OTTAWA — Despite the ongoing NAFTA standoff, recent events like Black Friday and the iPhone craze still show shoppers know few boundaries when it comes to sales.
Retail activity is up in Canada, even though many consumers continue to nip across the border to cash in on lower prices in the United States. And consumer costs in this country are down — ever so slightly — but still within the Bank of Canada’s comfort zone of one to three per cent, meaning the key interest rate is likely to stay where it is for now, at 1.25 per cent.
But there is a huge gulf between cross-border shopping and cross-border trade. As for renegotiating the North American Free Trade Agreement, it would appear that rhetoric also knows no boundaries.
“When the United States grows, so does the world,” President Donald Trump said last week in a speech to the annual World Economic Forum in Davos, Switzerland.
“American prosperity has created countless jobs around the globe and the drive for excellence, creativity and innovation in the United States has led to important discoveries that help people everywhere live more prosperous and healthier lives,” Trump said Friday. “The United States is prepared to negotiate mutually beneficial, bilateral trade agreements with all countries.”
Until now, however, six sessions aimed at reaching common ground on NAFTA — the last round is wrapping up Monday in Montreal — have produced little agreement on the big issues, such as “rules of origin” that determine who gets preferential tariff treatment within the U.S., Canada and Mexico, with auto production being a major issue in the talks.
Easy money will be around for some time yet, Poloz saysImagine a Finance Committee that asks actual meaningful questions of the Bank of Canada
“(Trump) is certainly the single biggest wild card in the process,” said Derek Burney, senior strategic advisor at the law firm Norton Rose Fulbright and former Canadian ambassador to the United States.
“I think it’s impossible for anybody to predict whether Donald Trump really wants a renegotiated NAFTA or whether he’s looking for a pretext to pull the pin on it,” Burney said in a television interview.
“I don’t think he knows, in his own mind from one hour to the next, what his position really is on NAFTA. I think the encouraging thing … is that despite all the media posturing and fireworks, I actually think the negotiators are doing some serious work … and I have every confidence in the Canadian team. There’s no question that NAFTA can be modernized, NAFTA can be improved, but you need the will at the top to see that goal realized in a mutually beneficial manner. And that’s what is missing.”
So far, so good
The Bank of Canada’s most recent economic forecast calls for GDP output of 2.2 per cent this year and 1.6 per cent in 2019. The most recent reading on the economy will come Wednesday, when Statistics Canada releases GDP numbers for November 2017.
Bank Governor Stephen Poloz seemed confident enough in his own forecasting team that he agreed on Jan. 17 to raise the central bank’s trendsetting rate a quarter of a point to 1.25 per cent — the first hike since consecutive increases in July and September. Nearly all private-sector analysts in the trenches supported the move.
But the timing of the next incremental increase will be on a wait-and-watch basis. While many analysts have been anticipating three rate increases in 2018, some think otherwise.
“We are calling for the next hike to come in the summer — July — (and) no more in 2018 after that,” said economist Nick Exarhos, at CIBC World Markets.
The next scheduled rate decision isn’t until March 7, but that announcement will not be followed by a news conference, nor a quarterly Monetary Policy Report. We’ll have to wait until April 18 to get the full complement — and that could include another quarter-point increase in the bank’s lending level.
Through the rear-view mirror
Economic data from the International Monetary Fund aren’t always timely, nor necessarily right on the money. Central banks and private-sector analysts are usually farther ahead of the curve, closer to the ground and quicker with their forecasts.
But for what it’s worth, people do still listen to the IMF — it is, after all, a big global entity.
And what we are hearing from the Washington-based development agency are many of the same messages and economic numbers that populated its October outlook — only now juiced by the Trump adminstration’s new tax-reduction policies, anticipated to lift growth through 2020.
First, a quick recap from the IMF: Growth this year and next will come in around 3.9 per cent, stronger than previously thought, and up from an estimated 3.7 per cent in 2017, according to the agency’s World Economic Outlook. “The revision (in forecasts) reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes,” it said.
Those tax reforms, along with “associated fiscal stimulus, are expected to temporarily raise U.S. growth, with favourable demand spillovers for U.S. trading partners — especially Canada and Mexico — during this period.”
But, again, we already assumed that much.
According to the IMF’s fall report, the organization now believes Canada’s economy will grow 2.3 per cent in 2018 and two per cent in 2019, up 0.2 and 0.3 percentage points, respectively, from its previous forecast. Ditto Mexico, where GDP this year is seen rising by nearly half a per cent to 2.3 per cent and growing between 0.7 per cent to three per cent in 2019 — if, of course, the North American Free Trade Agreement remains intact that long.
Among the G7 countries, the IMF projects Canada and Germany — another country pencilled in for a 2.3 per cent gain in 2018 — will have the second-strongest growth rates, trailing only the United States at 2.7 per cent. But looking ahead, the economic numbers that really count will come from the central banks — the policymakers who actually set interest rates based on their own data crunching and forecasting.
Rating the rate-setters
A new year for central bankers, and another year of “should they stay or should they go?”
On Wednesday, the U.S. Federal Reserve will announce its first of eight policy decisions for 2018, following three hikes last year that lifted the key borrowing level to between 1.25 and 1.50 per cent. As in Canada, the U.S. economy appears strong and sustainable — enough so that at least three additional increases are forecast this year under incoming Fed chair Jerome Powell, who replaces Janet Yellen in February.
Meanwhile, the European Central Bank passed its judgment on the region’s health, choosing last Thursday to hold its main policy level at minus 0.4 per cent and continue its monthly asset purchases of 60 billion euros.
The Bank of England will hold its next monetary meeting on Feb. 8, the first session this year for governor Mark Carney, previously head of the Bank of Canada. In December, the BoE kept its policy rate unchanged at 0.5 per cent and maintaining its 435-billion pound (C$761-billion) limit on its quantitative easing program.
“Any future increases in bank rate are expected to be at a gradual pace and to a limited extent,” the BoE said. “Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.”