the first trade agreement to make the free flow of information across borders a default, the first to require countries to put in place regulations to protect consumer privacy online, and also the first to set rules governing digital protectionism – how and when countries could limit information flows across borders.
However, proponents of these negotiations ignore an important reality. Even if the negotiators find common ground in a matter of months, it could take years before the three parties put NAFTA into effect. In addition, the United States has said it will no longer be a participant in TPP, and the remaining parties to TPP are quibbling about its provisions in the wake of U.S. withdrawal.
Meanwhile, in the midst of this governance gap, China is setting the rules governing cross-border information flows. China already has economies of scale and scope; it is the world’s largest digital market, with about 731 million users, or almost 19 per cent of current global users. In contrast, the three North American countries have about 400 million users (or about 10 per cent of the 3.835 billion people online today).
Second, Chinese companies are innovative and increasingly hold Internetwide market power, particularly in e-commerce and messaging platforms. Seven of the world’s 20 largest Internet companies call China home and their market share is rapidly expanding.
Third, Chinese officials are making decisions with global consequences. They are taking deliberate steps to transform the country to a major centre of innovation by 2020 while simultaneously controlling information flows. China has enacted rules regarding privacy, censorship, cybersecurity and cyberstability that most Internet companies wishing to serve the Chinese market are complying with. For example, Apple agreed to move its Chinese data to servers located in China and agreed to sell only VPN apps (virtual private network apps that allow the user to circumvent Chinese censorship) that the government can monitor.
Ever so gradually, Chinese rules are becoming global Internet norms.
The NAFTA countries need to rethink their strategy and challenge China collectively. If they really want to maintain an open stable Internet, the NAFTA countries, along with the European Union and the remaining TPP participants should meet to develop binding rules to govern cross-border information flows.
They could build on the TPP’s chapter 14 on electronic commerce. The parties could begin by saying they aim to create a digital free-trade zone, where signatories are obligated to allow the free flow of information while respecting privacy, national laws and maintaining trust and Internet stability. The agreement should also delineate clear exceptions that allow governments to restrict cross-border flows in a transparent manner, but only if these restrictions do not distort trade and are necessary to preserve privacy, public health, public morals, national security or social stability.
Trade negotiators should also include clear definitions of barriers to digital trade such as data localization or procurement rules and delineate appropriate remedies that do not undermine Internet stability. Finally, the parties should agree to never conduct cyber-enabled theft of intellectual property, while banning both the use of distributed denial of service (DDoS) attacks by governments – and associated entities – and the export of malware.
The United States, EU and the 11 TPP countries have a choice. They can focus their energies on specific digital chapters included in bilateral and regional free-trade agreements such as CETA, NAFTA and TPP. In so doing, they and the rest of the world are responding to China’s “China First” approach with their own “My Country or Region First” approach. In such a scenario, China – with its market size, innovative firms and its determination to invest massive sums and resources in emerging industries – would rapidly become the market leader in innovations such as artificial intelligence and automation. Alternatively, leaders of these countries could collaborate to ensure that information and people remain free.
Susan Ariel Aaronson is research professor and Cross Disciplinary Fellow at George Washington University. Patrick Leblond is a senior fellow at the Centre for International Governance Innovation and the CN-Paul M. Tellier Chair on Business and Public Policy at the University of Ottawa.
The Globe and Mail. THE CANADIAN PRESS. SEPTEMBER 14, 2017. U.S. seeks to insert five-year termination clause in NAFTA agreement
KEVIN LAMARQUE
ALEXANDER PANETTA, WASHINGTON
The United States is seeking to insert a so-called sunset clause into a new NAFTA, which would terminate the agreement after five years unless the three member countries agree to extend it.
Wilbur Ross, Donald Trump's commerce secretary, confirmed the news Thursday, saying the constant threat of termination would force a permanent re-evaluation of the agreement and require countries to keep improving it.
"(It) would force a systematic re-examination," Ross told a forum organized by the website Politico.
"You'd have a forum for trying to fix things."
He said he and the U.S. trade czar, Robert Lighthizer, agree on the idea. Ross made his remarks after being asked about a report on the idea by Politico and he publicly confirmed the report.
But he said it's unclear whether Canada and Mexico, the other NAFTA countries, would accept the proposal.
He said he wants a deal by the end of the year and would rather not terminate the agreement as Trump has threatened.
Ross said it will become harder to get a deal after this year for four reasons: Next year, the U.S. fast-track law needs to be re-affirmed in Congress, the U.S. has congressional elections, Mexico has presidential elections and Canada has provincial elections.
Ross said the president is serious when he threatens to cancel NAFTA.
"It's a very real thing," he said.
REUTERS. SEPTEMBER 14, 2017. U.S. wants NAFTA five-year sunset provision: Commerce's Ross
David Lawder
WASHINGTON (Reuters) - U.S. Commerce Secretary Wilbur Ross said on Thursday that the United States was seeking to add a five-year sunset provision to the North American Free Trade Agreement to provide a regular, “systematic re-examination” of the trade pact.
Ross told a forum hosted by Politico that both he and U.S. Trade Representative Robert Lighthizer had agreed on the need for such a sunset provision for quite a while and would “put it forward” in the NAFTA modernization talks, but it was unclear whether Canada and Mexico would back it.
U.S., Canadian and Mexican negotiators are set to reconvene for a third round of talks in Ottawa on Sept. 23-27.
Ross said that a sunset provision was needed because forecasts for U.S. export and job growth when NAFTA took effect in 1994 were “wildly optimistic” and failed to live up to expectations.
He said the termination clause currently in NAFTA that allows a country to exit after a six-month notice period has never been triggered, and “it’s the kind of thing that probably wouldn’t be.”
But Ross and Trump have both talked about quitting NAFTA if it can’t be renegotiated to reduce U.S. trade deficits with Mexico and Canada.
“The five-year thing is a real thing, would force a systematic re-examination,” Ross said. “If there were a systematic re-examination after a little experience period, you’d have a forum for trying to fix things that didn’t work out the way you thought they would.”
Politico first reported that USTR had circulated the sunset proposal with other federal agencies.
Reporting by David Lawder; Editing by Andrew Hay and Phil Berlowitz
INFLATION
BANK OF CANADA. REUTERS. SEPTEMBER 14, 2017. Bank of Canada opens discussions on 2021 inflation target
Andrea Hopkins
OTTAWA (Reuters) - While the Bank of Canada’s inflation targeting regime has worked well, improvements should always be considered, Bank of Canada deputy governor Lawrence Schembri said on Thursday in kicking off a conference on the bank’s 2021 inflation target renewal.
The central bank’s monetary policy framework, which includes a 2 percent inflation target, has come under increased scrutiny in recent months as the bank twice raised official interest rates even though inflation remains well below the target.
“While the framework has worked well in the past, improvements should always be considered — especially given the changing economic environment, the lessons learned from experience in Canada and elsewhere, and advances in academic research,” Schembri said in opening remarks.
The conference is aimed at soliciting ideas for changes to the monetary policy framework from analysts and experts. Schembri and other senior Bank of Canada officials are participating in panel discussions and Governor Stephen Poloz is in the audience
“I think the mandate is posing a problem,” former TD Bank chief economist Don Drummond told the first panel, pointing to the “hassle” and misunderstanding that has swirled around the bank’s recent rate hikes.
The Bank of Canada struck back on Monday against criticism it had not adequately prepared markets for last week’s rate increase after another prominent economist took issue with the central bank’s lack of communication in the nearly two months leading up to the hike.
Drummond, who was seated in the audience beside Poloz, said he believed more emphasis should be placed on the 1 percent to 3 percent inflation target range rather than the 2 percent midpoint.
Schembri opened the conference by saying that the bank has historically used the five-year review of the monetary policy framework, which also includes a flexible exchange rate, to consider dimensions well beyond the relatively narrow scope of the joint inflation-control agreement and the goal of price stability.
He said previous discussions of such frameworks have focused on the decline in the equilibrium real interest rate and thus in the so-called neutral policy rate, as well as the decline in potential output growth.
Other considerations might include “the elevated level of indebtedness of both the private and public sectors, which raises concerns about financial stability, fiscal space and central bank independence,” Schembri said.
The conference includes remarks by most of the Bank of Canada’s top officials, though Poloz is not scheduled to speak.
Reporting by Andrea Hopkins; Editing by Meredith Mazzilli
MINING
EDC. WEEKLY COMMENTARY. SEPTEMBER 14, 2017. Metals: Pointing to True North?
Peter G. Hall, Vice-President and Chief Economist
It still baffles me that magnetized metal on a frictionless surface will point north. Since its discovery, the simple compass has been relied on by the small and great alike, and doubtless has myriad stories to tell of dramatic rescues and great navigational feats. Metals have in the same way been a reliable bellwether of the economy – some more than others. As the signs of a long-delayed revival in global growth mount, are movements in metals markets telling us anything?
If so, it would be a big change. Metals lost their magnetism in the post-recession years, for a number of reasons. First, the massive global government spending program, launched in 2009, created the illusion of recovery, vaulting metals prices back to pre-recession highs. Second, wave upon wave of liquidity injections, through central banks’ quantitative easing mechanisms, kept prices high even when governments reversed course on their spending plans. A third, and more persistent, factor was the investment in mineral exploration and development that surged in the wake of the artificially-high prices. This increased available supplies well beyond market needs – a fact that became all too apparent when monetary tapering began in mid-2014, sending prices crashing to impossible lows.
China had a peculiar and instrumental role in this debacle. During the heady years of double-digit annual economic growth, its prime concern was security of supply. High prices meant one thing: scarcity. Even if it meant over-stocking, China felt extreme pressure to feed its voracious appetite for metals, and was reputed to be accumulating official and unofficial inventories of all base metals. Steel is probably the most obvious. As a key input to China’s nationwide building program, a top priority was the creation of vast productive capacity. This was more than successful, vaulting China from a heavy net importer to a heavy net exporter of steel in about a decade. The Great Recession truncated global steel demand, leaving China with a gaping overhang – not just of production capacity, but also actual inventories of steel products.
Certain analysts felt that recovery would be a long way off – perhaps as much as a decade. Are they right? Well thankfully, metals prices staged a partial revival after the mid-2014 crash. They hit bottom in early 2016, and made it about halfway back by late summer. Then late in the year, another jump. For the first half of 2017, prices were flat and appeared unsure of where to go. But since June, a smart, 11 per cent gain that shows no sign of abating has taken prices back to early-2014 levels. Among commodity classes, it stands alone; the only comparator is a much more modest uptick in raw industrial commodities.
Which metals are driving this? Lead prices are up 8.8 per cent since June, and are now above average post-recession prices. Nickel, pummeled by the ill fortunes of steel, is up 32 per cent from mid-year levels – an impressive run-up, although prices are still less than half of pre-recession levels. At the same time, zinc prices are now at their highest levels since late-2007, thanks to a recent 19 per cent surge. Iron ore is also up, although it staged a similar rally last year, only to fizzle out. It will continue to be closely tied to steel market prospects, which remain soft.
What about copper, the li’l red metal with economic foresight? It was stripped of its PhD in economics because of the false signals it sent back in 2010. We’re thinking about giving it back, though. Only time will tell whether this time its upward movement is a sign of better things in the global economy. Get this – since mid year, it is up 24 per cent, and there is no let-up in the trajectory. In fact, this is copper’s most significant price increase since the ill-fated one in 2010.
These movements in metals prices, while surprisingly strong, square nicely with the recent upswing in global economic growth. Major institutions are adjusting their forecasts northward, and for the first time in about seven years, it’s looking as if global business investment is in for some serious re-invigoration.
The bottom line? If the economy is heading north, then it looks like metals might again be the compass that’s pointing in the right direction. Not the false signal that we got in 2010 – this time looks a lot like True North. If so, it will be the first time since the Great Economic Debacle that we are on the right path.
HOUSING
The Globe and Mail. 14 Sep 2017. House listings: Toronto prices fell 0.4 per cent in August. Toronto prices seen stabilizing as key housing ratio balances
The ratio of Toronto house listings compared with monthly sales has moved back into longterm balance, limiting the potential for significant further price corrections in the region, a new analysis concludes.
A report by National Bank of Canada economist Marc Pinsonneault said the ratio of listings to sales in the Toronto area hit 2.5 months in August, which means it would take 2.5 months to sell all houses listed in the region at the pace of sales recorded last month. That’s a significant change from earlier this year as the ratio hit a low of 0.66 months in February because of a lack of inventory available for sale in the city.
Mr. Pinsonneault said the ratio has now climbed back to its longterm average level of 2.5 per cent, last seen in 2012, which suggests the market is in balance in the region, limiting the risk of a significant further price correction.
“A few years ago we would say this is a normal ratio,” he said in an interview. “It limits the potential for price correction. In order to exacerbate a price correction, it would have to be much higher than that, to the levels we saw during the recession … but that’s not the case.”
The analysis adds more fuel to predictions the Toronto region may have already experienced the bulk of its price drop after average home prices across the GTA fell by more than 20 per cent from the peak in April to August.
But Mr. Pinsonneault is nonetheless warning home prices may still have some room to decline because of the potential for further interest-rate increases this year and the possibility of tougher mortgage qualification rules from Canada’s banking regulator, the Office of the Superintendent of Financial Institutions. OSFI published a proposal for comment in July, which could take effect this fall, that would require home buyers who do not need mortgage insurance to prove they could still afford their mortgages if interest rates were two percentage points higher than the rate offered by their banks.
For Canada as a whole, the Teranet-National Bank House Price Index rose 0.6 per cent in August from July.
The index, which combines three prior months of sales data to smooth out monthly fluctuations, showed prices fell 0.4 per cent in Toronto in August compared with July, according to data released Wednesday. It was the first decline recorded for Toronto since January, 2016. On an “unsmoothed” basis for August alone, the average sale price in Toronto fell 4.2 per cent in August from July, National Bank reported.
The index measures home sales when the deals close and are recorded with land registry offices, so it tends to lag data published monthly by local real estate boards that report on sales negotiated in the prior month. The Teranet data reflects market trends, but is not as quick to show a rapid turn in the market like Toronto saw when average prices began to drop in May after soaring in March and April.
For Canada as a whole, the Teranet-National Bank index rose 0.6 per cent in August from July, despite Toronto’s decline. Prices in Vancouver rose 2.4 per cent, Victoria was up 1.8 per cent and Ottawa-Gatineau rose 1.4 per cent. Montreal posted a decline of 0.1 per cent in August.
Compared with August last year, the index price was up 13.1 per cent nationally, including an annual gain of 23.9 per cent in Toronto.
Mr. Pinsonneault said that if the Teranet-National Bank index price falls by 10 per cent in Toronto in the next 12 months as predicted, it would not be a lot for the market considering the recent gain.
REUTERS. SEPTEMBER 14, 2017. Canada housing prices rise in July on strong Vancouver demand
OTTAWA (Reuters) - Canadian new home prices rose in July as Vancouver saw strong demand from buyers, while prices in Toronto were unchanged for a second month in a row following provincial measures to rein in the market, data from Statistics Canada showed on Thursday.
Nationally, prices were up 0.4 percent from June, slightly exceeding economists’ forecasts for a gain of 0.3 percent. Compared to a year ago, prices were up 3.8 percent.
The new housing price index excludes apartments and condominiums, which have seen strong demand in Vancouver and Toronto recently as potential buyers have been priced out of more expensive single-family homes.
Vancouver led the price growth in July with a 2 percent monthly increase. A tax on foreign buyers implemented by the provincial government in August 2016 initially cooled the market but prices and sales have been heading back up recently.
Prices in the west coast city have climbed 7.7 percent since the start of 2017 when a loan program for first-time buyers was introduced by the British Columbia government, the statistics agency said.
In Toronto, Canada’s largest city, prices were unchanged on the month, though they were still up 7.4 percent from a year ago.
Toronto home sales have dropped in the wake of a number of measures taken by the Ontario government in April to cool the market, including a foreign buyers tax.
Reporting by Leah Schnurr; Editing by Bernadette Baum
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