Whither the economy
As David Madani sees it, the outlook for Canada’s economy is “hanging in the balance” as the political parties duke it out in an election campaign that’s too close to call.
There are issues here that have been “years in the making,” said Mr. Madani, the Capital Economics group’s man in Toronto.
And come Oct. 19, we’ll see how some of them will be dealt with.
Canada’s economy has been whacked by the collapse in oil prices, with the once-powerhouse province of Alberta, the home of the energy sector, driven into recession.
The overall economy contracted in the first half of the year, and analysts now project a third-quarter rebound to the tune of growth in the 2.5-per-cent to 3-per-cent range, annualized.
Certain indicators, such as exports, have picked up, though we’ll see whether that can hold up.
The Bank of Canada moved quickly to deal with the shock, cutting interest rates twice this year, while governments largely pulled back to ease the blow to their finances.
Mr. Madani noted the huge investments in Canada’s oil sands in past years, which relied on oil prices of $60 (U.S.) to $80 to bring in strong profits.
“It’s no surprise then that similar new projects are now being scrapped,” he said in a report.
“So, one crucial mistake by businesses and policy makers was expecting oil prices to remain high indefinitely.”
Many policy makers used the boom times to deal with their debts, rather than to cut taxes, Mr. Madani said, though some did just that.
It’s what happens next that’s the question.
While Alberta has a new government that has laid out its plans, there’s a big question mark at the federal level, and Mr. Madani is not alone in suggesting that some politicians may be wrong in how they are dealing, or would deal, with the trouble.
“Unfortunately, to help offset the effects of the commodity price bust on the economy, many policy makers nowadays seem reluctant to either cut taxes or increase spending,” said Mr. Madani, whose group has been bearish on Canada.
“Some political party leaders have even suggested that corporate tax rates should be increased,” he added.
“The majority of politicians appear convinced that better times are around the corner, despite the fact that the improving U.S. economy and lower Canadian dollar so far haven’t generated any meaningful export-led recovery. So, with the polls for the upcoming federal election showing a neck-to-neck race among the three key political leaders, it appears that the economy’s fate is hanging in the balance.”
Arctic chill
Royal Dutch Shell is pulling back from the Arctic, a move that could cost the energy giant more than $4-billion (U.S.).
The company said today that what it has found to date off Alaska isn’t enough to go forward with further exploration. The well in question in the Chukchi Sea will be sealed and “abandoned,” it said in a statement.
“Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.,” an executive said.
“However, this is a clearly disappointing exploration outcome for this part of the basin.”
Glencore tumbles
Shares of Glencore PLC took a nosedive today after a reportedly troubling research note from Investec issued a warning on the company’s stock and commodity prices.
Shares of Glencore, which went public a few years ago, are now down by about 80 per cent from the IPO.
Alcoa to split
Alcoa Inc.’s split into two separate companies likely means its Canadian operations will end up in the smaller unit, which is focused on aluminum production and exposed to the vagaries of the global commodities cycle, The Globe and Mail’s Bertrand Marotte reports.
Alcoa said today it plans to separate its primary products business from its higher-margin operations, which have gotten a big boost in recent years from deals to supply the automotive sector with lightweight aluminum parts.
That leaves most of its Canadian operations – centred on three aluminum smelters in Quebec – falling into the legacy commodity company, which will retain the name Alcoa and be publicly listed.
What to watch for this week
Wednesday is a key day, both for economy watchers and politicians on the campaign trail.
Remember that the second quarter ended on a strong note, despite the overall economic contraction, as gross domestic product rebounded by 0.5 per cent in the final month.
Economists expect to see more of that on Wednesday, projecting Statistics Canada will report that GDP expanded by 0.2 per cent in July, which, as noted above, could send the third quarter on its way to growth of 2.5 per cent to 3 per cent.
“Manufacturing had a solid month, driven by autos, retail activity was modestly higher, while wholesale trade was a drag,” said senior economist Benjamin Reitzes of BMO Nesbitt Burns.
“Oil and gas is a question mark after rebounding strongly in June following maintenance and shutdowns in the prior months.”
A GDP pickup would, of course, play into the hands of Stephen Harper’s Conservatives in helping to shoo away recession talk.
And, just as an aside here, Mr. Harper, too, is no doubt saying “Go, Jays, go.”
“Another notable sector in June was arts, entertainment and recreation, which jumped due to the women’s World Cup,” Mr. Reitzes said.
“With the Pan-Am games in Toronto in July, don’t expect much retracement just yet,” he added.
“In fact, the Parapan-Am games in August, the Blue Jays streaking toward the playoffs in September (and hopefully making a run for the World Series in October) could keep this sector elevated for another few months.”
For the record, I’m sure the Liberals and NDP are cheering on the Jays, too.
For the markets, the key report this week is Friday’s reading of the U.S. jobs market in September, which will feed into speculation over when the Federal Reserve will hike interest rates.
Economists expect the report to show that about 200,000 jobs were created last month, with the unemployment rate holding steady at 5.1 per cent.
“If the current pace of hiring is maintained, it won’t be long until the unemployment rate is below 5 per cent and wage pressures start to rise,” said Andrew Grantham of CIBC World Markets.
“Further solid labour market improvement would support the case for a December Fed hike” he added.
“However, given the previous statement’s concerns regarding the international outlook, it isn’t just the domestic data that needs to impress FOMC members at present,” he said, referring to the Federal Open Market Committee, the central bank’s policy-setting panel.