Aurelia Butler

OTTAWA (Reuters) – Canadian Prime Minister Justin Trudeau has fueled economic growth and plugged gaps in the labor market by ramping up immigration, but now new arrivals are straining public services and contributing to an overheating economy, economists say.Since taking power in 2015, Trudeau has brought in an estimated 2.5 million new permanent residents, driving the population above 40 million. Canada’s population grew at its fastest pace since 1957 last year, placing it among top 20 fastest growing countries in the world, Statistics Canada said, in part offsetting the effects of aging residents who are retiring and adding to healthcare costs. In large part thanks to immigration, Canada has matched the United States with an average GDP growth of just over 2% over the past decade, well above the 1.4% G7 average, according to Marc Ercolao, an economist at TD Securities. But problems caused by rapid immigration are beginning to show. First of all, the Bank of Canada struggled to pin down the impact of the newcomers as it tried to cool economic growth.Bank of Canada Governor Tiff Macklem has said immigration adds to both supply and demand, but the overall effect has increased the need for higher interest rates. While immigrants helped ease a labor shortage, they added to consumer spending and housing demand.”If you start an economy with excess demand (and) you add both demand and supply, you are still in excess demand,” he said about immigration earlier this month after hiking rates to a 22-year high of 5.0%. The more concrete problems are the growing strains on transit, housing and healthcare, issues that have begun to dog the federal government as municipal and provincial leaders increase calls for more funding to address them.”If we want to do more immigration, fine, but let’s have a suite of policies” that increase infrastructure investment for “transit, housing, healthcare… schools,” said Chris Ragan, director of the Max Bell School of Public Policy at McGill University in Montreal and an adviser to the Conservative Finance Minister Jim Flaherty in 2009-10.”Our communities and our economy are made stronger every day by people who chose to move to Canada,” said a spokesperson for the Finance Ministry.Most “will contribute to Canada’s economic prosperity and… help address the labor shortages”, the spokesperson said. ‘MIRAGE’Earlier this month, under pressure from Toronto’s new mayor, Trudeau’s government pledged nearly C$100 million ($76 million) to the city to help house refugees who had been sleeping on the street.One-fifth of Canadians in the publicly funded healthcare system do not have a family doctor, the Angus Reid Institute research firm said last year. In Toronto, Canada’s largest city, an average driver lost 118 hours in traffic in 2022, up 60% on the year and the third-highest in North America, data analytics firm Inrix says. While immigration adds to annual GDP, per capita GDP has grown only 2.4% since the first quarter of 2016 compared to 11.7% for the United States. That means Canadians’ wealth, or their standard of living, is rising more slowly than in the U.S.”The Canadian economy on a per-capita basis is flat on its back,” said David Rosenberg, chief economist and strategist at Rosenberg Research. Through population growth “you can create this mirage of economic prosperity, but in the end that’s what it is, a mirage,” he said.($1 = 1.3189 Canadian dollars) More

(Reuters) – Weakening loan growth for U.S. banks and what top lending officers across the industry have to say about the credit outlook will color the debate U.S. Federal Reserve officials are having over where they push policy from here.Fed officials are broadly expected to raise their policy rate on Wednesday, but whether that is their last increase or they feel more may be needed hinges on a range of factors they see as influencing the direction of inflation. Just how freely credit is flowing – and is likely to flow in the near term – is a key input. A valuable guide to that is the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), a quarterly survey of commercial banks that Fed officials consider as they debate policy moves. The central bank has raised interest rates by 500 basis points since March 2022, intentionally weakening demand for loans that help fuel consumption and thus into inflation. Banking data is important in the context of the muddled economic outlook overall: The Fed’s preferred measure of inflation has come down to 3.8% as of May from 7% in June 2022, but a persistently tight labor market and robust consumer spending have led some economists to argue that the economy is still too strong to bring prices down to the 2% target the Fed aims to achieve.Here’s a snapshot of what the previous SLOOS released in May said about the state of credit, as well as other banking data published weekly by the Fed. THE SLOOSEven before the collapse of Silicon Valley Bank in mid-March triggered upheaval across the banking sector, demand for credit had already started to weaken – but not evenly. The Fed’s SLOOS splits credit demand into several main categories, including firms of varying sizes for commercial and industrial loans, commercial and residential real estate and other consumer loans such as credit cards and auto loans. Demand for commercial real estate loans plummeted as remote work diminished the value of office space. Similarly, loan demand from firms of all sizes fell amid rising interest rates.By contrast, demand for credit card lending dropped more modestly, propped up by robust consumer spending and healthy household balance sheets. At the same time, banks tightened credit standards across all categories but placed the most stringent restrictions on loans to the increasingly risky commercial real estate sector. WEEKLY LENDING DATAMore timely data on how the credit conditions described in the latest SLOOS – conducted from late March to early April – are playing out closer to real time are published weekly by the Fed. That data suggests credit tightening continued – and in some cases increased – through the second quarter. That shows, for instance, that annual growth in credit from U.S. banks looks likely to turn negative before long and is already at a decade low. Overall credit provided by U.S. banks is divided by the Fed into two broad buckets, securities and loans.Securities, which includes bonds and other financial assets held on banks’ balance sheets, have fallen by more than 10% on a year-over-year basis, the fastest rate ever. A substantial part of that is due to the value of those securities taking a big hit from the Fed’s rate hikes because as rates go up, bond prices fall.Growth in loans are faring better by comparison, but are showing some signs of weakness too: Representing 70% of the banking system’s overall balance sheet, growth rates are near the historical averages but are also on the decline across all categories.A regional survey released by the Dallas Fed in June supported these challenging conditions, finding that most banks in the district expected further deterioration in the coming months. The four largest banks in the U.S. reported better-than-expected second quarter earnings in July, as increased income from loans still outpaced the payouts from deposits, but analysts cautioned that weakening demand for loans could jeopardize net interest margins. More

At a meeting with top business leaders this month, Luiz Inácio Lula da Silva focused firmly on the future. “I didn’t come back to do the same thing I already did,” said the 77-year old, who is six months into a third non-consecutive term as Brazil president. “We came back to do things differently.” It was a sorely needed message. Despite pledges to overhaul Latin America’s largest economy — and high expectations for a big green transition package next month — Lula’s leftwing administration has so far had a decidedly retro feel. From an industrial strategy focused on subsidies and propping up manufacturing to a foreign policy that has loudly reasserted Brazil’s non-aligned credentials, many of the government’s signature policies echo a bygone era, say critics, who are urging a more modern approach. “Our president wants to impose an outdated leftwing agenda from the 1970s,” said Sérgio Werlang, a former central bank director now a professor at the Getulio Vargas Foundation. “Nowadays it just does not make sense.”Most prominent are the government’s attempts to prop up industry, which as a sector has shrunk from 48 per cent of economic output in 1985 to less than 24 per cent today. But rather than tackle the root causes of industrial decline — poor education levels, costly logistics and burdensome bureaucracy — Brasília has focused on handouts. Between June and July, the government spent R$650mn ($135mn) subsidising the sale of 125,000 so-called “people’s cars” to less well-off citizens. The package was an effort to boost car manufacturing, which has haemorrhaged jobs in recent years. But its impact was fleeting. As if to highlight the futility of the strategy, the package was rolled out at the same time as Volkswagen was announcing that it was suspending production in Brazil, citing market stagnation. That followed stoppages by General Motors, Stellantis and Hyundai and others already this year.Brasília said it intended to spend $20bn over the next four years to bolster industry, with a focus on supporting “socio-economic inclusion [and] promoting decent work and improved salaries”. But for some their focus is misguided. “They think it will preserve more jobs and these jobs are important for growth. But this is the mindset of the 1970s when industry was important in generating jobs. Not now. The world has been changing towards services,” said Werlang.Lula’s political beliefs can often be traced back to his formative years as a trade union activist in the 1970s and 1980s — a time when manufacturing was a bulwark of growth. Many of those who surrounded Lula during those years remain influential today, notably Aloízio Mercadante, who founded the Workers’ party with Lula in 1980. He is now spearheading Brazil’s “neo-industrialisation” push as head of the national development bank.“I see the government as running short of new ideas. We are seeing the old-minded Workers’ party [with] ideas from an old world when the state had more power,” said Bruno Carazza, a professor at the Dom Cabral Foundation.Carazza said the government’s retro mentality was most evident in its foreign policy, particularly its cold war-era outlook on Russia’s invasion of Ukraine. While emphasising Brazil’s non-aligned status, Lula has claimed Ukraine bears as much responsibility as Russia for the conflict and criticised leader Volodymyr Zelenskyy for “wanting the war”. “This [is] Lula paying tribute to an obsolete cold war view that Ukraine was a satellite of Russia, and so the Russians were legitimated to invade,” said Carazza. One notable exception to the administration’s retro bent is Fernando Haddad, who has surprised the business community since his appointment as finance minister. Despite longstanding loyalty to Lula, Haddad has walked a fine line to balance Workers’ party interests with market demands for reform and fiscal discipline. Most notably, he has helped shepherd a long-awaited and widely demanded tax reform, which could be passed by Congress as soon as next month.The overhaul, which is expected to boost long-term growth by up to 2.4 per cent, comes amid an increasingly optimistic outlook for the economy, with gross domestic product forecasts for this year being revised up to 2.2 per cent. Much of this is being driven by the booming agribusiness sector rather than any kind of industrial or governmental policy. But if life starts to improve for Brazilians, Lula will take the credit, retro style. More

Let me take you back to the summer of 2018. It was the hottest on record for the UK. Inflation was running at less than 2 per cent, interest rates were at 0.75 per cent, and 18mn people watched Meghan Markle marry Prince Harry and wished them well.Five years later, inflation is nearly 8 per cent. Interest rates — 5 per cent today — are expected to rise towards 6.5 per cent by the end of this year. And Meghan and Harry? Well, times change. Although headline inflation is falling — mainly due to fuel prices dropping back to levels from before the invasion of Ukraine — wage inflation seems persistent in the UK. The problem of inflation is not going away quickly. For many investors used to trying to build up their wealth, just preserving its value is now the priority. Today, several savings firms offer cash products yielding 6 per cent — though often requiring you to lock in for three years. While inflation stays so high, this is costing you nearly 2 per cent a year in purchasing power. At that rate your £1 will be worth around 82p in a decade. Not great, but these returns set a new benchmark for what to expect from other investments.One area of portfolios worth re-examining is dividend-paying stalwarts. Many high-yielding shares trade on low multiples of earnings and are seen as value stocks. Take National Grid — perhaps the epitome of a solid, steady, low-growth company. It offered a better-than-average yield of 5.5 per cent in 2018. That looked juicy when interest rates were low.National Grid’s earnings are linked to the assets it employs in electricity networks in the UK and the US, where it has a substantial business. These are rising as it plugs in the ever-growing network of renewables.

The growth in earnings has shown in a rising dividend. Between 2018 and 2020 National Grid’s dividend grew from 46p to 49p, keeping up with inflation. From 2020 up to this year’s final dividend the payment should rise to 58p — an increase of 18 per cent. But the cost of living will have risen by about 25 per cent in the same period. The rising cash dividend may feel good, but you are actually getting poorer.And dividends must be viewed in the context of share prices. National Grid’s share price has risen in five years from around £8 to just over £10. So anyone buying in 2018 did pretty well. But the consequence of that price rise is that the yield is the same now as it was five years ago. With dividend rises failing to keep pace with inflation, the share price may be vulnerable to a fall to help restore the attractive yield relative to cash. National Grid is not an outlier. In 2018 the yield on the FTSE 100 was about 4.5 per cent. Today it is the same. Is that enough to compensate you for owning shares rather than leaving money in the bank?Income managers will remind you that the dividend is only part of the story — an important one. But there is a bit of growth, too, hopefully. It is a fair point, but investors should be very careful about assuming that the dividend element they see in the headline data on their investment platform is in the bag — or that share price growth is assured.By way of illustration, potential takeover target BT is down 34 per cent in the past year. It is now delivering a 6 per cent yield, but analysts say rising interest rates mean it needs to cut that dividend drastically to avoid a big rise in its debt costs. If it does, the share price could fall further. Tear up the textbooks?Looking across the market, you would normally expect higher interest rates to lead to higher yields in equities. The old-school theory was that value stocks should outperform in times of inflation. Higher inflation leads to higher interest rates and on to higher discount rates. As a result, immediate earnings are worth more to investors than hoped-for cash flow. The chart below plots the MSCI World Value Index versus the All-Country World Index (in US dollars). As can be seen, value stocks had a period of outperformance in 2022. But this was largely because the oil stocks in a value basket rose significantly on the invasion of Ukraine. The value index has fallen back this year. So much for the textbooks. A couple of reasons come to mind. Value-type stocks are often in sectors with poor pricing power (think chemicals), high debts (try utilities and telecoms) and often high labour costs (construction). The market sees many of today’s growth stocks as a better alternative. Investors believe they are able to outdistance inflation and maintain margin — a slightly exaggerated hope, perhaps, when you see the speed at which Big Tech has been laying off staff lately. Generally speaking, though, growth stocks that have strong earnings and are reinvesting the bulk of their profits do look more attractive in the face of inflation. That does not mean you should overpay. Some of the share prices in the tech growth sector are now eye-watering. Nvidia could fall 40 per cent but still would not attract new buyers disciplined about cashflow-based valuation.Is there a middle way?Well, first it is worth digging below the aggregate numbers. In the US, on average, yields have fallen since 2018. This is largely because of the rise in technology stocks, which often pay no dividends. But look deeper. Kinder Morgan, the largest US gas pipeline company — so a bit like National Grid — used to yield 4.5 per cent. Its dividends have risen from $0.725 in 2018 to around $1.12 this year. That is a rise of more than 50 per cent over five years. Meanwhile, its share price has moved little. So it now yields 6.5 per cent. Globally, there are still some decent-yielding companies lifting their dividends.Within the growth arena I would look for stocks on middling ratings — TSMC, the Taiwanese chipmaker, for instance, on 20 times earnings, and Intel, on 15 times. Both available through US markets, they offer some modest yield. Are the cutting-edge stocks priced to perfection really worth so much more? How far would they fall on any failure to keep pace with the hype around them?There are plenty of steady Eddie stocks that are not that pricey and have long records of maintaining high margins and reinvesting profits wisely. They may not offer the most generous dividends, but they may be better placed to preserve your wealth. Dividends can be important, but be confident they are rising and well covered. Look beyond the headline yield numbers before pressing “buy”. Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and Artemis Global Select Fund More

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The Federal Reserve is expected to raise its benchmark interest rate by a quarter of a percentage point on Wednesday as it wrestles with how much more monetary tightening will be needed to bring US inflation under control.The Federal Open Market Committee is expected to lift the federal funds rate to a new target range of between 5.25 per cent and 5.5 per cent, resuming its most aggressive campaign of monetary tightening in decades.An increase on Wednesday would come after a brief reprieve at the previous gathering in June. At the time, Fed chair Jay Powell indicated the central bank would take a more gradual approach to rate rises to account for months of earlier monetary tightening and the fallout of a banking crisis this year.The Fed will release its latest rate decision at 2pm Eastern Time.Having raised its benchmark rate from near zero in March 2022 to more than 5 per cent, the Fed is now close to a level of borrowing costs it deems “sufficiently restrictive” to bring inflation down to its longstanding 2 per cent target in a timely manner.Powell last month said the Fed was “not so far away from the destination”. But officials have so far resisted ruling out any further rate increases in case inflation — which fell to an annual rate of 3 per cent in June, according to the consumer price index — does not keep falling this year.One complication for the central bank is that the US economy has defied expectations of a sharper slowdown this year. The labour market has cooled off but remains strong, helping to buoy consumer spending. Headline inflation has fallen as energy and food prices have eased, although “core” measures that strip out those volatile costs still hover well above the Fed’s target.

Concerns that some prices — such as those for services — were still rising more quickly than expected prompted officials last month to revise up their forecasts for core inflation, as measured by the personal consumption expenditures price index, and in turn their predictions for the level at which the fed funds rate would peak this year.In June, most officials saw the benchmark rate topping out between 5.5 per cent and 5.75 per cent, suggesting one further quarter-point increase after a July move.However, market participants and economists are sceptical the Fed will follow through with further rate rises this year.After the July gathering, the Fed next meets in September, giving it two more full rounds of monthly data on jobs, inflation and consumer spending. Christopher Waller, a governor and one of the FOMC’s most hawkish members, recently said the September gathering would be a “live meeting”, meaning the Fed could raise rates then.But many economists believe the Fed has a high bar for more tightening in September. Should data indicate the need for another rate rise, most expect it to be implemented at the November meeting. More