From strongÂ job creation to roaring stock markets, North AmericaÂ under U.S. President Donald Trump is continuing toÂ showÂ signÂ of vigour, despite Friday`s gloomy U.S. GDP numbers.Â
It’s not just a U.S. phenomenon. The giant Ontario economy is exhibiting signs of life as tax receipts rise, and some experts say the western oil slump has been overdone.
But there are reasons to be wary. There is a danger that, like a three-year-old child high on sugary treats, the economy may be getting overstimulated. And as any parent knows, suchÂ euphoria can come to a bad end.
Inflation has been tame
This week Federal Reserve chair Janet Yellen,Â who has often seemed like the single voice of restraint on the effervescentÂ U.S. economy, presents the central bank’s latest outlook. In spite of a surge in something called the employment cost index â€” an indicator of plentiful jobsÂ andÂ growing wages â€”Â inflation has been unexpectedly tame.
Just as for our own central banker, Stephen Poloz,Â weak core inflation may offerÂ Yellen a good excuse to keep rates lower for longer.
Market-based predictionsÂ for U.S.Â price inflation, as indicated by bond prices, had been climbing but have nowÂ retreated well below the Fed’s twoÂ perÂ cent target.
In many ways that is good. With U.S. unemployment bumping along near record lows, rising wages in the face of low general price inflation may finally begin to offer employees a bigger share of productivity gains, allowing themÂ to buy more with their weekly pay.
Whether intentionally or by accident, that would go some way to fulfillingÂ Trump’s promise of a better deal for U.S. working people.
It’s not entirely clear why inflation has remained so low. It is certainly not what manyÂ have been predicting.
As economic analyst Mike Patton wrote in Forbes two years ago in an article titledÂ Why Inflation Is Low, Despite The Fed’s Massive Monetary Expansion, something seemed amiss.
Patton put the possible blameÂ on aÂ weak global economy, falling oil prices after the 2014 price bust, or the possibility that the money being created by central banks just wasn’t making its way into the economy.Â Others have suggested it has something to do with hidden effects of technology or the sudden addition of the developing world to global industrial capacity.
PolozÂ insists low interest rates really are stimulative and that we just have to wait a little longer to see theirÂ effect. He says Canada will close the output gapÂ â€”Â the point where the economy begins to use up its available resources of labour and capitalÂ â€”Â by early 2018.
If Poloz is right, holding interest rates near historic lows in Canada and the United States is only one of many things that may be soupingÂ up the economy.
In Canada the federal government has an official policy of fiscal stimulus, the promise to spendÂ more than it it collects in revenue so as to invest in Canadian jobs.
Provincial budgets have done something similar. In Ontario, despite a surging economy that has boosted revenues from income tax, land transfer taxes and sales taxes, the government has promised to add fuel to the fire by pouring it all, plus money from asset sales, back into the economy.
Canada’s hot housing market,Â responsible for Ontario’s transfer tax windfall, is also stimulating the economy, partly through the wealth effect where people who feel real-estate-rich decideÂ they can spend freely and partly through the realized gains of those who sell and moveÂ someplace cheaper.Â
Cheap oil and a low loonie have hadÂ stimulating effects of their own.Â
In the U.S.Â there is even more stimulus on the way, provided that Trump can get his proposalÂ to cut taxes from 35 to 15 per cent and his promised market deregulation through Congress. A first-quarter growth rate of just 0.7 per cent may strengthen that resolve.
In theory, tax cuts could be neutral if they move money from government to private hands. But Trump has promised not to roll back spending. That means borrowing from the future to stimulate now.
U.S. big business is framing the deregulation plan as productive rather than stimulative because less red tape makes business more efficient. But if it opens the door to the kinds of irresponsible practicesÂ seen in the U.S. sub-primeÂ crisis, it too will be borrowing from the future the costs of patching up the next meltdown.Â Â Â Â
Although the causes may beÂ different, Canada facesÂ its own sub-prime crisis as trouble at Home Capital threatens an important part of the Canadian mortgage market.
If, as so many people have suggested, housing is a bubble nearing its end, that stimulative effectÂ â€”Â including the CanadianÂ construction boomÂ â€”Â may be on the wane.Â
Stimulus is not meant to be a persistent economic strategy. Like giving sweets to a three-year-old, it is only a temporary solution.
But watch out when the sugar high ends.
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