CANADA ECONOMICS

NAFTA

Global Affairs Canada. September 27, 2017. Trilateral Statement on the Conclusion of the Third Round of NAFTA negotiations Statements

Ottawa, Ontario - Canadian Foreign Affairs Minister Chrystia Freeland, Mexican Secretary of the Economy Ildefonso Guajardo, and United States Trade Representative Robert Lighthizer today successfully concluded the third round of the renegotiation and modernization of the North American Free Trade Agreement (NAFTA). The round took place in Ottawa, Canada from September 23 to 27, 2017. Negotiators made significant progress in several areas through the consolidation of text proposals, narrowing gaps and agreeing to elements of the negotiating text.  Negotiators are now working from consolidated texts in most areas, demonstrating a commitment from all parties to advance discussions in the near term. In particular, meaningful advancements were made in the areas of telecommunications, competition policy, digital trade, good regulatory practices, and customs and trade facilitation.  Parties also exchanged initial offers in the area of market access for government procurement.

Importantly, discussions were substantively completed in the area of small and medium-sized enterprises (SMEs), effectively concluding negotiations on that chapter pending specific outcomes in related discussions. The inclusion of a chapter on SMEs in a modernized NAFTA recognizes the contribution that SMEs make to our economies. The chapter will serve to support the growth and development of SMEs by enhancing their ability to participate in and benefit from the opportunities created by this Agreement, including through cooperative activities, information sharing, and the establishment of a NAFTA Trilateral SME Dialogue, involving the private sector, non-government organizations, and other stakeholders. In addition to a specific chapter on SMEs, negotiators are also working on modernizing other aspects of the agreement that would benefit SMEs, including customs and trade facilitation, digital trade, and good regulatory practices. Discussions also touched upon energy trade, gender and Indigenous peoples.

We also advanced substantively in the competition chapter and expect to conclude the negotiation on this chapter prior to the next round.

NAFTA partners continue to be guided by a shared desire to create jobs, economic growth and opportunity for the people of our countries. Canada, the United States and Mexico remain committed to an accelerated timeline for negotiations. Ministers from all three countries have reiterated the mandate to the Chief Negotiators to continue on an accelerated path. Negotiators will continue their work and consult with their respective stakeholders in preparation for the fourth round of talks in Washington, D.C., from October 11 to 15, 2017.

The Globe and Mail. 27 Sep 2017. U.S. labour proposals fall short of Canada’s NAFTA goals
ROBERT FIFE,
CAMPBELL CLARK, OTTAWA
JUSTIN GIOVANNETTI, TORONTO

American negotiators tabled new proposals on labour standards at NAFTA talks on Tuesday, opening an area of dispute among the three trading partners with measures that fall far short of Canada’s goal to protect union rights and compel Mexico to pay higher wages.
The U.S. text, which sets lower labour provisions than the Canadian position, came just hours before Foreign Affairs Minister Chrystia Freeland hosted a dinner for her U.S. and Mexican counterparts on the eve of the final day of the latest round of North American free-trade agreement talks in Ottawa.
Contentious issues such as labour standards, trade-dispute settlement mechanisms, Buy American provisions for infrastructure and tougher rules of origin to assure that autos and auto parts have higher North American content are expected to be on the table at the ministerial-level negotiations.
U.S. President Donald Trump wants labour concessions from Mexico under a modernized NAFTA pact to satisfy the Republican base that says low Mexican wages undercut U.S. workers.
The U.S. proposal echoes what was in the Trump-rejected TransPacific Partnership (TPP) agreement, which would have guaranteed “acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.” » The proposals came on the same day that the U.S. Commerce Department issued a preliminary ruling that said Montreal-based Bombardier Inc. used government subsidies to sell its C Series jets to Delta Airlines last year at what U.S. giant Boeing Co. called unfairly low prices.
The ruling that imposed U.S. duties of nearly 220 per cent on Bombardier C Series jets is expected to be a hot topic when Ms. Freeland and U.S. Trade Representative Robert Lighthizer hold bilateral talks on Wednesday before trilateral negotiations involving Mexican Economy Minister Ildefonso Guajardo.
The American text tabled Wednesday rejected Canada’s call for an end to right-to-work laws in 28 U.S. states. Those laws allow workers to have a right to refuse to pay union dues while enjoying all the benefits of union membership.
Experts say the Canadian proposal to undercut U.S. right-towork laws would never survive in the cauldron of American politics and would alienate U.S. businesses that have investments in Mexico.
“This has the potential to unravel,” said Dan Ujczo, an international trade lawyer with the cross-border law firm Dickinson Wright. “Let’s assume that they could even make it into the agreement – right-to-work would be the death knell of any new NAFTA agreement in Congress.”
In the House of Commons, Ms. Freeland defended her labour proposal after NDP MPs urged her to make sure that a rewritten NAFTA forces up wages in Mexico and keeps auto jobs in Canada.
“Our government is absolutely committed to advancing the cause of workers’ rights through NAFTA and through the NAFTA negotiations,” she said. “We are very aware that it is unfair to expect our workers to be part of a race to the bottom and compete against workers with lower standards. That is what we are saying at the table.”
The Canada proposal has won support from some unions in Canada and the United States.
Christopher Monette, a spokesman for Teamsters Canada, said Ms. Freeland has the backing of 1.4 million Teamsters across North America.
“I understand there is an ocean of difference between the Canadian and American proposals,” Mr. Monette said.
Mexico’s delegation has yet to put forward its own labour proposal, saying its will study the Canadian and American texts.
“We understand that the [Mexican] business community is pushing back hard against the Canadian text, and the Mexican government is feeling it,” one labour source said.
The head of one of Mexico’s top business lobbying groups, which has a formal consultation role in NAFTA, said he didn’t think the U.S. proposal would be as troublesome as Ms. Freeland’s plan.
“The Canadian proposal is not aimed at Mexico, it’s really aimed at right-to-work in the U.S.,” said Moises Kalach, the head of trade negotiations for Mexico’s Consejo Coordinator Empresarial. “The proposals from the U.S., I hear, are very similar to what [was] in TPP. I have not read it, but if that’s the case, and it’s similar to the TPP, I think we’ll feel okay.”
Jerry Dias, president of Unifor, which represents Canadian auto workers, said his union is strongly supportive of the Freeland proposal, which would also do away with Mexico’s “yellow” unions that represent employers and not employees.
“At some time or another, people are going to have to make some significant moves. Mexico has no chance, no chance, of getting an agreement without labour standards being a part of the central body of the NAFTA agreement,” Mr. Dias said.
Canada’s ambassador to Washington, David MacNaughton, told a Toronto audience on Tuesday that NAFTA bargaining talks are going about as well as he expected, but “there will be some drama” before negotiations conclude.
Facing questions from a wellheeled crowd, Mr. MacNaughton said his message was one of reassurance and that “Canada’s goal is a good deal, not any deal.”
Mr. MacNaughton said many early obstacles at the negotiating table have been overcome and officials from all three countries are beginning to have constructive talks over substantive issues.
“I am optimistic. People don’t shoot themselves in the foot on purpose,” he said of renegotiating the trade pact. “Our negotiators are in great shape, but I think we’re going to need continued co-operation from the provinces and the business community.”
The ambassador said that Canadians will need to continue lobbying American leaders on the merits of trade between the two countries indefinitely if Canada’s goal is to overcome protectionist rhetoric after the NAFTA talks end.

The Globe and Mail. 27 Sep 2017. Auto makers keep Canadian content a closely guarded secret
GREG KEENAN

So you want to buy a Canadian car – or as Canadian a car as possible.
You will get no help from the five auto makers that assemble vehicles in Canada – all of them subsidiaries of foreign companies – because they refuse to reveal the amount of Canadian content in their vehicles.
The issue of content in automobiles has become a focal point of the North American free-trade agreement negotiations because of a demand by the Americans that a new deal require that all vehicles made in each of the three countries contain a minimum amount of U.S. content in order to earn duty-free status.
U.S. negotiators have not yet revealed what minimum percentage they are seeking, but their message was reinforced last week by a Commerce Department study saying that the U.S. value added in Canadian-made vehicles imported into the United States fell between 1995 and 2011.
It dropped to 26.4 per cent last year from 34.9 per cent in 1995, the study found.
Executives from Canada’s autoparts sector vigorously disputed that conclusion during and after a meeting on NAFTA last week with Foreign Affairs Minister Chrystia Freeland.
Auto makers in Canada and the industry groups to which their parent companies belong are silent, however, on how much Canadian content is in the vehicles they make in this country. »
They are silent even though they have urged the Canadian and U.S. governments to make sure that a new NAFTA contain no clauses requiring a specified amount of content from any of the three countries and maintain the status quo of 62.5 per cent as the rule of origin for North American content.
Disclosing the percentages of Canadian and U.S. content on average in their vehicles would help correct the misleading and incomplete data in the Commerce Department report, Canadian trade lawyer Larry Herman said.
If auto makers are so strongly opposed to a specific amount of U.S. content, they should be “more forthcoming with their data to show why it makes sense to keep it the same,” added auto industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc.
The five auto companies with assembly plants in Canada – Fiat Chrysler Automobiles NV, Ford Motor Co., General Motors Co., Honda Motor Co. Ltd., and Toyota Motor Corp. – said in responses to Globe and Mail inquiries that their Canadian-made vehicles meet the current NAFTA rule of origin requiring 62.5 per cent North American content.
But the amount of Canadian or U.S. content in the vehicles is a closely guarded secret.
Dave Gardner, president of Honda Canada Inc., the Canadian sales arm of Japan-based Honda, said “our feeling is that maintaining the North American perspective, versus focusing on any one of the individual countries, is the salient one in the current environment.”
The American Automobile Labeling Act shows that Civic coupes and CR-V all-wheel drive crossovers assembled at Honda’s plant in Alliston, Ont., contain 70 per cent and 75 per cent, respectively, in combined Canadian and U.S. content, Mr. Gardner said, but he acknowledged that the requirements for that calculation are different from the rules used to measure NAFTA content.
A spokeswoman for Fiat Chrysler Canada said that company does not release Canadian content figures for proprietary reasons and “because of the complex nature of the issue.”
A General Motors of Canada Co. spokesman said the information is “business confidential.”
Public-relations officials with two of the companies, Ford Motor Co. of Canada Ltd., and Toyota Motor Manufacturing Canada Inc., also refused to say why they will not reveal the number.
With the five auto makers keeping the amount of their content from Canada a closely guarded secret, identifying which vehicle is the most Canadian is impossible.
A buyer can start with the 17 vehicles assembled in Canada, which can be considered more Canadian than the approximately 250 other vehicles sold here.
But there is no data that enables a buyer to distinguish whether a Chrysler Pacifica is more Canadian than a Ford Edge, Chevrolet Equinox, a Honda CR-V or Toyota RAV4 or vehicles sold in Canada that originate in assembly plants in Michigan, Alabama, Kentucky or other U.S. states.
The amount of Canadian content in the average vehicle assembled in Canada was $4,105 last year, which represented 17.2 per cent of the overall parts content, according to numbers compiled by Mr. DesRosiers.
That number has been as high as 25.6 per cent and as low as 13 per cent this decade, Mr. DesRosiers said, noting that it does not include assembly costs, which would increase the percentage of Canadian content.
His data show that U.S. parts content in Canadian-made vehicles fell to 53.3 per cent last year from 69.2 per cent in 2000, while the parts content from Mexico stood at 11.1 per cent last year.
One industry source who has deep knowledge of vehicle and parts manufacturing in Canada estimated that the overall Canadian content figure is between 20 per cent and 24 per cent.
Canadian content at plants operated by Honda and Toyota is likely higher, the source said, because they do more in-house manufacturing of parts, such as plastic-injection-moulded components, than the Canadian plants operated by the Detroit Three.
The American Automotive Policy Council, a U.S. industry lobby group for the Detroit-based auto makers, said in a submission to the U.S. government earlier this year that its members’ vehicles made in Canada contain 60-percent U.S. content while those made in Mexico have 40-per-cent U.S. content.
“So every car exported from Canada and Mexico benefits the U.S. auto parts sector,” the group said in its submission.
Trade figures also underscore how critical vehicle assembly in Canada is to the U.S. auto-parts sector.
Canada runs a perpetual trade deficit in auto parts with the United States. That deficit rose to $13.04-billion last year, its highest level since 2003.
Fiat Chrysler (FCAU) Close: $17.45 (U.S.), down 6¢ Ford (F)
Close: $11.93 (U.S.), down 1¢ General Motors (GMM.U) Close: $40.44, up 11¢ Honda (HMC)
Close: $30.01 (U.S.), up 8¢ Toyota (TM)
Close: $121.33 (U.S.), up 36¢

POPULATION

StatCan. Canada's population estimates: Age and sex, July 1, 2017

Annual demographic estimates by age and sex for Canada, the provinces and the territories as of July 1, 2017, are now available. Revised estimates as of July 1, for the years 2013 to 2016, are also available.

Population estimate — Canada: 36,708,083
July 1, 2017: 1.2% increase (annual change)

Proportion of persons aged 0 to 14 years — Canada: 16.0%
July 1, 2017: -0.0 pts decrease (annual change)

Proportion of persons aged 65 years and older — Canada: 16.9%
July 1, 2017: 0.4 pts increase (annual change)

Median age — Canada: 40.6 years
July 1, 2017: 0.0 year (annual change)

Source(s): CANSIM table 051-0001

FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/170927/dq170927d-eng.pdf

MONETARY POLICY - INFLATION

BANK OF CANADA. September 27, 2017. Monetary policy data dependent given unknowns in inflation outlook, Bank of Canada Governor Poloz says. St. John's, Newfoundland and Labrador

The Bank of Canada’s approach to monetary policy has become particularly data dependent, because of significant unknowns around the inflation outlook as the Canadian economy nears its potential, Governor Stephen S. Poloz said today.

In a speech to the St. John’s Board of Trade, Governor Poloz reviewed the complex economic adjustments to the 2014 oil price shock, and the progress that has been made since. The Bank’s decision to ease monetary policy in 2015 helped facilitate this progress, and “we could see by the beginning of summer that the economy’s adjustments to lower oil prices were essentially complete,” the Governor said.

While growth in the second quarter far exceeded expectations, and showed the expansion becoming more broadly based and self-sustaining, “recent data point clearly to a moderation in the second half of the year,” the Governor said.

The challenge for the Bank now is to weigh the upside and downside risks to inflation as the economy approaches its capacity. In the current environment, several unknowns are preventing the Bank from thinking mechanically about the outlook for interest rates, the Governor said. In particular, as the economy nears its potential, business investment can have the effect of pushing out its capacity limits, either through increases in productivity or the workforce, giving the economy more room to grow in a non-inflationary way, he said.

Other unknowns that are clouding the outlook for inflation include the impact of the digital economy, which may be placing downward pressure on inflation, ongoing weak wage growth, and the sensitivity of the economy to higher interest rates given elevated levels of household debt.

“We need to keep updating our understanding of the economy in real time,” the Governor said, as he highlighted the work done by the Bank’s regional offices to gauge business sentiment and gather intelligence from the business community.

“There is no predetermined path for interest rates from here,” the Governor concluded. “Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction. We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.”

FULL DOCUMENT: http://www.bankofcanada.ca/wp-content/uploads/2017/09/press_270917.pdf

BANK OF CANADA. September 27, 2017. The Meaning of “Data Dependence”: An Economic Progress Report. Remarks. Stephen S. Poloz - Governor. St. John’s Board of Trade. St. John's, Newfoundland and Labrador

Introduction

I am always happy to be here in St. John’s, a unique corner of our country. Given the city’s geography, its history and rich culture, those of you who get to call St. John’s home are fortunate, indeed.

The idea of “home” is a preoccupation for us at the Bank of Canada. We have been working since the global recession almost a decade ago to bring the Canadian economy home. What I want to do today is give you a sense of how far the economy has come and how much further it has to go, and talk about some signs to watch for along the way.

The goal of our monetary policy is to keep inflation low, stable and predictable. Under the terms of the agreement between the Bank and the federal government, we aim for an annual rate of consumer price inflation of 2 per cent. Of course, unforeseen events can always push inflation up or down. So, our agreement sets out a target band of 1 to 3 per cent.

What do I mean by “home”? For us, home is at the intersection of full capacity and 2 per cent inflation. We expect that when the economy reaches full capacity, inflation will converge on the 2 per cent midpoint of the target band. That is why we are so preoccupied with the idea of home.

Our adjustments to interest rates affect economic activity, which affects the gap between the level of output and full capacity, which in turn affects inflation. However, there is an important consideration that sometimes gets lost: this process takes time. Any change in interest rates will not have its full impact on inflation for about a year and a half to two years. So, when we make our monetary policy decisions, we are less concerned about the latest inflation numbers—which are already a month old—than we are about where inflation will be in the future.

Forecasting Inflation: Data, Sentiment and Intelligence

That brings us to the question of how to forecast future inflation. The place to start is with economic models. Models are indispensable for developing forecasts of inflation and the rest of the economy. However, no central banker would ever base a monetary policy decision solely on a projection from an economic model. Models provide us with a coherent starting point, but we need to apply real-world judgment before reaching a policy decision.

A lot of this judgment comes from conversations with people. Earlier this year, Deputy Governor Lynn Patterson spoke about how the Bank gleans intelligence from financial markets. Equally important are efforts to gauge business sentiment—sometimes called “soft data”—and to gather intelligence about the real economy from business leaders. We need to understand the view from both Main Street and Bay Street to help inform our outlook for growth and inflation. This is where our regional offices, staffed by people who routinely visit companies across the country, play a vital role.

One of the most important vehicles for these efforts is our Business Outlook Survey (BOS), which is celebrating its 20th anniversary this year. The informal process for these visits began when I was at the Bank in the early 1990s. In fact, the first time I visited St. John’s was to do some of those consultations. Through our surveys and conversations with business leaders, we regularly get clues about economic trends before they show up in the official economic statistics.

Let me illustrate. The roughly 50 per cent drop in oil prices during 2014 represented a cut of roughly $60 billion per year in export revenue for oil producers. Some of the impacts of this cut were immediately obvious and predictable. We knew oil-intensive regions would be hurt by the drop in income and that oil companies would reduce their spending. Certainly, the people of this city and province are aware of the pain caused by the oil price shock.

However, the BOS taken late in 2014, together with additional discussions we had with energy companies, revealed warning signs that went well beyond the decline in business investment. For example, companies in this region told us that they were being flooded by résumés of workers returning from Alberta. Service firms, such as hotel and trucking companies, told us about bookings being suddenly cancelled. Energy-service companies told us that previously signed contracts for construction and exploration work were being renegotiated, or even terminated.

So, well before the shock started to show up in the statistics, we could see that it would have a significant negative effect on the Canadian economy and the outlook for inflation. This was crucial to our decision to lower interest rates in January 2015. And, as companies cut their investment intentions further, we lowered interest rates again the following July.

To be clear, our economic models correctly predicted that the collapse in oil prices would be a serious blow. Specifically, our main policy model gave us invaluable insights into how the shock would affect the economy and how the subsequent adjustments would unfold. But the fact that everything we were hearing was supporting these insights increased our confidence that cutting rates was the right course of action.

Adjusting to Lower Oil Prices

Obviously, the drop in oil prices was a significant detour for the Canadian economy. We knew that the shock would trigger a complex series of adjustments and create significant hardship for many people.

Basically, our models projected that the economy would go through the reverse of its experience in 2010–14, when high oil prices led to strong increases in business investment and national income. Provinces where the energy sector is relatively more important, such as Newfoundland and Labrador, would feel these effects most acutely. This underscores one of the fundamental challenges for policy-makers, that economic shocks can have very different effects across Canada’s regions.

In terms of adjustments, we anticipated that lower oil prices would mean not only a decline in the energy sector, but also a pickup in growth in the non-energy sector. We expected exports to be boosted by a lower Canadian dollar. And, as exporting companies reached their capacity limits, we expected to see business investment increase. Stronger exports and investment would complement household spending, and growth would become more broadly-based and self-sustaining.

Certainly, adjustment in the energy sector has been painful. Beyond cuts to investment spending, oil companies restructured operations and laid off workers. Employment in the resource sector fell by roughly 50,000 jobs from the beginning of 2015 to the middle of last year. Despite this, companies boosted production and exports of crude oil as earlier investments were completed and as they found greater efficiencies. And, since oil is priced in US dollars, the decline of the Canadian dollar also helped cushion the impact of the shock. The increased output and weaker currency helped to offset almost half of the $60 billion decline in revenue from oil shipments, boosting exports by about $25 billion.

That said, Canada’s other exports took longer to recover than we anticipated. Exporting companies had taken a significant hit both during and after the global financial crisis. Many disappeared, to be replaced over time by new firms exporting new goods and services. As a consequence, the composition of Canada’s exports has also changed since the crisis. Exports of services in categories such as technical, travel, financial and management services, have taken the lead, while some traditional goods, such as motor vehicles and parts, have seen their shares decline. By mid-2016, non-energy exports had fully recouped their previous drop, and today, total exports are almost 10 per cent above their pre-crisis peak.

Monetary policy has played a key role in this adjustment. We estimate that if we had not lowered our policy rate in 2015, the economy would be roughly 2 per cent smaller today—a difference of almost $50 billion—and there would be about 120,000 fewer jobs. Government fiscal stimulus measures also contributed importantly to growth, and this has meant a better mix of monetary and fiscal policy. Without this fiscal stimulus, interest rates would have had to have been even lower than they were. All things being equal, this would have meant even more household debt and an increased longer-term vulnerability for the economy.

As we look ahead, we project that business investment will be a key driver of economic growth. Business investment has also been slower to materialize than we expected, but it has been strong across the board over the first half of this year. Further, in our most recent BOS, our regional staff found that companies were more focused on expanding capacity than they were previously. Indeed, businesses across an increasing range of sectors say they expect sales growth to improve further, and hiring intentions have reached a record high.

Given all this evidence, we could see by the beginning of summer that the economy’s adjustments to lower oil prices were essentially complete. To be clear, the impact of the shock was still visible in energy-intensive areas of the country. But this was being offset at the macro level by greater strength in other areas.

So, in July, and again earlier this month, we raised our key policy interest rate. Between those two rate hikes we saw a long string of stronger-than-expected economic data, culminating in the GDP report at the end of August that showed an annual growth rate in the second quarter of 4.5 per cent. As we noted in our most recent interest rate announcement, this pace is unlikely to be sustained, and recent data point clearly to a moderation in the second half of the year. Still, the expansion is becoming more broadly-based and self-sustaining, and it is important to remember that it is the level of output relative to potential that drives inflation, not the growth rate. We are in the process of developing an updated forecast for growth and inflation, and it will be published in next month’s Monetary Policy Report (MPR).

Risk Management

Despite the recent news about economic growth, the story of inflation in Canada over the past few years has been dominated by downside risks. Indeed, for most of the past five years, inflation has been in the bottom half of the target band. Bearing in mind the long lags between economic activity and inflation, much of this low inflation has been due to slow economic growth in the past. More recently, it has also reflected temporary factors such as weakness in food and electricity prices. In fact, inflation has been surprisingly soft recently in much of the developed world, not just Canada. I will have more to say about this in a few minutes.

Since inflation has been so consistently in the lower half of the target band, our risk-management approach to monetary policy led us to pay greater attention to forces pushing inflation down. This is because when inflation is already low, a negative shock to the outlook for inflation has more significant policy consequences than a surprise on the upside. Throughout, we wanted to be sure our policy would be sufficiently stimulative to get the economy home.

As the expansion continues, we will continue to manage the evolving risks to the inflation outlook. The temporary factors that have been holding inflation down should dissipate in the months ahead, although recent exchange rate developments could affect this timing. In our July projection, we forecast that inflation would reach close to 2 per cent by the middle of next year. Since that projection, the Bank’s measures of core inflation have edged higher, as expected. We expect the downward pressure on inflation to shift to upward pressure as economic slack is used up. Indeed, our models forecast a very slight overshoot of our 2 per cent target in 2019—a product of our model’s dynamics.

The appropriate path for interest rates in this situation is very difficult to know, because there are a number of important unknowns around the inflation outlook. These unknowns are unusual, as they are mostly the product of the unusual nature of the situation we find ourselves in—the legacy of the global financial crisis, the protracted period of slow economic growth and extremely low interest rates, and so on. Accordingly, we need to keep updating our understanding of the economy in real time. That is why we say that the outlook for inflation, and therefore monetary policy, is particularly data dependent right now.

The Meaning of Data Dependence

What does it mean, in practical terms, to say that monetary policy is “data dependent”? After all, central banks always depend on data to measure their economy’s progress relative to expectations.

What I mean in this context is that in a period of heightened uncertainty about how the economy is evolving and the implications for inflation, we need to pay very close attention to all the information we receive, including data, sentiment indicators and intelligence, and make continuous inferences about not just how the economy is evolving, but how its behaviour may be changing.

Let me give you four examples of the issues we will be monitoring.

The first, and most important, is the evolution of economic capacity. I said that our version of “home” is at the intersection of full capacity and 2 per cent inflation. But full capacity can be a moving target. This is because when companies increase investment, they augment their capacity to produce through some combination of raising their productivity and increasing their workforce. This is a welcome development because, as the economy approaches full capacity, investment spending can have the effect of pushing out those capacity limits, giving the economy more room to grow in a non-inflationary way. In short, this is something worth encouraging. To some extent, this happens at this point in every economic cycle, but the protracted cycle we have been through makes this issue particularly relevant this time around.

A second issue is the question of inflation and technology. Some economists have cited technology as contributing to the weakness in global inflation. The digital economy may be allowing goods and services to be produced and delivered more efficiently, helping to keep prices down. We may also be seeing stronger competition through e-commerce, which affects how retailers set prices.

It is worth emphasizing that this type of disinflation increases everybody’s purchasing power and therefore is also a positive development. The Bank would want to estimate the impact of technological developments on trend inflation and, assuming the impact was temporary, see through it, provided that inflation expectations remained well anchored. There is a lot more work to be done to understand both the size and persistence of these effects.

A third issue is wage growth, which has been slower than would be expected in an economy that is approaching full output. Hourly wages increased at an annual pace of 1.7 per cent in the second quarter, and growth has been subdued for months, although there were signs of an increase in the latest monthly employment report. The slow growth is likely due in part to employment shifting from higher-paying jobs in the oil sector to lower-paying jobs elsewhere. How long this effect will continue is not clear, and other phenomena may be at work. Again, we must work hard to understand the data, and the underlying shifts in behaviour they may be pointing to.

The fourth issue is elevated household debt. There is reason to think that interest rate increases may have more of an impact on the economy and inflation than they did in the past. Further, we do not yet know the full extent of the economy’s reaction to various macroprudential measures aimed at imbalances in the housing market. So, the Bank will be looking closely to see how the economy’s adjustment to changes in interest rates may differ from that in previous economic cycles.

This is not an exhaustive list. There are also many external risks and uncertainties around our outlook, including geopolitical developments and the rise of protectionist sentiment in some parts of the world. The evolution of the neutral rate of interest is also a topic of significant debate in the profession. We have been talking about these uncertainties for some time.

In such an environment, we simply cannot rely mechanically on economic models. This does not mean we are abandoning our models. It does mean we need to use them with plenty of judgment, informed by data, sentiment indicators and intelligence, as we go through the delicate process of bringing inflation sustainably to target. We will continue to watch all the data closely, as well as developments in financial markets, in terms of their impact on the outlook for inflation. We recognize that the economy may act differently than in previous cycles. We will not be mechanical in our approach to monetary policy.

Let me quickly make one final point. Among the financial market developments that we watch closely are movements in longer-term interest rates and the exchange rate. Changes in interest rates naturally lead to movements in the Canadian dollar. However, currencies can move for many other reasons, including external factors, and these movements can affect our inflation outlook, depending on their cause, size and persistence.

Conclusion

It is time to conclude. I hope I have given you an appreciation of just how far the economy has come on its way home. And although we are confident that the economy has made significant progress, we cannot be certain of exactly how far there is left to go.

The economic progress we have seen tells us that the moves we took to ease policy in 2015 were the right thing to do. At a minimum, that additional stimulus is no longer needed. But there is no predetermined path for interest rates from here. Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction. We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.

I would like to thank Russell Barnett and David Amirault for their help in preparing this speech.

FULL DOCUMENT: http://www.bankofcanada.ca/wp-content/uploads/2017/09/remarks-270917.pdf

G-7

Innovation, Science and Economic Development Canada. September 27, 2017. Canada shows global leadership on innovation at G7 Industry and ICT Ministers’ Meeting. Minister Bains highlights Canada’s commitment to jobs, skills and business growth during talks in Italy

Ottawa – The Government of Canada is positioning Canada as a world leader in innovation through the Innovation and Skills Plan, a multi-year strategy aimed at ensuring that Canada meets the challenges and seizes the opportunities of the modern and global economy. As a result of this plan and multilateral economic cooperation, middle-class Canadians and the international community will benefit from more jobs, skills and business opportunities.

That was the message delivered by the Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development, at the G7 Industry and ICT Ministers’ Meeting held in Turin, Italy, on September 25 and 26. The ministers discussed issues concerning small and medium-sized enterprises, competitiveness, high-tech ecosystems, cybersecurity cooperation, artificial intelligence and intellectual property rights.

While in Italy, the Minister also advocated for Canada’s values of diversity and inclusion. Through the Innovation and Skills Plan, our government is working tirelessly to promote Canada as an ideal destination for global businesses to invest, while helping Canadian companies to scale up and succeed in the global economy. Canada’s values of openness, diversity and inclusion are a big part of that plan. Our open society has attracted countless innovators and entrepreneurs who have found in Canada a place to fulfill their potential. We are a stronger country as a result. Diversity is our strength, and we’re committed to playing a leadership role in promoting it on the world stage.

During separate meetings with his G7 counterparts and Italian business leaders, the Minister promoted Canada’s value proposition and emphasized the importance of multilateralism, economic cooperation and free trade for businesses to grow and create more jobs for the middle class in all G7 countries.

The G7 Industry and ICT Ministers’ Meeting provided an opportunity for the world’s most advanced economies to come together and collaborate to improve conditions for innovation and to grow the middle class.

In 2018, Canada will hold the G7 presidency, providing an opportunity to further showcase the country’s commitment to innovation and economic growth.


Quotes

“I had very productive discussions with my G7 counterparts on jobs, economic growth, skills and business opportunities. Our government is deepening its global economic relationships to develop new markets and opportunities for Canadian businesses and create more jobs for middle-class Canadians. Our values of diversity, openness and inclusion give Canadians a competitive edge in a global economy that depends on people’s ability to navigate through different cultures and languages, and I’m proud to promote these values at home and abroad. I look forward to continuing to work with the international community when Canada takes on the G7 presidency in 2018.”

– The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development

Quick Facts

• The Group of Seven (G7) comprises seven of the world’s advanced economies: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
• The G7 dates back to the mid-1970s. The G7 presidency, which rotates annually between member countries, sets the agenda for the year in consultation with G7 partners. Italy holds the presidency in 2017, and Canada will hold it in 2018.

TRANSPORTATION

The Globe and Mail. Bloomberg. 27 Sep 2017. Alstom-Siemens rail-equipment merger is more than an attempt to compete with China. A merger [between Alstom and Siemens] gives Emmanuel Macron and Angela Merkel a prized example of European business co-operation.
CHRIS BRYANT, columnist covering industrial companies

First, Europe gave us Airbus; now “Railbus”?
On Tuesday, Siemens AG and Alstom SA signed off on a merger of their rail-equipment activities to create a new European champion. The deal has appeal for the German and French companies’ shareholders but governance, antitrust and costcutting could yet disrupt the journey.
While a combined entity will control only about 14 per cent of the €110-billion ($160-billion) rail-equipment market, the footprint will be bigger in parts of Europe.
So will Europe’s antitrust authorities block it? That depends. After the 2015 merger of two Chinese rolling-stock companies, the new entity CRRC Corp. dwarfs its international peers.
CRRC has won rail contracts as far afield as Chicago and Kenya, and China’s Belt and Road initiative will bring yet more international business its way.
The fear is that the Chinese company’s size plus access to cheap finance will let it crush rivals unless they bulk up, too.
In absolute terms, CRRC spends seven times more on R&D than Alstom, Morgan Stanley notes.
But it isn’t unbeatable, at least not yet. International customers accounted for only 8 per cent of CRRC sales last year, when its railway-equipment sales declined. The Alstom and Siemens train businesses have performed quite well in the meantime, as rapid urbanization spurs demand for less-polluting mass transit.
So why risk a big cross-border merger?
Unsurprisingly, Siemens isn’t wedded to its comparatively low margin rolling-stock business: The unit does lots of manufacturing in high-cost Germany, while rail companies regularly suffer delays and cost overruns on long projects. Chief executive Joe Kaeser has form in unlocking value via spinoffs and separate listings, so folding the business into Alstom is worth a shot.
The French company has a big and globally diverse order book, very little debt and is poised for a €2.5-billion cash injection related to the sale of its energy activities to General Electric Co.
A merger is appealing to Alstom, too. First, there’s the risk that Siemens could do a deal with Bombardier Inc. instead. Plus Siemens’s rail business is more profitable than Alstom’s because it sells more high-tech signalling and rail automation products. Siemens would contribute about 60 per cent of a combined group’s operating profit.
Alstom investors spy higher margins: The company has added almost €700-million of market value since Bloomberg reported the Siemens talks last week. A combined entity should spend proportionally less on R&D and will have a stronger hand in price negotiations with customers and suppliers – although regulators might not like that.
Yet, cutting production costs won’t be easy. Last year, Alstom had to row back on job cuts at a French plant amid government and trade union pressure. Besides, rail companies are building factories overseas to win international contracts, while customers tend to want bespoke trains to fit their country’s needs. This makes economies of scale difficult. Joining forces might also cause some customers to take their business elsewhere (so-called revenue dis-synergies).
Governance is a worry, too. While Siemens would probably own slightly more than half of the combined entity, according to Bloomberg News, Alstom’s CEO, Henri Poupart-Lafarge, will be in charge and the headquarters will be in France. The two companies haven’t always got on.
Still, a merger gives Emmanuel Macron and Angela Merkel a prized example of European business co-operation. So, if regulators can be persuaded, this Railbus will no doubt roll on regardless.
The launch of Siemens Alstom will be the equivalent of a land-bound Airbus, the European passenger-jet maker that is Boeing’s main global rival.
The merger hits Bombardier with a hefty dose of bad news in the same week that its Montrealbased aerospace business faces a blow from the U.S. Commerce Department. On Tuesday the department was expected to issue a preliminary ruling on whether the Canadian company benefited from unfair subsidies on the sale of its C Series jet in the U.S. market. Boeing contends that Bombardier sold the C Series to Delta Air Lines at “absurdly low prices” while taking unfair government aid.
Both Bombardier and BT, whose headquarters are in Berlin, declined to comment Tuesday about the Siemens-Alstom deal and how it would affect the Canadian train maker. BT is 70-percent owned by Bombardier and 30 per cent by pension fund Caisse de dépôt et placement du Québec, which invested $1.5-billion (U.S.) into BT in 2015 as Bombardier was struggling to raise money to finance the C Series.
All three European train makers have been circling one another for years as the Chinese threat intensified. BT insiders have said that competition from the new breed of Chinese train giants, which intend to become strong competitors in the European and North American markets, would force industry-wide consolidation among the French, German, Italian and Japanese train companies, a process that has already started. In 2015, Hitachi of Japan bought Italy’s AnsaldoBreda, the maker of Italy’s new generation of Bombardier-engineered highspeed trains.
Although there are other issues that could have swayed the Siemens board, politics is believed to be the strongest. As leaders in France and Germany articulated an ambition behind the scenes to create a truly European champion, pressure against a Siemens-Bombardier deal intensified in recent weeks, high-level sources confirmed.
Siemens and BT also have greater overlap, raising the likelihood of asset sales and job cuts that would not have pleased the French government or unions. A former BT senior manager who did not want to be identified said massive overlap in Germany between Siemens and BT was also a deal buster. “Everyone agrees that the European rail business needs restructuring, but forcing the German factories [of Siemens and BT] to bear the brunt of this restructuring would not be politically acceptable,” he said.
Siemens will transfer its train and rail equipment business to Alstom in return for a 50-per-cent stake in the enlarged company, the manufacturers said in a joint statement. Alstom boss Henri Poupart-Lafarge will be the chief executive of the new company, which will be based and listed in Paris. Siemens will name the chairman. A break fee of €140million is in place. The companies still have to win anti-trust approval for the deal. It wasn’t immediately clear how they would deal with current contracts they’re working on with Bombardier, including the modernization of Montreal’s metro system.
Siemens is best known as the maker of Germany’s ICE highspeed inter-city trains, while Alstom makes the high-speed TGV trains that are a source of French pride. Siemens is also a strong player in signalling systems. Bombardier also makes high-speed trains but is better known for its commuter and light-rail trains.

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LGCJ.: