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October 31, 2017

CANADA ECONOMICS



CANADA - COLOMBIA



Global Affairs Canada. 2017-10-31. Canada provides support to Colombia. Backgrounder

The initiatives announced today by the Government of Canada will support peace efforts and will aim to reduce gender-based violence and early pregnancy rates in Colombia. In total, these projects amount to approximately $14.4 million.

Delivering Rights for Girls through Improved Comprehensive Sexuality Education
Funding announced: $10 million
Time frame: 2017 to 2023

Implemented by Profamilia, this initiative will provide Colombian youth with age-appropriate education on their rights—including sexual and reproductive health rights (SRHR)—to help reduce gender-based violence and early pregnancy rates in four of Colombia’s most impoverished regions. Through this initiative, almost 8,000 girls and boys, aged 10 to 14, from 55 schools will receive training to become champions within their schools and communities to promote positive attitudes and behaviours around SRHR. The project will also train 550 teachers and 240 government officials to improve their ability to implement successful comprehensive sexuality education in schools and deliver youth-friendly and gender-responsive SRHR services.

The following four projects are funded through the Peace and Stabilization Operations Program (PSOPs) and amount to approximately $4.4 million. The projects are aimed at supporting peace and capacity building in Colombia.

Peace Process in Colombia: Building Confidence in Transitional Justice
Funding announced: $2 million
Time frame: March 2017 to March 2019

Transitional justice arrangements are a key component of the peace agreement in Colombia. Canada is supporting the Victims’ Chapter of the agreement through a project with Lawyers without Borders to support civil society and Colombia’s government with the implementation and monitoring of transitional justice mechanisms. This project will contribute to building the confidence of Colombian society, particularly of women and girls, in the transitional justice system and contribute to the reaffirmation of the rule of law.

Support to the Transformation of the Colombian Army
Funding announced: $297,000
Time frame: February 2017 to March 2018

Transforming Colombia’s army into a professional peacetime force is fundamental to the establishment of a durable peace in the country. Canada is supporting this process through funding strategic analysis exercises and sharing regional experiences and lessons learned on security sector transformations in other countries. This project supports the efforts of the Colombian National Army in their transformation into a peacetime institution.

Strengthening the National Center for Historical Memory in Readiness for the establishment of the Truth Commission
Funding announced: $1.2 million
Time frame: March 2017 to December 2018

Truth and reconciliation initiatives have been a proven and effective component in peace processes worldwide. Canada is supporting this process in Colombia through funding the National Center for Historical Memory’s project to recognize the impact of the conflict on individuals, which will lay the basis for the establishment of a truth commission under Colombia’s peace agreement.

Deployment of a Government of Canada Expert to the Office of the UN High Commissioner for Human Rights in Colombia
Funding announced: $850,000
Time frame: October 2017 to August 2019

Through the PSOPs Civilian Deployment Platform, the Government of Canada will make an in-kind contribution for a two-year deployment of a Canadian expert to the Office of the UN High Commissioner for Human Rights (OHCHR) in Colombia. The expert will support the OHCHR’s monitoring of the human rights aspects of Colombia’s Peace Process, by providing strategic and technical advice on economic, social and cultural rights. Additional expertise to be provided includes analysis of human rights violations resulting from gender-based violence and guidance on the implementation of gender mainstreaming strategies.

The following two initiatives take place through the Canadian Police Arrangement (CPA), a partnership between Global Affairs Canada, Public Safety Canada and the Royal Canadian Mounted Police. A combined total of up to 10 Canadian police will be deployed in these projects.

Canadian Police Participation in the United Nations Verification Mission in Colombia
Time frame: February 2017 to March 2019

Through the CPA, Canada deployed two police officers as observers to the first United Nations Mission in Colombia in February 2017. That mission has transitioned to a second: the United Nations Verification Mission in Colombia. One of the Canadian police officers deployed to the first mission will extend into the second as a continuation of the Government of Canada’s support for the implementation of the historic peace agreement between the Government of Colombia and the Revolutionary Armed Forces of Colombia.

Bilateral Police Initiative between Canadian and Colombian Police

The governments of Canada and Colombia are developing a bilateral police initiative to support police capacity building for the post-conflict environment in Colombia. Through the CPA, Canadian police will deploy to Colombia to provide training, capacity building and strategic advice to the National Police of Colombia and the Office of the Attorney General of Colombia. The areas of focus under discussion include police capacities and needs related to improving citizen security in rural Colombia in the post-conflict context, with a focus on gender.

Global Affairs Canada. October 31, 2017. Canada reaffirms support for Colombia

Ottawa, Ontario - The Canada-Colombia relationship is built on close economic ties, dialogue on human rights, long-standing development assistance, support for Colombia’s peacebuilding efforts, growing defence and security cooperation and collaboration on other key regional issues. We are also committed to tackling climate change and helping our country, and the world, create a cleaner global economy.

The Honourable Chrystia Freeland, Minister of Foreign Affairs, the Honourable Marie-Claude Bibeau, Minister of International Development and La Francophonie, and the Honourable Catherine McKenna, Minister of Environment and Climate Change, today announced new initiatives in support of Colombia’s peace efforts and an investment to address climate change. This announcement follows yesterday’s state visit to Canada by Juan Manuel Santos Calderón, President of Colombia.

Minister Freeland announced projects in the areas of transitional justice and security that will help to address important needs in Colombia’s peace plan as it progresses.

Minister Bibeau also announced funding to provide nearly 8,000 Colombian youth from 55 schools with age-appropriate comprehensive sexuality education, to help reduce gender-based violence and early pregnancy rates in Colombia.

During the President’s visit, the Honourable François-Philippe Champagne, Minister of International Trade, discussed the conclusion of the first round of trade negotiations between Canada and the Pacific Alliance, which was held from October 23 to 27, 2017, in Cali, Colombia. The Pacific Alliance is a regional initiative established in 2011 by Chile, Colombia, Mexico and Peru.  Canada recognizes the importance and growing influence of the Pacific Alliance and continues to seek out opportunities to strengthen its trading relationships. In so doing, it is creating more jobs for the middle class.

Furthermore, Minister Champagne welcomed the signing of the Canada-Colombia Air Transport Agreement (ATA) by the Honourable Marc Garneau, Minister of Transport, and María Ángela Holguín, Colombia’s Minister of Foreign Affairs. The ATA was negotiated in 2012 and supports people-to-people ties and the growth of education, tourism and trade linkages between the two countries.

Minister McKenna also announced during the President’s visit that the Government of Canada will provide $1.6 million to the four Pacific Alliance countries to address climate change. The $1.6-million project will help the Pacific Alliance reduce climate pollutants, attract investment to support climate change actions and help create a cleaner environment for the Pacific Alliance countries, Canada and the rest of the world.

Quotes

“The projects announced today demonstrate Canada’s continued support to Colombia as it strives to build a lasting and just peace for the people of Colombia and carve out a new role for itself in the Americas and internationally.”

- Hon. Chrystia Freeland, P.C., M.P., Minister of Foreign Affairs
“Canada is committed to protecting and promoting the health and rights of women and girls globally. By providing girls and boys with comprehensive education on their rights—including sexual and reproductive health—Canada will help to ensure a brighter future for Colombian youth, especially girls, by reducing gender-based violence and early pregnancies.”

- Marie-Claude Bibeau, Minister of International Development and La Francophonie
“With its growing middle class, open, market-driven economy and shared goal of free, fair and progressive trade, Colombia is one of Canada’s key commercial partners in the Americas and the Pacific region. Together, we are committed to pursuing a progressive approach to trade that will build on this close and growing relationship and support growth, opportunities and middle-class jobs in both our countries.”

- François-Philippe Champagne, Minister of International Trade
“Climate change is a global problem that requires a global solution. We must work together and help each other. Through this project, we are helping the Pacific Alliance nations improve their capacity to carry on the great work they’re doing.”

– Catherine McKenna, Minister of Environment and Climate Change

Quick Facts

  • Canada and Colombia enjoy constructive cooperation and shared values at the Organization of American States, the United Nations and in other multilateral and international organizations and forums, such as the Lima Group of countries formed to address the crisis in Venezuela. Colombia is a founding member, and current pro tempore president, of the Pacific Alliance (Colombia, Chile, Mexico and Peru), of which Canada is an active observer.
  • The Pacific Alliance is a regional initiative founded in 2011 by Chile, Colombia, Mexico and Peru to foster the free movement of goods, services, capital and people among member countries.
  • Canada’s bilateral trade with Colombia reached $1.6 billion in 2016; two-way foreign direct investment stood at $3.7 billion at the end of 2016.
  • Canada’s total merchandise trade with the Pacific Alliance exceeded $48 billion in 2016. The four member countries account for more than 75% of Canada’s two-way merchandise trade with Latin America.
  • In 2016, Canada announced a total of $78.4 million in international assistance to support peace in Colombia.
  • The $1.6-million investment to help the four Pacific Alliance countries address climate change is part of Canada’s pledge of $2.65 billion to support developing countries in transitioning to low carbon economies that are both greener and more climate resilient.

See also:




GDP



StatCan. 2017-10-31. Gross domestic product by industry, August 2017

Real GDP by industry, August 2017: -0.1% decrease (monthly change)
Source(s): CANSIM table 379-0031

Real gross domestic product (GDP) edged down 0.1% in August, after being essentially unchanged in July. Declines in manufacturing and mining, quarrying and oil and gas extraction more than offset increases in most sectors (12 out of 20).

Chart 1: Real gross domestic product edges down in August

Chart 1: Real gross domestic product edges down in August

Goods-producing industries contracted for the second consecutive month, declining 0.7% in August in part due to temporary reduced capacity in the manufacturing and the mining, quarrying and oil and gas extraction sectors. Services-producing industries edged up 0.1%.

The manufacturing sector declines

Following a 0.2% dip in July, the manufacturing sector contracted 1.0% in August as both durable and non-durable manufacturing declined.

Chart 2: Manufacturing sector declines in August

Chart 2: Manufacturing sector declines in August

Non-durable manufacturing decreased 2.0% following three consecutive months of growth as the majority of subsectors registered declines. Chemical manufacturing dropped 7.3%, its largest decline in the last 20 years, as all industry groups declined. Declines reflected in part some lost capacity due to plant maintenance shutdowns and lower demand from export markets for basic chemicals and pharmaceutical and medicinal products. There were notable decreases in manufacturing of petroleum and coal products (-3.1%) and plastic and rubber products (-2.5%). Food (+1.2%) and beverage and tobacco product manufacturing (+3.4%) were the only non-durable subsectors to increase.

Durable manufacturing declined 0.1% as 6 of 10 subsectors contracted. Fabricated metal (-3.2%) and miscellaneous manufacturing (-6.6%) contributed the most to the decline. Increases in machinery (+5.8%), primary metal (+1.4%) and electrical equipment (+1.9%) manufacturing partly offset the declines in other subsectors.

The mining, quarrying, and oil and gas extraction sector contracts

The mining, quarrying, and oil and gas extraction sector was down 0.8% in August, declining for the third consecutive month.

The oil and gas extraction subsector contracted 1.4%, with conventional oil and gas extraction declining 5.2% as both crude petroleum and natural gas extraction declined. Maintenance shutdowns in Newfoundland and Labrador in August affected conventional oil production. Non-conventional oil extraction grew 3.3%, more than offsetting a 3.0% decline in July.

Mining and quarrying (except oil and gas) expanded 2.5% in August. Non-metallic mineral mining grew 8.6%, led by a 14% increase in potash mining. Coal mining was up 6.2%. Metal ore mining declined 1.9% as growth in copper, nickel, lead and zinc (+4.4%) and gold and silver ore mining (+1.7%) was more than offset by declines in iron ore (-11%) and other metal ore mining (-3.4%).

Support activities for mining, oil and gas extraction declined 2.8%. This was a fourth consecutive decline after a string of increases that began in the summer of 2016.

Wholesale trade grows while retail trade declines

After growing 2.0% in July, wholesale trade gained 0.4% in August as five of nine subsectors grew. Leading the growth was a 4.4% increase in personal and household goods wholesaling, which rose for the sixth month a row. Miscellaneous (+1.5%), motor vehicle and parts (+1.3%) and petroleum products wholesaling (+2.3%) also increased. Building materials and supplies (-2.8%) and machinery, equipment and supplies wholesaling (-0.7%) gave back some of the gains registered in July.

The retail trade sector posted a 0.4% decrease as its 12 subsectors were evenly split between increases and decreases. The largest declines in terms of activity were at food and beverage stores (-2.0%) as most of the industry groups in the subsector registered decreases. There was less activity at store types traditionally associated with housing purchases and home renovation as both building material and garden equipment and supplies stores (-1.3%) and furniture and home furnishing stores (-2.3%) registered decreases. There were increases at clothing and clothing accessories stores (+1.3%), electronics and appliance stores (+2.0%) and motor vehicle and parts dealers (+0.4%).

Real estate rental and leasing edges up

Real estate and rental and leasing edged up 0.2% in August.

Following four consecutive months of decline, activity at the offices of real estate agents and brokers rose 0.3% in August, led by increases in the Greater Toronto and Greater Vancouver areas.

Finance and insurance edges up

The finance and insurance sector posted a gain of 0.2%, following a 0.6% decline in July, which was the largest in two years. Depository credit intermediation and monetary authorities grew 0.7% as activity at banking, monetary authorities and other depository credit intermediaries increased. Financial investment services, funds and other financial vehicles were down for a third consecutive month, declining 0.6%, while insurance carriers and related activities declined 0.2%.

Transportation and warehousing up slightly

Transportation and warehousing grew 0.2% as four of nine subsectors increased. Air transportation (+2.1%) rose for a third consecutive month as there was increased air traffic both from Canadian travellers and travellers to Canada from other countries. Postal service and couriers and messengers expanded 1.5% as both industries increased. Rail transportation contracted 1.8% as rail movement of automotive products, manufactured goods and intermodal freight declined. Pipeline transportation declined 0.6% as increases in pipeline transportation of natural gas (+0.7%) were more than offset by declines in crude oil and other pipeline transportation (-1.8%).

Construction edges down

The construction sector declined for a second consecutive month, edging down 0.1% in August. The declines in July and August have only given back part of June's 1.8% increase. Residential construction declined 0.9% from decreases in work put in place on single-family dwellings. Growth in non-residential (+0.5%) and repair construction (+0.7%) was more than offset by the declines in residential and engineering and other construction activities (-0.1%).

Other industries

The utilities sector was down 0.8% as electric power generation, transmission and distribution as well as natural gas distribution declined. Cooler than usual weather in August reduced electricity demand for air conditioning.

Professional services grew 0.3%, mainly attributable to increases in computer systems and related services (+0.5%) and management, scientific and technical consulting services (+0.9%).

Accommodation and food services edged up 0.1%, as a 1.0% rise in accommodation services was almost entirely offset by a 0.2% decline at food services and drinking places.

The public sector (education, health care and public administration) was up 0.2%, rising for the seventh month in a row.

Agriculture, forestry, fishing and hunting (-0.3%) was down.

Chart 3: Main industrial sectors' contribution to the percent change in gross domestic product in August

Chart 3: Main industrial sectors' contribution to the percent change in gross domestic product in August

FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/171031/dq171031a-eng.pdf

THE GLOBE AND MAIL. OCTOBER 31, 2017. ECONOMY. Canada ‘back to reality’ as economy contracts
DAVID PARKINSON, ECONOMICS REPORTER

Canada's economy took a surprise step backward in August, the latest and strongest evidence yet that the growth surge of the first half of the year has given way to a much more stunted second half.

Statistics Canada reported Tuesday that real gross domestic product fell 0.1 per cent in August from July on a seasonally adjusted basis, the first decline in 10 months. The reading disappointed economists, who had estimated that the economy had eked out modest growth of 0.1 per cent in the month.

The dip comes on the heels a July GDP report that showed essentially no change. Taken together, the two months paint a picture of an economy catching its breath after a blistering few months of growth. GDP expanded at a 4.5-per-cent annualized rate in the second quarter, the strongest quarter in nearly six years.

"The two-month lull in activity pounds home the point that the frothy growth of the past year is over and done," said Douglas Porter, chief economist at Canadian Imperial Bank of Commerce, in a research note. "The run of amazing Canadian economic data is officially over, with growth coming back to reality in hurry."

But even though the weak August result suggests that growth was something less than 2 per cent annualized in the third quarter, economists believe the economic expansion remains on track in the second half of the year, albeit at a more moderate pace.

"One should be careful in not getting too gloomy on Canada's softened growth in the third quarter," said Bank of Nova Scotia economist Derek Holt, who estimated third-quarter growth at just 1.5 per cent annualized in light of the August decline. "After 4.5-per-cent growth in the second quarter … what did you expect?"

Economists also noted that the August setback wasn't reflective of a broad-based slowdown, as 12 of 20 major industry sectors showed growth in the month. The overall result was weighed down largely by declines in manufacturing and in oil and gas extraction, both of which were slowed by temporary maintenance shutdowns.

"With much of the third-quarter weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry," said Brian DePratto, senior economist at Toronto-Dominion Bank, in a research report.

The goods-producing side of the economy contracted 0.7 per cent, its second straight setback. Goods output was weighed down by a 5.2-per-cent slump in conventional oil and gas and 7.3-per-cent plunge in chemical manufacturing, the sharpest single-month drop in 20 years. Both sectors were slowed considerably by maintenance shutdowns.

But the larger services side of the economy grew 0.1 per cent, its 17th straight month of expansion. The gain was led by the wholesale sector, up 0.4 per cent, while the real estate and finance-and-insurance sectors each grew 0.2 per cent. But retailing fell 0.4 per cent, its second straight decline following several months of strong growth.

Economists still believe that the economy will likely grow at something near a 2-per-cent pace in the second half of the year, with growth expected to pick up somewhat in the fourth quarter after the third-quarter lull. Last week, the Bank of Canada estimated a third-quarter growth rate of 1.8 per cent annualized, accelerating to 2.5 per cent in the final quarter of the year.

Still, the August GDP report's confirmation of a relatively sluggish third quarter should support the Bank of Canada's recent cautious stance on further interest rate increases, following its two rate hikes in July and September.

"The moderation of growth and still-mild inflation will be welcome by a Bank of Canada intent in delaying interest rate hikes for as long as possible," said National Bank of Canada senior economist Krishen Rangasamy in a research note.

Indeed, most economists don't expect another rate increase until January at the earliest, and possibly not until next spring, as the central bank weighs the slower growth pace, still-below-target inflation, and the emergence of risks to growth in 2018 from new mortgage regulations and the uncertain NAFTA negotiations.

"My bias [is] that the BoC is on a prolonged hold, and more so because of question marks hanging over the 2018 economy than a [third] quarter it can't do anything about anyway," Bank of Nova Scotia's Mr. Holt said. "Only time will help to inform those risks."




THE GLOBE AND MAIL. OCTOBER 31, 2017. Canadian dollar weakens as GDP data further cools rate hike prospects
FERGAL SMITH

TORONTO - The Canadian dollar weakened against its U.S. counterpart on Tuesday after data showing a surprise contraction of the domestic economy in August further dampened prospects of another Bank of Canada interest rate hike this year.

Canada's gross domestic product declined 0.1 per cent in August following flat growth in July, in part due to maintenance shutdowns in major industries, Statistics Canada said. Analysts had forecast an increase of 0.1 per cent.

The data supported the view that Canadian growth will slow in the third quarter after rapid expansion of the economy in the first half of the year.

Perceived chances of another Bank of Canada rate increase by the end of the year slipped to 22 per cent from 27 per cent before the data, the overnight index swaps market indicated.

They were 37 per cent before last week's interest rate decision by the central bank, when the benchmark rate was left unchanged at 1 per cent. The Bank of Canada had hiked in July and September for the first time in nearly seven years.

At 9:13 a.m. ET (1313 GMT), the Canadian dollar was trading at $1.2892 to the greenback, or 77.57 U.S. cents, down 0.5 per cent.

The currency traded in a range of $1.2825 to $1.2915. On Friday, it touched a more than three-month low at $1.2916.

In separate domestic data, producer prices fell by 0.3 per cent in September from August as a stronger Canadian dollar helped cut prices for motorized and recreational vehicles.

Canada's October employment report and trade data for September are due on Friday. The U.S. Federal Reserve will make an interest rate decision on Wednesday.

Prices of oil, one of Canada's major exports, steadied after a week of gains as the prospect of increasing U.S. exports dampened bullish sentiment.

U.S. crude prices were down 0.06 per cent at $54.12 a barrel.

Canadian government bond prices were higher across a steeper yield curve, with the two-year up 3.5 Canadian cents to yield 1.388 per cent and the 10-year rising 8 Canadian cents to yield 1.948 per cent.

Canadian yields fell further below yields on U.S. Treasuries across much of the curve.

The gap between Canada's two-year yield and its U.S. counterpart widened by 1.7 basis points to a spread of –19.2 basis points, its widest since July 11.

THE GLOBE AND MAIL. OCTOBER 31, 2017. OPINION. Bank of Canada begins its delicate dance around inflation risks
DAVID PARKINSON, Columnist

After a fair bit of research and deliberation, the Bank of Canada is pretty sure that inflation will still do what it is supposed to do in a growing economy – go up. It's just not so sure that it wants to bet any more interest-rate hikes on it until it sees the economic data to justify its faith.

In announcing on Wednesday that it had decided to hold steady on rates for the time being – on the heels of rate hikes in its previous two policy announcements – the BoC signalled it is very much in a wait-and-see mode for its next rate move.

While Governor Stephen Poloz made clear the bank still expects to raise rates further in the coming months as the economy continues to expand at a healthy clip, the bank said it will be "cautious" in its rate decisions from here. There are just too many things the bank's policy makers don't quite understand about how things will play out from here.

And at the top of that list is inflation. Inflation was the first item of discussion in the bank's rate-decision statement.

Inflation issues occupied not one but two special "boxes" in the Monetary Policy Report – one of the central bank's favoured devices to draw attention to the most pressing questions dominating its monetary-policy deliberations. At the same time, the bank released two staff analytical papers on factors affecting Canadian and global inflation.

That left no doubt the inflation riddle is a major preoccupation for the central bank's top decision makers. And that riddle, in a nutshell, is why do we still have remarkably tame inflation even as the Canadian economy has accelerated to more or less full speed?

That is, after all, the standard recipe for inflation. The two rate hikes over the summer were predicated on the widely accepted economic notion that inflation rises as an economy uses up its spare capacity. Indeed, after the country's economic surge of the first half of the year, the central bank now estimates the output gap – the difference between how much the economy is producing and how much it has capacity to produce – is essentially closed.

Yet, the inflation rate has only just started to pick up and remains well below the bank's 2-per-cent target, which serves as its formal guide for setting monetary policy. And even the recent increases are less than convincing; the modest climb to 1.6 per cent in September was helped considerably by a spike in gasoline prices due to hurricane-related U.S. refinery shutdowns – a textbook temporary distortion, the kind of thing the BoC usually looks past when assessing inflationary pressures.

This is hardly new; inflation has been stubbornly weak throughout the post-financial-crisis economic recovery, not just in Canada but throughout the world's advanced economies. Persistent economic weakness could usually be blamed. But the increasing worry in some quarters is that the inflation model is somehow broken, that the world has changed so much that one central bank's domestic monetary policy can't get inflation back up to where it used to be.

In economies such as Canada's that have overcome that persistent weakness and returned to full capacity, the moment of truth has arrived.

But the BoC's researchers examined the question and concluded that global factors often blamed for inflation's demise, such as globalization and digital technology, haven't had a big impact in Canada. The stubborn lag in inflation in Canada can still be attributed to good old-fashioned supply and demand, obscured by various transitory factors. (The latest of these is this year's rise in the Canadian dollar, which the bank believes will trim about 0.5 percentage points off year-over-year inflation by the middle of next year, after which its impact will drop off.)

"This work has generally confirmed our faith in our model of inflation, in which inflation depends mainly on the degree of excess demand or excess supply in the economy, and this process operates with a lag," Mr. Poloz said.

But the faith has yet to be proven. And to make things more complicated, the Bank of Canada isn't entirely sure if the economy is, in fact, running at full capacity. It believes that companies' facilities are essentially operating at their maximum output, but the labour market still has slack in it – as evidenced by the still relatively tame growth in wages. And businesses have stepped up their investing as the economy has surged this year, implying that capacity is being added to meet rising demand. So the economy may still have more room to grow before the inflation train leaves the station.

So the bank has shifted into caution mode while it waits for economic data to justify its faith that the inflation model still works. In fact, Mr. Poloz said that as long as inflation remains below the 2-per-cent target, "we continue to be more preoccupied with the downside risks to inflation" – a pretty clear signal the next rate hike is going to need some evidence that inflation is taking hold.

The risk is that the central bank waits too long to be convinced it is right, that capacity pressures have triggered inflation. But by getting two rate hikes under its belt in the summer, the bank has hedged its bet on this front – tempering the economy and creating a headwind on inflation that will buy it some more time to see if the inflation-and-capacity forces beneath the surface are behaving as expected. Its hope is that it has done just enough to keep the risks balanced. It's a delicate dance the central bank has begun.

REUTERS. OCTOBER 31, 2017. Canadian economy slows, reinforcing central bank caution
David Ljunggren

OTTAWA (Reuters) - The Canadian economy unexpectedly shrank in August, reinforcing forecasts from the Bank of Canada about slowing growth and damping down market expectations of a possible third rate hike this year.

August gross domestic product edged down by 0.1 percent from July, the first month-on-month decline since October 2016, in part due to maintenance shutdowns in the chemical and extractive industries, Statistics Canada (Statscan) said on Tuesday.

Analysts in a Reuters poll had predicted a 0.1 percent increase in GDP after the economy stalled in July.

Producer price data were also weaker than expected and the Canadian dollar quickly dropped to C$1.2914 to the U.S. dollar, or 77.44 U.S. cents, from C$1.2849, or 77.83 U.S. cents before the release.

The Bank of Canada raised rates in July and September but sat on the sidelines last week, lowering its estimate for third-quarter annualized growth to 1.8 percent to 2.0 percent.

Governor Stephen Poloz said more hikes would be required over time while noting the central bank would be cautious as it considered its next move, relying heavily on economic data. The bank’s next rate announcement is in December.

“The moderation of growth and still mild inflation will be welcomed by a Bank of Canada intent on delaying interest rate hikes for as long as possible,” said Patric Booth of National Bank.

The manufacturing sector slipped by 1.0 percent, pulled down by a 7.3 percent slump in chemical manufacturing - the largest monthly drop in 20 years - caused by plant shutdowns and lower demand for export markets.

The mining, quarrying and oil and gas sector edged down by 0.8 percent as maintenance-related closures hit conventional oil output in Newfoundland and Labrador.

Nick Exarhos, economist at CIBC Capital Markets, said the Statscan GDP release “justifies the Bank of Canada’s current wait-and-see approach after two quick hikes”. CIBC thinks the next move will be early next year.

Separately, Statscan said producer prices fell 0.3 percent in September from August as a stronger Canadian dollar cut the cost of motorized and recreational vehicles.

Analysts in a Reuters poll had forecast prices would increase by 0.4 percent from August. Of the 21 major commodity groups, 16 were down, four rose and one remained unchanged.

Reporting by David Ljunggren; editing by Susan Thomas

REUTERS. OCTOBER 31, 2017. Canadian dollar weakens as GDP data further cools rate hike prospects
Reuters Staff

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday after data showing a surprise contraction of the domestic economy in August further dampened prospects of another Bank of Canada interest rate hike this year.

Canada’s gross domestic product declined 0.1 percent in August following flat growth in July, in part due to maintenance shutdowns in major industries, Statistics Canada said. Analysts had forecast an increase of 0.1 percent.

The data supported the view that Canadian growth will slow in the third quarter after rapid expansion of the economy in the first half of the year.

Perceived chances of another Bank of Canada rate increase by the end of the year slipped to 22 percent from 27 percent before the data, the overnight index swaps market indicated. BOCWATCH

They were 37 percent before last week’s interest rate decision by the central bank, when the benchmark rate was left unchanged at 1 percent. The Bank of Canada had hiked in July and September for the first time in nearly seven years.

At 9:13 a.m. ET (1313 GMT), the Canadian dollar CAD=D4 was trading at C$1.2892 to the greenback, or 77.57 U.S. cents, down 0.5 percent.

The currency traded in a range of C$1.2825 to C$1.2915. On Friday, it touched a more than three-month low at C$1.2916.

In separate domestic data, producer prices fell by 0.3 percent in September from August as a stronger Canadian dollar helped cut prices for motorized and recreational vehicles.

Canada’s October employment report and trade data for September are due on Friday. The U.S. Federal Reserve will make an interest rate decision on Wednesday.

Prices of oil, one of Canada’s major exports, steadied after a week of gains as the prospect of increasing U.S. exports dampened bullish sentiment.

U.S. crude CLc1 prices were down 0.06 percent at $54.12 a barrel.

Canadian government bond prices were higher across a steeper yield curve, with the two-year CA2YT=RR up 3.5 Canadian cents to yield 1.388 percent and the 10-year CA10YT=RR rising 8 Canadian cents to yield 1.948 percent.

Canadian yields fell further below yields on U.S. Treasuries across much of the curve.

The gap between Canada’s two-year yield and its U.S. counterpart widened by 1.7 basis points to a spread of -19.2 basis points, its widest since July 11.

Reporting by Fergal Smith; Editing by Jonathan Oatis

BLOOMBERG. 31 October 2017. The Canadian Economy Just Shrank Unexpectedly
By Theophilos Argitis

  • GDP contracts 0.1%, led by declines in manufacturing and oil
  • Slowdown bolsters central bank’s ‘wait-and-see approach’

Canada’s economy unexpectedly contracted in August, adding to signs of a faster-than-expected cooling following a torrid pace of growth in the first half of this year.

Highlights of August GDP Report

  • Canada’s GDP shrank 0.1 percent versus estimates for a 0.1 percent gain. It was the first monthly decline since October 2016 and follows a flat reading in July
  • Drop was led by across-the-board weakness in goods-producing industries, including a 1 percent fall in manufacturing and a 1.4 percent decline in oil and gas
  • Statistics Canada cites maintenance shutdowns in manufacturing and conventional oil for decline

Key Takeaways

Most analysts are anticipating a slowdown in the second half of this year after growth was running at a 4 percent clip in the first six months of 2017. Tuesday’s numbers suggest there could be a more pronounced drop than expected.

If the economy fails to post gains in September, third quarter annualized growth would be on pace for a sub-2 percent increase. Economists surveyed by Bloomberg News are forecasting growth to average 2.1 percent in the second half.


The nation’s currency dropped as much as 0.6 percent to C$1.2823 against the U.S. dollar after Tuesday’s report, which may fuel concern the Bank of Canada’s caution with raising interest rates will only deepen. Governor Stephen Poloz indicated last week he’s in no rush to cool the economy with further with hikes.

Economists Say

Nick Exarhos, CIBC Economics: “A weak result has us on track to see the deceleration in growth in Q3 that we were expecting, to less than half the pace seen in Q2. That justifies the Bank of Canada’s current wait-and-see approach after two quick hikes”

Other Details

  • There were positives in the data, with 12 out of 20 sub-sectors posting gains. Services-producing industries posted a 0.1 percent increase
  • Non-durable manufacturing fell 2 percent, with chemical producers posting a 7.3 percent drop, the largest in the last 20 years. Statistics Canada cited “plant maintenance shutdowns and lower demand from export markets” for the drop
  • Shutdowns in Newfoundland impacted conventional oil and gas production, which was down 5.2 percent in August.
  • The real estate broker industry posted its first gain in five months, up 0.3 percent. Wholesalers were another source of strength, with that sector up 0.4 percent

— With assistance by Erik Hertzberg

BLOOMBERG. 31 October 2017. Former Bank of Canada Governor Calls Poloz’s Caution a Mistake
By Theophilos Argitis

  • David Dodge says higher rates needed to slow debt accumulation
  • Bank of Canada kept benchmark rate at 1 percent last week

One of Governor Stephen Poloz’s predecessors says the Bank of Canada’s current approach to increasing interest rates is too cautious.

David Dodge, who led the Canadian central bank between 2001 and 2008, thinks Poloz should focus more on the long-neglected issue of financial stability and take the opportunity to raise rates now that the economy is running more or less at potential. Poloz kept his benchmark rate at 1 percent last week and indicated he’s in no rush to tighten, given that he still sees signs of wage and inflation slack.

Keeping borrowing costs low will only encourage households and businesses to keep adding debt, risks that should factor in more to the central bank’s decision making, Dodge said in a telephone interview.

“While I understand why they want to be cautious, and I think that’s quite correct, the fact that they are not moving to deal with what is a problem in financial markets arising from this very long period of very low interest rates I think is a mistake,” Dodge said.

Interest rates could rise by a full percentage point and still remain well below the 3 percent the Bank of Canada estimates is “neutral” for the economy -- neither stimulative or contractionary.

“It’s not like the bank is being unreasonable,” said Dodge. “Their’s would be more or less the mainstream view, whereas I put a little bit more emphasis” on financial system distortions. “I’ve lived through earlier periods,” he said, in reference to the financial crisis.

While government debt levels are low, Canada has by far the most private sector debt relative to GDP in the Group of Seven.

“If we think we are actually growing at about the capacity of the economy and are pretty much balanced, then indeed we should have rates that are higher than they currently are,” Dodge said.

Poloz Testimony

The issue of financial stability will get some attention Tuesday when Poloz gives his twice-annual testimony to lawmakers. The spotlight though will likely be risks associated with raising interest rates, not keeping them too low, given the impact higher borrowing costs will have on highly indebted households.

The fact new government spending measures, outlined last week by Finance Minister Bill Morneau, could pressure the central bank to move rates higher is already drawing opposition attention to the matter.

“I want to highlight the potential risks that Canada faces as interest rates inevitably begin to rise,” Pierre Poilievre, the opposition Conservative Party lawmaker responsible for finance issues, said in a phone interview.

“We have both growing household debt and growing government debt,” he said. “I want to know more about the burden that these higher rates will mean for Canadian taxpayers and families over the next decade.”

Poloz has cited the increased sensitivity of the economy to higher interest rates as one reason to remain cautious, but at a press conference last week he wouldn’t be drawn on whether the new spending measures were stimulative.

The governor and his Senior Deputy Governor Carolyn Wilkins are due to address the House of Commons Standing Committee on Finance at 3:30 p.m. Ottawa time.

Debt Baton

The Bank of Canada’s latest credit data show growth in debt financing is slowing from elevated levels earlier this year. Still, 2017 is on pace for the strongest year since the 2008-2009 recession.

Total business and household credit in the economy reached C$4.08 trillion ($3.2 trillion) in September, 7.2 percent above year ago levels.



The increase is mostly due to a surge in borrowing by businesses, which have increased credit by 9.1 percent from a year ago, accounting for 60 percent of all credit taken out in the economy over that time.

That could be a good thing if it means companies are financing investments. Since corporate borrowing is rising faster than investment, however, it may suggest instead that companies are taking on debt to fund share buybacks or higher dividends, Dodge said. The debt baton is simply being passed from one sector to another.

“The bank talks about the household sector, which is worrisome,” Dodge said. “But we also have a number of corporations which are overextended, which is also quite worrisome from the perspective of future macro financial stability.”

The rising level of business credit may reflect a number of other things as well. According to Doug Porter, Bank of Montreal chief economist, economic data show companies have also been ramping up inventories this year, which needs to be financed.

They are also in the process of repairing income statements, after a tough couple of years of profits, and may need some debt to get investments going.

“We might be at the stage of the cycle where businesses do need a bit of financing to support modest increases in capital spending,” Porter said. “But perhaps a year from now as earnings grow they won’t need as much external financing.”

Language Matters

Since the Oct. 25 decision and Poloz’s talk of being cautious, investors have pared bets on a rate increase at the Dec. 6 meeting to a one-in-four chance, from about 50-50 early last week. Language in the statement accompanying the rate decision may have something to do with that.

The Bank of Canada’s rate statements often have language to describe the appropriateness of monetary policy or stimulus. Reappearing in last week’s statement after a two-month absence was this phrase: the “current stance of monetary policy is appropriate.”

A variation of that phrase has appeared 21 times in Poloz’s statements dating back to 2014, but only once immediately preceding a rate change -- the surprise rate cut in January 2015.

— With assistance by Erik Hertzberg

BLOOMBERG. 30 October 2017. Pessimism About the Economy and Housing Dent Canadian Confidence
By Greg Quinn

  • Real-estate sentiment worsens on tighter mortgage rules
  • Weak reading among low earners suggests income ‘asymmetry’

Canadian consumer confidence fell for a second month as the outlook for the economy and real estate prices soured, telephone polling showed.

The Bloomberg Nanos Canadian Confidence Index declined to 57.6 in the week ended Oct. 27, the final reading of the month, versus 58.3 in September and 59.7 August. The sub-index tied to perceptions about the economy and housing had the lowest month-end reading since January.

The deterioration reflects what’s happening in the economy. The pace of growth in Canada is returning to more normal levels after topping the Group of Seven in the first half. Additionally, the central bank raised interest rates twice since July, eating into the disposable income of some families, and a federal regulator introduced measures this month to tighten access to mortgage financing.

“More households are holding a negative outlook on the economy than a positive one,” said Bloomberg economist Robert Lawrie. “Considering the persistent slack in the labor market and the high level of household debt, the prospect of slower growth might seem more daunting for households with less savings.”



The share of respondents who said local housing prices will decline in the next six months climbed to 15.4 percent last week, up from 14.5 percent a month earlier. Canada’s housing agency pared its sales and price forecasts last week for the next two years, saying five-year mortgage rates could rise by 1.6 percentage points over that period.

Pessimism about the overall economy increased for a third month. The 28.2 percent of respondents who said it would become weaker in the next six months was the highest month-end reading since January.

Income ‘Asymmetry’

Household finances received a boost last week from Prime Minister Justin Trudeau’s fiscal update, which offered expanded benefits for families and low-income workers, and the Nanos data suggest poorer workers could use a shot in the arm. The confidence reading for people making between C$15,000 ($12,000) and C$29,999 a year was the lowest since March 2016. Sentiment has held up across other income brackets, said Nanos Research Group Chairman Nik Nanos, meaning “the tracking suggests an income asymmetry in confidence.”

The results show the two main sub-indexes are diverging: the Expectations measure fell to 54.2, while the Pocketbook Index -- tied to job security and personal finances -- rose to 61. The gap between them is the widest on a month-end basis since February 2016.

The Bloomberg Nanos Canadian Confidence Index is based on a four-week rolling average of 1,000 telephone respondents. The results are considered accurate within 3.1 percentage points, 19 times out of 20.

— With assistance by Erik Hertzberg, and Luke Kawa



NAFTA



The Globe and Mail. 31 Oct 2017. Harper’s NAFTA memo could push Ottawa’s united front to crumble. The former PM’s gloomy missive will encourage Tories to start slipping off the Liberals’ sunny message
CAMPBELL CLARK, Columnist

There goes the united front. Stephen Harper’s memo, “Napping on NAFTA,” was just the biggest crack in the smiley-face consensus Canadian politicians have been putting on. Who doubts there will be more?
Prime Minister Justin Trudeau’s own façade, a relentlessly upbeat optimism on the trade deal, almost begged for a slap across the face with a sock full of pessimism, and who else but his predecessor, Mr. Harper, who never saw an international situation that didn’t look like a gloomy ball of risk, to deliver?
Mr. Harper penned a memo to clients of his Harper & Associates firm, leaked to The Canadian Press, that sounded an alarm. If his point was that we have to prepare for the post-NAFTA worst, then Mr. Harper is right. But it didn’t provide real advice for the talks.
Still, it’s a signal that will encourage Mr. Harper’s fellow Conservatives to start slipping off the Liberals’ NAFTA message.
The Conservatives have, for the most part, been playing ball with the Trudeau Liberals’ call for a beyond-partisan approach to the renegotiation. U.S. President Donald Trump isn’t a popular figure in this country, and many Canadians view his North American free-trade agreement threats as bullying. And the Liberals had reached out to ask former prime minister Brian Mulroney to help, and asked former interim Conservative leader Rona Ambrose to serve on a NAFTA advisory council. But there are signs Conservatives itch to be free of those chummy constraints.
Even in early days, just after Mr. Trump was elected, former trade minister Ed Fast suggested Mr. Trudeau should ditch Mexico and work on a bilateral deal with the United States, an inclination Mr. Harper shares. Andrew Scheer, the Conservative Leader, said in September that the Liberals are jeopardizing Canadian jobs by putting forward proposals on issues such as climate change, gender and Indigenous peoples. That, too, was one of Mr. Harper’s complaints.
But the biggest part of Mr. Harper’s memo was warning that talks are going badly, and Mr. Trump might pull the plug. Canada, he said, must realize that it doesn’t matter if it gets a worse deal than what it has now; what matters, “is whether it is worth having a trade agreement with the Americans or not.”
That’s partly a reflection of the sour feeling that the talks could fail. And that prospect also encourages the opposition to break more with the government’s handling of the negotiations.
The Liberals are squealing that Mr. Harper is disloyally weakening the knees of Canadians so the Americans can take advantage. But Canadians don’t need an entire political class telling us to keep calm and NAFTA will carry on. Already, Foreign Affairs Minister Chrystia Freeland has become a little more pointed about the problems. If Mr. Harper’s leaked memo was advising clients to manage their risk, the risk of a non-NAFTA Canada, that’s reasonable. But it doesn’t provide a viable alternative strategy for negotiations.
The Liberals’ bottom line doesn’t really revolve around proposals for gender, or Indigenous people, or climate change. That’s political symbolism. Mr. Trump’s team won’t have much trouble ignoring the parts it’s not interested in entertaining.
And why dump Mexico now? It may be Mr. Trump’s chief political target in NAFTA, but American trade with Mexico also motivates pro-NAFTA lobbies inside the United States, in border states such as Texas or specific sectors. Mr. Trump cancelled plans to trigger the sixmonth NAFTA withdrawal process in April after Agriculture Secretary Sonny Perdue warned it would hurt farmers.
One big motivator: Without NAFTA, Mexico would be free to impose far higher duties under the World Trade Organization on U.S. exports such as corn, and buy it from competitors such as Brazil instead. Those are the interests that sway members of Congress, the only body that could force Mr. Trump to stay in NAFTA.
So far, the United States has proposed so many non-starters that it cannot expect there to be a basis for a deal. There’s no outward signal that Canada could find a separate deal alone, or even a deal that is better than none. It’s not clear what Mr. Trump wants, or if he knows what he wants. The Liberal government’s position in the talks seems to be to wait, and find out.
It’s now likely to be a rockier wait for the Liberals. They’re going to hear more voices from across the Commons suggesting they should do more, more quickly, even if there isn’t yet a deal to be done.
After Mr. Harper has sounded the alarm, his fellow Conservatives will be itching to follow.



AVIATION



REUTERS. OCTOBER 31, 2017. Airbus's legal troubles grow as admits inaccurate U.S. arms filings
Tim Hepher, Cyril Altmeyer

PARIS (Reuters) - Airbus (AIR.PA) said on Tuesday it had uncovered inaccuracies in its filings to U.S. regulators over arms technology sales, drawing the United States for the first time into a scandal over alleged misconduct at Europe’s largest aerospace firm.

Airbus also warned about potentially significant fines resulting from existing bribery investigations in Britain and France over the use of middlemen in civil airplane sales, which have triggered a sweeping internal investigation.

But it said it was too early to guess the size or timing of any European penalties, or the outcome of the new U.S. findings.

Shares in the defense and civil aviation group rose more than four percent after it posted a smaller than expected drop in third-quarter profits despite jetliner delivery delays.

However the gains were overshadowed by news that Airbus had itself unearthed inaccuracies in past filings to the State Department on defense technology exports.

These involved inaccurate statements made by Airbus under a section of the U.S. International Traffic in Arms Regulations (ITAR), which governs the use of commissions and agents.

Airbus said the flaws were first discovered during an audit at the end of 2016 and were confirmed in an internal follow-up review completed in the third quarter.

Finance Director Harald Wilhelm said the European company had not disclosed any secrets about U.S. technology and that the issue was restricted to the use of sales agents and commissions, governed under part 130 of the ITAR rules.

It is separate from investigations into the use of agents in commercial airplane sales, which are not subject to the same U.S. controls as weapons exports, but do have some U.S. restrictions over the use of advanced navigation technology.

“This is about defense equipment and services related to it,” Wilhelm told reporters.

CO-OPERATION

Wilhelm declined to say whether the latest disclosure could lead to an investigation by the U.S. Department of Justice, which has so far stayed out of the European bribery probes.

The DOJ shares jurisdiction for ITAR rules with the State Dept where criminal activity is suspected.

A person familiar with the latest case said it involved inaccuracies over both names of agents and amounts paid.

That echoes inaccuracies in applications for UK export aid which triggered the separate UK and French probes, but the now-disbanded headquarters team at the center of those accusations was not involved in the U.S. ITAR process, sources said.

Airbus hopes that by self-reporting and co-operating fully with the European probes it can qualify for a deal similar to a $680 million settlement granted to Rolls-Royce (RR.L) this year.

Legal experts estimate Airbus faces fines in the billions because of the scale of suspect paperwork dating back years.

The cost of legal advice and running its own investigations pushed up headquarters cost sharply in the third quarter.

The world’s second largest planemaker after Boeing (BA.N), posted third-quarter core operating earnings of 697 million euros ($811 million), down 4 percent on lower plane deliveries.

It took a further small charge for the troubled A400M military project and warned of further costs later this year.

It reaffirmed its 2017 guidance but acknowledged it would miss an informal goal of 720 jet deliveries that was higher than the official target of 700. Airbus has given different written and verbal delivery targets for several quarters in a row.

The shortfall is chiefly the result of engine delays for the A320neo. Airbus now expects to deliver fewer than 200 of the aircraft this year, compared with a target of “around 200”.

Markets had expected a weak quarter due to delays in commercial aircraft and a build-up of inventory.

Analysts on average expected third-quarter adjusted operating profit down 5.6 percent at 690 million euros on revenues up 1.8 percent at 14.2 billion, according to a Reuters survey.

Reporting by Tim Hepher and Cyril Altmeyer; Editing by Sudip Kar-Gupta and Mark Potter


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