Economics Newsletter – March 29, 2023

New UWES articles, CPI data, and more!

Written By: Benjamin Pipicelli & Noel Tom Paul

Economics Newsletter – March 29, 2023

Canada’s Economy at a Glance

Economics Society News, Events, and Articles

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* All closing prices are based on Thursday, March 29, 2023

Author’s Commentary

Canadian Macroeconomic Conditions – March 2023

As of March 2023, the Canadian economy is facing a slowdown in growth, with GDP growth estimated at 0.5% for 2023. The Bank of Canada has been fighting against inflation to control an overheating economy; as a result, GDP growth is expected to be below its 2.0% potential for 2023-24. Inflation in Canada is still high but has declined from its peak, and is projected to fall to around 3% in the middle of 2023 and reach the 2% target in 2024.

The Canadian economy has been resilient despite global challenges such as the war in Ukraine, resulting sanctions on Russia, and a significant slowdown in China that has disrupted global growth in the past 12 months. Growth has been sustained by a strong job market recovery, household savings, high commodity prices, an increase in business investment, and strong demand for services unleashed after COVID restrictions were lifted.

However, there are concerns that the Canadian economy may slip into recession in 2023 due to tighter monetary policy and its impact on financial conditions throughout the Canadian economy. This has meaningfully slowed economic growth expectations as household consumption begins to feel the pressure of higher interest rates and elevated inflation.

Silicon Valley Bank – What happened?

Silicon Valley Bank (SVB) was a bank that specialized in banking for tech startups, providing financing for almost half of US venture-backed technology and healthcare companies. It was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year. However, SVB collapsed rapidly, facing a sudden bank run and capital crisis, and was taken over by federal regulators. It was the largest failure of a US bank since Washington Mutual in 2008.

The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. The Federal Reserve began raising interest rates a year ago to tame inflation, which sapped the momentum of tech stocks that had benefited SVB. Higher interest rates also eroded the value of long-term bonds that SVB and other banks had bought during the era of ultra-low, near-zero interest rates. At the same time, venture capital began drying up, forcing startups to draw down funds held by SVB. So the bank was sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.

 

News and Noteworthy

Federal government eases some restrictions on non-Canadians purchasing property

The Canadian government has eased some restrictions on foreign ownership of residential property, just months after implementing new rules. Non-Canadians with work permits or work authorization in Canada can now purchase residential property if they have at least 183 days remaining on their permit or authorization and intend to purchase only one property. Non-Canadians and foreign businesses can also purchase residential property if they plan to develop it or vacant land zoned for residential or mixed-use. These changes come after Parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act in June 2022, which restricted non-Canadians from buying residential property in Canada for two years. The restrictions were aimed at cooling rising home prices. The changes were announced by Ahmed Hussen, the minister of housing and diversity and inclusion, who said they would “allow newcomers to put down roots in Canada through home ownership and businesses to create jobs and build homes.” Read more.

Canada Targets Banks for Billions With Dividend Tax Change

The Canadian Finance Minister, Chrystia Freeland, is planning to change the tax rules for dividends received by banks and insurance companies from Canadian firms, in a move expected to generate CAD 3.2 billion ($2.3 billion) over five years, starting in 2024. The measure will begin treating these dividends as business income, applying to shares held as mark-to-market assets, and closing a loophole that banks and other financial firms have used to reduce their overall tax burden. This change comes as Canada’s government faces a deteriorating fiscal outlook and slowing economy, while it ramps up spending to help residents cope with inflation, prop up the healthcare system and compete with the US on low-carbon initiatives. The government previously introduced a corporate tax hike on large banks and life insurers and a one-time windfall tax on financial firms called the Canada Recovery Dividend, both projected to raise more than CAD 5 billion over five years. Freeland’s new budget, released on Tuesday, also proposed changes to an “alternative minimum tax” that will apply to some Canadians earning more than CAD 300,000 annually. Read more

BlackRock, Fidelity Lose Out in $1 Trillion China Pension Market 

BlackRock and other international firms are struggling to attract customers in China’s private pension plan market, which may eventually grow to $1.7tn. Global companies including BlackRock and Fidelity International have had a slow start as domestic banks and fund managers are offering incentives and have won the vast majority of new business. Most foreign money managers have so far been excluded from pilot trials in 36 cities, allowing banks like the Industrial & Commercial Bank of China and China Merchants Bank to grab all the inflows. BlackRock has about ¥6bn ($918m) in mutual fund assets in China but has yet to issue any products under the new program. Read more.

Canada’s fiscal spending moves out of step with overheating economy

Canadian Finance Minister Chrystia Freeland’s promise of a fiscally prudent budget in the face of high inflation has disappointed some strategists who had hoped for spending restraint from the Liberal government. Increased spending in the budget leaves the government with less in reserve to deal with a possible economic downturn and it could forestall a shift to interest rate cuts by the Bank of Canada, analysts said. The worry is that the deficit, estimated at C$43 billion ($31.7 billion) in 2022-23, or 1.5% of GDP, is wider than it should be at this point of the economic cycle, with the economy running hot, unemployment at a near record low and inflation elevated, analysts said. Read more.

Binance accused of breaking US financial laws

US regulators are seeking to ban Binance, the world’s largest crypto trading platform, alleging that the firm has been operating in the country illegally. The lawsuit from the Commodity Futures Trading Commission (CFTC) said the firm cultivated US business while failing to register properly with authorities. It accused Binance of breaking numerous US financial laws, including rules intended to thwart money laundering. Binance defended its practices. It said it had made “significant investments” to ensure that US users were not active on the platform, including blocking users identified as American citizens or residents, or who had a US mobile number. Read more.

Mortgage moves ‘good news’ for borrowers, but budget lacks housing support: experts

Real estate observers say a new mortgage code of conduct promised in the federal budget will be handy for Canadians facing financial difficulties, but they still feel the economic plan was lacking needed housing affordability measures. The code of conduct is meant to ensure federally-regulated financial institutions will provide fair and equitable access to mortgage relief measures for people struggling to stay in their homes because of elevated interest rates. It would protect these people from unnecessary penalties, internal bank fees, or interest charges and allow them to extend amortizations, adjust payment schedules and make lump-sum payments. Dominion Lending Centres’ chief economist Sherry Cooper says the code of conduct is “good news” for people with variable rate mortgages because their financial burdens will be “markedly lower” if banks can extend the repayment timeline when borrowers renew, for example extending a 25-year amortization period to a 30-year one. Read more.

 

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