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Economy Lab

Delving into the forces that shape our living standards
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Why China’s housing boom is more solid than it looks

IAN McGUGAN

If global fund managers were asked to name their No. 1 bogeyman, it would probably be a housing crash in China. A lost decade for the Middle Kingdom, like the one that followed the end of Japan’s great property craze in the 1980s, would hammer the world economy.

But how likely is such a catastrophe? A new study by Hanming Fang of the University of Pennsylvania, Quanlin Gu of Peking University, Wei Xiong of Princeton University and Li-An Zhou of Peking University confirms the enormous price gains between 2003 and 2013 in China’s four biggest cities. In Beijing, Shanghai, Guangzhou and Shenzhen, home prices shot up by an average of 13.1 per cent a year, the researchers figure. However, they also note that the crazy market wasn’t quite as insane as many skeptics believe.

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What’s holding India’s tech future back? Old habits

KEVIN CARMICHAEL

The Indian business press is a little like science fiction. The “pink pages” are full of stories related to the hundreds of millions of dollars that investors are pouring into India’s technology industry. All that money is a bet on a future in which more than a billion people conduct their lives on a smartphone. The stakes are huge: The winners will be the next Facebook or Alibaba. It makes for exciting reading.

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Chinese President’s new Silk Road plan will fail unless ideas are free to travel

CARL MORTISHED

“One Belt, One Road” is China’s slogan for a 21st-century revival of the ancient trading routes that linked Han Dynasty silk merchants with Central Asia and the Mediterranean. President Xi Jinping’s big idea is investment in roads, railways, ports and pipelines that will link China to the world.

However, the ancient Silk Road was more than a caravan of camels loaded with stuff. It was also a convoy of ideas, and this may be where the Chinese Communist Party’s great ambition comes a cropper.

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Higher minimum wages will put least productive out of work

BRIAN LEE CROWLEY

When my wife and I owned our little restaurant in Dartmouth, N.S., the biggest issue we had, bar none, was staff. My wife, who actually ran the restaurant, had to be constantly alert to make sure that hard-working employees got appropriately praised and rewarded, while those who didn’t deliver the goods were politely but firmly pressed to meet our standard.

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Balanced budget law is poor economics

ANDREW JACKSON

The balanced budget legislation introduced as part of the federal budget is based on dubious economic principles that should raise the eyebrows of even fiscally conservative economists.

Bill C-59 requires the federal government to balance the budget and reduce debt each year except when there is a recession or emergency. It imposes significant sanctions on ministers and deputy ministers if this is not the case. The preamble to the bill states that a balanced budget is crucial to economic growth and job creation over the longer term.

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Bank of Canada moves toward new era of inflation

DAVID PARKINSON

The Bank of Canada’s interest-rate announcement Wednesday was about as stand-pat as you’re going to get. But it sent a signal that there is change afoot in the central bank’s approach to inflation – a key issue that looks destined to take a prominent position on the central bank’s agenda over the next 18 months.

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Emerging-market investors face debt hangover

BRIAN MILNER

Emerging-market companies have been binging on debt for years, borrowing record sums and increasingly tapping international bond markets to take advantage of cheap credit and outsized demand from institutional investors scouring the world for any sort of decent yield.

But the boisterous party may soon be coming to an end, and the cleanup could be messy.

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Poloz likely to hold rates steady this week as he waits for economic fog to lift

DAVID PARKINSON

The Bank of Canada looks set to stand pat on interest rates in its latest policy announcement this week, as it waits for the fog to clear on what has been a murky first few months of 2015.

The consensus of economists, as well as financial markets, is that Canada’s central bank is all but certain to maintain its key interest rate at 0.75 per cent when it announces its latest policy decision Wednesday morning. (The bond market is pricing in just a 6-per-cent chance of a rate cut.) The rate has been at that level since January, when Bank of Canada Governor Stephen Poloz stunned the markets with a quarter-percentage-point rate cut, which he described as “insurance” against the downside risks to Canada’s economy from the sharp fall in oil prices.

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Canada’s mixed economic data still all about oil

DAVID PARKINSON

Friday’s mixed Canadian economic data underline that we’re still mired in a period where the key indicators must be taken with a large grain of salt. Or, more accurately, a large drop of oil.

Statistics Canada issued two key economic numbers Friday morning – inflation for April and retail sales for March – that headed in opposite directions. But the plunge in oil prices late last year and early this year places substantial asterisks on both of these indicators. And, in the case of the retail sales, it looks like we’re still waiting for the biggest oil-shock shoe to drop.

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Central bank leaders face classic prisoner’s dilemma

KEVIN CARMICHAEL

It is almost amusing. The world’s central bankers face a classic prisoner’s dilemma. Yet all those master economists are proving as inadequate at solving one of the great puzzles of game theory as the pitiful rational actors that appear in the textbooks.

A quick review: The prisoner’s dilemma illustrates how normal people, acting in their self-interest, can actually make their situations worse. Two suspects from a gang are held by the police in isolation. Investigators lack evidence for a conviction, so offer each prisoner an opportunity to rat on the other in return for his or her freedom. The optimal thing for the prisoners to do is keep quiet: Both would be set free because the cops would have no case. But Prisoner A and Prisoner B have no idea what the other will tell the police. The self-interested response therefore is to squeal on the other. And then both go to jail.

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Are loyalty programs inflaming the rage over income inequality?

TODD HIRSCH

Everyone remembers the Occupy Wall Street movement of a few years ago. While the disgruntled 99 per cent could have honed their message a bit, the lightning rod of anger was the growing inequality of income distribution. The tent villages and drumming circles may have vanished, but the widening gap between the rich and the poor has not – and it’s almost certain to return to public-policy debates in the near future.

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Canada’s foreign affiliates change country’s trade game

DAVID PARKINSON

Stop me if you’ve heard this argument before: Canada’s international trade footprint barely sticks a toe beyond the United States. And while that has often served us well (if you’re going to rely on one trading partner, why not the world’s biggest economy?), it’s not healthy. For our own long-term good, we have to diversify into more foreign markets.

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Global economy finally benefiting from half-price oil

GLEN HODGSON

It has taken a while, but the global economy is finally showing signs of responding positively to the sharp drop in oil prices in the past 12 months. Most of the world’s major economies import millions of barrels of oil each day, so it is reasonable to expect the global economy to benefit from a half-price sale for oil.

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Notley could score early win with carbon moves for Alberta

JEFFREY JONES

Rachel Notley had to put up with a lot of “oilmansplaining” after she smashed through the gates of the Progressive Conservative dynasty in Alberta.

The days following her New Democratic Party’s election victory coincided with a number of oil company quarterly conference calls, during which top executives said they looked forward to helping the incoming NDP premier understand the importance of the energy industry to Alberta.

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Goldman predicts a further fall in oil prices, but should that be trusted?

ERIC REGULY

What are we to make of Goldman Sachs Group Inc.’s new, and surprisingly low, oil price forecast?

In a fresh report, Goldman predicted that prices for Brent crude, the main international benchmark, will fall to $55 (U.S.) a barrel in 2020. (Monday’s price was $66, down 1 per cent.) Its previous forecast was $70. If the forecast proves accurate, a whole lot of high-cost producers, among them the Alberta oil sands, are going to be in a whole lot of pain.

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Why are Canadians so in love with credit?

IAN McGUGAN

This is part of a Globe series that explores our growing dependence on credit – from the average household to massive institutions – and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge

Everyone knows that Canadians are sinking deeper into debt. What no one knows is exactly why.

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Are Canada’s manufacturers set to lead us out of the woods?

DAVID PARKINSON

If Canada found itself in the economic wilderness in the first quarter of this year (and all evidence says it did), it’s in no small part because the manufacturing sector lost its sense of direction. But March’s rebound in manufacturing sales signals that the sector may finally be poised to lead us out of the woods.

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Squeezing more from top earners ignores already lop-sided tax systems

CARL MORTISHED

In this world nothing can be said to be certain, except death and taxes. Benjamin Franklin’s puritan aphorism suggests that our fate is indeed sorry: The grim reaper will each year take a tithe of our harvest before his scythe eventually chops off our heads. After 2 1/2 centuries, we still can’t seem to shake off mortality, but the founding father from Pennsylvania might be surprised by the universal popular political will to exempt very large numbers of people from income tax.

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B.C. First Nation will accept LNG project – on their terms

BRIAN LEE CROWLEY

What a brave new natural resource world it is that has such players in it.

What else but the Bard’s Tempest could be brought to mind by the storm of consternation and controversy surrounding the decision by one B.C. First Nation to turn down more than $1-billion for their agreement to a liquefied natural gas project on their territory?

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A report card on Modi one year after Indian election

KEVIN CARMICHAEL

It’s that time. A year ago this week, Indian Prime Minister Narendra Modi and his Bharatiya Janata Party romped to landslide victory, positioning themselves to form India’s first majority government in a generation. The reviews of Mr. Modi’s first year have begun – and they are less enthusiastic than those that were written in the wake of his astonishing electoral triumph.

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Dear millennials: some of the boomers are struggling too

ANDREW JACKSON

Andrew Jackson is an adjunct research professor in the Institute of Political Economy at Carleton University and senior policy adviser to the Broadbent Institute

There has been a great deal of recent media commentary on inter-generational unfairness, much of which misleadingly argues that affluent older Canadians are benefiting from current economic and social arrangements at the expense of youth.

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Euro zone growth builds, but it's the usual laggards supplying the oomph

ERIC REGULY

The surprise was not that European growth is speeding up after years of zombie-like performance. The surprise was the source of that growth, which was not the continent’s traditional, recession-busting powerhouses – Germany and Britain.

Instead, it was the laggards – France, Italy and Spain – that seemed to have got their acts together as consumers opened their wallets again. These countries’ recovery lifted growth within the 19-country euro zone (which excludes Britain) by 0.4 per cent in the first quarter of the year, according to a flash estimate Wednesday from Eurostat, the European Commission’s statistics agency. The reading means that the euro zone is outperforming the United States even though there were pockets of weakness, notably Greece, whose economy is back in recession.

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What the new Fed tightening cycle means for investors

CLÉMENT GIGNAC

It has already been nine years since the last rate hike by the U.S. Federal Reserve. This means that there are currently a significant portion of investment professionals who have never experienced rising overnight rates and their effect on the stock market. A question we often get is: What should investors expect when the Fed starts a new hiking cycle?

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Greece bailout woes: From merely painful to outright traumatic

Eric Reguly

The phony war is over. Greece has to get a new bailout signed and sealed in a hurry because its debt repayment schedule is going from the merely painful to the outright traumatic.

On Monday evening, only hours ahead of deadline, Greece confirmed it made a €750-million ($1.01-billion) loan payment to the International Monetary Fund in spite of pressure from some members of the ruling Syriza party to withhold the transfer unless the European Union acknowledged that some progress had been made on the bailout talks.

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Be wary of the oil price recovery in a world of shifting variables and supplies

ERIC REGULY

Only a few months ago, oil prices were plunging and a few of the usual suspects predicted they would keep plunging. Citigroup Inc. said prices could hit $20 (U.S.) a barrel, proving that investment banks never met a trend they didn’t love.

The rout now appears to be over, with oil prices up more than 50 per cent since January, taking the international price close to $70. Of course, the forecasts are now being furiously rewritten because the trend is your friend. The bears have moulted into bulls with amazing speed.

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Female politicians, voters true winners of British election

CARL MORTISHED

After such a political upheaval, a massive defeat for the British Labour Party unpredicted by any opinion poll before last night’s ballots were counted, you might be tempted to believe that it was just about the economy. It’s true – the English voted in droves for another five years of the Tory economic plan of paying back debt. U.K. financial markets are today celebrating an unexpected but welcome defeat for the old British Labour Left – the FTSE100 is up and sterling is up. But that would be to ignore a subtle but more interesting development. This is the first British election that was truly made and won by the power of women.

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Yellen: Not investment advice, but a warning on stability

KEVIN CARMICHAEL

United States Federal Reserve Chair Janet Yellen’s observation this week that U.S. stock prices had become dear was immediately challenged. No more so than the two previous business cycles, countered RBC Capital’s Tom Porcelli, citing the average ratio of equity price to reported earnings. Many others were equally dismissive. The actual market reaction to the Fed chair’s comments was muted, suggesting most traders still think U.S. stocks are priced for profit.

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Now’s the time for Alberta to wean itself off its oil habit

DAVID PARKINSON

In turfing a government that has reigned for the better part of two generations, Alberta voters have signalled a taste for radical new thinking to address the provincial government’s chronic fiscal addiction to oil. Will premier-designate Rachel Notley pick up that mandate and run with it? That depends on whether she has the nerve to impose a provincial sales tax.

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Services exports: Canada’s quiet growth engine

GLEN HODGSON AND DANIELLE GOLDFARB

Many Canadians and much of the world continue to view Canadian trade through the rear-view mirror, focusing on exports of natural resources and advanced manufactured goods, such as autos and airplanes. These traditional export sectors have struggled recently. However, there is an important but underappreciated bright spot in Canada’s trade picture. Canadian companies have been quietly and steadily increasing their international sales of services.

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Canada’s place in the global economy depends on education advantage

SCOTT BARLOW

Tyler Cowen is an economics professor at the George Mason University and one of the most widely respected public intellectuals in the United States. In a recent interview, Mr. Cowen made a prediction about the Canadian economy that gets more disturbing the longer I consider it.

“[Technology] has been evolving in a pretty clustered way; I don’t mean simple software support, which is more like dentistry, but big, grand projects – the next Google, the next Facebook, Uber. We see those come out of quite a small number of places … I think any location, not just Canada, has to ask itself, ‘are we going to be one of those clusters or not?’ And the correct answer may be ‘no’… I guess at this point that seems likely – that Canada will not be a huge, innovative part of the knowledge economy.”

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Independent agency needed to manage Ontario’s cap and trade

CHRISTOPHER RAGAN

A few weeks ago, Ontario’s Premier announced her government’s intention to introduce a cap-and-trade system to reduce greenhouse gas emissions. Although many have applauded this announcement, there are still many critics – and they are only now beginning to gather their forces. Kathleen Wynne should recognize that the political road ahead will be anything but smooth.

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Strong U.S. dollar will help corporate America in the future

KEVIN CARMICHAEL

If Caterpillar Inc. chief executive Doug Oberhelman wasn’t paid some $17-million (U.S.) in 2014, you’d feel sorry for him. His company is taking it from all sides and there apparently is nowhere to hide.

“We are seeing a very competitive marketplace right now,” Mr. Oberhelman told analysts on a conference call after the release of the company’s first-quarter results. “I will tell you, with a yen that’s off over 50 per cent in three years, euro, Brazilian currency, pound currency off 20 per cent to 30 per cent in the last year; you know all of our competitors aren’t in the U.S. So it really is a competitive environment out there …”

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