Top of the Morning
In the Financial Times, former U.S. treasury secretary Larry Summers, who reignited discussions of “secular stagnation” in late 2013, examines looming supply-side constraints to economic growth and what to policy-makers can do to avoid them:
Assume (optimistically, given recent trends) that the labour force participation rate for workers of a given age remains constant, and that the economy creates 200,000 jobs a month. The unemployment rate would then fall to about four per cent by the end of 2016.
While such a low unemployment rate is conceivable, it seems much more likely that employment growth would slow at some point, because of rising wage costs or policy actions, or because employers have difficulty finding workers. Then, the economy would be held back not by lack of demand but lack of supply potential…
To achieve growth of even two per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.
On the Homefront
TSX 60 futures are sinking ahead of the open after the composite index gave back ground last week.
The loonie is falling this morning, dropping below 0.917 against the greenback.
CSeries soars once more. On Sunday, Bombardier (BBD.B) revealed that test flights for its new CSeries jet had resumed following a delay attributable to engine problems. According to the press release, “The CSeries aircraft’s entry-into-service remains on track for the second half of 2015.” Analysts at Goldman Sachs surely doubt this optimism, as they recently lowered their price target on the stock to $3, suggesting that the new line would likely be plagued by additional delays. Analyst Noah Popopnak believes the CSeries “will negatively impact Bombardier’s financial results and create negative catalysts for the next several years.” However, other firms such as Canaccord are considerably more bullish on the name, and suggest that Bombardier will benefit from a weaker Canadian dollar and think that this new jet line offers substantial upside potential for the stock.
Change atop Athabasca Oil. After (finally) completing the sale of its 40 per cent stake in the Dover project to PetroChina, Athabasca Oil (ATH) announced that president and CEO Sveinung Svarte will be retiring at the end of the month, but will remain as a member of the board. Tom Buchanan, the chairman of the board, will assume Svarte’s responsibilities. “Our company is now well funded and ready to deliver profitable growth under Tom’s guidance,” said Svarte. In a strategic update that was included in this announcement, the company noted that it will continue to look for joint venture partners to help develop its assets, and hiked its 2014 capital spending budget by $140 million.
Building permits on deck. At 8:30 a.m. (EDT), Statistics Canada will publish the value of building permits approved in July. The consensus estimate is for a decline of five per cent month-over-month, with weakness concentrated on the non-residential side, following impressive gains in the previous two readings. “While the housing market remains firm, building permits are expected to be anything but in July,” writes Bank of Montreal senior economist Benjamin Reitzes. “But that follows two months of double-digit gains, so there’s nothing to be overly concerned about.” In its latest communiqué, the Bank of Canada warned that housing activity is exceeding its expectations.
UPDATE: Building permits unexpectedly spiked, rising 11.8 per cent month-over-month in July, with intentions for multi-family homes making up the bulk of the increase.
Private-equity firm sues Canadian government. On Friday, the news broke that Quadrangle Group, the private-equity firm that invested millions to create Mobilicity, is suing the Canadian government for $1.2 billion. The plaintiffs claim that promises were made by Ottawa were broken, as they were not allowed to sell their spectrum to incumbent Telus even after the five-year moratorium on these sales had passed. “Canaccord Genuity analyst Dvai Ghose said in a research note the lawsuit appears to be another barrier to persuading new investors to take a chance on Canada’s wireless market,” writes the Globe and Mail‘s Christine Dobby.
Pick-and-pay on the way? The Canadian Radio-Television and Telecommunications Commission (CRTC) begins a two-week hearing this morning to discuss a variety of proposals, notably, the potential for consumers to choose the channels they’d like to receive (commonly known as “pick and pay”). Ottawa has made boosting choices for consumers a key priority; facilitating a switch from traditional bundled TV packages to pick-and-pay would arguably be its biggest victory in this arena.
Questions raised about latest jobs report. In the wake of August’s labour force survey, which showed that the economy unexpectedly shed a net 11,000 jobs, some economists are warning that these results may be flawed. This group includes Scotiabank’s Derek Holt and Dov Zigler, who pointed out a string of odd coincidences in July’s report before Statistics Canada revealed there was an error. The primary point of contention with August’s figures is that the decline in private sector employment and spike in self-employment were both monthly records. In spite of this, there’s still no reason to believe that the results of August’s labour force survey are more incorrect than usual.
Abenomics is sure to face renewed criticism following the latest string of weak data out of Japan. The island nation’s economy contracted at an annualized rate of 7.1 per cent in Q2 compared to the previous estimate of -6.8 per cent. That’s also tick worse than economists had forecast and its worst quarterly performance since the financial crisis, proof that the implementation of a sales tax hike in April took a huge bite out of the economy. In a separate release, Japan’s current account surplus for July was also well below the consensus estimate. The yen wasn’t rocked by the news, but continues to trade near six-year lows against the U.S. dollar.
The growing strength of the Scottish independence movement has pushed the British pound down to its lowest level in 10 months. The latest poll from YouGov showed that the group favouring Scottish autonomy had pulled in front by a slight margin, prompting Chancellor George Osborne to declare that the government would be announcing new powers for Scotland in order to entice its residents to vote “No” in the Sept. 18 referendum. Meanwhile, Andrew Morrison, an accountant and aspiring Scottish politician who favours unity, points out that YouGov’s recent polls have shown a surge in support for the “Yes” side that does not appear to be fully consistent with the results of other polling organizations. “You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine,” writes New York Times columnist and Nobel Prize-winning economist Paul Krugman.
China posted a record August trade surplus of $49.8 billion, nearly $10 billion above the consensus estimate, with exports up close to double digits while imports retreated modestly. As IG market strategist Stan Shamu observes, this development is good news for China, but bad news for Australia. “China’s imports of key commodities for Australia continue to decline,” he writes in a note to clients. “In particular, iron ore imports into China dropped significantly by both volume and value. This probably confirms the sharp drop we’ve seen in iron ore prices recently, as limited restocking is taking place.
Today’s awful European data point is brought to you by Sentix, whose investor confidence index plummeted from 2.7 in August to -9.8 in September. The consensus estimate called for a much more modest moderation to 1.4. “This is all the more noteworthy as during Mario Draghi’s presidency the ECB has managed on several occasions to turn round investors’ economic expectations,” writes analyst Sebastian Wanke. “Now, this does not seem to work anymore.”