A Good Economy May Get Even Better. What That Means for Stocks and Fed Rates. - Barron's

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A Good Economy May Get Even Better. What That Means for Stocks and Fed Rates.  Barron's
A Good Economy May Get Even Better. What That Means for Stocks and Fed Rates. - Barron's
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Globe editorial: The Prosperity Problem: How Canada can build a better future - The Globe and Mail

Working longer hours for lower pay sounds like the opening lines of a particularly woeful country song. But giving more to get less is also the anthem for the Canadian economy these days.

The economy is growing, sure, but once inflation and population growth is taken into account, there is a smaller slice of national income for each person: less wealth and lower wages. Or, as economists would say, real per capita gross domestic product is shrinking.

But Canada’s prosperity problem is not just something for economists to obsess over. It is the key challenge facing this country in coming years. Dealing with climate change, fixing health care, rebuilding decaying infrastructure, meeting global defence challenges, coping with an aging population: all of those will require the Canadian economy to become much more productive than it is currently. And for any parent that wants their children, and their grandchildren, to be better off than them – that hope hinges on dealing with the prosperity problem.

So far, Canada is not meeting that challenge. As the accompanying chart shows, real per capita GDP has dropped in the past 18 months, retreating to fall 2017 levels. That pattern can’t be chalked up to the effects of the pandemic. Real GDP per capita in the United States – already significantly higher than in this country – has grown during the same period.

That is a failure of the federal Liberals’ economic agenda. Some supporters of the government have argued that declining real GDP per capita doesn’t matter, that incomes for many Canadians have been rising.

That countercritique falls short for two reasons. It glosses over the reality that in an economy with declining wealth, any income gains eventually come at someone else’s expense.

And all Canadians are already paying the price of a less productive economy in the form of a weakened currency – an invisible tax. Vacations abroad and imported goods cost more because of long-standing policy failures that have undermined the Canadian economy.

The Prosperity Problem

This is part of a series on Canada’s economic challenges. Follow our editorials page to see more instalments as they are published.

National Bank economist Stéfane Marion has argued that Canada is in danger of being snared in the kind of growth trap that usually threatens only developing countries, in which living standards stagnate or decline because the economy cannot generate enough capital to keep up with increases in population.

That trap has not yet closed around Canada, but avoiding it will require Ottawa (and the provinces) to abandon the demonstrably failed economic policies that have weighed down the national economy and sapped our prosperity.

Some of those failures, such as interprovincial trade barriers, date back to Confederation. And not only government is to blame: Complacent businesses have not invested or innovated enough.

Still, the decline in Canada’s economic performance under the Trudeau government, particularly in the past two years, has been striking.

One obvious driver is the recent surge in immigration, particularly of low-skilled workers. Ottawa needs to retool temporary immigration and to focus on higher-skilled workers that will increase per capita GDP.

But that is only a start; in the coming week this space will examine how to rejuvenate Canada’s economy. A measured reduction in the regulatory burden is part of the answer. Tax laws need to be recast, to galvanize corporate investment. New structures are needed to harness the 21st-century engine of wealth, intellectual property. And, yes, after 157 years, Canada must become a single national economic space.

The capacity to build a better country and to create a better future for our children: those are the stakes. Canada’s flagging prosperity is everybody’s problem.

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Globe editorial: The Prosperity Problem: How Canada can build a better future - The Globe and Mail
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Car Loan Review Entangles Banks and the Wider UK Economy - BNN Bloomberg

(Bloomberg) -- Britain’s banks gave investors reasons to be optimistic in their earnings over the past few days. But one key unknown won’t go away anytime soon: the ultimate cost of potentially mis-sold car finance. 

The Financial Conduct Authority’s review of commissions for car loans remains a major drag on domestic lenders’ valuations, according to UBS analyst Jason Napier. Uncertainty around the application of UK rules on this issue is one of the reasons that British banks trade at lower valuations than their peers in the euro area, Napier said in an interview.

Lloyds Banking Group Plc, the UK’s biggest auto finance provider, on Thursday set aside £450 million ($570 million) for possible compensation and other costs linked to the review — the first major firm to take a charge. Barclays Plc, which exited its motor finance business in 2019, hasn’t taken a provision due to “uncertainty” around the FCA investigation’s outcome and the “very low” level of complaints the bank got, Finance Director Anna Cross told reporters on a call Tuesday. 

Close Brothers Group Plc has a smaller total car loan book than Lloyds but it represents a larger portion of its business. The firm has canceled its dividend amid the FCA review, and this week got downgraded by credit rating firm Fitch to two notches above junk. Its shares have shed more than half their value since the beginning of the year as hedge funds Millennium Capital and Marshall Wace held and then exited short positions in the stock. 

Smaller non-listed players expected to be affected by the FCA review include private equity-owned Blue Motor Finance, whose corporate lenders included Goldman Sachs Group Inc. 

The FCA has said it will update on its review in September. The uncertainty has stirred speculation in the industry that some lenders might be forced to exit the market. 

How It Worked

In an era of near-zero interest rates that made credit plentiful, nearly 90% of new car purchases in the UK were made on finance, according to the FCA when it examined the industry in 2018. Car dealers could often earn thousands of pounds for themselves, and the bank, by pushing up the interest rate they offered buyers, in a practice known as discretionary commission arrangements. 

Before the FCA banned this approach in 2021, every loan rate would have its own assigned commission rate, a person with direct knowledge of the practice said. This setup systematically incentivized dealers to pick a higher rate, the person said, declining to be identified discussing private information. 

The FCA has estimated that its ban is saving customers £165 million a year. Now, though, it’s been forced to take further action after a spike in complaints to the Financial Ombudsman from customers who were sold these loans. It’s reviewing loans dating as far back as 2007. 

The legal industry is already compiling multiple country court cases in order to construct a class action case, according to Henry Farris, partner at law firm Withers LLP.“The class action has a much broader scope than what Lloyds has set aside,” Farris said in an interview. He estimated that 50,000 to 100,000 people could be enough to build a substantial class action — which were until recently a rarity in English law. 

Pogust Goodhead, another law firm, has set up a portal for customers to submit claims. Global Managing Partner Tom Goodhead said it was a “watershed moment” for borrowers. “It’s high time that lenders are held to account over unfair practices that have left consumers unnecessarily out-of-pocket,” he said in a statement.

Economic Fallout

Along with the regulatory review, a mix of high interest rates and falling used car prices might spell trouble for banks — especially those who lend to less affluent customers. 

“In the pandemic, interest rates rates were low, people got loads of stimulus and delinquencies were very low too,” said Aidan Rushby, founder and chief executive officer of Carmoola, a London-based car finance firm that lends directly to consumers, rather than through dealers. “Now we’re in a recession, delinquencies will go up and car prices will go down. This means some lenders will recoup less value when a borrower defaults.”

Some industry watchers see banks potentially slowing down lending, which could lead to fewer used car sales. Banks might also decide to further trim their workforces in this space. To be sure, Lloyds reported this week that motor finance continued to grow last year, and it now has £15.3 billion on its loan books. 

“Undoubtedly the future products and services of banks and non-bank lenders may be influenced by the FCA’s decision,” said Isabelle Jenkins, who leads the financial services practice at PwC UK. But “it remains to be seen what this may look like.” 

--With assistance from Katherine Griffiths, Ellie Harmsworth, Joe Easton, Harry Wilson and Aisha S Gani.

©2024 Bloomberg L.P.

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Car Loan Review Entangles Banks and the Wider UK Economy - BNN Bloomberg
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Bank of Canada Likely To Cut Rates Before The US Due To Weak Economy - Better Dwelling

The Canadian and US economies are tightly integrated, and tend to provide similar data for their central banks to move together. That’s no longer the case, as Canada’s economy grinds to a halt and inflation spirals back towards target. Meanwhile, the US economy continues to outperform expectations. Will economic divergence result in diverging monetary policy? At least one bank sees the Bank of Canada (BoC) cutting rates before the US Federal Reserve, as the two countries head on different paths. However, the market isn’t ready to commit to this call… yet. 

Canadian Inflation Surprise May Drive Lower Fixed Rates

Canadian inflation came in much cooler than expected, helping to drive yields lower.  Headline inflation was just 2.9% in January, trimming nearly half a point in a month. The BoC-preferred Core CPI, considered more stable than headline, even dropped 0.3 points over the month. The latter remains above an acceptable target range, but it’s heading in the right direction.  

The decline is largely attributed to weak demand, the opposite issue seen in the US. American headline CPI remains at 3.9%, significantly above the Federal Reserve’s target rate. The country’s economy is heading in the opposite direction, leading to a divergence—at least into the short-term. 

Cheaper Mortgages In Canada, More Expensive In The US

Canada is a relatively small economy and the US is its biggest trade partner. Consequently, the two countries tend to have economies that are tied very closely, including monetary policy. In fact, the BoC explicitly demonstrates this by using the US neutral policy rate as its own. 

However, the market currently views the two countries heading in the opposite direction. “Canadian bond markets managed to buck the upward trend in yields this week, courtesy of a surprisingly friendly CPI reading,” wrote Douglas Porter, Chief Economist at BMO. 

Porter’s observation indicates Canadian fixed rate mortgage interest costs are seeing pressure ease. Unlike in the US, where mortgage rates are heading in the opposite direction on the strength of its economy.  

A divergence like this leads to the unusual consideration of what occurs when two tightly-linked economies move in the opposite direction. 

“These diverging trends add to an ongoing debate since the possibility of rate cuts first came into view: Who would cut first, the Bank of Canada or the Fed?” rhetorically asks Porter. 

Answering his own question, he continues “We have consistently leaned to the former, given the greater strain on the domestic economy from high rates, and a slightly cooler inflation backdrop. And the latest round of data supports that view, on both growth and inflation.”  

Though Porter’s team is fairly certain, he explains the market isn’t fully sold on this idea. He estimates the market is pricing in 50-50 odds for a BoC rate cut in June. 

“The lingering concern about early rate cuts in Canada is not so much about stoking a flaming equity market—no Nvidias in the TSX, sadly—but instead about fanning a simmering housing market,” he says.

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Bank of Canada Likely To Cut Rates Before The US Due To Weak Economy - Better Dwelling
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De-risking and friendshoring won’t get governments supply chain security. Putting their economic house in order will - Fortune

De-risking is in vogue. At the recent World Economic Forum in Davos, both European Commission President Ursula von der Leyen and French President Emmanuel Macron spoke of the dangers of “overdependence” on global supply chains. Policymakers may now speak of de-risking rather than de-linkage, but the goal is unchanged—self-reliance within the global value chain (GVC).

A goal that may come at a price.

The pursuit of security within the supply chain is understandable, especially with geopolitical tensions, particularly the rivalry with China, and international supply chain disruptions stemming from the COVID-19 pandemic and the war in Ukraine.

The key is how it’s done. There’s a right way, and a wrong way—and most countries are choosing the latter.

The U.S.–and imminently Europe’s–decision to use tech export controls on China is clearly on the wrong path. They are self-defeating, perversely accelerating the development of China’s own technological capacity, starkly evident in the cutting-edge Kirin semiconductor used in Huawei’s latest smartphone. Such controls also deny U.S. firms, like Intel, the opportunity of growing through exports to China. And they force countries such as Indonesia, Thailand, and Vietnam to make the invidious choice between U.S.- and China-centric supply chains.

Massive state subsidies are just as problematic, distorting international competition at the expense of poorer developing countries. They disrupt the international trading system while running the risk of regulatory capture as the companies that benefit from subsidies become dependent on them.

Nor is friend-shoring a clear path forward. The ultimate logic of trading with friends, however defined, would split the world into rival trade blocs. Recent research from the International Monetary Fund and the World Trade Organization highlights that such a split would entail serious financial fragmentation and major losses in GDP, as high as 12% in some regions.

So what is the right path to dealing with supply chain disruption and vulnerability? There are two pointers.

The first is recognizing that the World Trade Organization, despite efforts by governments in the West and elsewhere to hobble it, is still the best place to tackle supply concerns over China’s practice of state capitalism. Within the auspices of the WTO, Beijing could agree to end subsidies for state-owned enterprises operating in overseas markets, in exchange for more tolerance for those supplying public services within China.

Countries can also build on the cooperation within the WTO negotiations on e-commerce, covering issues such as data protection, that brings together key players, including the U.S. and China, offering a welcome opportunity for constructive engagement between Washington and Beijing. (We might expect progress at the WTO’s ministerial conference, which starts Feb. 26)

The second and perhaps most critical pointer is the need for overall national policy frameworks that generate genuine resilience to shocks by fostering innovation and export diversification.

The scope to get domestic policies right can usefully be demonstrated by taking the countries engaged in the Supply Chain Resilience Initiative (SCRI), a trilateral endeavor by Japan, India, and Australia—and prospectively the United States—to secure supply chains and reduce dependence on China.

Rather than picking winners, the SCRI countries need to get the basics right. For Japan, this includes rebuilding fiscal space by increasing the consumption tax while improving productivity—lowest of all G7 economies—via enhanced corporate governance; for India, improving health and education infrastructure, modernizing labor laws to remove disincentives for firms to create jobs and further reducing restrictions to trade; for Australia, avoiding over rigid production systems based on the worst and most infrequent of predicted events; and for the United States, returning to more open policies of technological development, enabling it to “run faster” rather than seeking to hobble the opposition.

What these policies share is their focus—not narrow, in trying to defy comparative advantage through misplaced targeted trade-distorting interventions in the name of self-reliance, but broad, addressing economic fundamentals to foster genuine resilience.

In other words, countries seeking greater security within the global value chain should concentrate, above all, on putting their own economic house in order.

Ken Heydon is a former Australian government and OECD official and visiting fellow at the London School of Economics. He is the author of The Trade Weapon: How Weaponizing Trade Threatens Growth, Public Health and the Climate Transition.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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De-risking and friendshoring won’t get governments supply chain security. Putting their economic house in order will - Fortune
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Putin's War in Ukraine Is Decimating the Russian Economy - Bloomberg

Vladimir Putin wants the world to believe that Russia’s economy is doing fine, and that he has the wherewithal to prosecute the war in Ukraine indefinitely.

He’s bluffing. His aggression is costing him dearly, and the West should exploit this vulnerability to the fullest.

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UK Consumer Confidence Retreats Amid Caution About Economy - BNN Bloomberg

(Bloomberg) -- UK consumer confidence slipped back in February, suggesting households are not ready to splash out despite growing signs that the economy has emerged from its shallow recession.

GfK said its key sentiment indicator dropped 2 percentage points to minus 21, ending a three-month run of improvements. Economists surveyed by Bloomberg had expected a reading of minus 18 on average.

Client Strategy Director Joe Staton described the findings as a “mixture of bad news and good news.” Most measures fell on the month — including a gauge of willingness to make major purchases — but households remained relatively upbeat about their finances in the year ahead.

“All the measures this February are better than a year ago, but consumer confidence alone will not carry us into a brighter economic future,” Staton said. 

The figures underscore the challenges facing Prime Minister Rishi Sunak, who is counting on a feel-good factor from falling inflation and improving living standards to rescue his Conservative Party before an election expected later this year. 

Data on retail sales and private-sector activity suggest the economy has turned a corner after sliding into a technical recession in the second half of last year. However, consumer spending is still being curtailed by high interest rates eating into household budgets. 

A GfK index tracking personal financial prospects, while stronger than other components of consumer confidence, remained at zero this month. 

“The reality for many households remains adapting spend to meet higher essential costs,” said Linda Ellett, KPMG’s UK Head of Consumer, Retail and Leisure. “Many households also still face higher mortgage rates when their fixed-term deal ends this year.” 

The figures provide a final snapshot of consumer confidence before the budget on March 6. With the Tories trailing 20 percentage points behind the Labour opposition in opinion polls, Chancellor Jeremy Hunt is widely expected to announce more tax cuts in a bid to win over voters.

©2024 Bloomberg L.P.

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