Wednesday, December 14, 2016

August 2011 Posts

18 Posts from August 2011
Statistics Canada has released the Canadian economic accounts with GDP estimates for the second quarter of 2011.   Overall, real gross domestic product or GDP declined by 0.1 percent in the second quarter following a 0.9 percent increase in the previous quarter.  The big driver of the drop was the decline in exports as domestic demand was up.  While business investment in plant and equipment was up and consumer spending on goods and services was also up, exports declined 2.1 percent and oil and gas extraction decreased 3.6 percent (due mainly to maintenance shutdowns and Alberta wildfires). (See the accompanying figures from Statistics Canada).  Businesses are piling up inventories which means that demand is slowing (or if you are an optimist they are piling things up to meet the anticipated coming boom in demand.  Not likely given the tight inventory management most companies follow today).  When converted to an annual rate, real GDP in the second quarter declined 0.4 percent while it was up 3.6 percent in the first quarter. 




 




This decline in the second quarter of 2011 comes before the economic turmoil and trauma of the summer in terms of sovereign debt and the stock market drop.  The burning question is whether this signals the start of another recession.  If the third quarter of 2011 shows another decline then we will technically be in another recession as recessions are traditionally defined as two consecutive quarters of negative growth.  What are the odds of this happening?  Pretty good actually given that the big driver of the second quarter real GDP decline was the drop in exports. 




 














Exports make up a third of our GDP and the weak performance of the American and European economies over the course of the summer does not bode well for a pick-up in exports in the third quarter.  The third quarter will also be marked by a slowdown in U.S. output due to the impact of Hurricane Irene on the U.S. eastern seaboard though that might be balanced by reconstruction activity in the fourth quarter.


A little known agency of the Ontario government is the Ontario Financing Authority which was created in 1993 to manage the Province's debt as well as provide financial services to Infrastructure Ontario and the Ontario Electricity Financial Corporation.  The web site provides some interesting information on Ontario's debt portfolio which at present consists of 244.7 billion dollars.  Of this amount about 61 percent is held as domestic bonds, 27 percent is held in international bonds and 6 percent in U.S. T-bills and commercial paper.  The remainder is held as non-public debt which is debt instruments issued to public sector pension funds.  One third of Ontario's debt is held internationally.  While interest paid on domestically held debt recirculates income within Canada, the portion paid out to foreign bond-holders represents a leakage of income out of Ontario and Canada.

 Of course, what is more important is not the absolute value of the debt per se but its relation to provincial output or GDP.  Here, the OFA provides not only the net-debt to GDP ratio for the recent past and present but also forecasts into the future based on recent government projections.  Net debt is the gross debt minus financial assets and while total debt is 244.7 billion dollars, net debt at last count was 238.3 billion dollars.  The net debt to GDP ratio is currently at 37.1 percent - up from 26.8 in 2007-08, just before the onset of the recession and the surge in deficits.  As the accompanying figure from the OFA shows, it is slated to continue rising for the next few years and is expected to peak in 2014 at 40.2 percent after which it is supposed to decline.  That remains to be seen.



Naturally, this is an important issue for this year's provincial election.  The deficit is currently estimated at 14 billion dollars.  Interest on the debt is currently running the government 10.2 billion dollars a year.  This is 10.2 billion dollars that could have been spent on education, health, roads, transit or tax relief. The plans each of the major parties have for reducing the deficit and ultimately the growth of the debt and its associated debt charges is an important issue and one that needs to receive more than passing attention.  Debt charges are already absorbing 10.2 billion dollars a year and that is at relatively low interest rates.  If interest rates rise, what will debt charges go up to?  Interest rates are still low and Ontario is not Greece (where short term rates on bonds are now running at over 40 percent) but the era of cheap money is being delayed by quantitative easing in the United States and Europe.  It is imperative for the health of the long-term public finances of Ontario that the budget issue be addressed.

Well, I normally do not follow the price of gold or other precious metals but an email from a former student of mind has piqued my curiousity.  My former student is studying medicine rather than economics but has a consuming interest in economics and markets and forwarded me a newsletter on the price of gold and a "model" linking the price to real interest rates.

In essence, there is a critical value of 2 percent - if real interest rates are below this, then the price of gold will soar.  The newsletter also has a reference to discussions that the price of gold may soar to $5,000 or even $10,000 an ounce - quick frankly this is all starting to sound like the Dow 30000 talk and we all know what happened to the stock market not that long after.
A  link to interest rates for the price of gold is not a bad story but it is part of a bigger portfolio picture.  In the wake of the tech stock crash at the end of the 1990s boom and the potential for recession, interest rates were lowered.  This led to money pouring into real estate and fueled the mortgage bubble that has led to the current financial crisis.  With rates still low and the returns to real estate now depressed, money poured for a while back into the stock market (with yet another crash in 2008) but this was also combined with a search for another asset - hence gold. With returns depressed on real estate and other financial assets and the market crashing again, money is now pouring into gold. 
To my mind, this is another speculative bubble much like the housing market and is being fueled by the search for quick speculative returns as much as any view of gold as a "safe asset" or as some type of alternate international currency.  The price of gold was under 400 dollars an ounce for most of the late 1980s and 1990s and only starts its recent ascent after 2000 - coinciding with the 21st century's first decade of turmoil in stock and real estate markets.  It is now pushing 1800 dollars an ounce but for how long?  
The rise of gold prices since 2000 reminds me of what happens to a population of fruit flies sealed in a glass aquarium with a fixed supply of food.  The population explodes and population increases exponentially until the supply of sugar is exhausted and then the population collapses.  Replace fruit flies with gold prices and replace food supply with cheap money and you have what I think is a nice metaphor for the current gold price story.  As long as it remains cheap to borrow and other asset prices are depressed, one can expect gold prices to remain high.  Is a real interest of 2 percent the critical value?  Who knows.  At some point, the boom will end.  As we have seen to date.  All booms comes to an end.  The real question is not if but when which is indeed the hardest question to answer. Of course, having cycled through the stock market, real estate, then the stock market again and now gold - where will speculative investment money flow next?

With the month of September dawning, Ontario's election is about to heat up dramatically as the campaign intensifies towards the October 6th election day.  At the start of the summer, polls suggested Tim Hudak's Conservatives were poised to win with an 11 point poll lead over the government McGuinty Liberals. However, the polls of recent weeks suggest that the gap has narrowed and that there is now a much tighter race with the Conservatives at 38 percent, the Liberals at 36 percent and the NDP at 23 percent.  After an early forward dash as the speedy hare, the Conservatives may be about to be surpassed by the Liberal tortoise. 
While the last few years have been economically tumultuous for Ontario, it may not necessarily translate into a win for the Conservatives.  First, despite dissatisfaction with Liberal policies and polls that say there is a desire for change, a clear alternative has not really been articulated by either major opposition party.  For example, despite the rhetoric, how the parties will differ in dealing with high electricity prices and the debt and deficit will likely not be any different when push comes to shove.  In the end, the three parties are fundamentally so centrist that the election becomes a personality contest which is why campaign ads often feature such nasty personal attacks devoid of policy.  This lack of real alternatives in policy is probably also a reason why voter apathy has increased over time and turnouts declined. As well, there is now a Conservative government federally and Ontario voters may decide to counterbalance the federal conservatives with a different regional voice. 
However, the number of Twitter followers the party leaders have suggest not so much a sudden shift in voter preferences but a slow and steady increase in followers that has left the distribution fundamentally unchanged.  After nearly two months of monitoring, McGuinty still has about a 45 percent share of the party leader Twitter followers followed by Tim Hudak still with 31 percent and Horwath at 18 percent with Schreiner of the Greens at about 6 percent. Growth rates of Twitter followers have differed only marginally over the last two months thus preventing any sudden shift.  Between August 2nd and August 25th, Hudak's Twitter followers grew the least at 7.7 percent.  The next highest was Schreiner at 9.4 percent, then McGuinty at 9.7 percent and finally Horwath at 11.4 percent.  The Twitter scores do not pick up a fundamental shift in support and suggest that if anything all the candidates are all tortoises, plodding along at rates of growth not significantly different to affect their vote share over the next five weeks.  Indeed, based on these Twitter scores, the McGuinty Liberals have been ahead all along with a substantial lead.


 



If one were to forecast based on the Twitter scores, it looks like we are heading for a Liberal government again though whether it might be a majority or minority is not really possible to tell.  However, based on the opinion polls, the vote is close enough that we might end up with either a Conservative or Liberal minority government.  That would not be such a bad thing.  A minority government forces politicians to be much more cooperative with one another and can create a more moderate and diverse government.  At the same time, the quest for a majority might result in some serious work among the parties on policy that would create some policy differentiation that might be attractive and interesting to voters.  At present, Ontarians may be content remaining with the devil they know but there are potential wild cards.  Voter interest is still rather low at this point and the Conservative platform may spark some interest going into September if a desire for change takes hold.  Then there is always the possibility of an Orange wave taking hold at the provincial level especially in the wake of the death of Jack Layton.  The situation is still fluid.


Summer is rapidly drawing to an end and with it the relative calm that seems to have marked Thunder Bay politics.  Come September, Thunder Bay City Council will have a number of issues on its plate while the province will be in the throes of a provincial election.  Summer is short in Northwestern Ontario and it is understandable that issues tend to be deferred to the autumn.  One may recall the movie The Agony and the Esctacy where Pope Julius II (Rex Harrison) is continually asking Michaelangelo (Charlton Heston) as he works on the Sistine Chapel as to when he "will make an end".  Come the fall, it will be worth asking City Council as to when they will make an end of a number of issues.
First and foremost, the waterfront.  No doubt, the waterfront has been a success in terms of employment creation for local contractors as there seems to be alot of activity with equipment constantly going back and forth and the new pavilions do appear to be nearing completion.  At the same time, Phase I is 17 percent over budget and one should not be surprised if the fall reveals that there is yet another unanticipated increase in the budget for the project in light of recent water main breaks.  This first phase was supposed to reach completion late in the fall of 2011 so we shall wait with bated breath to see if the project is on time if not on cost.  More to the point, we are still waiting for an announcement of who the hotelier is going to be and the start of the condo projects.  Construction on the hotel was supposed to start in June and the earth has not started to move yet.  It would appear that the City of Thunder Bay and the hotelier have yet to consummate their relationship.
Second, I am looking forward to the first financial report on the status of the city's investment in equities.  As some might recall, rather than the usual assortment of bonds, t-bills and cash, City council decided to put some of the City's investments in the equities market.  It was a relatively small amount relative to the total portfolio and had grown to about 6.4 million dollars by December of 2010.  However, as was pointed out at the time by Councillor Pullia, this was probably not the wisest investment strategy given that markets can go up but they also inevitably go down. Given the drop in the stock market this month, it will be interesting to see how much of a hit they have taken.
Third, City Council seems to have deferred two rather contentious decisions regarding neighborhood development.  Unless I have somehow missed their resolution, no decision has yet been reached as to whether a mega Tim Horton's and hotel will be built in the middle of a residential neighborhood at the corner of Junot and John Street.  As well, the proposed controversial cell phone tower at the foot of Regina Avenue has also been deferred into September.  With respect to the proposed Tim Horton's/Hotel project, one does recall Mayor Hobbs siding with the angry residents at the town hall meeting though Councillors Ruberto and MacKinnon - who were present at the neighborhood meeting -  seemed to be more opaque on whether they were for or against the project. No doubt, they may have more to say in the cooler temperatures of fall.
All of these issues of course, will pale in comparison with the aftermath of the provincial election.  No matter which party wins the October 6th election, there will be a 14 million dollar deficit to contend with and it is inevitable that any restructuring of the provinces finances will affect its transfers partners.  That is a nice oblique way of saying that municipalities will probably see either a freeze or more likely a reduction in their grants.  There will be a certain seasonality to the public finances this year as the summer fiscal largesse of the run up to the election will make an end with the freezes of autumn.  Next year will likely not be as good a year for public sector construction projects in Thunder Bay.

The Conference Board of Canada has issued its Metropolitan Outlook 2 for Summer 2011 and is rather glum on the prospects for Thunder Bay.  According to the overview:

“Although the 0.4 per cent expansion
posted by Thunder Bay’s economy in 2010 was
tiny, it was nonetheless the census metropolitan
area’s first annual increase in gross domestic product
since 2005. We expect no growth in 2011, but
small increases in 2012 and 2013. Employment
also registered a rare annual gain last year, rising
0.4 per cent after dropping 4.2 per cent in 2009.
Job counts are forecast to rise further in 2011 and
2012. Last year’s job growth helped cut the
unemployment rate to 6.4 per cent, although a
falling labour force was a larger cause. But new
labour force entrants, attracted by the improving
job market, should push the unemployment rate
back up to 6.8 per cent in 2011.”

Thunder Bay’s manufacturing sector contracted for the 10th straight year in a row.  The city’s GDP is expected to start growing marginally in 2012 after staying flat for 2011 but employment will not be any higher than it was in 2008 by 2015 according to the forecast.  One positive note that was picked up was the population increases due to net in-migration.  However, there was really no explanation as to why given the poor economic prospects there was an increase in migration to Thunder Bay.   The one game changer that was noted for the local economy was the potential (referred to as a long shot) of acquiring service work or the smelter for the Ring of Fire chromite deposit.
So what is keeping Thunder Bay going?  Well, according to the Conference Board:

“Reflecting Thunder Bay’s status as a regional hub,
the city’s non-commercial services sector, which
includes schools and hospitals, is its largest service
industry. This sector’s output rose 1.3 per cent
during 2010, but is poised to advance less than
1 per cent this year. Relevant headlines include
$4 million in FedNor support for a cyclotron at
the Thunder Bay Regional Health Sciences Centre.
The cyclotron will be used to produce radioisotopes
for molecular imaging and earlier detection of cancer.
Meanwhile, Thunder Bay’s finance, insurance,
and real estate sector expanded 2 per cent during
2010, the most since 2001, with another 1.5 per
cent rise on tap this year. The local resale market,
surprisingly strong for such a troubled community,
is balanced. Brisk sales have kept realtors and
bankers busy.”

Again, Thunder Bay seems to be a paradox.   Basically, the economy is flat but people are moving to Thunder Bay, and retail sales and housing sales are brisk.  The forecast is glum but there seems to be a lot of activity that even the Conference Board has noted.  It would be more useful if the Conference Board had a more penetrating analysis of what is driving Thunder Bay's economy in light of 10 straight years of manufacturing decline. If we are "such a toubled community" then why exactly is the "local resale market surprisingly strong" and why is there such a tight rental market?


Well, I’ve just returned from a week in the UK.  There is a great deal of construction underway in London in preparation for the 2012 Olympics.  Along with redevelopment of Leicester Square and Piccadilly, there is also work on a new rail station over the Thames and substantial work on redeveloping Tube lines to move the anticipated hordes that will arrive in2012.  My experiences travelling about London were quite interesting and has generated some observations.
First, the population density of London is amazing.  For example, the partner of one of my hosts is the Director of Public Health for a region of London just south of the Thames.  She is responsible for a population of about 250,000 people in an area that measures approximately 5 miles by 9 miles in area.  This is actually a less densely populated area relative to the rest of the city.  Contrast that with the provision of public health services in Northwestern Ontario where approximately the same number of people is spread across an area that is the size of France.  I think we who live in northwestern Ontario (as well as those who administer us in Toronto) often forget just how thinly we are spread out and the challenges of proving services to this population.
Second, there is the youthfulness of the population.  The number of young people in their twenties is astounding.  In the evenings, they fill up the pubs and restaurants.  The streets are filled with spillover crowds sipping their beers.  They do not necessarily come in from the suburbs.  They have started their careers in London and live and work there generating the experience needed to move up in their careers.  If someone seems a bit older they are more often than not tourists rather than residents of the city.  There is a vibrant energy to the city from the large numbers of young people.  Many of course are migrants from around the world.  This is a global city – a "human port" where the UK interfaces with the world.  Of course, life in London is probably best for the young given the grind of daily commutes and the crowded conditions.  While politeness is everywhere, one senses the underlying tensions of relentless daily competition.
Finally, while there is much new construction with some very innovative architecture, a lot of effort has also been made on working with the existing buildings.  As a result, London has an amazing collection of architecture dating back hundreds of years.  One expression I came across referred to renovating old buildings as “recycling”.   In the current age of environmental sensibilities, keeping old buildings maintained and reused is not only an investment in our heritage but also a form of urban recycling and needs to be encouraged especially in newer cities with a more fragile set of heritage buildings.  Our current debate in Thunder Bay on whether or not it is worth refurbishing our own Whalen building should be a non-starter.  We are not a city on the scale of London and never will be but if we want to create an interesting city for future generations we need to be more proactive in recycling our heritage buildings and converting them to new  uses.

Today is "A-level" day in the UK, the day when teenagers find out the results of their end of high school exam tests which form the basis for university admissions.  The more A levels you get on your subjects, the better your chances for admission to a program of your choice.  The added wrinkle this year however is that tuition fees are expected to triple from from 3,000 to 9,000 pounds.  In today's Independent, there was a special university supplement that among other things explored foreign options for British students.  British students have the option of going to the continent - say the Netherlands - which is close by and charges much lower tuition fees.  Alot of attention was spent in the Independent on the option of going to the United States.  Little mention of Canadian universities was made however.  This is unfortunate.  Given that there may be as many as 250,000 British students who may not be able to go to the British university of their choice for one reason or another, there is the opportunity for some substantial international student recruitment by Canadian universities who as we know want to become more international anyway.  What better opportunity than this?

In Northern Ontario, we often feel inconvenienced if it takes more than ten minutes to drive across town and traffic is when there are a half a dozen cars lined up to turn left.  Moreover, our population density is so low that our public transit is generally inefficient and sporadic.  Without a car, you are not going anywhere fast.  In London, road traffic is incessant, congested  and therefore there  is reliance on public transit - bus, Tube and train.  Every day, not only do millions of Londoners journey across their city to work but millions also pour in by rail from suburbs and cities from around the metropolis.  No wonder there was an outcry when it was announced this week that season rail passes would be going up eight percent.  Londoners and other regional commuters are quite outraged and even were demonstrating at Waterloo Station this week.  Then there is the Tube.  It is amazingly convenient and easy to use and has been part of the London public transport scene since the Victorian era.  If you miss a tube train, another comes by in minutes.  The stations are marvels of engineering.  The Tube however really is a tube and during peak periods it gets very crowded with commuters jammed in like sardines.  It is hot and there are breakdowns and mechanical delays.  In just three days here, I've experienced two.  It is a system under stress and new investment is required to keep up with demand.  Without the Tube, London could not function as it does.  Large densely populated cities like London, unlike cities in Northern Ontario, are dependent on public transit.  Given increasing urbanization, this bodes well for the future of the Bombardier plant in Thunder Bay.  It should be assured decades of work in building light rapid transit systems and subway cars for markets around the world.

 




I have returned!  Northern Economist is in London this week to attend a workshop titled Common Wealth? Wealth Holding and Investment in Britain and its Settler Colonies, 1850-1914. My hosts and organizers are Alastair Owens from Queen Mary University of London and David Green from King's College London and with international colleagues we will be looking at research work on wealth using probate records.  Spent  time touring yesterday familiarizing myself with the Tube and saw a few sights including the Eye of London.  Lovely weather in London yesterday and large crowds everywhere.  No evidence at all of the recent unrest in the suburban parts of the capital in Central London.  The most amazing part of the experience is again as in New York, the sheer number of people and the variety of languages being spoken.  Yet, lines move very quickly and efficiently and everyone is extraordinarily polite and helpful. Am looking forward to the rest of the trip. Cheers.





Statistics Canada has just released its statistics for airport travel for 2010 and they show that passenger traffic at Thunder Bay between 2009 and 2010 is up 5.8 percent.  In 2010, there were 624,072 passengers while in 2010 there were 660,485.  This is on top of a decade of steady growth.  Nationally, it is up 4.4 percent while for Ontario as a whole it is up 6.4 percent.  On domestic travel, Thunder Bay was up 6.6 percent compared to 3.1 percent for Ontario and 1.8 percent for Canada.  On trans-border travel, however, there was a sharp decline in Thunder Bay given the termination of the air link to Minneapolis.  While Ontario was up 9 percent and Canada almost 8 percent, Thunder Bay was down 22.7 percent.  However, Thunder Bay International Airport made up with it with other international flights  - largely winter flights to warm destinations – and here it was up 33.7 percent compared to 10.7 percent for Ontario and 9.2 percent for Canada as a whole.  In terms of cargo, there was also growth of 2.8 percent for Thunder Bay but this was well below the Canadian growth rate of 13.0 percent.  All in all, airport use is definitely up in Thunder Bay.  Hopefully, there will be a resumption of air travel links to Minneapolis in the not too distant future.
 


Investment spending or capital formation is a key component of GDP and one of the more volatile parts of the macro economy given that along with interest rates and the general business cycle, it is also driven by investor expectations or what Keynes referred to as “animal spirits”.  Investment spending is generally divided into residential and non-residential investment with non-residential investment further divided into industrial, commercial and government/institutional investment.  Regional investment spending is no less important a driver than national and the trends in non-residential investment spending in Northern Ontario as demonstrated by its two major centres – Greater Sudbury and Thunder Bay – are quite interesting.
Using seasonally adjusted, current dollar quarterly data, non-residential investment spending data was obtained for Greater Sudbury (population in 2006 of 157, 857) and Thunder Bay (population in 2006 at 122,907) from Statistics Canada for the period 1997-2011.  The average quarterly value of total non-residential investment over this period was 38.9 million dollars for Sudbury and 27.2 million dollars for Thunder Bay.  Sudbury’s population is 28 percent greater than Thunder Bay while its average quarterly total non-residential investment spending was 43 percent greater.  This would suggest that Sudbury is the relatively more robust economy – again not a surprise given the boom in the mining sector and the forest sector downturn.
The data comparing the two cities is plotted down below for total as well as component investment spending along with linear trend lines.  What is interesting is the trend over this period for total non-residential investment spending as well as its components.  While both have trended upward over this period, Sudbury has demonstrated the more robust linear upward trend.  When industrial investment spending is compared, Sudbury has trended upward while Thunder Bay has actually declined over the same period.  Commercial investment spending trends upward in both Sudbury and Thunder Bay but again the growth trend is more pronounced in Sudbury.  As for governmental and institutional investment spending, despite the recent flurry of public sector building in Thunder Bay, the overall trend in this sector is positive but barely so.  Meanwhile, Sudbury again demonstrates a pronounced high growth trend.
It would appear that non-residential investment spending in Sudbury over the last decade has been firing on all three cylinders with significant positive growth trends in industrial, commercial and government/institutional investment.  While Thunder Bay has seen growth in total non-residential investment spending, it is being fueled mainly by commercial sector activity with the government/institutional sector growing very slowly and the industrial sector showing decline.  What is surprising is how well Thunder Bay is doing despite the forest sector downturn particularly in the area of commercial and retail investment.  What is also surprising is its relatively weaker performance in the government and institutional sector compared to Sudbury. 


 

 



The current mayhem on world stock markets and the threat of another recession invariably generate questions as to what is happening and why.  Of course, what is presently occurring on world markets is linked to the mortgage loan and financial crisis of 2008 and the ensuing global recession.  In essence, prior to 2008, the world economy had a big party, which involved a lot of debt financing.  Not everyone was invited to the party but those that attended had a great time.  The party ended, but now everyone has to help clean up – whether they attended the party or not.  In simple terms, this is the crux of the matter.
In the wake of the financial crisis and the recession, government stimulus programs bought time but after three years, mountains of private debt have been augmented with mountains of public debt and the world economy has still not started growing in a manner that would assist in dealing with the debts.  The U.S. economy is still mired in slower economic growth.  Europe is still facing debt problems not just in Greece but also in the larger economies of Italy and Spain.   Add into this the reluctance of politicians to face their debts as most recently illustrated in the U.S. debt ceiling debate and it is no wonder that world stock markets have decided that things are not so good.  There is a lot of debt to unwind and it basically means that there is going to be a lot less consumption in the immediate future both publicly and privately.  This was apparent before Standard and Poor’s downgraded the U.S. debt – at best their downgrade was a match that lit the highly combustible world financial situation. 
Debt is a tool that enables individuals and government deal with large capital purchases or short-term fluctuations in purchasing power.   Used responsibly, it allows people to buy a house, companies to finance expansions, and governments to build infrastructure.  Used irresponsibly, it becomes a way to fuel current consumption and short term growth and postpone the day of reckoning which when it arrives can be quite brutal if the economy has slowed or interest rates are rising.  Part of the solution to the current situation requires governments and individuals taking responsibility for their current debts and institutional mechanisms that prevent the future irresponsible accumulation of both private and public debt.  In many respects, there is a crisis of confidence in world economic leadership and that confidence needs to be restored before progress can be made in dealing with debt and world economic growth. 
The leaders of the G-20 need to come together and create a new global sovereign debt stabilization fund (a global bailout package for lack of a better term) that in essence safeguards debt issues either through the World Bank or IMF or as part of a new institutional arrangement.  Coupled with this would need to be conditions for countries to deal with their fiscal deficits over a three to five year period with credible plans to restructure their finances as well as transition payments (in essence a form of global equalization grant program) from the new global fund to deal with the shock of adjustment.  In essence, this is a crisis in confidence and the current ad hoc approach needs to be replaced with the structure of a more formal mechanism that will generate the confidence in the world financial system needed to restore stability in world markets.
What about Canada? Well, Canada is in comparatively good shape but the indicators suggest concern.  For Canada, there are high levels of private debt and public sector debt has grown but not to the extent that it has in Europe or the United States.  However, watch out for the value of our dollar.  Oddly enough, while the United States received the debt downgrade, the value of its dollar rose relative to ours.  The U.S. problem is not the debt ceiling debate or the Standard and Poor’s downgrade but its lack of a credible long-term plan to resolve its debt issues and a very anemic economy.  Its debt instruments – treasury bills - are still seen as a safe store of value.  A weak United States economy means a drop in demand for Canadian exports and a slower economy – hence a drop in our dollar’s value. 


Standard and Poor’s has downgraded the U.S. debt rating from AAA  to AA+.  Effectively speaking, there is still little risk of an actual default by the U.S. government on its debt and its borrowing costs are not likely to be affected very much given that about two-thirds of U.S. debt is domestically held anyway.  So what does this mean?  Well, its pretty much a direct comment on U.S. political behavior over the last month leading up to raising the debt ceiling.  As well, there is another political message here that involves S&P taking a swing back at U.S. politicians.  Recall, that in the wake of the mortgage loan debacle Standard and Poor’s was criticized by many – American politicians included - for not anticipating the mortgage loan crisis.  Well, S&P is not going to make that mistake again and probably decided to make sure it anticipates any crisis with U.S. debt – as remote as it may be. Bond rating agencies have long memories.

  • Aug 5, 2011 Posted By: Livio Di Matteo Tags: none
At first glance, comparing Hamilton and Thunder Bay seems inappropriate given that Hamilton has nearly five times the population of Thunder Bay and is located in the highly urbanized south of Ontario.  Yet, for comparison purposes it would be difficult to find a resource manufacturing/port city of 100,000 in southern Ontario that is an eight hour drive from any other major Canadian urban centre.  However, they are both “Lakeheads” with Thunder Bay and its port at the head of Lake Superior and Hamilton at the Head of Lake Ontario.  Both have served as transshipment points to their respective hinterlands and both developed into major industrial centers – Hamilton with steel and Thunder Bay with rail car manufacturing and forest products.  As well, both have been hard hit by the economic change of the last decade and the decline of manufacturing and have been trying to diversify their economies. 
According to the 2010 BMA Municipal Study, Hamilton has 530,420 people while Thunder Bay has only 110,984.  Over the period 2006-09, Hamilton’s population grew by 5.1 percent while Thunder Bay’s grew by only 1.7 percent.  Hamilton is more densely populated but also still quite spread out. Though it has nearly five times the population, its population density is 475 people per square kilometer while Thunder Bay’s is 338.  Interestingly enough, while Hamilton has five times the population, it only has about three times the length of paved roadways indicating the relatively higher dispersion of Thunder Bay’s urban setting.
Hamilton is the older of the two cities, dating back to the early 19th century with city status for Port Arthur and Fort William – Thunder Bay’s predecessors - going back to the early 20th century.  Yet, Thunder Bay has a higher proportion of its homes erected before 1986 reflecting slower housing development over the last few decades.  Hamilton has benefitted from being closer to the GTA when it comes to housing growth over the last few decades.  Household income is also higher in Hamilton compared to Thunder Bay – at 78,000 dollars versus 69,000.
While both cities have been subjected to the trauma of manufacturing decline, the economic indicators suggest that Hamilton has weathered the downturn relatively better than Thunder Bay.  Per capita building permit values in Hamilton are double those of Thunder Bay, household incomes are higher and population growth faster.    This is also apparent when some of the municipal government indicators are examined.  Per capita tax assessments have grown faster in Hamilton than Thunder Bay.  The per capita municipal financial position for Hamilton is better than Thunder Bay, according to the BMA study, and the debt reserve ratio is 0.8 for Hamilton and 2 for Thunder Bay.  In terms of the impact on municipal fiscal position, Thunder Bay has fared comparatively worse.
One explanation for Thunder Bay’s poorer performance might lie in its municipal tax structure.  Thunder Bay’s net municipal levy per capita currently stands at 1,319 dollars while Hamilton’s is only 1,269 dollars.  However, taxes per detached bungalow on average are higher in Hamilton (though so are property values) as are standard industrial taxes per square foot as well as rates for things like neighborhood retail.  Tax differentials are not sufficient to explain the difference in recent growth and activity.  Location is probably a more important factor.  There is simply a much larger population cluster surrounding Hamilton – both in Canada and the United States - providing it with economic opportunities that Thunder Bay can only dream of. 
Thunder Bay is still a small isolated population island that needs to overcome locational disadvantages despite its location in the middle of the country.  While Thunder Bay may be in the centre of the country’s east-west axis, unfortunately there are not a couple of million people to go along with it.  Once again, it is the market depth of a larger population that provides much of southern Ontario with long-term economic growth opportunities as well as competitive pressure.  Thunder Bay needs to focus new energy on how to boost its immediate urban as well as regional population if it is to grow in the long term.  While population growth and associated congestion may seem to be drawbacks in southern Ontario, they also come with the opportunity that creates jobs and retains youth.


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From time to time, there are occasional calls in Thunder Bay municipal politics to sell off public assets and invest the proceeds in future needs for the community.  Whether it is our municipal golf courses, municipally owned land or even the municipal phone utility, the argument is that these activities often compete with the private sector and therefore the municipal government should divest themselves of them, create market activity and in the process generate cash – the proverbial win-win situation.
An interesting example of this process is in Hamilton, Ontario where in 2002, the Hamilton Hydro utility was sold and 137 million dollars raised in the process and invested in what was called The Future Fund.  Between 2002 and 2007, 37 million dollars from the fund was invested in high priority infrastructure projects including the restoration of the Hamilton Art Gallery, rebuilding parts of the downtown and contributing to a Dieppe Memorial on the beach strip.  The remaining 100 million dollars was put aside in a fund that was supposed to provide a perpetual source of funds for other worthy projects.
On the surface, this seems like a wise strategy but an enormous amount of discipline is needed to make it work long-term.  Nothing is more tempting to politicians than a pool of seemingly idle money and unless the appropriate safeguards are put in place, a plethora of worthy projects seem to spring up that quickly create an incentive to dip into the capital.  In Hamilton, the city’s general manager of finance recently announced that the bulk of Hamilton’s Future Fund will eventually shrink to about 10 million dollars in part because the bulk of what is left is going to be invested in Pan Am game projects.  By 2014, there will only be 10.2 million dollars left in the fund that was supposed to generate income for projects in perpetuity. 
Rather than loan the money to the Pan Am games, the board over seeing the fund was overruled by Hamilton City Council.  Apparently, some of the original 100 million dollars was loaned out and repayment is expected after 2014.  As well, any sale of harbor lands is apparently going to be used to replenish the fund and it is predicted to rise to 128 million by 2026 – barring any other loans or projects.  Needless to say, the skepticism quotient is high in the minds of many.
The fact is, there was supposed to be 100 million dollars to provide income in perpetuity.  An endowment approach to the proceeds of sales of public assets is a wise strategy and represents prudent use from the sale of public assets.  This is a very important lesson of why it is sometimes better to retain successful income producing public assets such as municipal utilities rather than sell them off.  No matter how sincere the intentions of the politicians are to wisely invest and manage the proceeds, over time politicians seem unable to restrain themselves from spending the pile of money on politically attractive projects.  In the case of Hamilton, one may ask if spending 50 million dollars of their endowment on athletic games is the wisest use of the money.  In the case of Thunder Bay, this story should serve as a warning to citizens the next time councilors suggest the sale of income earning municipal assets to raise cash.  If the asset is earning an income, it should be retained.  If it is sold, the proceeds should be invested in a fund with an autonomous corporate board that is outside the reach of myopic municipal councilors.  Allowing politicians near large piles of cash without the appropriate institutional safeguards is fiscal folly.



Well, I took another look at the number of Twitter followers for the four Ontario provincial political party leaders and the distribution has not shifted very much.  Dalton McGuinty still has about 45 percent of the followers followed by Tim Hudak at just over 31 percent, Andrea Horwath next at 18 percent and Mike Schreiner at about 5 percent.   However, what is interesting is the growth rate in the number of followers between June 30th and my tally as of about 3pm August 2nd.  As the table down below shows, while Dalton McGuinty still has the largest number of followers,  the highest growth rate in the number of followers over the June 30-Aug 2nd period belongs to Andrea Horwath at 10.4 percent.  Mike Schreiner of the Greens was second at 9.1 percent followed by Tim Hudak of the Conservatives at 8.7 percent and finally Dalton McGuinty was last at 8.2 percent.  Apparently the Liberals have begun focusing on the NDP just as much as the PCs in their electioneering efforts.  Does the growth in Twitter followers signal the start of a surge?  We shall see what the next few weeks brings.


Northern Economist is away from Thunder Bay and touring the Golden Horseshoe this week with Hamilton as the home base.  Hamilton definitely shows evidence of the manufacturing decline that has hit the older industrial cities of southern Ontario. Hamilton was once one of Ontario's premier industrial cities with manufacturing rooted in steel and equipment sectors but the erosion of the last few decades has seen the steel sector reduced to a shadow of its former self in terms of employment.  The carnage continues.  Siemens announced last week that it is moving its operations to the United States - the loss of another 400 jobs. Meanwhile, U.S. Steel (Stelco’s successor) employees are still locked out.
Oddly enough, the demise of Ontario manufacturing has had a silver lining when it comes to energy.  The loss of automobile and manufacturing plants in southern Ontario has reduced the demand for electricity by nearly 1000 MW.  Meanwhile, the demise of the northern Ontario forestry sector has reduced demand by another 1000 MW.  The hot humid summer has therefore not resulted in peak demand breaking any electricity demand records.  There is now such a relative abundance of electricity that just the other day the Roger’s Centre closed the roof and turned on the air conditioning so fans could watch a baseball game in comfort.  It must be so nice to know that the loss of all those forest and automobile sector jobs has had such a nice side benefit – perhaps this will be featured in election campaign literature this fall under the rubric of  “Ontario’s Cool Economy.”
Hamilton has been trying to diversify its economy via knowledge and service sector jobs but the impact of the decline is quite evident in the older parts of the city.  A drive down Barton Street towards Ottawa street reveals block after block of boarded up stores and shops – the effect is positively Great Depression like.  While this has been a long-term decline, the process appears to have accelerated over the last couple of years.  Yet, as in Thunder Bay, there is new retail activity – even in the east end – as big box stores replace some of the older retail shops.  There is also activity in the west end and on the mountain and houses and condos are going up as Hamilton becomes more of a bedroom community to Toronto but the economic devastation of the older industrial city is ever present.   In an effort to boost the downtown area, formerly one-way streets have returned to being two-way in the belief they will generate more stops and customers but any increase in traffic is probably an illusion from the increased congestion.
The poverty in downtown areas and social decay is quite evident.  Even the more affluent areas of the city are not spared as gangs of dissolute individuals go about spraying graffiti on both private and public property.  Homeowners whose fences back a path alongside the Linc Highway continually have their fences defaced and to add insult to injury, the municipal government sends them notices that they have ten days to clean up their fences or face up to 10,000 dollars in fines.  This is perhaps an attempt by their city government at an economic stimulus program as homeowners spend quite a bit of money on paint from local retailers in order to clean up their fences – at least for a short time. 
All in all, like many former industrial cities in Ontario, Hamilton has had a tough time.  Yet, there is still a determination in the face of the economic challenges that many of us in northern Ontario can identify with.  In the old Hamilton downtown area, on James Street, the old Lister Block, which had been in danger of being demolished, is actually being restored to its former glory.  There has also been an impressive renovation of the farmers market and the public library, which is quite impressive.  Hamilton has also invested in a substantial waterfront park.  These are all symbols of hope and investment in the future.