Business Briefing

Economists speculate on why Flaherty went outside for central bank chief

The Globe and Mail

These are stories Report on Business is following Thursday, May 2, 2013.

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Poloz named Bank of Canada chief
Finance Minister Jim Flaherty shocked Bay Street today, shunning the obvious choice to follow Mark Carney as governor of the Bank of Canada, and instead naming Stephen Poloz.

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For months, investors around the world have been almost universal in the assumption that the next governor of Canada’s central bank would be Tiff Macklem, the current No. 2 at the institution.

The selection of Mr. Poloz threatens to roil Canada’s bond and currency markets, at least in the short term, as traders digest the surprise, The Globe and Mail's Kevin Carmichael and Bill Curry report. Unlike Mr. Macklem, Mr. Poloz is an unknown commodity outside Ottawa.

His selection to the seven-year term will raise questions about whether Prime Minister Stephen Harper is seeking greater influence over monetary policy by installing a governor from outside the institution.

Here's what economists are saying:

"Why did the finance minister decide to take this direction as opposed to the widely-expected choice of going with the current senior deputy governor? The answer may be that the minister would like to see a governor with more experience with dealing directly with the private sector. Mr. Poloz has this experience along with a good understanding of the bank's work given that he spent 14 years within the bank, so in many ways in the eyes of the finance minister he brings more to the table and is not quite the 'outsider.' Also, helping here is the recent federal government’s focus on trade, and the potential view that with his recent experience  as the head of the EDC he will be better positioned to provide leadership on that front." Benjamin Tal, Emanuella Enenajor, CIBC World Markets

"Markets could take this appointment as a dovish nod in that the government may be placing the emphasis upon Poloz’s strong background in the export sector and hence his understanding of the competitive challenges facing Canadian exporters including an elevated currency. That said, Poloz has not delivered an official speech since about a year ago on April 26, 2012 and that was about trade relationships between Canada and Japan while offering no insight into his thinking on monetary policy. He has generally avoided public commentary on matters of monetary policy, and by sticking to his knitting has pursued a successful career under the (Conservative) federal government. As such, his views as applied to the conduct of monetary policy are not well known. It is possible that markets will initially treat his appointment as mildly dovish for rates and bearish for [the Canadian dollar], but the strong caution is that Poloz’s initial speeches and [monetary policy report] will therefore be of heightened interest as his views on monetary policy are such an unknown quantity." Derek Holt, Dov Zigler, Bank of Nova Scotia

"Mr Poloz has not commented on monetary policy for some time and it is hard to judge how he perceives the current monetary policy stance. However, since the BoC's rate decisions are taken by consensus by the governing council, we should expect the BoC to maintain the same direction and to keep its forward guidance. As chief economist at EDC, Mr. Poloz has worked intensely on the productivity and competitiveness issues that have been plaguing the Canadian economy over the past decade. This could be important given the recent BoC forecast peg a lot of hope of an export led recovery." Charles St-Arnaud, Nomura Securities

"The appointment of an 'outside' candidate will likely raise some uncertainty as to the future course of monetary policy. There may also be a tendency to assume that someone coming from an organization such as the EDC, which is focused on promoting external trade, will slant monetary policy in a similar direction particularly with respect to the exchange rate. However, this would do a disservice to Poloz’s early career at the central bank where the priority is to set monetary policy to achieve an appropriate rate of inflation. Our expectation is that monetary policy under Poloz will remain focused on strengthening growth to a rate that puts greater downward pressure on the unemployment rate with the objective of maintaining inflation at the 2-per-cent mid-range target." Paul Ferley, Royal Bank of Canada

"We don't anticipate that Poloz will be looking to alter the Bank's mandate in any way and wouldn't anticipate any major shift in how the Bank sets policy. Mark Carney's departure is a loss but, in our opinion, markets tend to get a bit over-excited about changes in central bank chiefs. Alan Greenspan's departure as US Fed Chairman in 2006 prompted all sorts of speculation at the time that the Fed's credibility would suffer without the 'Maestro' at the helm. A couple of years later, Greenspan's reputation was in tatters. The Bank of Canada may have a new governor, but he will be faced with the same problems: Persistent weak growth in Canada's closest trading partner, a downturn in Canada's housing market, still dangerously high household debt levels and uncomfortably low inflation." Paul Ashworth, Capital Economics

ECB cuts key rate
The European Central Bank finally cut its benchmark interest rate today in the face of crippling unemployment and cooling inflation.

The question is how much good the cut of one-quarter of a percentage point will do.

The benchmark rate now stands at 0.5 per cent. This had been expected, but the central bank also unveiled a surprising cut of half a percentage point to its marginal lending facility rate, which banks pay on overnight loans, now at 1 per cent.

“The cut shows the ECB are not asleep at the switch, responding to a run of weaker than expected data in recent weeks,” said Andrew Grantham of CIBC World Markets.

“However, apart from possibly a mild boost to exports should the euro ease slightly, on its own a rate cut will do little to improve growth prospects in the region with the effective overnight rate already so low,” he added in a research note.

“To greatly change growth prospects, we will need to see countries lift off on fiscal tightening or for the ECB to pursue more aggressive monetary policy aimed at longer dated peripheral yields. The latter at least appears a long way off still given the opposition of some euro zone countries to such measures.”

ECB chief Mario Draghi painted a bleak picture when he spoke later to reporters, though pointing to better times ahead.

"Real GDP contracted by 0.6 per cent in the fourth quarter of 2012, following a decline of 0.1 per cent in the third quarter," Mr. Draghi said of the embattled 17-member euro zone.

"Output has thus declined for five consecutive quarters," he added at the news conference.

"Over all, labour market conditions remain weak. Recent developments in short-term indicators, notably survey data, indicate that weak economic sentiment has extended into spring of this year. Looking ahead, euro area export growth should benefit from a recovery in global demand and our monetary policy stance should contribute to support domestic demand. Furthermore, the improvements in financial markets seen since last summer should work their way through to the real economy."

Today’s meeting came amid numbers this week showing annual inflation in the euro zone at just 1.2 per cent, and unemployment at 12.1 per cent, with 19.2 million people out of work.

Even that high level masks the overwhelming problems in countries such as Greece, Spain and Portugal, whose jobless rates stand at 27.2 per cent, 26.7 per cent and 17.5 per cent, respectively.

“The continued rise in this number is a shocking indictment of the failure of Europe’s economic policy and the euro as an economic project, the prospect that some form of rate reduction will help Europe’s economy completely misses the point as to why Europe is in the mess it is in,” said senior analyst Michael Hewson of CMC Markets in London, referring to unemployment across the 17-member monetary union and noting that bond yields have eased in some of the peripheral countries regardless, removing some pressure.

For Mr. Hewson, a rate cut  “is likely to be about as much use as rearranging the deck chairs on the Titanic.”

He was scathing in a research note, suggesting that some of the ECB’s actions to date bought political leaders “valuable time” that they have squandered amid “partisan and vested” interests.

“There is an argument for stating that the ECB’s actions have actually prolonged the crisis by allowing politicians to hang back from making the necessary economic reforms to open Europe’s archaic and protected labour markets.”

Canadian exports climb
Canada's trade balance rebounded in March to a surplus of $24-million, recovering from a hefty deficit as exports climbed more than 5 per cent.

The gain in exports outpaced the 1.7-per-cent increase in imports, Statistics Canada said today, reversing February's over all deficit of $1.2-billion.

Exports to the United States, Canada's biggest trading partner, rose by 4 per cent, largely on autos and energy. Energy, in turn, was driven by an increase of almost 25 per cent in natural gas.

Notably, that was on volumes, while Statistics Canada said that "exports of this commodity group have been on an upward trend since May, 2012, primarily the result of higher prices."

Exports to other countries, meanwhile, surged 7.9 per cent, with those to Japan up a sharp 25 per cent.

Loblaw to send staff to factories
Loblaw Cos. Ltd. will start sending its own staff to its Joe Fresh apparel factories in Bangladesh to oversee conditions on the ground in a bid to prevent another deadly tragedy, The Globe and Mail's Marina Strauss reports.

But Galen G. Weston, executive chairman of Loblaw, also said he is disappointed about 30 or so other global apparel companies whose garments were also made in the building that collapsed – killing more that 400 – haven’t come forward and pledged to contribute to a fund for victims and their families.

In his first public address since the collapse of the building which housed Joe Fresh garment production, Joe Mimran, creative director of the line, said the company has to do “a much better job” of producing the low-cost fashions.

Manulife profit slips
Manulife Financial Corp. today posted a hefty drop in first-quarter profit, to $540-million or 28 cents a share from $1.2-billion or 67 cents a year earlie.

Sales, The Globe and Mail’s Jacqueline Nelson reports, were hit by a decline in Asia, among other things.

Manulife was the first of Canada’s major life insurance companies to report first-quarter results.

“While insurance sales fell short of our expectations in the first quarter, due to our taking a leadership role in pricing to reflect lower interest rates, we also generated record wealth sales, with contributions from all of our major units around the world,” said chief executive officer Donald Guloien.

Facebook shares on rise
Shares of Facebook Inc. climbed today after an earnings report late yesterday that showed big gains on the mobile front.

Facebook's first-quarter profit rose to $219-million (U.S.) or 9 cents a share, from $205-million, also 9 cents, a year earlier. Revenue climbed to almost $1.5-billion from $1.1-billion.

The social network had been under pressure to make greater strides on mobile devices, and, indeed, it posted a 54-per-cent gain in mobile users, now at 751 million on a monthly basis.

The number of average daily activer users rose in March by 26 per cent, to 665 million, while over all monthly users climbed 23 per cent to 1.1 billion.

Mobile advertising revenue climbed in the quarter to 30 per cent of the total, up markedly from 24 per cent in the fourth quarter of last year.

Gildan profit climbs
Gildan Activewear Inc. beat its own estimates with record second-quarter results, at the same time raising its outlook for the year.

The Montreal-based underwear (and other things) maker earned $72.3-million (U.S.) or 59 cents a share in the latest quarter, The Globe and Mail's Bertrand Marotte reports, compared to $26.9-million or 22 cents a year earlier.

Sales climbed more than 8 per cent to $523-million.

Gildan now expects full-year sales of $2.15-billion and earnings per share of between $2.65 and $2.70.

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