Legal marijuana could pinch Canada's economy (but at least we'd be mellow about it)
- Legal marijuana could hurt economy
- Scotiabank profit up slightly
- Scotiabank bids for Chilean bank
- Markets at a glance
- OECD sees weaker growth in Canada
- Mortgage stress tests to hit hard
What legal marijuana could mean
David Madani has a couple of scenarios for what the pending legalization of marijuana could mean for Canada's economy.
One sure thing is that it will lower marijuana prices, according to the senior Canada economist at Capital Economics.
That will obviously make many people happy (or already happy people even happier), but Mr. Madani goes well beyond that in a new report, looking at how Ottawa's plans could ripple through the economy.
"The legalization and regulation of marijuana production and sales next year will lower marijuana prices and generate additional tax revenues," he said.
"The flip side, however, is that it could upset the large and highly profitable underground marijuana industry, with unintended consequences for the broader domestic economy."
Legalization will "by definition" lead to expansion of gross domestic product because "whenever a black market industry is added into the national economic accounts, the level of GDP typically increases," Mr. Madani said.
But he has different views as to how this could play out.
His best-case scenario sees no "material effect" on economic growth.
"But we are fairly sure that it will result in lower prices," he said.
"That's probably good news for weed fans. But we doubt that this will significantly improve the outlook for household consumption."
(You might be tempted to think he was talking about the amount of legal marijuana we're going to consume. But, no, in this case household consumption is an economic term that refers to the amount we spend on goods and services for our daily needs.)
Mr. Madani's worst-case scenario is where it gets really interesting because legalization promises to upset the underground industry by pinching illegal profits.
"That would have ripple effects throughout the broader domestic economy," he said.
"We could see this depressing demand for luxury goods, exotic motor vehicles and expensive housing, potentially triggering a further slowdown in the economy. Accordingly, this would have implications for monetary policy."
(Just imagine the Bank of Canada expounding on that one: Accordingly, personal stimulus may require a delay in withdrawing monetary stimulus.)
Mr. Madani expanded on that in an interview: The underground industry launders its profits, spending the clean money on a "lavish lifestyle," be it cars, housing, yachts or whatever.
"The underground marijuana industry is a large net exporter and the income generated by it over the years has likely been laundered/spent/invested in the domestic economy, possibly contributing to the inflating of real estate property values," he said.
"Accordingly, legalization and regulation in the years to come could have some negative unintended consequences for the economy."
(This wasn't the point of Mr. Madani's report, but it would sure be interesting to see pot at least partly doing what policy initiatives couldn't accomplish on a sustained basis by deflating house prices. The phrase bring me down comes to mind here.)
Some other interesting tidbits from Mr. Madani:
1: Based on a health survey, Capital Economics calculates Canada is home to about 4.2 million regular users of marijuana.
2: "Using the rule of thumb from other information sources that weed consumers smoke an average 0.2 kilograms annually, which translates into less than one joint per day and far less than tobacco cigarette smokers, we calculate that as much as C$6.5-billion was spent on marijuana last year."
3: Canada is a huge net exporter of pot: "From what we can gather, the amount of production that is consumed domestically is roughly 30 per cent. If that figure is accurate, then it implies that production equals 2.8 million kilograms annually which, at current market prices, means operating revenue of around C$22-billion annually."
4: As for that latter figure: "This is worth roughly a quarter of the operating revenues from the sales of goods and services by the agriculture, forestry and fishing sectors combined. On that basis, we calculate that the marijuana industry is worth, in value-added terms, C$8-billion, or around 0.5 per cent of GDP."
(Obviously there are no official numbers on exports. If there were, you can bet the Trump administration would move for anti-dumping duties and really tick some American voters off.)
5: Production costs are about half of revenues and the return on equity in the underground industry is substantial, "so there's obviously a huge incentive for organized crime to flourish here, no different than illegal alcohol sales in the U.S. during prohibition."
(Whoever would have thought, when they were getting busted in the Sixties and Seventies for possession, that one day we'd be talking about return on equity.)
- Daniel Leblanc: Ottawa’s plan to slap a new tax on medical cannabis sparks outrage
- Jeffrey Jones: Flurry of deal activity in marijuana sector adds to market euphoria
Scotiabank profit up
Bank of Nova Scotia kicked off the latest round of bank earnings with a slight jump in fourth-quarter profit and a $2.9-billion bid for a majority chunk of a Chilean bank.
Scotiabank posted a quarterly profit just shy of $2.1-billion, up 3 per cent from a year earlier. Earnings per share, diluted, came it at $1.64, up from $1.57.
Return on equity was little changed at 14.5 per cent, compared with 14.7 per cent.
Scotiabank also announced it has offered to buy Banco Bilbao Vizcaya Argentaria's stake in BBVA Chile, which the parent company said it will agree to if its minority partner doesn't exercise its right of first refusal.
"This transaction is in line with Scotiabank's strategy to increase scale within the Chilean banking sector and the Pacific Alliance countries," the bank said in a statement.
"It will double Scotiabank's market share in Chile to approximately 14 per cent, and make Scotiabank the third-largest non-state owned bank in the country."
Markets at a glance
OECD sees slower growth
The Organization for Economic Co-operation and Development sees Canada's economy slowing markedly over the next two years, but with the jobless rate finally dipping below 6 per cent.
"Economic growth is projected to ease as private consumption and government spending slows," the group said in a new global forecast released today.
"Recent strong private consumption gains have not been supported by commensurate increases in wages and thus are set to ease with further interest rises, slowing job growth, the absence of further substantial increases in government transfers and house price appreciation that is assumed to return to a more historical average annual rate of around 3 per cent in real terms."
Here's the OECD's outlook:
As reported last week, the OECD also warned again on Canada's high consumer debt levels and inflated home prices.
"The rise in price-to-rent ratios has been particularly steep in the Scandinavian countries, Australia and Canada," the group said.
"Although this in part reflects strong population growth, these developments may entail significant risk to financial stability, given the direct exposure of the financial system to the housing market, mortgages being one of the largest asset classes on bank balance sheets."
- Barrie McKenna: Slower wage, house-price growth to weigh on Canadian economy in 2018: OECD
- James Bradshaw: After big year, Canada’s major banks likely to post flat finish
- OECD warns of rising private debt as Canada among top countries in red
- Brent Jang, Janet McFarland: 2018 could be real estate’s year of turbulence
- Mortgage sticker shock: Get ready to pay more on renewal, possibly through the nose
- Housing affordability: It’ll be far nastier in Toronto and Vancouver as rates rise this time
- Janet McFarland, Brent Jang: Toronto, Vancouver see home-sales rush ahead of new stress-test rules
- 2018 consumer math: 2% inflation + 1.4% pay raise = you’re screwed
Stress tests to hit hard
New mortgage stress tests coming in 2018 could disqualify about 10 per cent of prospective home buyers, affecting $15-billion a year in new borrowing, the Bank of Canada says.
The impact of the new restrictions is expected to be concentrated in the Toronto and Vancouver areas – the markets that have seen the steepest run-up in prices in recent years.
Indeed, two-thirds of the dent in new mortgage borrowing is expected to be concentrated in those two markets, which combined account for half the value of home sales in Canada, The Globe and Mail's Barrie McKenna reports.
The tighter rules could disqualify as many as 12 per cent of buyers in those cities.