“Investment and hiring intentions lowest since 2009”: Bank of Canada
Since Christmas Eve, the Toronto Stock Exchange index has dropped every single day, 10 trading days in a row, including so far today as I’m writing this, the longest losing streak since 2002. Now at 12,210, it’s down 21% from its 52-week high, set on April 17, and thus in bear market purgatory.
Beaten down energy producers, at about 20% of the index, have had a big impact. But the problems are broader. Among the standouts is the must-own, super-growth, TSX mega-cap Valeant, whose shares have plunged 65% from their 52-week high.
The Canadian dollar just dropped below US$0.70 for the first time since spring 2003, to US$0.6996. It now takes C$1.43 to buy a US dollar, up from about parity in 2011, 2012, and much of 2013. That year, Stephen Poloz became governor of the Bank of Canada. His solution was to demolish the currency. So he took it down 28% against the US dollar, with a big supporting hand from the collapsing prices of the commodities that Canada exports. Oil joined them in mid-2014.
The US benchmark WTI is trading just above $30 a barrel. Pundits at major investment banks have their eyes set on $20. Doom-and-gloomers see $10.
Canadian producers aren’t so lucky. Alberta’s heavy crude blend, Western Canada Select, plunged 30% so far this year, and on Monday hit US$16.51 a barrel, according to PSAC. “Lowest close on record,” according to the Globe and Mail.
Canadian producers are already experiencing what doom-and-gloomers are predicting for WTI. The swoon of the Canadian dollar is in part a reflection of this. Poloz is patting himself on the back. He sees benefits for big exporters outside the resource sector, such as auto manufacturing plants and component suppliers to the US auto industry that compete with Mexico.
This is a small consolation for Canadians who want to eat: At lot of food is imported; 81% of fruits and vegetables are imported. Canadians have to buy them with their plunging loonie.
In 2015, food prices rose 4.1%, according to the 2016 Food Price Report by the Food Institute at the University of Guelph. Meat prices rose 5%, fruits 9.1%, vegetables 10.1%. The average Canadian household spent C$325 more for food in 2015 than in 2014. Steeper increases are expected this year, with the average household likely to spend $345 more than last year. The report squarely blamed the loonie.
Well-to-do Canadians might brush off price increases. But they make a big difference for many middle-class Canadians who, just like their brethren in the US, are struggling on a monthly basis to make ends meet.
It’s impacting consumer confidence, which plummeted 12 points in December, to 91, the lowest level in two years, according to the Conference Board of Canada. Consumers are now increasingly worried about their finances and job prospects, and they’re becoming more reluctant to make major purchases.
It’s impacting businesses too: hiring and investment intentions by Canadian companies have plunged to the lowest level since 2009.
That’s according to the Bank of Canada’s quarterly Business Outlook Survey. Yet the interviews were conducted between mid-November and early December. Since then, oil prices have plunged and the loonie has dropped further.
Now there’s contagion. The Business Outlook Survey:
The negative effects of the oil price shock are also increasingly spreading beyond the energy-producing regions and sectors. For example, many businesses across the energy supply chain continue to struggle as they adjust to an environment of weak demand. As well, more firms exposed to slowing demand from their energy-related customers or from households in affected regions feel an indirect, yet often significant, impact on their sales perspectives.
And the weak loonie? Exporters outside the commodities sector are seeing some benefits as the relative cost of labor declines, and some of them are planning to raise their investment spending. “However, the majority of firms also face higher costs for imported inputs and investment goods….”
Given these higher costs of investment goods, investment intentions plunged below zero for the first time since 2009:
Compared with recent surveys, fewer projects are aimed at expanding production capacity, and many firms are limiting their spending to repairing and replacing existing equipment. The investment outlook for firms in the Prairies deteriorated further, but weakening investment intentions are now also evident in other regions.
Businesses most often cited concerns about the strength of domestic demand, uncertainty in the regulatory and tax environment, still-insufficient foreign demand, and low commodity prices as factors restraining their investment.
And the outlook for employment darkens, with employment intentions dropping to the lowest level since 2009:
Fewer firms plan to increase their staff over the next 12 months. As well, plans to cut staff are more widespread and are not confined to the commodity-producing sectors and regions.
Unperturbed, Finance Minister Bill Morneau displayed the optimism requisite of any government official, no matter what:
“I’d like to start by saying I’m optimistic,” he said in in Halifax on Monday, after this sort of lousy economic data had swamped the country which was alternating between anemic growth and a technical recession last year. “The good news is we have a plan,” he said.
That plan better be good because, as far as oil is concerned, Canada’s new government is unlikely to get much support; now that the new meme is, “Even lower for even longer.” Read… Oil Plunges toward $30, Dallas Fed President Sucker-Punches any Leftover Oil Bulls