2015-07 The dollar is falling

On Tuesday, the Canadian dollar exchange rate in terms of the US dollar fell to the lowest level since 2004. This article discusses why, and what the consequences are:

Why?

• Resource prices are falling
• The Canadian economy is weak and the Bank of Canada is unlikely to raise interest rates in the near future

Consequences: the depreciation of the dollar

• cushions the blow to the economies of the oil-producing provinces
• leads to higher exports
• leads to the improvement to the tourism balance
• the economy will adjust from commodity-led growth to export-led growth

What is not mentioned is that some prices of imported products in Canada have been increasing. But inflation is not increasing significantly

2015-06 The effect of aging population

During the course we will be talking about a very important change: the fact that populations of developed countries are aging rapidly. This will have profound effect on taxes, government revenue, retirement age and income in the future. The obvious effect is that, as there will be fewer working people for each retired person, the portion of national income that will need to be transferred from the working population to the nonworking population will increase. This article from the Economist talks about other effects of aging population:

• higher real interest rates
• higher wages
• reduction in inequality

The article attributes the changes to the end of two big demographic shifts

• entry of baby-boomers to the labour force
• the addition of China and the former communist countries to the world economy, which greatly increased world workforce.

The increase in the number of workers led to slow wage growth, and imports from China reduced the cost of manufactured goods, producing deflationary pressures and allowing central banks to reduce interest rates. In addition, the Chinese saved a lot, leading to further decrease in interest rates. Slow wage growth reduced the share of wages in GDP and led to higher inequality. These trend will come to an end.

As the population is aging, the pool of savings fall since old people save less than middle-aged people. There will be pressure for wages to rise as old people will require more help. Higher wages will increase the share of labour income in GDP.

2015-05 The Volkswagen scandal

You may have heard of the Volkswagen scandal.
This article shows what happened with stock market price.
What is the business lesson?

2015-04 Latest inflation data

Here are the latest data on inflation (from August 2015):
Inflation = 1.3%
Food inflation = 3.6%
Gasoline inflation = -12.6%
Core inflation = 2.1% (was 2.4% last month)
Goal - inflation between 1% and 3%, preferably close to 2%
Bank of Canada thinks there were temporary factors that raised the inflation rate, in particular the depreciation of the Canadian dollar

2015-03 Thursday's question: will the FED raise interest rate today (they did not)

You can read this to see the predictions before the decision is announced later today.

There is a great graph in the article showing the rate since 1985.

It shows the Federal Funds Target Rate: the rate at which financial institutions lend reserves to each other overnight.

As you can see:

• the Federal Funds rate was greatly reduced (by 5%) in the recession that followed the bursting of stock market bubble in 2000

• the FED started increasing it in 2004, and it rose significantly (by 4%)

• When the Great recession hit, it very rapidly reduced (by 5%) the rate to just above zero

• The rate has been constant since 2008.

2015-02 Canada's lagging innovation and productivity

Not everything is rosy about the Canadian economy. According to the Wold Economic forum, OECD and IMF, Canada's innovation and business productivity performance is weak

• According to WEF, Canada is 26th for business innovation
• According to OECD: Canada is 22nd in business investment on research and development
• According to IMF: Canada is 17th in business productivity

Canadian small and medium size firms export relatively little and do not use cutting edge technology.
The author thinks that government policy directed specifically at innovation, and innovation clusters, would help.

2015-01 China's economy is slowing down

Last month the Chinese stock market fell dramatically, as investors became concerned that growth in China is slowing down. This article summarizes the most recent data.

• GDP may grow by less than 7% in 2015, the slowest since 1990

• Both imports and exports are falling, showing weak demand both in China and abroad

• Investment in fixed assets grew by 10.9%, slower than the expected 11.1%

• But retail sales grew by 10.8%, faster than expected 10.5%

1. Some notes on these numbers

• The Chinese economy grows incomparably faster than economies of developed countries

• Data are never simple: some things are better, some worse, and figuring out what is happening is not straightforward.

• A lot of attention is put on small deviations from expectations

2. The article also talks about macroeconomic policy:
"China’s central bank has lowered interest rates five times since November and has repeatedly relaxed banks’ reserve requirements in an effort to put a floor beneath the sputtering economy.[...]Further policy easing is widely expected in coming months, and the government is also trying to increase investment in infrastructure projects to support growth."

• To stimulate the economy, the central bank lowers interest rates. This is monetary policy.

• In addition, in China reserve requirements are lowered (there are no reserve requirements in Canada)

• Investment in infrastructure is another way to stimulate the economy. This is fiscal policy.

3. Finally, there is a point which shows that China matters and it affects other countries:

"Fears of a global economic slowdown led by China have roiled markets worldwide in recent weeks, prompting speculation that the Federal Reserve may hold off on raising interest rates this week."

The Federal Reserve (the US central bank) is making its policy decision this week. They were planning to raise the short-term interest rate (the Federal Funds rate). But, given the events in China, they may delay the increase.

By the way, the rate has been between 0% and 0.25% since the end of 2008.