Our mining, oil and natural gas industries may get all the headlines, but they will not displace service industries any time soon. The services sector dominates the economy. Canadian businesses and consumers rely heavily on the services sector for a wide range of activities.So what does it mean when the rate of change in consumer services goes negative?
While it's too early to make predictions based solely on this statistic, I think it's important to keep in mind that the federal government has made it clear that it too is in the process of reducing its contribution to the services sector in order to eliminate its budget deficit. Also, if you consider the fact that consumer borrowing is slowing down and export potential isn't what it used to be due to the strong Canadian dollar, it's clear that all there is left to keep GDP growing is business investment, an area that is actually doing well these days.
Perhaps the fall in demand for consumer services is simply a one-off event.* That being said, it should be emphasized that a negative rate of change in consumer services has only occurred once before in the last decade. And that was in 2008 at the start of the last recession.
* Statistics Canada defines consumer service as follows:
Services consumed by households, such as rent (including the rent imputed on owner-occupied housing), transportation, education, medical care, child care, food and accommodation services as well as travel expenditures of Canadians abroad, less travel expenditures of foreigners in Canada. Also includes the current (operating) expenses of associations of individuals and unincorporated businesses.
Very interesting. Not too many writeups these days on the service sector. Good!
ReplyDeleteYour timing is great. Households debt in Canada hits a high of $1.5Trillion. Service sector will have to be slashed by consumers; and if I recall, household debt in the US was supposedly a major component of the Great Recession of 2007. Here we go Mr. Carney, unless you follow the same suit as the US. Maybe Mr. Harper's fiscal policy was prematurely restrictive. Where is Keynes?
ReplyDeleteI assume Goffredo suggests BoCanada to reduce its rates. Not a bad idea. Inflation is not on the horizon unless indicators are out of whack, or none of us can read them properly. Where is Keynes? Keynes, in his own words, 'In the long run, we're all dead'
ReplyDeleteAgain I assume Goffredo suggests that we follow Keynesian ideas. Bernanke is doing a good job of enticing congress to do so. Is there a counterpart in Canada?
Anon, thanks for your comment. Glad I was able to fill a gap in the commentary.
ReplyDeleteGoffredo, I agree there's more in store for Canada; though I think it'll be brought up by the federal government's expenditure cuts rather as a result of consumer restraint. As for your question regarding Keynes's whereabouts, all I can answer is "not in Canada"! Policymakers and commentators in Canada are obsessed with balanced budgets. Even so-called progressives take it as a given that governments must balance the books (more or less at all costs). No one realizes that the balanced budgets of yesteryear were largely the result of circumstance rather than policy. In the 90s, Canada benefited from export growth resulting from the weakness in the CAD in relation to the USD. Also, the Bank of Canada's moderate stance starting the late 90s cut real interest rates, thus alleviating the government's cost of servicing the debt (IMO, this is the extent of the policy origins of balanced budget). Then, in the 00s, the US housing boom boosted exports of Canadian forestry products at the same time as the increase in the price of oil increased tax revenue and exports. Spending cuts played a minor back then and will continue to do so in the next few years.
Yes, I think Harper's stimulus was alright. It helped to increase household income and kept employment levels reasonable. A fiscal reversal would indeed be premature.
Jorge, there's a bit of history here with respect to cutting interest rate. The previous Bank Governor back in the mid-00s was forced to cut rates after having judged appropriate to increase them (even though the Fed was keeping their rates low). Carney won't go there, just to save face.
As for whether Canada has someone summoning politicians into fiscal action, I have to answer no. Unfortunately, there's very little discussion from policymakers on the fiscal front.
Jorge, part of my last response didn't get published. I was trying to say that there is really no one of Bernanke's stature in Canada who's trying to tell the government to go easy with expenditure cuts. Also, in case I wasn't clear in regards to the possibility of cutting interest rates, my view is that unfortunately this probably won't happen. As I was trying to explain in my last comment, the previous Bank governor, David Dodge, had to backtrack after having raised rates prematurely. In doing so, he lost a bit of his credibility. I suspect that the current governor would want to avoid a repeat of that situation.
ReplyDelete