e-Gonomics

CANADA ECONOMICS

NAFTA

The Globe and Mail. 22 Dec 2017. How Canada can win on NAFTA: Remain calm, ignore Trump’s bluster
DEREK BURNEY FEN, was Canada’s ambassador to the U.S. from 1989 to 1993
OSLER HAMPSON, is chancellor’s professor at Carleton University and director of Global Security and Politics at CIGI.

The manner in which the NAFTA negotiations unfold will be the most exacting challenge facing the government in the new year. While these negotiations are at a fever pitch politically and in the media in Canada and Mexico, they barely register a blip in the United States, where headlines are dominated by North Korea, Russian meddling in the U.S. election and the allegations of sexual indiscretions spreading across the corporate and political landscape.

These commanding distractions may actually be a good thing for the North American free-trade agreement’s prospects. So, while some pundits are wallowing in gloom and doom, the future of NAFTA is not all bleak. For one thing, there is scope for a rational modernization of NAFTA that includes several topics already negotiated and agreed under the original Trans-Pacific Partnership – measures affecting small business, the expansion of IT and digital services and new technologies to facilitate customs clearance. But would a pragmatic upgrade satisfy U.S. President Donald Trump?

All three leaders need to see a “win, win, win” with political as well as economic success. Alas, that common spirit at the top, which had been vital to success in the original FTA and NAFTA, is woefully absent.

Unilateral demands for unilateral concessions are never a basis for successful negotiation. Many of the U.S. negotiating demands – abrogation of the dispute-settlement mechanism, a five-year sunset clause, tighter rules of origin for higher U.S. content on autos, one-sided Buy America proposals and of course the elimination of supply management – are prescriptions for failure, not success. They may be a deliberate pretext for abrogation.

The biggest question mark of all is what will constitute “victory” for the unpredictable President.

As we usher in the New Year, what should Canada do? That answer is to prepare for all contingencies. As Foreign Affairs Minister Chrystia Freeland says: “Hope for the best and prepare for the worst.” We should not be driven by arbitrary deadlines. The Mexicans and the Americans have electoral time pressures next year. Canada does not. We should resist unilateral demands that are inimical to our interests. We can always walk away from a bad deal. We must continue to work key members of the administration and Congress as well as NAFTA stakeholders, especially the 35 states for whom Canada is the top export market, to demonstrate what America stands to lose. We need to remind Americans and the President himself at every turn that the United States has a trade surplus with Canada – not the other way around. Our best tactic is to rag the puck and be disciplined and cautious but not apocalyptic about the outcome.

Some suggest that separating the negotiations into three separate bilaterals may be a more sensible approach, reflecting the obvious fact that Canada’s interests vis-à-vis the U.S. are different from those of Mexico, and vice versa. (Our Prime Minister now seems more open to this option.)

But a similarly important tactic is to pursue a credible Plan B to reduce our vulnerability by broadening our trade horizons specifically with direct negotiations with China and India and with support for a mini-TPP. Regrettably, our latest ventures into “progressive” trade deals in Asia have backfired and had a “regressive” effect.

We should also be much more mindful and smarter about the implications of tax and regulatory reforms in the United States on our competitive position in North America. U.S. success on tax reform could actually have a worse impact on Canada than a NAFTA renegotiation because the U.S. would become a much stronger magnet for investment and talent. Notice of abrogation may be a pretext for Mr. Trump to offload the responsibility to Congress, a tactic he is learning to use on other issues. But that could get messy. Congress would want a say and would, in any event, have to dismantle legislation underpinning NAFTA before abrogation took effect. That would take time. Meanwhile, there could be court challenges to the President’s authority.

In the event of a complete collapse, trade could either revert to non-preferential World Trade Organization levels, or to the original FTA. Both offer potential avenues for redress. If the past is prologue, a plausible scenario would see negotiators reach a consensus on the modernization aspects of the agreement, while isolating the more contentious issues for deliberations at the political level. The crunch will come at the meeting in Montreal next month. We may learn whether Mr. Trump is amenable to any compromise on the hard issues.

As the 2018 elections draw near, the pressure to secure a “win” on NAFTA will abate. The negotiations may then limp on inconclusively. That would prolong uncertainty but avoid a severe jolt. Not good, but not as bad as it might be.

Above all, we need to keep our cool and not be rattled by Mr. Trump’s bluster.

GDP

StatCan. 2017-12-22. Gross domestic product by industry, October 2017

Real GDP by industry, October 2017: 0.0% increase, (monthly change)
Source(s): CANSIM table 379-0031: http://www5.statcan.gc.ca/cansim/a26?lang=eng&retrLang=eng&id=3790031&&pattern=&stByVal=1&p1=1&p2=31&tabMode=dataTable&csid=

Real gross domestic product (GDP) was essentially unchanged in October following 0.2% growth in September, as 9 of 20 industrial sectors expanded.

Service-producing industries rose 0.2%, mainly from growth in wholesale trade, retail trade and real estate. Meanwhile, goods-producing industries contracted 0.4%, largely due to the mining, quarrying, and oil and gas extraction sector.

Chart 1: Real gross domestic product is essentially unchanged in October

Wholesale and retail grow

The wholesale trade sector grew for the 9th time in 11 months in October, with a 1.4% rise more than offsetting September's decline of 0.9%. Six of nine subsectors expanded, led by wholesalers of machinery, equipment and supplies (+3.4%), personal and household goods (+3.2%) and petroleum products (+3.1%). The wholesaling of motor vehicles and parts declined 1.7% as automotive imports decreased.

Chart 2: Wholesale trade grows in October

The retail sector expanded 1.1% in October, almost offsetting three consecutive months of declines. Gains were posted in 7 of 12 subsectors, led by a 2.3% increase at motor vehicle and parts dealers as activity at new and used car dealers was up. General merchandise stores gained 2.4%, more than offsetting three months of declines. Food and beverage stores were up 1.0% while building material and garden equipment and supplies continued to grow, rising 2.0%.

Real estate and rental and leasing up

Real estate and rental and leasing rose 0.3% in October. Activity at the offices of real estate agents and brokers (+2.1%) was up for the third month in a row, led by increased home resale activity in Ontario and British Columbia. However, the level of activity of this subsector remains below its March 2017 level, following provincial government changes to housing regulations in Ontario in April.

Mining, quarrying, and oil and gas extraction declines

Mining, quarrying, and oil and gas extraction was down 1.1% in October, the fourth decline in five months.

Oil and gas extraction declined 0.7%. Non-conventional oil extraction was down 3.5% in October, the fourth decrease in five months, reflecting in part a loss of capacity during maintenance operations. Following a 5.1% gain in September, conventional oil and gas extraction was up 1.8%, led by increased crude petroleum extraction.

Mining excluding oil and gas extraction contracted 0.8% after six consecutive months of growth. Non-metallic mineral mining fell 1.9% as potash mining dropped 5.3%. Other non-metallic mineral mining excluding potash grew 3.6%.

Metal ore mining edged up 0.1% as growth in iron ore (+1.4%) and gold and silver ore (+1.8%) was partly offset by declines in copper, nickel, lead and zinc (-1.3%) and other metal ore mining (-1.8%). Coal mining declined 1.8%.

Support activities for mining, oil and gas extraction declined 5.2%. This was a fourth consecutive decline after a string of increases that began in the spring of 2016 and ended in April 2017.

Finance and insurance continues to decline

Finance and insurance (-0.2%) declined for the fourth month in a row in October. Financial investment services, funds and other financial vehicles (-1.5%) were down for a fourth consecutive month, as market activities declined. Insurance carriers and related activities edged up 0.1%, while depository credit intermediation and monetary authorities were essentially unchanged.

Construction edges down

The construction sector edged down 0.1% in October following four consecutive monthly increases. Repair construction fell 0.3% after rising 1.6% in September. Non-residential construction contracted 0.3%, as a decline in commercial construction more than offset growth in industrial and public construction.

Residential construction (-0.1%) was down slightly as declines in single-family dwellings and home alterations and improvements more than offset growth in doubles, rows and apartment dwelling units. Engineering and other construction activities edged up 0.1%.

Transportation and warehousing declines

Transportation and warehousing was down 0.2% as six of nine subsectors declined. Support activities for transportation contracted 0.8%. Rail transportation decreased 1.1% as rail movement of automotive products, grain and fertilizer, coal and intermodal freight were down. Pipeline transportation was down 0.4% as growth in pipeline transportation of natural gas (+0.7%) was more than offset by a decline in crude oil and other pipeline transportation (-1.5%).

Manufacturing edges up

The manufacturing sector edged up 0.1% as growth in non-durable industries (+0.3%) was partly offset by a decline in durable industries (-0.1%).

Non-durable manufacturing was up in five of eight subsectors. Petroleum and coal products (+3.5%), plastic and rubber products (+1.8%) and beverage and tobacco products manufacturing (+2.4%) contributed the most to the growth. There were declines at paper (-3.7%), printing and related support activities (-4.9%) and chemical products manufacturing (-0.2%).

Durable manufacturing was down slightly as a decline in transportation equipment manufacturing offset growth in 7 of 10 subsectors. For the fourth time in five months, transportation equipment was down (-2.4%), as five of its seven industry groups decreased. Work stoppages and some assembly plant shutdowns in October partly contributed to decreases in the manufacturing of motor vehicles (-5.5%) and motor vehicle parts (-2.5%).

Aerospace and parts manufacturing declined 0.4%, reflecting lower exports of aircrafts and aircraft engines and parts. The largest increases in output were posted by manufacturers of wood products (+3.2%), fabricated metal products (+1.6%) and primary metal (+1.9%).

Other industries

The public sector was unchanged in October following 0.3% growth in September. Educational services were essentially unchanged after growing 0.5% in September. The community colleges and CEGEPs subsector declined 4.6% as a result of a strike by Ontario community college faculty staff that started on October 16. In other components of the public sector, health care and social assistance edged up 0.2% while public administration edged down 0.1%.

Utilities contracted 1.3% as both electric power generation, transmission and distribution (-1.0%) and natural gas distribution (-4.2%) declined. October's decline offset higher activity in September in response to volatile and unseasonal weather conditions.

Accommodation and food services edged up 0.1%. Activity at food services and drinking places was up slightly (+0.1%) while accommodation services edged down 0.1% after six months of growth.

After three months of growth, activity at professional services was essentially unchanged, as there was growth in computer systems and related services and decreases in other subsectors.

Agriculture, forestry, fishing and hunting (-0.6%) was down for the 9th time in 12 months.

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

FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/171222/dq171222a-eng.pdf

REUTERS. DECEMBER 22, 2017. Canada economic growth stalls in October, dampens odds of Jan rate hike

OTTAWA (Reuters) - The Canadian economy paused in October, reinforcing expectations that growth cooled in the second half of the year and taking some steam out of bets that the central bank could raise interest rates as soon as January.

Gross domestic product was unchanged in October, Statistics Canada said on Friday, short of economists’ forecasts for a gain of 0.2 percent following September’s unrevised 0.2 percent increase.

The soft reading was driven by a decline in oil and gas extraction that offset gains in the wholesale trade and retail sectors.

The report lowered market odds the Bank of Canada could raise interest rates next month, with the likelihood declining to 47 percent from 50 percent ahead of Friday’s figures. The Canadian dollar weakened against the greenback. CAD=

Growth in the second half of 2017 is expected to have cooled from the blistering pace set in the first half, though analysts expect the Bank of Canada to continue to tighten interest rates next year after improvements in the labor market and inflation. BOCWATCH

“It’s a modest setback for the economy,” said Sal Guatieri, senior economist at BMO Capital Markets, who expects the central bank to hike next in March. Market odds on a March move were 80 percent.

Last week, Bank of Canada Governor Stephen Poloz said the central bank is increasingly confident the economy will need less stimulus over time.

Activity in goods-producing sectors of the economy declined by 0.4 percent in October, led by a 1.1 percent pullback in the mining and oil and gas extraction industry.

It was the fourth decline in the sector in five months as nonconventional oil extraction fell, partly due to a loss of capacity during maintenance. Mining also declined by 0.8 percent.

But the weakness was tempered by a 1.4 percent increase in wholesale trade, which was helped by sales of machinery and equipment.

The retail sector grew by 1.1 percent after three consecutive months of declines as consumers bought more new and used cars. Overall, the service sector grew by 0.2 percent.

Increased home sales in Ontario and British Columbia helped lift activity in the real estate sector by 0.3 percent, though construction edged down 0.1 percent due to a decline in both the residential and nonresidential segments.

Reporting by Leah Schnurr; Editing by Phil Berlowitz and Jeffrey Benkoe

MANUFACTURING

StatCan. 2017-12-22. Annual Survey of Manufacturing Industries, 2016

Revenue from goods manufactured — Canada: $620 billion, 2016, 0.9% increase (annual change)
Source(s): CANSIM table 301-0008: http://www5.statcan.gc.ca/cansim/a26?lang=eng&retrLang=eng&id=3010008&&pattern=&stByVal=1&p1=1&p2=31&tabMode=dataTable&csid=

Total revenues reported by Canadian manufacturers increased to $664 billion in 2016, up 0.9% or $6 billion from 2015. This follows a decline of $5 billion (-0.8%) in 2015. Total expenses were relatively unchanged, down $203 million or less than 0.1%.

Revenues from goods manufactured increased 0.9%, up $5 billion to $620 billion and accounting for 93% of all revenues earned by Canadian manufacturers in 2016. The $44 billion difference between total revenues and revenues from goods manufactured was made up of revenues from financial investments, sales of goods purchased for resale (as is) and business activities other than manufacturing such as wholesaling activities. In addition to the revenues from the sale of physical goods manufactured, revenues from goods manufactured also include revenues from manufacturing service fees and custom work, as well as from repair work. In these cases, only the labour is charged, as the materials and products are owned by the clients.

Total cost of materials and supplies kept pace with revenues from goods manufactured, increasing 0.9% (+$3 billion) and accounting for 63% of total expenses in 2016. Transportation equipment (77%) and petroleum and coal product (85%) manufacturing had the highest proportion of cost of materials and supplies to total expenses, with beverage and tobacco product manufacturing (44%) reporting the lowest ratio.

Total energy and electricity costs decreased 1.3% or $189 million from 2015, and accounted for 2% of total expenses in 2016. Total salaries and wages declined 0.1% or $93 million from 2015 and accounted for 14% of total expenses.

Gains in Ontario, Quebec and British Columbia were partly offset by declines in Alberta and New Brunswick

In 2016, four provinces registered a decrease in revenues from goods manufactured: Alberta (down $6 billion or 8.8%), New Brunswick (down $1 billion or 7.3%), Newfoundland and Labrador (down $901 million or 14.0%) and Saskatchewan (down $389 million or 2.7%).

These declines partly offset the increases in revenues from goods manufactured reported in Ontario (up $7 billion or 2.6%), Quebec (up $3 billion or 1.9%), British Columbia (up $3 billion or 6.1%), Nova Scotia (up $578 million or 7.6%), Prince Edward Island (up $139 million or 7.9%), Manitoba (up $65 million or 0.4%) and the territories (up $38 million or 57.4%).

Ontario revenues from goods manufactured up for fifth straight year

Revenues from goods manufactured in Ontario rose 2.6% in 2016, up $7 billion from 2015 to $298 billion. This marks the fifth consecutive year of annual increases in revenues from goods manufactured. In Ontario, the transportation equipment ($108 billion), food ($34 billion) and chemical ($22 billion) industries accounted for 55% of revenues from goods manufactured in 2016.

In 2016, revenues from goods manufactured increased for 14 of the 21 industries, up $11 billion in total. The largest year-over-year increases were in transportation equipment (up $6 billion or 6.1%) and food (up $1 billion or 3.5%) manufacturing. These increases were partially offset by declines in petroleum and coal products (down $2 billion or 14.2%), chemicals (down $807 million or 3.6%), primary metals (down $435 million or 2.4%), miscellaneous (down $154 million or 2.1%) and machinery (down $50 million or 0.3%) manufacturing.

Revenues from goods manufactured in Quebec continue to expand, rising for the fifth straight year
In 2016, revenues from goods manufactured in Quebec increased to $149 billion, up 1.9% or $3 billion from 2015. This marks five consecutive years of growth. Among the 21 manufacturing industries, 14 reported increases totalling $6 billion in revenues from goods manufactured. Industries contributing to this increase were food (up $2 billion or 8.6%), wood products (up $784 million or 10.6%), machinery (up $668 million or 11.8%) and computer and electronic products (up $529 million or 17.2%). Partially offsetting these increases were declines in revenues from seven manufacturing sectors totalling $3 billion. The majority of the decrease was observed in the petroleum and coal products (down $2 billion or 15.2%) and transportation equipment (down $386 million or 1.8%) industries.

Unlike Ontario, the manufacturing sector in Quebec is not dominated by one particular industry. Roughly 51% of revenues from goods manufactured in the province are generated from four industries: food ($24 billion), transportation equipment ($22 billion), primary metals ($19 billion) and petroleum and coal product ($10 billion) manufacturing.

British Columbia adds to revenue gains for fifth straight year

In British Columbia, revenues from goods manufactured increased to $48 billion in 2016, up 6.1% or $3 billion from 2015. This marks the fifth consecutive year of annual increases in revenues from goods manufactured. In 2016, 14 of the 21 industries grew compared with the previous year. The largest contributors to this provincial increase were food (up $962 million or 14.1%), primary metals, and wood product (up $431 million or 4.3%) manufacturing. The largest decreases were in fabricated metal products (down $332 million or 12.3%) and petroleum and coal products.

As in Quebec, manufacturing in British Columbia is not concentrated in one specific industry. The largest industry in this province, accounting for 22% of revenues from goods manufactured, is wood product manufacturing ($11 billion), followed by food ($8 billion) and paper ($4 billion) manufacturing.

Revenues from goods manufactured in the Prairies decline for a second straight year

In the Prairie region, revenues from manufactured goods fell to $95 billion in 2016, down $6 billion or 6.4% from 2015. Alberta accounted for the majority of this decrease, down $6 billion or 8.8% from the previous year. Saskatchewan registered a smaller decrease (down $389 million or 2.7%), while Manitoba increased slightly (up $65 million or 0.4%).

In 2016, 56% of manufacturing revenues in the Prairie region were derived from food ($21 billion), chemical ($17 billion) and petroleum and coal product ($15 billion) manufacturing. Of the 21 manufacturing sectors, 15 showed decreases in manufacturing revenues. Industries accounting for the majority of this decline include petroleum and coal product (down $2 billion or 12.2%), machinery (down $2 billion or 19.2%), chemical (down $1 billion or 5.6%) and fabricated metal product (down $922 million or 12.0%) manufacturing.

Atlantic provinces saw revenues from goods manufactured fall for a fourth straight year

Revenues from goods manufactured fell to $31 billion in the Atlantic provinces in 2016, down 4.3% or $1 billion from 2015. The largest industry contributing to this decline was petroleum and coal product manufacturing. This marks four consecutive years of decline in revenues from goods manufactured.

In the Atlantic provinces, manufacturing is concentrated in petroleum and coal products and in food. Together, the two accounted for more than half of all revenue generated from goods manufactured in this region.

Chart 1: Manufacturing's share of gross domestic product