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Business Briefing The fascinating fallout from a minimum wage raise. (Shh, everyone will want one)

Briefing highlights

  • Minimum wage and demographics
  • Cap-and-trade: Just sayin’
  • Markets at a glance
  • Canadian dollar withering
  • What to watch for at OPEC meeting
  • What to expect from inflation report
  • What else to watch for this week
  • Baytex to buy rival Raging River
  • Magna in China venture
  • Audi CEO arrested in Germany

Minimum wage fallout

The fallout from recent minimum wage hikes may be broader than you think.

Don’t misinterpret that. Raising the minimum wage is a good thing. It’s that the ripple effects are fascinating.

There are several aspects to this, but one of the more interesting is what Statistics Canada researchers have found is a change in the makeup of who’s earning what.

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“As minimum wages increased in 2017 and early 2018, the composition of the population of minimum wage employees moved away from individuals under 25 years of age and towards older workers,” René Morissette, assistant director in Statistics Canada’s social analysis and modelling division, and Dominique Dionne-Simard, an analyst in the labour statistics unit, said in their recent study.

This comes amid recent increases to minimum wage levels across Canada, but notably in Ontario, with a hefty hike that has been lauded by some and damned by others who say certain businesses can’t afford it, and will have to cut jobs.

Ontario’s Conservatives, who swept to a majority in the recent election, have pledged to kill a further increase planned by the previous Liberal government.

Using 2017 and 2018 labour force survey readings, the Statistics Canada researchers found that the proportion of those earning minimum pay among younger workers, under the age of 25, fell to 43 per cent in the first quarter of this year, from 52 per cent a year earlier.

Over the same period, those between the ages of 35 and 64 increased their representation to 31 per cent from 25 per cent.

This chart breaks it down further by looking at students and non-students who still live with their parents.

PERCENTAGE DISTRIBUTION OF

MINIMUM WAGE WORKERS

By age group, first quarter of 2017 and 2018

Ages 15 to 34

Ages 35 and over

100%

80

Ages 15 to 24

Non-students living with their parents and students

-9.6

percentage

points

52

42.6

60

6.1

-0.1 p.p.

15 to 24

Other

6.2

16.3

+3.6 p.p.

40

25 to 34

12.7

17.3

+4.5 p.p.

21.8

35 to 54

20

+1.7 p.p.

9.6

55 to 64

7.9

65 and over

3.8

3.6

-0.2 p.p.

0

Q1 2017

Q1 2018

Change

MURAT YUKSELIR / THE GLOBE AND MAIL,

SOURCE: STATISTICS CANADA

PERCENTAGE DISTRIBUTION OF

MINIMUM WAGE WORKERS

By age group, first quarter of 2017 and 2018

Ages 15 to 34

Ages 35 and over

100%

80

Ages 15 to 24

Non-students living with their parents and students

-9.6

percentage

points

52

42.6

60

-0.1 p.p.

6.1

15 to 24

Other

6.2

16.3

+3.6 p.p.

40

25 to 34

12.7

17.3

+4.5 p.p.

21.8

35 to 54

20

+1.7 p.p.

9.6

55 to 64

7.9

65 and over

3.8

3.6

-0.2 p.p.

0

Q1 2017

Q1 2018

Change

MURAT YUKSELIR / THE GLOBE AND MAIL,

SOURCE: STATISTICS CANADA

PERCENTAGE DISTRIBUTION OF MINIMUM WAGE WORKERS

By age group, first quarter of 2017 and 2018

Ages 15 to 34

Ages 35 and over

100%

80

-9.6

percentage

points

52

42.6

Ages 15 to 24

Non-students living with their parents and students

60

-0.1 p.p.

6.1

15 to 24

Other

6.2

16.3

+3.6 p.p.

40

25 to 34

12.7

17.3

+4.5 p.p.

21.8

35 to 54

20

+1.7 p.p.

9.6

55 to 64

7.9

65 and over

3.8

3.6

-0.2 p.p.

0

Q1 2017

Q1 2018

Change

MURAT YUKSELIR / THE GLOBE AND MAIL, SOURCE: STATISTICS CANADA

What’s happening here, said CIBC World Markets deputy chief economist Benjamin Tal, is that more workers fell under the minimum wage “umbrella” as levels rose to match what they earned.

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“What used to be just over minimum wage is now minimum wage,” he said in an interview, noting that that captured older workers.

And here’s what Mr. Tal cited as a significant ripple effect: Some in the older group who now see themselves as ”only making minimum wage,” believe they’re worth more and will demand higher pay.

Call it the begat aspect: If they get raises, others will want more, so the cycle can be inflationary.

Look, too, at prices charged by businesses that traditionally pay minimum wages.

“While everyone likes to get paid more, nobody likes to pay more,” said Bank of Montreal senior economist Sal Guatieri.

“But that’s what happens when wages rise faster than productivity, as occurred in Ontario when businesses were forced to raise their minimum payout by 21 per cent in January.”

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“The increase compelled restaurants, many of which pay the minimum, to boost prices 4.8 per cent in the first four months of the year (or an annualized 15 per cent), outpacing other provinces, including those that also raised their wage floor (albeit by less than Ontario),” Mr. Guatieri said, noting that marked the fastest rise in restaurant prices in the province since the goods and services tax that we all knew and loved was introduced in 1991.

“If there is some consolation for (fast) food lovers, most of the price spike was in the first two months of the year. However, still-large gains in the last two months suggest patrons may need to stomach further increases to come.”

CIBC’s Katherine Judge and Royce Mendes see yet another potential impact from generally rising wages, this one on business costs and how investors might react, though not this soon.

“There’s a clear negative correlation between pay and corporate profits,” they said in a report, adding Statistics Canada’s latest wage growth reading of an annual 3.9 per cent in May “might have been slightly jarring” for investors.

“Amidst a historically low unemployment rate, it would make sense if firms were bidding up wages to score talented workers,” Ms. Judge and Mr. Mendes said.

“Except they may not actually be doing that, at least not yet,” they added.

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“The wage series released [more than a week ago] is showing a gain off of a very weak base. Three other measures, all of which are arguably more reliable, have actually decelerated recently. While faster wage growth will gradually show up, [the latest] release appears to overstate the progress.”

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Just sayin’

Photo illustration

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Loonie withers

The Canadian dollar is withering, and is likely to weaken further.

The loonie now stands below 76 US cents, driven down over time by trade fears and policy differences between the Bank of Canada and U.S. Federal Reserve, and pushed along Friday by a weak Canadian manufacturing reading.

The currency is actually up today, though.

“We’re not too concerned on Friday’s disappointing factory sales as much as the deteriorating trade outlook,” said Bipan Rai, CIBC’s North America head of foreign exchange strategy.

“Tariffs lobbed between the U.S. and China will raise concerns of escalation, which will hit global demand proxies - like the CAD,” he added, referring to the Canadian dollar by its symbol.

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The drop below 76 US cents “opens up a potential run” below 75 in the coming weeks and 74 in the months to come, Mr. Rai said, adding that this could change as the Bank of Canada is expected to make a loonie-friendly move by raising interest rates in July, and the U.S. is overvalued against other currencies.

Read more

Markets at a glance

Stay tuned for more twists and turns in this season of Survivor: Trade wars!

— Sue Trinh, Royal Bank of Canada
Read more

What to watch for this week

Everyone from U.S. President Donald Trump to those of us who curse the cost of filling up hope OPEC producers will agree to ease up at a key meeting this week.

Observers believe the Organization of the Petroleum Exporting Countries will take at least some baby steps when it meets in Vienna Friday, pushed along by Saudi Arabia and Russia, which isn’t an OPEC member but is part of a production cap agreement that has buoyed oil prices.

Saudi Arabia and Russia are key players here, and both are looking at the possibility of loosening the agreement, which is set to run through the end of the year.

Mr. Trump took to Twitter again recently, calling for OPEC to open the taps and help bring down high prices at the gas pump.

RETAIL GASOLINE PRICE MOVEMENTS

Indexed, June 2017=1

1.7

Brent

Germany

U.S.

France

Japan

Spain

Canada

Italy

Britain

1.5

1.3

1.1

0.9

F

M

A

M

J

2017

J

A

S

O

N

D

J

2018

GLOBAL OIL DEMAND

Yearly averages, in million barrels per day

2017

2018

2019

Africa

Americas

Asia/Pacific

Europe

FSU*

Middle East

World

Annual change

* Former Soviet Union countries

4.3

31.4

33.9

15.1

4.7

8.3

97.8

1.6

4.4

31.7

34.6

15.2

4.8

8.4

99.1

1.4

4.5

32

35.4

15.3

4.9

8.5

100.6

1.4

THE GLOBE AND MAIL,

SOURCE: INTERNATIONAL ENERGY AGENCY

RETAIL GASOLINE PRICE MOVEMENTS

Indexed, June 2017=1

1.7

Brent

Germany

U.S.

France

Japan

Spain

Canada

Italy

Britain

1.5

1.3

1.1

0.9

F

M

A

M

J

2017

J

A

S

O

N

D

J

2018

GLOBAL OIL DEMAND

Yearly averages, in million barrels per day

2017

2018

2019

Africa

Americas

Asia/Pacific

Europe

FSU*

Middle East

World

Annual change

* Former Soviet Union countries

4.3

31.4

33.9

15.1

4.7

8.3

97.8

1.6

4.4

31.7

34.6

15.2

4.8

8.4

99.1

1.4

4.5

32

35.4

15.3

4.9

8.5

100.6

1.4

THE GLOBE AND MAIL, SOURCE: INTERNATIONAL ENERGY AGENCY

RETAIL GASOLINE PRICE MOVEMENTS

Indexed, June 2017=1

1.7

Brent

Germany

U.S.

France

Japan

Spain

Canada

Italy

Britain

1.5

1.3

1.1

0.9

F

M

A

M

J

2017

J

A

S

O

N

D

J

2018

GLOBAL OIL DEMAND

Yearly averages, in million barrels per day

2017

2018

2019

Africa

Americas

Asia/Pacific

Europe

FSU*

Middle East

World

Annual change

* Former Soviet Union countries

4.3

31.4

33.9

15.1

4.7

8.3

97.8

1.6

4.4

31.7

34.6

15.2

4.8

8.4

99.1

1.4

4.5

32

35.4

15.3

4.9

8.5

100.6

1.4

THE GLOBE AND MAIL, SOURCE: INTERNATIONAL ENERGY AGENCY

“OPEC is under pressure to release barrels, given the risk of overtightening and higher oil prices on sustained demand growth,” said John Normand of JPMorgan Chase, which expects a production boost.

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“There is also the additional risk that the U.S. and [International Energy Agency] could release oil from their strategic reserves if they were to deem current market tightness due to market disruption,” he added.

“Given Saudi Arabia and Russia have currently the control over oil markets, it would be counterintuitive for them to lose it by not reacting in advance to market tightening due to unplanned declines in Venezuela, Angola and potentially Iran due to sanctions.”

Mr. Normand also cited the “several cracks” in the production pact as dynamics changed, noting “the deal is waiting to collapse.”

Royal Bank of Canada analysts also expect an output boost, albeit a soft one.

“Our base case is that Saudi Arabia and the OPEC leadership will err on the side of caution and orchestrate a modest easing of the output cut (up to 500,000 barrels per day, in our view) and strongly signal a readiness to act quickly to fill serious supply gaps as needed, by potentially convening an extraordinary meeting in the fall,” said Helima Croft, RBC’s global head of commodity strategy, and her colleagues Christopher Louney and Michael Tran.

“In addition, Saudi Arabia and OPEC leadership will likely reaffirm their overall commitment to the collective production agreement in order to incentivize further investment in the energy sector,” they added in a preview of the meeting.

“Nonetheless, we could envision a scenario where the meeting proves to be so antagonistic because of deep divisions over production and sanctions that they fail to reach a consensus, leaving big producers like Saudi Arabia and Russia to act on their own.”

But even that would result in a soft production boost “as no one wants to cause another collapse in oil prices.”

By coincidence, as OPEC meets we’ll also get to see how much more we’re paying for higher prices when Statistics Canada releases its May inflation report.

Observers expect to see that consumer prices rose 0.4 per cent last month, pushing the annual inflation rate to a six-year high of 2.6 per cent.

“Energy prices continued to march higher in the month, with gasoline up about 3 per cent, though there’s been some retreat in the first half of June,” said Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist.

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The rest of the calendar:

MONDAY: STOCKS

The week opens on a gentle note, with little on the economic front. But watch for how stocks react to the ongoing disputes between the U.S. and its trading partners after the Trump administration hit China with stiff tariffs on US$50-billion in goods on Friday.

Read more
TUESDAY: HOUSING

Another gentle day, though markets will have May U.S. housing starts to digest. Economists expect to see a rise of 2.2 per cent at an annual pace.

WEDNESDAY: TRADE

Here’s where we pick up a bit of steam, with a report expected to show that the U.S. current account deficit fattened further in the first quarter to about US$129-billion, handing Mr. Trump more fuel for his trade fire.

Federal Reserve chair Jerome Powell

Cliff Owen/The Associated Press

Markets will also be watching for what Federal Reserve chief Jerome Powell and others have to say at a chat in Portugal in the wake of the U.S. central bank’s rate hike last week.

He’s speaking at an annual European Central Bank conference.

THURSDAY: RATES

A rate decision by governor Mark Carney’s Bank of England won’t be nearly as exciting as last week’s meetings of the Fed and ECB, the latter unveiling plans to wind down its stimulus.

Observers expect the central bank to hold its key rate at 0.5 per cent and make no changes to its asset-buying program.

Bank of England governor Mark Carney

BEN NELMS/Reuters

“The outlook issued by the BoE last month was a little subdued, as the growth forecasts for 2018 and 2019 were lowered,” said CMC’s Mr. Madden.

“The latest average earnings showed a cooling in the growth rate, and this is likely to play on central bankers’ minds, as they would prefer to see firmer wages before raising rates again.”

Read more
FRIDAY: BLACKBERRY

Hey, remember when BlackBerry ruled the world?

Besides the OPEC gathering, the Canadian company that gave the world the smartphone reports first-quarter results before markets open.

“Despite BlackBerry progressing in its turnaround, the shares have experienced volatility around quarterly results,” said RBC equities analyst Paul Treiber, whose price target on the stock is US$11 and who expects to see adjusted earnings per share of zero, down from 5 US cents in the fourth quarter.

And along with Statistics Canada’s inflation report comes a look at April retail sales. Don’t expect to see much change from March.

“Retail sales grew a whopping 7 per cent last year, but the days of such heady readings are now clearly in the rearview mirror,” said Royce Mendes of CIBC World Markets.

“During the first quarter of 2018, retail sales shrank at an annualized pace of 1.5 per cent. While Q1 did end on a positive note, it doesn’t look like that momentum carried over into April.”

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