The recent investment-friendly decades of unusually low interest rates are — and sadlly will remain for the foreseeable future — only a pleasant memory. While the world economy has many moving parts that do not always appear to be operating in synch, taken together these are difficult times for investors and indeed, for ordinary people trying to make ends meet..Let's start with the banks and inflation..During the first three months of 2023, most central banks increased interest rates at an unusual pace. This discouraging news was exacerbated by the failure of the Silicon Valley Bank, while oil and natural gas prices collapsed for different reasons, but both partly in response to a weaker economy..Surprisngly however, given the rapid and steep interest rate increases, economic conditions have remained stronger than anticipated and inflation remains “sticky” in many countries. Indeed, according to the Wall Street Journal “data from the US, China, and Europe have shown surprising vitality.” And so, recognizing a roughly 18-month lag period, and a set of unusual or unique dynamics, most central bankers have minimized their most recent rate increases. .Among the unusual dynamics, the inverted yield curve continues. Inversion is when a yield curve graph of (typically) government bonds shows the shorter term bonds offering a higher yield than the long-term bonds. .This usually suggests a recession, yet that possibility is moving out in time. As the WSJ puts it, “The most anticipated recession in history is yet to materialize.".Given the significant stimulus checks during COVID and continued liquidity increases in the US, the same WSJ article suggests “there is far too much money floating around.”.This cycle is also different because supply constraints, not just demand, are putting inflationary pressure on costs. This COVID induced supply-chain-collapse is slowly sorting itself out..The shortage of workers, another inflationary trigger, is now showing signs of softening in the private sector. The US Department of Labour reported 11 million available jobs in December, 50% above levels in February 2020, preceding COVID. Energy costs, one of the drivers of the surprisingly rapid increase of inflation, have moved strongly in the opposite direction, more like a collapse..“We are going through the second, third, and fourth round effects of the initial savings spurred by all these transfer payments during the pandemic,” said the chief global strategist at BCA research in Montreal. This has been, in part, a credit-fueled post-pandemic recovery. But, the failure of the Silicon Valley Bank has added to further economic uncertainty just as central bankers are wondering if it is time to pause and/or reduce rates..So much for the home front. Elsewhere in the world, the current growth target in China of five percent is the lowest in 25 years. There are many who look at the flight of capital resulting from the renewed primacy of the communist party over free markets. There are suggestions that the Chinese numbers understate the impending demographic crisis, and western pushback to unacceptable behavior is strengthening. The extraordinary China story may, after several decades, be winding down..After 10 consecutive monetary increases in Australia, the robust consumer price-index increases are now slowing, a common global theme. The Reserve Bank is now guiding moderation. It remains to be seen whether Australia continues its unprecedented long period without a recession..Another WSJ article suggests “2023 could be the year India finally emerges as a global economic heavyweight.” This is the result of “the cumulative effect of solid economic growth, microeconomic reform, and a changed geopolitical environment”, all furthering the growing importance of India..Its growing population will soon surpass China’s, given the latter's shrinking birth rate, and many prognosticators believe that inevitably India will surpass China's economic output. According to the IMF, India's annual economic growth will average 6.5% this year, the highest among 30 major economies..More directly impacted by Russia's war on the Ukraine and subsequent reactions, Euro zone inflation eased in February for the fourth straight month. Strikes and labour unrest across the region are pushing wages higher and damaging output. Expectations are for continued increases in interest rates for the foreseeable future. Yet is important to note that its key bank rate is only 3%..Price increases above 10% in February in the United Kingdom indicate that inflation “is proving stubbornly high.” There will be an economic and perhaps a political price for the Conservative government that has been anything but conservative. The renewables overreaction to the purported climate crisis and resultant energy shortages have led to Britain’s first new coal mine in decades..According to the WSJ, in the United States “inflation eased in February but remained stubbornly high… inflation of 5.2% over the last three months at an annualized rate is well above economist’s expectations”. The Fed raised rates in March again for the ninth-straight time since last March, but the two most recent only 25 basis points, half what was predicted. The range is now 4.75%-5.0%, and the Fed is signaling moderation..Again, according to WSJ “the American manufacturing sector is starting to show signs of weakness after two years of strong growth.” Spending at stores, online, and in restaurants also fell in February. New export orders have been contracting for seven straight months; exacerbated by the stronger US dollar, exports become more expensive..We have written in the past about the importance of monetary and fiscal policy working together. The misnamed Inflation Reduction Act, at an announced cost of $391 billion will ultimately cost $1.2 trillion according to Goldman Sachs..US economic leadership was in part the result of consumers exercising their free will and pursuing their self-interest. Today the government takes consumer/taxpayer money and directs behavior by way of subsidies on the questionable supposition that their superior beliefs are more valid than the rights and choices of its citizens. Over the long term, this will not end well..Finally back home in Canada, Phillip Cross, a Senior Fellow at the Macdonald-Laurier Institute, says real GDP growth in Canada has stalled, rising only 12.3% over the last eight years. Real per capita GDP has grown “a microscopic 0.1%, well below the 4.1% recorded in the US over the same period.” One influence is the fact that Canada's population has grown at a higher rate somewhat skewing per capita numbers..More concerning is lackluster business investment and exports. Cross says “both have receded since 2015,” (the year Trudeau took power.) “We should be analyzing the alarming and persistent decline of business investment in Canada and the loss of our export competitiveness. At some point, Canada’s governments have to end their fixation on unrelenting stimulus to short-term demand and focus on the determinants of long-term growth”..He reminds us of the OECD projection that, of the almost 40 leading global economies, Canada is projected “to have the slowest increase in real per capita GDP growth through 2060.”.After promising a surplus by 2027, Minister of Finance Freeland no longer even pretends to moderate spending and address the growing federal debt. She has further entrenched spending — health care, childcare, a new dental care program and a promise for “pharmacare legislation”. A Fraser Institute study earlier this year indicated that combined federal and provincial debt in our country has almost doubled from $1.1 trillion in fiscal year 2007/8 to a projected $2.1 trillion this year. This, before recent budget additions..The $491 billion budget “invests” heavily in green economic transformation in a hapless attempt to match the unprecedented US government intervention to reshape its economy. This from our “friend”, President Biden who twice cancelled approval of the Keystone XL pipeline..The sobering growth numbers are perhaps part of the logic that has led the Bank of Canada to be the first G7 Country to pause its interest rate increases, currently at an overnight rate of 4.5%. The Bank of Canada noted that “data last week showed labour productivity in Canada fell for the third straight quarter”, another dynamic supporting the pause announced after its mid-March meeting..On the other hand, there are continued inflationary pressures, including especially borrowing to finance the budget. Federal government debt results in the printing of money and higher inflation. Also wage growth, at 5.4% year over year, now exceeds the Consumer Price Index increase of 5.2%. Inflation may remain sticky..The weakening Canadian dollar makes imports more expensive and reduces our standard of living. Let us remember that in January 2002, the Canadian dollar traded below $.62 – this can happen again..Ever more government spending, more taxes again in the new budget, divisive policy and constitutional issues, and growing debt are do not build confidence in the future..To sum up, the World Bank is warning of a “lost decade”, saying that potential global growth will slump to a three decade low of 2.3% a year through 2030. This compares two 2.6% for the previous decade, and 3.5% from 2000 to 2010. The IMF, in its latest World Economic Outlook, sees the global economy growing at 2.9% this year and 3.1% next year..More revealing is the almost double rate of growth in emerging markets and developing countries. Increasingly, ever more interventions by advanced economy governments discourage capital investment, as do regulation and taxation. These are among the reasons less mature economies are dramatically outperforming the developed world. Taking ever more money from its citizens by way of taxation, the real issue is what governments then do to us with our money. There are reasons Canada’s economic performance has declined..Shorter term, having missed the inflationary cycle and describing it as “transitory”, central bankers have hit hard with rapid and significant reductions of liquidity creating upward pressure on interest rates. The early response is mixed - falling inflation — but also indications that rates will likely remain above target ranges for longer than hoped..Underlying dynamics described above suggest that the risk of higher interest rates for longer may also increase the likelihood of recession, or worse, stagflation. The uniqueness of our current economic circumstances, and the uncertainty described above, will continue to dissuade private capital investment. The Bank of Canada can now only pause and hope.
The recent investment-friendly decades of unusually low interest rates are — and sadlly will remain for the foreseeable future — only a pleasant memory. While the world economy has many moving parts that do not always appear to be operating in synch, taken together these are difficult times for investors and indeed, for ordinary people trying to make ends meet..Let's start with the banks and inflation..During the first three months of 2023, most central banks increased interest rates at an unusual pace. This discouraging news was exacerbated by the failure of the Silicon Valley Bank, while oil and natural gas prices collapsed for different reasons, but both partly in response to a weaker economy..Surprisngly however, given the rapid and steep interest rate increases, economic conditions have remained stronger than anticipated and inflation remains “sticky” in many countries. Indeed, according to the Wall Street Journal “data from the US, China, and Europe have shown surprising vitality.” And so, recognizing a roughly 18-month lag period, and a set of unusual or unique dynamics, most central bankers have minimized their most recent rate increases. .Among the unusual dynamics, the inverted yield curve continues. Inversion is when a yield curve graph of (typically) government bonds shows the shorter term bonds offering a higher yield than the long-term bonds. .This usually suggests a recession, yet that possibility is moving out in time. As the WSJ puts it, “The most anticipated recession in history is yet to materialize.".Given the significant stimulus checks during COVID and continued liquidity increases in the US, the same WSJ article suggests “there is far too much money floating around.”.This cycle is also different because supply constraints, not just demand, are putting inflationary pressure on costs. This COVID induced supply-chain-collapse is slowly sorting itself out..The shortage of workers, another inflationary trigger, is now showing signs of softening in the private sector. The US Department of Labour reported 11 million available jobs in December, 50% above levels in February 2020, preceding COVID. Energy costs, one of the drivers of the surprisingly rapid increase of inflation, have moved strongly in the opposite direction, more like a collapse..“We are going through the second, third, and fourth round effects of the initial savings spurred by all these transfer payments during the pandemic,” said the chief global strategist at BCA research in Montreal. This has been, in part, a credit-fueled post-pandemic recovery. But, the failure of the Silicon Valley Bank has added to further economic uncertainty just as central bankers are wondering if it is time to pause and/or reduce rates..So much for the home front. Elsewhere in the world, the current growth target in China of five percent is the lowest in 25 years. There are many who look at the flight of capital resulting from the renewed primacy of the communist party over free markets. There are suggestions that the Chinese numbers understate the impending demographic crisis, and western pushback to unacceptable behavior is strengthening. The extraordinary China story may, after several decades, be winding down..After 10 consecutive monetary increases in Australia, the robust consumer price-index increases are now slowing, a common global theme. The Reserve Bank is now guiding moderation. It remains to be seen whether Australia continues its unprecedented long period without a recession..Another WSJ article suggests “2023 could be the year India finally emerges as a global economic heavyweight.” This is the result of “the cumulative effect of solid economic growth, microeconomic reform, and a changed geopolitical environment”, all furthering the growing importance of India..Its growing population will soon surpass China’s, given the latter's shrinking birth rate, and many prognosticators believe that inevitably India will surpass China's economic output. According to the IMF, India's annual economic growth will average 6.5% this year, the highest among 30 major economies..More directly impacted by Russia's war on the Ukraine and subsequent reactions, Euro zone inflation eased in February for the fourth straight month. Strikes and labour unrest across the region are pushing wages higher and damaging output. Expectations are for continued increases in interest rates for the foreseeable future. Yet is important to note that its key bank rate is only 3%..Price increases above 10% in February in the United Kingdom indicate that inflation “is proving stubbornly high.” There will be an economic and perhaps a political price for the Conservative government that has been anything but conservative. The renewables overreaction to the purported climate crisis and resultant energy shortages have led to Britain’s first new coal mine in decades..According to the WSJ, in the United States “inflation eased in February but remained stubbornly high… inflation of 5.2% over the last three months at an annualized rate is well above economist’s expectations”. The Fed raised rates in March again for the ninth-straight time since last March, but the two most recent only 25 basis points, half what was predicted. The range is now 4.75%-5.0%, and the Fed is signaling moderation..Again, according to WSJ “the American manufacturing sector is starting to show signs of weakness after two years of strong growth.” Spending at stores, online, and in restaurants also fell in February. New export orders have been contracting for seven straight months; exacerbated by the stronger US dollar, exports become more expensive..We have written in the past about the importance of monetary and fiscal policy working together. The misnamed Inflation Reduction Act, at an announced cost of $391 billion will ultimately cost $1.2 trillion according to Goldman Sachs..US economic leadership was in part the result of consumers exercising their free will and pursuing their self-interest. Today the government takes consumer/taxpayer money and directs behavior by way of subsidies on the questionable supposition that their superior beliefs are more valid than the rights and choices of its citizens. Over the long term, this will not end well..Finally back home in Canada, Phillip Cross, a Senior Fellow at the Macdonald-Laurier Institute, says real GDP growth in Canada has stalled, rising only 12.3% over the last eight years. Real per capita GDP has grown “a microscopic 0.1%, well below the 4.1% recorded in the US over the same period.” One influence is the fact that Canada's population has grown at a higher rate somewhat skewing per capita numbers..More concerning is lackluster business investment and exports. Cross says “both have receded since 2015,” (the year Trudeau took power.) “We should be analyzing the alarming and persistent decline of business investment in Canada and the loss of our export competitiveness. At some point, Canada’s governments have to end their fixation on unrelenting stimulus to short-term demand and focus on the determinants of long-term growth”..He reminds us of the OECD projection that, of the almost 40 leading global economies, Canada is projected “to have the slowest increase in real per capita GDP growth through 2060.”.After promising a surplus by 2027, Minister of Finance Freeland no longer even pretends to moderate spending and address the growing federal debt. She has further entrenched spending — health care, childcare, a new dental care program and a promise for “pharmacare legislation”. A Fraser Institute study earlier this year indicated that combined federal and provincial debt in our country has almost doubled from $1.1 trillion in fiscal year 2007/8 to a projected $2.1 trillion this year. This, before recent budget additions..The $491 billion budget “invests” heavily in green economic transformation in a hapless attempt to match the unprecedented US government intervention to reshape its economy. This from our “friend”, President Biden who twice cancelled approval of the Keystone XL pipeline..The sobering growth numbers are perhaps part of the logic that has led the Bank of Canada to be the first G7 Country to pause its interest rate increases, currently at an overnight rate of 4.5%. The Bank of Canada noted that “data last week showed labour productivity in Canada fell for the third straight quarter”, another dynamic supporting the pause announced after its mid-March meeting..On the other hand, there are continued inflationary pressures, including especially borrowing to finance the budget. Federal government debt results in the printing of money and higher inflation. Also wage growth, at 5.4% year over year, now exceeds the Consumer Price Index increase of 5.2%. Inflation may remain sticky..The weakening Canadian dollar makes imports more expensive and reduces our standard of living. Let us remember that in January 2002, the Canadian dollar traded below $.62 – this can happen again..Ever more government spending, more taxes again in the new budget, divisive policy and constitutional issues, and growing debt are do not build confidence in the future..To sum up, the World Bank is warning of a “lost decade”, saying that potential global growth will slump to a three decade low of 2.3% a year through 2030. This compares two 2.6% for the previous decade, and 3.5% from 2000 to 2010. The IMF, in its latest World Economic Outlook, sees the global economy growing at 2.9% this year and 3.1% next year..More revealing is the almost double rate of growth in emerging markets and developing countries. Increasingly, ever more interventions by advanced economy governments discourage capital investment, as do regulation and taxation. These are among the reasons less mature economies are dramatically outperforming the developed world. Taking ever more money from its citizens by way of taxation, the real issue is what governments then do to us with our money. There are reasons Canada’s economic performance has declined..Shorter term, having missed the inflationary cycle and describing it as “transitory”, central bankers have hit hard with rapid and significant reductions of liquidity creating upward pressure on interest rates. The early response is mixed - falling inflation — but also indications that rates will likely remain above target ranges for longer than hoped..Underlying dynamics described above suggest that the risk of higher interest rates for longer may also increase the likelihood of recession, or worse, stagflation. The uniqueness of our current economic circumstances, and the uncertainty described above, will continue to dissuade private capital investment. The Bank of Canada can now only pause and hope.
