Scotiabank Economist
Ron introduced Warren Justice, the Chief Economist of Scotia Bank very briefly.
Warren started by saying that the Bank is established pretty well everywhere and he travels a lot and is constantly reminded that we are very fortunate to live here. He thinks there's a lot going on in the world at the moment and much of it means that it is impossible to forecast anything. He said he will explain a bit about why he can't forecast and then he will do so for a while.
Back when he was studying Economics 101 they taught that business moved in cycles which are familiar and so can be predictable - business drops off, production is cut back, people are laid off, stockpiles are depleted, demand starts up and production gets back to normal. And there is some good news trickling out now - consumer spending is up and housing demand in the States is growing and there is some revitalization. But this is not a regular cycle and we won't be going back to what we knew. There will be a lot of change and an unfolding of a new, unfamiliar world around us.
Growth is happening in different places - two thirds fo global growth is happening in Asia and places like Brazil and they are growing twice as fast as the Western economies. The demand will be for resources - minerals, grains, livestock - in a world that is short of them which is good news for Canada. China is the biggest consumer of raw materials and we are holding a ten year old image of that country as one that produces cheap electronics because they have cheap labour. The paradigm has changed.
Americans are consuming more cars - they are replacing the ones they haven't replaced over the last 4 years - but they are not adding, they are replacing. It's China that's buying new and the demand there is huge. This will be good for Ontario's car plants but Asia is building their own too. Simcoe Muskoka depends on tourism and the Americans are not coming here the way they used to - the dollar, the recession, passports. But Japanese are willing to go to PEI. With proper marketing we should be able to attract a different market here. Chinese are now the number 1 spender on tourism, Russia is 8 and Brazil is 12. We need to put posters up in new places.
China is also the number one market for luxury goods. They do have a huge rich/poor split but the rich are really rich and there are a lot of them. They have a massive population, strong growth, rising incomes and a growing demand for the stuff we have.
But it is not all ecomomics. Many decisions are made by politicians and they take different factors into their decision making process. From an economics point of view Keystone is a no brainer but the decision is being made at the White House. Alberta and BC are looking at pipelines and, again, it would seem simple from an economist's point of view. But BC will be having an election in May and, with the Liberals in trouble, the likelihood is that the NDP will win there and the leader hates pipellines. As an investor these factors have to be taken into consideration but it's difficult to forecast.
Technology ruins forecasts. 10 years ago natural gas prices were rising and predictions were that they would continue up. Then we got fracking and now we have surpluses and low prices. This affects the producing Provinces and States but it also affects the national growth rate. There are positives - cheap energy leads to growth in some areas like Sarnia where the chemical industry is coming back and manufacturing is being revitalized but it's dependent on energy and is skill based and value added.
After all that Warren said there are things that can be predicted. Europe is still bad news and will be for years. The math doesn't work. They have too much debt and weak banks - where they should be enabling growth they are pulling loans to improve their balance sheets and lower deficits but people get laid off and there is negative growth. All the governments that tried serious austerity and that have gone to the people have fallen. Austerity is politically impossible. A well trained graduate in Spain - motivated and willling - faces 50% unemployment. So why are we pushing a trade deal with them? They are a large market but they are familiar. We should be turning to the growth regions.
The US, however, continues to entertain Warren with its Perils of Pauline approach and the constant anticipation of what crisis will they face next? He says it's even worse than it looks. Then why are they still able to borrow? Their private sector is strong. It's the government that's the problem - there is no willingness to solve the problems. They are selling money to themselves. The idea was to get money into circulation so people would invest but people have taken the message to heart - they're paying down debt or putting it in the bank, which is where it came from. It's starting to move now and that will lead to inflation, eventually, 2 or 3 years, maybe.
The new world rising will be important for Canada in general and Ontario, though it will probably grow slower than the rest of the country which had the resources. Our average income has gone to about 10% above the national average to about 4% below and Ontario has a big deficit so is cutting back on healthcare, education and etc. which means layoffs. But new jobs, different jobs, are being created in the private sector and that should help. Our interest rates will mirror those of the US. But we're still better off - our deficit is 1% of GDP, the States' is 8 and they are just kicking it down the road. Our dollar will probably drop to maybe $0.96 and with the solid domestic base our banks enjoy they will contine to do well.
They are expanding internationally and each is doing it differently. Scotia is diversified across countries and industries but no bank can be all things to all people so each focuses on its own expertise. As for some of the problems in China, empty cities etc., there is a slowdown and there is an imbalance but they are counterbalanced by liquidity - $3.2 billion and they are growing through local consumers and through select countries like Brazil, where they are heavily invested. There is friction between the rich and poor and there is political unrest but they are large, diverse and rich and are the new market.
Ron thanked Warren for his insights.