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By HaleStewart March 11, 2018 7:19 am
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International Economic Week in Review: The ECB and Bank of Canada Maintain Their Current Rate Policy

            At the political level, the “negotiations” between the UK and the EU over Brexit continue to show two parties talking past each other.  A week ago Friday, British prime minister May give a speech where she attempted to argue that the UK should still be able to maintain favorable access to the common market.  Earlier this week, the EU responded by saying in no uncertain terms that would not be possible.  What May fails to publicly recognize is that the EU will continue to take a hardline position for the duration of these negotiations.  The common market cannot allow a country to leave it yet still maintain some type of favorable treatment.  That just will not happen.  They’d sooner see a hard Brexit than favorable withdrawal terms.

            The ECB maintained their current interest rate level of 0.5%.  They also noted they, ” … expect [rates] to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.”  This signals to the markets that, barring unexpected bullish or bearish developments, they can expect the ECB to maintain this level for the next 12-18 months.  Later in his remarks, Draghi commented monetary stimulus was necessary to prod inflation towards the ECB’s 2% target.   The bank will also maintain their current bond purchases through September 2018.  Maturing principle will be reinvested invested.  The bank's buying program has increased liquidity which has translated into higher loan demand.

            The bank offered the following assessment of the EU economy:

Real GDP increased by 0.6%, quarter on quarter, in the fourth quarter of 2017, after increasing by 0.7% in the third quarter. The latest economic data and survey results indicate continued strong and broad-based growth momentum. Our monetary policy measures, which have facilitated the deleveraging process, continue to underpin domestic demand. Private consumption is supported by rising employment, which is also benefiting from past labour market reforms, and by growing household wealth. Business investment continues to strengthen on the back of very favourable financing conditions, rising corporate profitability and solid demand. Housing investment has improved further over recent quarters. In addition, the broad-based global expansion is providing impetus to euro area exports.

The latest GDP report from Eurostat confirms this analysis.  Headline GDP increased 2.7% year-over-year.  Household consumption rose 1.5%, business investment increased 2.5%, exports advanced a very healthy 6.1%, and imports -which are a good indicator of domestic demand -rose 3.7%.  Eurostat also provides industry level growth information.  Professional services were up 4%, manufacturing advanced 4.4%, will stay grew 1.6% and finance was up 0.9% (all figures are year-over-year).  The following two tables from the report provide additional detail:

The top table shows expenditure level data; we’re now in the fourth consecutive quarter a positive growth.  The bottom table shows industry level growth rates.  There are two patterns to this data: four quarters of consistent growth or increasing growth.  Regardless, both are positive.

            Finally, Markit economics released their latest composite number for the EU.  While it dropped from 58.8 to 57.1, it remains at high levels.  The service sector fell from 58 to 56.2 – its weakest readings in the last six months.  While marginally slower, job growth remains strong and sentiment is near a seven-year high.

            Several years ago, Canada experience a minor recession when oil prices collapsed.  While a majority of their economy continued to grow, the oil sands in the western part of the country took a major hit.  No chart better demonstrates that than the capacity utilization chart of Canadian industry:

From the 4Q14 to the 2Q16, overall utilization dropped sharply.  However, it has since come roaring back, climbing consistently every quarter since.  The following table from Statistics Canada shows primary spending by major GDP accounts in a Y/Y format:

Household spending has increased over 3% for each of the last four quarters.  Business investment is ramping up: it is now growing 6.3% Y/Y.  Like many countries, Canada is a net importer, with import growth far outpacing export growth.

            This week, the Bank of Canada maintained their 1.5% interest rate policy.  Their announcement contained the following assessment of the Canadian economy:

In Canada, the national accounts data show that the economy grew by 3 percent in 2017, bringing the level of real GDP in line with the projection in the Bank’s January Monetary Policy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity.

With inflation nearing the banks 2% target, don’t be surprised to see a rate hike or two this year. 

            As for the Canadian dollar, it is currently trading in the .78/.8 area to its primary trading partner, the dollar:

          Next week, we’ll get industrial production, employment, and inflation releases from the ECB.  Canadian Bank head Poloz speaks on Tuesday.  Finally, the Bank of England will release its latest policy announcement.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 



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