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How significant are U.S. moves? Just how significant are the Obama administration's new stimulus plans? Not very, Scotia Capital economists say. The U.S. government unveiled one new plan over the long weekend, a $50-billion (U.S.) boost to infrastructure and air navigation, and another proposal is expected today that will allow businesses to fully write off new plant and equipment investment through next year.
The infrastructure boost is impressive, economists Derek Holt and Gorica Djeric said in a research note today, though they question its significance: "The target of fixing 150,000 miles of roads is about 5 per cent of all paved roads in the U.S. according to the Federal Highway Administration. Laying or rebuilding 4,000 miles of railroad track equals under 2 per cent of all track in the U.S. according to the Association of American Railroads. Clearly these are big numbers but modest in relation to the size of the system involved."
The writeoff plan is more significant, they noted, carrying an estimated cost of about $200-billion. Still, the total impact of the programs is "modest," the economists wrote.
"An extra $250-billion in incentives compares to about a $14.5-trillion economy in nominal GDP terms, or about 1.7 per cent if fully incurred within one year. We're not certain of the distribution of such spending over time, but the annual effects would be well under 1 per cent of the U.S. economy as a first pass. The second pass raises more doubts.
"First, the take-up rates on such incentives are unclear. Businesses already face incentives to re-tool, particularly larger ones with access to capital markets funding, while nonfinancial corporate balance sheets are generally solid and borrowing costs are low. The issue remains one of continuing to shake off excess investment from the past cycle. Technological obsolescence makes much of the older capital stock obsolete, but we're not certain how much additional investment firms are prepared to make especially given expectations for modest growth going forward. "
U.S. outlook drives central banks The slowing economic recovery in the United States is making policy more challenging for major central banks. Both the Reserve Bank of Australia and the Bank of Japan today cited the U.S. slowdown as they held interest rates steady, with officials in Tokyo saying they could take emergency measures. While analysts noted that China's outlook is more important for both Japan and Australia, troubles in the world's biggest economy would still obviously spread globally.
This, too, is a dilemma for Bank of Canada Governor Mark Carney as he and his rate-setting colleagues prepare to meet tomorrow. Many economists believe Mr. Carney will announce the latest in a series of interest rate hikes, of one-quarter of a percentage point, before taking some time out to see how developments in the U.S. play out. Not all believe that, however. Here are the views of four banks:
"On the eve of the Bank of Canada's latest rate announcement, two major central banks flagged concerns over the U.S. outlook and left their key rates unchanged. Do their views matter to the [Bank of Canada] Somewhat, but there are important differences too. The Bank of Japan is mired in a renewed deflationary trap that doesn't exist in Canada, while the RBA's cash target rate of 4.5 per cent portrays much tighter policy conditions than the still emergency 0.75 per cent level that exists in Canada. ... The main point is to lift rates further off the emergency floor for non-emergency conditions as low rates encounter the growing risk of over-stimulating household imbalances." Derek Holt and Gorica Djeric, Scotia Capital
"While a weak external backdrop has been a cornerstone of the Bank of Canada's outlook for quite some time, the severity of the slowdown has surpassed the bank's expectation. Similarly, the performance of Canada's domestic economy has also been a touch softer than what the bank had forecast in July. Not surprisingly, the universal deceleration in economic growth and inflation has undermined the confidence that both the market and economists once had in expecting additional hikes. While this uncertainty is certainly warranted, an assessment of the relative rate of decline at home and abroad suggests that there remains a sufficient amount of domestic momentum to warrant a 25 basis point increase in the overnight rate [Wednesday]" David Tulk, TD Securities
"It's a close call for Bank of Canada policy on Sept. 8. After two consecutive rate hikes, lower-than-BoC-projected growth and inflation on the ground now, along with escalating U.S. risks, are weighing on the 'pause side' of the policy scale. Weighing on the 'hike side' is the fact that longer-term interest rates have fallen sharply since the last policy announcement, household credit continues to expand rapidly, and GDP growth is, nevertheless, still slightly above its potential pace. We see the scale nearly perfectly balanced. However, given that a pause would represent a policy shift, the scale would have to be pointing much more decidedly on the pause side to elicit inaction, particularly with a fresh set of economic and inflation projections available for the next announcement on Oct. 19." Michael Gregory, BMO Nesbitt Burns
"The Bank of Canada's decision should be a close call. We advocated standing pat for now, with elbow room to do so created by downside surprises in inflation readings, and the economy tracking only 1.5-per-cent annualized growth when measured from March's monthly GDP to June's. But we admit that such a step will require a big change of heart from Carney's team, which had been much more optimistic on growth in its last forecast." Avery Shenfeld, CIBC World Markets
"With lower than expected [second-quarter]GDP growth, July inflation and employment and weaker retail sales, the odds of a third consecutive rate hike by the Bank of Canada have declined recently. We believe the Bank will pause for a breather on Sept. 8, 2010, leaving the overnight rate unchanged at 0.75 per cent with consensus split between no change and a 25-basis-point hike. The bank may continue to cite the fragile and uneven nature of the global economic recovery. The bank's focus may shift from potential fallout from euro zone weakness to slowing growth south of the border. Nonetheless, we look for one more hike later this year (19 Oct. 2010) to bring the overnight rate target to 1 per cent, and 2 per cent by end-2011 given our Fed Funds outlook of 1 per cent at that time." Gary Cooper, Stephanie Phillips, George Vasic, UBS Securities Canada
Strikes roil France, Britain The austerity measures meant to fight Europe's debt troubles have sparked more social unrest today in France and Britain, where commuters have been hit by strikes. In France, a national strike to protest plans to boost the retirement age has affected all levels of transportation, schools and postal services. In Britain, the London Underground was largely shut down by the first of a series of threatened 24-hour walkouts. Unions in Spain and Greece are also promising more strikes.
Petrolifera launches strategic review
Petrolifera Petroleum Ltd. , whose shareholders have watched as their holdings plunged over the past several years, has put itself on the auction block. The company said in a statement today its board has launched a plan to "examine and consider a range of strategic alternatives" to boost shareholder value. That could include asset sales, joint ventures, a sale of the company or merger, or a financing or recapitalization. A special committee of three independent directors will lead the process. "No decision on any particular alternative has been reached at this time and there can be no assurance that the process will result in a transaction or, if a transaction is entered into, as to its terms or timing," the company said.
HSBC chief to become trade minister The chairman of HSBC Holdings PLC is quitting the bank to become Britain's new trade minister. A priest in the Church of England, Stephen Green has been with the bank since the early 1980s. The trade post has been empty since the British election in May, and the new government has made trade a major focus given the state of its economy. And, The Wall Street Journal said, the move may also heighten speculation that HSBC plans to move its headquarters to Hong Kong.
Diamond to become chief of Barclays Another American is taking the helm of an iconic British company. Barclays PLC, the British bank that acquired the U.S. business of Lehman Bros. during the 2008 meltdown, today named Robert Diamond Jr., its president and head of investment banking, as its next CEO. He will succeed John Varley, who will step down in March. Credited with building the bank's huge presence in investment banking, Mr. Diamond has also been criticized for his lavish pay packages. In an interview with The Times before the British election, the business secretary in the previous British government said Mr. Diamond had made his money by "deal-making and shuffling paper around," and that "is the unacceptable face of banking."
Mr. Diamond's pay - more than $2-million (U.S.) with hefty bonus possibilities, could become a flashpoint as the world recovers from the financial crisis, though the bank's chairman told reporters today that the compensation is "well benchmarked" against that of other bank CEOs.
Mr. Diamond is the latest American to take over a major British company, following a similar move by BP PLC.
From today's Report on Business
- Taking Stock: An old inflation fighter sticks to his guns
- In wake of oil spill, Enbridge CEO makes right moves
- As food prices jump, UN group tries to avoid fuelling new crisis
And, read our Streetwise blog and Your Business section