...against fictions and other tall tales

Wednesday, 31 August 2011

Canada's real GDP declines

Canada's second quarter economic accounts were released today. Real GDP declined 0.1%, largely due to the 2.1% drop in exports (see Charts 1 & 2). Also, business inventories have increased, income growth has slowed and goods production has decreased.

Chart 1 (Source: Statistics Canada)

Chart 2 (Source: Statistics Canada)

Honestly, there isn't much in these accounts to be optimistic about. That said, I still hold a glimmer of hope that business investment might be able to sustain economic activity for the next few quarters. Here are a few excerpts from the summary prepared by Statistics Canada:
Business investment in plant and equipment continued its upward trend, rising 3.7% in the second quarter, a sixth consecutive quarterly increase. Machinery and equipment has contributed the most to growth in overall investment in plant and equipment in four out of six quarters[....]
Government expenditures on goods and services grew 0.4%, after remaining unchanged in the first quarter. All levels of government increased spending on goods and services this quarter[...]

Consumer spending on goods and services rose 0.4% in the second quarter. Consumers increased their purchases of durable goods (+0.4%), as well as services (+0.8%). Purchases of non-durable goods edged down 0.1%, while purchases of semi-durable goods declined 0.8%.
Other than for the positive trend in business investment, it's clear that the second quarter of 2011 was a disappointment. This is definitely not the time to be cutting government expenditures. Instead, federal and provincial policymakers should be drawing up plans to inject additional stimulus into productive, job creating initiatives.

As for Canada's exports, let's face it, there is little hope that these will increase significantly. The strength of the Canadian dollar combined with the weak economy of Canada's main trading partner, the United States, make that goal close to impossible to achieve. A repeat of Canada's export boom in the mid-1990s is highly unlikely (see here). Also, it's simply not a sensible approach right now to expect consumers to be the source of economic growth. As I've explained in previous posts (here and here), the household sector in Canada is currently in the process of accumulating less debt. And that is a good thing given that household and personal indebtedness are currently at worrisome levels.

Therefore, the best bet for policymakers right now would be to abandon plans to cut public expenditures and ensure that business investment continues to expand.

For more on how to achieve the goal of increasing business investment, please refer to my previous post entitled "The right way to balance the budget: target the corporate surplus, not the government deficit".


  1. Hi Circuit,

    Canada's balance of payments for Q2 was also released recently.


    and has widened to $15.3 billion (in Q2)!

  2. I meant the deficit widened.

  3. @circuit...absolutely the wrong time for GoC to start cutting expenditures.

  4. Thanks Ramanan for the head's up and for providing the link. I take it you too are keeping track of Canada's imaginary (or fictional!) export growth potential. As you probably know, Canada's 3rd quarter is usually worse, so stay tuned for more. As another follower (B.Swells) would say: watch out for the squall in a few months.

  5. Circuit
    My last call before the meal. The news is not good in Canada. I just signed a comment in TC; Keynes was a Treasury man. then they ruled. In Canada, Treasury does not rule!! Of course, times have changed. That's another discussion, but interesting. BoC has really little leeway, regardless of what anyone says. They will drop rates, extend dates, 'hope' the loonie weakens to stimulate exports and improve the accounts. The gap with the US is fixed. The Fed is going nowhere-maybe they'll extend dates. Otherwise, BoC has full discretion. It doesn't have to look south. It only has to hear the indicators from the south. QE3? Unemployment is the only figure that counts in the US. Inflation is dead; so raising targets is a Marilyn Monroe hologram. The markets know it. New Orders and Housing for both countries is crucial. BB and TG are a nice guys; no Volckers!!! Volcker would wrestle Congress to the ground. No one on the Avenues can replicate.
    It's all fiscal from now on. BoC will buy time hoping things improve in the US; further hoping that Parliament resumes and sets a timeline to implement some fiscal stimuli. (plural)Carney is in a tough position. I don't envy the man.

    You registered: the squall is coming. You said it a while back.

  6. SIR, as always an excellent, well thought out article and I appreciate the focus on Canadian economics. Your entries are truly a pleasure to read, Circuit. You are becoming quite the economics star on the blogosphere! Cheers

  7. Keep'em coming, B. My money is on rates staying put. Not sure Mr. Carney wants to back track the same way his predecessor did. It's just a hunch, But I think it wouldn't be a bad idea. Stimulus? You bet. Inflation dead? You bet. Wouldn't increasing operating target work on the expectations channel? Isn't that the mainstream view these days? BoC is big on that stuff. Love the hologram analogy. Hope we didn't delay suppertime too much.

  8. @SIR: Thanks very much for the encouragement! I'm glad my views and analysis are of interest to you. I'll try my best not to disappoint! Best.

  9. @circuit: IE targets are life beams for wage settlers and product pricing-references for corporate strategists to soothe Board governance. Central Bank use them, but they are not primary operatives. The main issues are consumption and investment. The correlation of the first is the unemployment level; the second is the demand factor ensuing. Lags (18-24mths) on IE are long and any offnote can trigger a reversal. Markets know this. They use IE to warrant short term tactics-sometimes longer dates get priced accordingly, but in the end, it's still muddy water you're looking into. Naturally, someone will comment that all economic forecasts are muddy. I like to think that BoC and Fed policy prefer to avoid this last transmission channel when resolving MP. I believe it's an MM hologram. As far as Mr. Carney is concerned, he has place to evolve by devolving existing parameters slowly.

    Check this coordinate: 20°56′N 156°15′W / 20.93°N 156.26°W / 20.93; -156.26; it's nothing like the squall that's coming. Surfing that, requires skills and luck. That's without Europe. Chairman Bernanke has been doing a good job recently regardless of what some detractors in Government and media suggest. He definitely got rid of the skeletons in his closet, and there were some nasty ones. If he can get everyone through this, he'll make the pantheon with Volcker.

  10. Your column 'Best way to balance the Budget..." is good staging for Canada. In the US, apart from the very nature of the beast-the beast is too bi-partisan, it would never get started. There's little left in the US for monetary policy, rates are quasi-zero, dates are extended, there's still QE in the system to circulate; fiscal policy has to come to the fore. Same for Canada. If BoC drops its rates, that could ease your dollar. But Carney will not act quickly. It may create unnecessary caution, and send an incorrect signal.

  11. Good post, circuit. I think it will be tougher for BoC than FRS. On taht front, the consolation is that your baking system is more stable and properly regulated.

  12. i agree with the previous comments. the danger is to consider the theoretical position that since MP will exhaust itself soon, like in the US, and since there's only so much you can do with fiscal policy, that Parliament expediently conclude that a level of unemployment, higher than the past is now the NEW Norm. giving unemployment a structural property is not only philosophically abhorrent, it is economically unacceptable unless we decide that economics has now become the handmaiden to economic euthanasia.

  13. I can't disagree with manfredo's comment that emphasis should be on fiscal policy in the US (I'd say the same goes for Canada too, as my column indicates). The problem I see is that the case for more fiscal stimulus doesn't seem to be given much place under consensus theory. It's like there's this gap in the theory that says if monetary policy doesn't work, then the problem has to be structural.

    And this goes to the core of JH's comment, which is that, when MP doesn't work, trade or labor market factors are claimed to be at fault. Just yesterday, the Richmond Fed released a paper suggesting that the natural rate of unemployment in the US is up. Accordingly, the policy options available are limited to supply-side remedies, training, etc. FP isn't even a consideration. http://www.richmondfed.org/publications/research/economic_brief/2011/pdf/eb_11-09.pdf

    I'm quite perplexed by the case of the US because when I listen to Bernanke, I interpret him as telling politicians that it's really up to Congress. Or to use a sailing analogy, I see Bernanke admitting he's stuck in a 'wind hole' out there on the open seas. Maybe I'm reading him wrong. But he's been giving pretty obvious hints to Congress since at least last fall. This is from a BB speech dated Nov 19 2010:

    "In its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable. Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve."

    Time for TG to step up.

  14. Circuit. I read the Richmond piece. It is a valuable observation that policymakers and entitlement scholarship should bookmark. It is an excellent work for the subset.

    Unless I read jh's (nod) comment too aggressively, I retain that what is being challenged is the unemployment prescriptive or 'normative' as some suggest of the present economic model. These are not only mismatch issues, as some labour economists propose. The underlying growth considerations ensuing and affecting industrial policy are enormous for R&D, technology through to the smokestack, and related secondaries. I was shocked at jh (nod!!) voicing and reminding us of the imminent danger of the abhorrent concept of economic euthanasia, but in fact, @ to this subversive ideology, many must be sacrificed, lest suffer, for the betterment of the Most. It is a vision that is diametrically opposed to the constitutional structure of the country and of humanity. The premise is faulty, and it is the primary role of fiscal policy! to mend the fabric of our values, and the mission of economics to rethink its role in helping to define our societal values.
    Leadership, in squalls, can come from the Pres. and the WH, but Congress must show sensitivity and be receptive, as too, in Canada. I daresay that Mr. Geithner will be challenged, will have little flexibility in formulating appropriate solutions to 'take the day'. Mr. Geithner is not to be envied. This is not a reasonable Congress; it has forgotten the core of its instruction. This is not a 'wind hole'-the Fed is not a competitor nor the only solution(mi nod!!) It has taken the best of winds and did well. But one does not sail into a squall that can be avoided. (nod swells) Great leadership must steer a proper course. There is still time to sway, but Mr. Eric Cantor, Mr. Perry and the likes must resist that the United States is a virtual terrain for a role-playing-game. Thank goodness Mr. Romney abstains.
    The read is by BB June 14, 2011. This is an important statement laying out many normative issues and subtly underscoring the policy-ops. There is absolutely no Fedspeak in that document. It is a tribute to a great institution that is the Federal Reserve System.
    These are great squalls, but then the FRS is a great boat, and the USG a great ship.

  15. @jorge. That was a very strong political statement. Are you suggesting that Leadership to resolve the unemployment problem can only come from the Pres and Congress, and policy only issue therefrom.

    Secondly, circuit introduces a 'wind-hole' analogy, I assume in the context of @swells use of the squall imagery. Do you think the Fed and the BoCanada are in a wind-hole.

  16. Why does everyone view the state of the economies as an oncoming 'squall'. I consider the squall to be a foot away.

  17. @coleen E.: After watching the Europeans unload today, you may be right. But then you would have been right for the wrong reasons. I think most observers, except some very sharp luminaries felt that Europe was insulated. That's the MM hologram at work (nod swells)

    @circuit: The FRBR report had supply-side facets, but as J said, these are subset (ss-econ) considerations. These are not policy warrants; they are traditional options. Pragmatically, these types of challenges do have ss-type solutions. That is far from suggesting macro policy options.

    @kp: they're only in the wind-hole if you consider Washington to be the wind. Almost all the comments in FRB support fiscal initiatives. I haven't seen one commending fiscal consolidation (austerity etc), although some type of fc in some cases is effective. One then assumes that fiscal policy in the form of G-spending and as circuit suggested taxing corporate entities is optimally effective.

    @circuit: As to consensus macro-theory, I assume that is what you refer to and not some form of structural functionalism defining societal and institutional relationships, I venture to caution. Goodhart held that view. Fontana has an interesting 'take' on policy options for CMT, and I repeat interesting. I assume that since you introduce the unemployment issue, Fontana is best read.
    J, Craw and swells are endorsing that non-structural consideration and making a prescriptive policy claim that should entice and motivate Washington. It is not the Fed that sponsors traditional NCM as now called, it is Washington that perceives the policy bias as inherent to the Fed rather than a reflection of optimal expectations-very lucasian. As j and gc nuance: the policymakers, (inc Treasury) are aware of these challenges, and the BB statement of June 14, 2011 is a position paper, not a white paper....et al. Now a position paper can 'transform' into a policy paper.
    Finally, FRA stipulates that the objectives of monetary policy (sect 2a) are 'to promote maximum employment'. I think the consensus of your comments endorse this point.

  18. @Jorge: I really don't see how the Fed could provide any further stimulus. I tend to agree with Manfredo that there's little left with respect to monetary policy (and here I define MP to include such actions as QE, credit easing, etc). Isn't Japan evidence enough that further CB action is inadequate (though, the case of Japan also does beg the question as to whether anything less than a massive fiscal action can help)? I liked your comments on the leadership issue. I'll simply add that, from the standpoint of accountability, many in the public seem to believe that it's the CB that is responsible for getting the US out of these economic doldrums. This dynamic seems to provide a convenient cover for those elected officials in Congress eager to abdicate their responsibility in regard to economic policies.
    @KP: Call it a lull, wind-hole or whatever, the Fed can't get unemployment levels to budge significantly. The previous fiscal stimulus kept employment levels from rising any further. To get them to actually fall will take significant, sustained stimulus. Romer was right. Too bad they didn't follow her preferred approach back then.
    @Coleen: I used the analogy mainly in reference to the upcoming widening of Canada's current account deficit. That should take a few months (yet, it's getting closer every day). But you are right that, on the whole, we're nearing a difficult period ahead.

  19. Circuit, Where does anyone suggest that the Fed can provide further stimulus. J's statement that the Fed is not in a wind-hole I think implies that if there is fiscal policy, then the Fed can continue promoting as MI says, @FRA2a monetary complements. Coleen. no squall yet; MI said 'you may be right' Watch old-timers with words. Every word! It's like when John Carville says 'I don't know if...' means 'I know that...'speaking slowly lol! Anyone read Krugman's Fatal... I'm sure I received the wrong version.
    Tomorrow's market will be a metal's and USD's rush

  20. @swells when you say metals rush, what do you mean? The USD I can see.
    @manfredo specific cits on Goodhart and Fontana

  21. Thanks for the comments.
    @MI: Regarding the FRBR report, I now appreciate its limited scope and related policy implications. I think the report is interesting. But to clarify, part of the reason why I discussed the report in my Sept 2 post was simply to add to JH's comment on the risk of the situation being labelled the new norm. I wonder if such findings could be used by opponents to support the existence of such a new norm.
    @B: I misunderstood Jorge's comment regarding the wind-hole. I was probably Fatally Distracted while reading that sentence.

    Lucky for FRA2a. The employment mandate of in the Bank of Canada Act is now overshadowed by inflation targeting.

  22. @kp: Pardon me. I should comply with the format's guidelines (with which I entirely concur and most of all appreciate.) Goodhart is the 2005 Foundation paper, which is basically a critique of the microfoundations of NC macrotheory. Fontana is Giuseppe Fontana (2009), part of the Levy WP, on NCM, a synoptically excellent paper.

    @kp: I will also interject for swells. Swells wrote quite correctly the metal's (singular) rush, i.e. gold. Somewhat idiosyncratic, i agree, and misleading. It could have been copper.

    @circuit: Quite to the contrary. You highlighted the rub. Very significant. But the FRBR, as all other members of the FRS are exponents of freedom of speech and sometimes, somewhat esoteric, not in a straussian sense of course, recognizing that the readership is professional but also political. Supply-side remedies are a matter-of-fact subset category for most; for the political elite, they are a quicker grasp. In this case, the Supply-s facet is a no-brainer, but it is not intended to entail macro considerations. I think most nod your FBRB recall. To your second point, some in Congress think of taxes and deficits. It is a mindset; it is very difficult to untangle the perception that an economy works only in that accord.
    As to your distraction, most were also distracted but not fatally. The appropriation of the argument on deficits and spending is tenuous.
    On the BoC, that's a very delicate matter for some very touchy players.
    Many misunderstand FRA2a and scan over the word promote; others emphasize the price stability at the expense of employment; others underestimate maximum, some realists and rationalists equate maximum with optimal. The permutations of the components is very contextual. Some delve into its hermeneutics. The matter is very political and hence very relative.

    On the wind-hole. I had same reaction. You understood well. But I think j's intention was twofold- shifting imagery from the single sail boat to the Classical Metaphor: Ship of State. Reading J., he was being very cautious with sensitive political rhetoric.

    What happens to Canada if Europe dips? Hypothetical of course.

  23. @circuit & MI on the wind-hole and other: great stuff. MI was finer and more eloquent than I can be-much depth there. In any case, you are reading the macro correctly. You seemed puzzled by my endorsement of June 14, 2011 FRS statement by BB. Check the title and abstract; so too, in the title to every subsection, one word stands out. It's BB's style; he's not the orator and communicator that PV was. He's a very good writer, as is the staff, and somewhat reserved and courteous. Once one learns how to read him, one appreciates his craft. On the Ship of State and Leadership, I credit Plato's Republic VI (I think)

  24. @circuit: on the BoC, very smooth observation. controversial. BofE (BEA98) has nuanced mandate (save your decoding). in the preamble of BCA one finds ancillary mention tail-ending, but it is, one deems, intrinsic to the notion of 'ECONOMIC LIFE of the nation'(my caps). BoC in exercising its mandate, acts as a mitigating agent. the text stipulates via its influences. then the all-encompassing 'to promote the economic and financial welfare of Canada;' the wherefore and the why is nicely presented in JMCB '73 by ascheson and chant (nod)as to goal mandates; in JEH bordo & redish (nod) as to the intent and constitution of the bank itself. two great reads. wait for the surf on this one lol. FRS and BoC are fine boats. Actually, all CB's are fine boats: BoJ,BoE,RBA et al..

    @mi: canada won't sink; it'll float heads over others.

  25. @jorge: you sound like Talleyrand.
    @circuit: I concur with MI's ref. You are correct (nod) on fiscal absence. BoC is a great but strange construction. Since '91, it operates on a mandate that is jointly reviewed every 5 years. Last Nov 2006, expires Dec 31,2011. So far, and far it is, it acts on ICT. Recently, they've been researching price-level targeting PLT. The biggest consideration, apart from methodological considerations is that PLT endears a welfare model. And then, asset price tactics-what do you do with large asset price shocks,disturbances, misalignments...do you just employ as indicators and in the end, all this does very little for unemployment. Nothing will change. Parliament, even with a majority, hates venturing out into the unknown. (research is still ongoing).IT is a proven cane but not for a lame duck.

    In all fairness to the BoC, Canada is a constitutionally difficult consensus of disparate realities and aspirations to assemble in terms of MP vis-a-vis unemployment. But circuit,(nod!!!) GRIZZLY! you are there. Gov. Carney is not to be envied. Unemployment is all fiscal in Canada.
    Hear the kettles, I do. Gold and USD up, until SNB came in. She'll take ALL (juo) the market can give her. lol. to protect the swissie, and swiss exports.
    @JH (nod) subtle cit on B&R.
    @MI: The Old Dame dips, Loonie weighs a ton, and c/a chokes in less than 6mths. At least PM Harper did a decent job on the public-x and related. (JH nod).
    Kettles are boiling.

  26. @Jorge: I'm curious about your fascination for BB. I know Bernanke (Prof?) is sensitive to the fiscal components of MP. This much I can appreciate (See "Bernanke's paradox"...by Tcherneva). But the June 14 2011 was not my favorite. However, I was pleasantly surprised by the fact that the word inflation doesn't appear once. At the time, I interpreted that speech mainly as a last ditch effort by BB to expedite the preparation of a plan to cut expenditures (as requested by S&P) in light of the possible (now realized) downgrade.
    @KP: I'm familiar with Fontana's work. Very good. I would compliment that reading with Seccareccia's INET paper (attached to my April 17 2011 column). It includes visuals and incorporates fiscal policy. (See pp.5-12). As for Goodhart, it's title is "Continuing muddles of monetary policy...". A must read. Apparently, MI and I share the same library. In my case, these papers are always at arm's reach. Next to Moore 88, Wray 98 and Kaldor 86.
    @JH: Thks for the citations. "Why did the BoC emerge.." and "Bureacratic Theory..." are good articles. The Agreement trumps the BCA's preamble. Corporate communications confirms it. After all, the BoC's legal team would have had to approve current comms strategy emphasizing that the BoC's mandate is "price stability and inflation at 2%". Solid footing. Controversial? Yes. I think the target should be raised/relaxed. Baker, Krugman, Blanchard, Prof. Bernanke (pre-governor) all seem to agree. (See my march 3 2011 column...or not since Swells beat me to the punch).
    @Swells: Canada as "disparate realities and aspiration" affecting MP. Age-old question. Interesting debates on that in the past. I appreciate the discussion on PLT. If the BoC was serious about such a move, wouldn't it have implemented it back in 2009-10 when inflation was at its lowest The associated cost/impact of implementing PLT would have been optimal.
    @MI: Agree with JH. It would have to take a pretty big dip for the EU to affect Canada to that effect. As Swells mentions, federal stimulus was decent (see my comments to June 19 2011 column). Though the impact on the current account is interesting (Swells nod). But I'm not sure a weak Euro (and ensuing impact on Canada's exports) would be enough to outweigh consumer, business and govt spending combined.

  27. 'trump' is a loaded concept. i consider the '91 JA an historical necessity. it's supposed to remind the ... that fp is not BoC's jurisdiction or remind ... that Parl. has responsibilities. anyways no need to elaborate on that, you're aware. no comment on the mid-point, it'll depend on fiscal landscapes and skyscapes. as to the plt, it requires more research (nod swells). as you say there will be no export drive, but the challenge is what's the engine.
    @some readers: B-G ideas, as you say, are embedded in fed and many other cb strategies.

  28. @swells: You always had gargantuan judgement regardless of your namesake.

    @circuit: I will try to appease your curiosity. 'Fascination' would be appropriate if it reflected the recognition of unexpected mediocrity from a presumed brilliant mind, or unexpected brilliance from a presumed mediocre. In the case of Chair Bernanke, I will prefer to admiration, and as time unravels, greater admiration in the face of the challenges.
    As to the popular opinion that the Chair was playing up to the Agencies, or the Chair was covering his back or flank I would retort that the Fed plays up to no one, and the Fed was signalling from the vanguard, respectively. The RA's usually GET their Q's. I suggest again that Chair Bernanke did with one word what Chair Volcker would do with his cigar when facing Washington. I will admit to your readers not as effectively, at this moment (yet anticipating the benefit of time). However, I may become fascinated if Chair Bernanke cannot remain steadfast in steering his boat from his detractors and uber-distractors: Perry & Co and idealistic liberals & Co.

    An anecdote: Chair Volcker never faced the Press-he looked beyond them, or eyed them down. Unfortunately Chair Bernanke still slightly faces the Press. I don't think eyeing down is intrinsic to his Chair. As to Prof. Tcherneva's she will be overlooking the sound conclusions of her tactical paper when she writes her definitive work on the period and broadens the work's prospective. (nod GC 11-08-21; 20:xx)

    @circuit 'I'm not sure a weak Euro (and ensuing impact on Canada's exports) would be enough to outweigh consumer, business and govt spending combined.' This is an excellent caution for industry and commerce-a flare for good politicians to consider. A good ship can sink quickly esp if the small hole is at the right spot.

    @crow: skyscapes I concur. They're forever changing. Thank heaven for landscapes.

  29. @j: And you methuselahian vision, but you have to be keep your focus on the keyboard, not in the garden. It's 'craw', not 'crow' nth time.

    Nod to all on Canada, although I feel that some sectors are very vulnerable if the eme collapse quickly. The possible externalities are indeed concerning.

    @circuit. you've got NA covered. Unemployment is the problem.
    Early and out lol

  30. @craw 'B-G' is a contraction I don't know.

  31. Pardon me JH.
    Fine swells.
    @kp B_G: Bernanke-Gertler (Ben and Mark respectively) sometimes vice-versa

  32. what did you think of the speeches by Messrs Obama and Bernanke?

  33. BB's was good, especially the last paragraph. Obama's first half was what I wanted to hear. As for the second, I fully appreciate its necessity for securing some form of support from GOP members.