Canadians are cutting back on their international travel, but why?

Demand for international travel says a lot about the state of the world. It soars when people are feeling good about their finances and when the world is relatively peaceful; and it suffers when the economy goes pear-shaped and when war and terrorism are top concerns.

For years in Canada, the boom in international travel to countries other than the United States was a good news story. In October, Statistics Canada released its latest international travel numbers showing that 992,872 Canadians had returned from a foreign country other than the United States in August 2018, some 46 percent higher than the 679,234 Canadians who did so 10 years earlier in August 2008.

A closer look at the numbers, however, revealed more disturbing news: Canadians have been cutting back on their travel in 2018. The 992,872 who came home from abroad in August was down eight percent from the 1,074,086 who did so in August 2017.

Statistics Canada’s collection of data on Canadians’ international travels goes back to January 1972, which makes it possible to track year-over-year changes going back to January 1973.

Of the worst 10 percent of the 548 months for which year-over-year data is available, five of those months occurred during 2018 — January, and May through August.

Why is this slump happening, in a year when airlines have been adding new capacity to foreign destinations and prices have remained about the same? Is it a response to an increasingly uncertain foreign world, or a sign that Canadians are feeling apprehensive about their financial circumstances?

Let’s look back at similar slumps.

One such rough patch happened from Sept. 1979 through Aug. 1981, which featured 24 consecutive months of year-over-year shrinkage amid high inflation and an economic recession, with the worst months being between Mar. 1980 and Mar. 1981.

The summer of 1986 was also particularly bad, with results for each month from May through September being five to 10 percent worse than the same months in 1985. This slump cannot be blamed on the economy, which was going through a relatively good stretch in 1986. The previous year, however, had featured several terrorist incidents — including the Air India bombing and the coordinated assault rifle and grenade attacks on the check-in areas at the Rome and Vienna airports — and high-fatality airliner crashes at Dallas/Fort Worth Airport and in Japan.

The economy pummelled traveler numbers again in the early Nineties, with some months during 1991 being more than 10 percent off the same month in 1990 as Canada went through its second severe recession in a decade, with unemployment rates hitting 10 percent.

Apart from some weakness in 1999-2000, the next serious drop in traveler numbers took place from Oct. 2001 through Aug. 2002, undoubtedly on account of the 9/11 terrorist attacks.

What is behind the travel slump of 2018 is not yet clear, but one can hope that it’s simply a sense of unease about the state of the world, and not the chill of an oncoming recession.

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Housing market cool-down, spending cuts and tax rises to be the heated issues of 2015?

This modest-looking house on Vancouver's east side was sold for $774,900. Overvalued, a bargain, or priced just right? (Click for source.)

This modest-looking house on Vancouver’s east side was sold for $774,900. Overvalued, a bargain, or priced just right? (Click for source.)

When the analysts at the International Monetary Fund (IMF) speak, the world’s governments listen — or at least they should. Several IMF staff arrived in Canada recently to give our country a thorough economic check-up, and today they released their findings.

Thankfully, there were some positive comments in their report. The IMF noted that Canada’s economic performance “has been solid in recent quarters”, “economic slack has been gradually declining” and that the country has “an improving labor market”.

The IMF was also particularly pleased with the strength of the Canadian banking system, which they described as being “highly profitable, with favorable loan quality, low nonperforming loans, and improving capitalization.”

But the IMF also saw some creeping problems that they felt Canada should make an effort to fix before they get out of hand.

One such area was the housing market, which the IMF suggested was showing signs of being over-priced. While some of this was driven by normal supply-and-demand factors, such as a growing number of households and land scarcity in larger cities like Toronto, Vancouver and Calgary, fast growth in the number of uninsured mortgages was seen as a troubling sign.

The IMF’s openly expressed worries about “overvaluation” and “vulnerabilities” in the housing market increases the probability that the federal Finance department will push for even tighter rules in 2015 to prevent higher-risk mortgages from ever being approved — a sound move, but one that wouldn’t necessarily be popular with rejected applicants or the real estate industry.

Even more controversial changes in 2015 could come from the IMF’s displeasure with the provincial governments’ difficulties in balancing their budgets — a task complicated by the growing number of older people who both pay less in tax and are more reliant on government services.

The most controversial proposal of all is cleverly concealed in what might appear to the reader as bureaucratese:

Consolidation plans at the provincial level should proceed, especially in provinces with higher levels of public debt. While adjustment plans rely on ambitious expenditure restraint, raising concerns about their durability, it would be essential for provinces to successfully pursue strategic spending reviews. Still, the adjustment plans may need to be complemented with revenue measures to meet balanced budget targets.

A rough translation into Plain English would go something like this: “Governments are naïve if they think they’re going to balance their budgets by ‘getting rid of waste’ and ‘finding efficiencies’. They are going to have to say ‘no’ to some spending requests, including indirect spending such as tax credits, even if this makes them unpopular. If that doesn’t cover the shortfall — and it likely won’t — they’re going to have to find ways to pull in more money, such as through fees, fines, taxes, and ‘unbundling’ some of their services.”

 

Canada’s strengths heading into 2015:

  • The IMF notes that the job market has been heading in the right direction during most of 2014, and that inflation, while inching upward, remains under control.
  • Household debt has stabilized — though it is still high, at more than 150 percent of disposable income.
  • The U.S. economic recovery and a lower Canadian dollar should be good for Canadian exports and business investment in 2015.
  • A profitable, stable banking system “resilient to credit, liquidity, and contagion risks”. Yet the IMF cautions that Canadian banks face risks from capital markets and their own foreign operations, which should be kept an eye on so that problems are fixed early on.
  • The federal government’s expected return to a balanced budget in 2015-16  should make it easier for Ottawa to pursue useful goals such as increasing the amount of research and development that takes place in Canada, encouraging businesses to invest more and to improve their productivity, or reducing federal income taxes.

 

Canada’s weaknesses heading into 2015:

  • The IMF notes that Canadian businesses have been slow to invest in recent years, and much of their job-creation has been of the part-time and temporary variety.
  • Overvalued housing, driven in part by normal supply-and-demand, but complicated by high-end buyers and a growing use of poorly insured mortgages. Reforms to prevent buyers from taking on mortgages that might later turn out to be unaffordable would be a good idea, even if controversial.
  • If oil prices continue to drop, the economies of the oil-rich provinces (particularly Alberta) will begin to slow down. The IMF notes, however, that this might be partially offset by better growth opportunities in manufacturing and services.
  • More could be done to improve oversight of the financial services industry in Canada, with this job now being split between federal and provincial regulators. While progress has been made in closing these gaps, federal and provincial regulators need to work more closely together.
  • The provinces remain prone to running deficits, and the growing number of older people in the population adds to the financial pressure. They will sooner or later have to make tough choices that could include both cutting spending and getting their hands on more money.
  • Productivity could be better. Contrary to popular belief, this doesn’t mean spending more evenings and weekends at the office; but it might mean making some controversial choices such as entering into more international trade deals, opening protected industries to more competition (which could include scrapping foreign ownership limits) and getting energy exports to market more quickly (think Keystone XL Pipeline).

 

Where the big money was in the Manitoba economy in 2012

Statistics Canada released its latest labour force productivity numbers this past week, normally a ho-hum affair. That’s no surprise: the word “productivity” strikes fear in the human heart, having become unfortunately associated with longer days, shorter lunch breaks and lower wages.

In fact, productivity shouldn’t be so scary a word. Higher output per hour worked is positively associated with basic well-being measures such as GDP per capita. And it is the countries that work fewer hours that are more productive, a real-life validation of Parkinson’s Law, which concluded that, “Work expands so as to fill the time available for its completion.”

Now, having made that point, let’s get to what the latest StatsCan numbers reveal about the Manitoba economy.

Overall, Manitobans averaged $45.20 in economic output per hour worked in 2012 — or at least in the 2007 dollars that StatsCan prefers to track productivity levels in. That’s not too bad, as you’ll see further below. It’s interesting to note, however, how widely productivity levels vary by sector.

The biggest boosters to this provincial average were the energy, mining, oil and gas sectors, in which economic output per hour worked was many times the provincial average and well above $100 per hour. Real estate, rental and leasing also produced quite a lot of economic output per hour worked, which might explain that industry’s economic and political sway.

Information and cultural industries and utilities also helped boost the average.

Industries at the lower end of the scale included the retail trade, administrative and support services, arts, entertainment and recreation, and accommodation and food services.

Source: CANSIM 383-0029

Source: CANSIM 383-0029. Click to enlarge.

Unsurprisingly, the high productivity associated with energy and mining put the provinces and territories most involved in those sectors at the top of the national productivity chart. B.C., Ontario, Quebec and Manitoba finished within a fairly narrow band just below the national average, while the three non-resource-rich East Coast provinces trailed a bit further behind.

Source: CANSIM 383-0029. Click to enlarge.

Source: CANSIM 383-0029. Click to enlarge.

Counting on China to save the economy is a risky bet indeed

In the year 2030, a professor stands before a classroom full of young Chinese students in Beijing, delivering a lecture on why great nations fail.

“They all make the same mistakes,” he explains, “turning their back on the principles that made them great.”*

With his students hanging on to his every word, he discusses how the United States was brought down by its efforts to tax and spend its way out of recession, making “massive changes” to health care, nationalizing private industries, and running up debts.

“Of course, we owned most of the debt,” he says, followed by an ominous-sounding chuckle. “So now they work for us.”

The students laugh.

So goes a U.S. TV commercial produced and aired in 2010 for “Citizens Against Government Waste”, just ahead of America’s mid-term congressional elections.

By standard appearances, China is becoming a power to be reckoned with.

While other countries languished in recession, China’s economy is estimated to have grown by about 10 percent in 2010. Its public debt was a mere 19 percent of GDP. If needed, it could draw from a pool of 318 million men and 300 million women fit for military service. And the wealthiest five percent of its population are greater in number than the entire population of France.

Thus, some people wonder if it might be up to China to save the world. Consider the following commentary written for Britain’s The Guardian by Dean Baker:

Can China save the world economy? That is a question that people should be asking as the other potential candidates withdraw from the race. At the moment, the economies of the United States, Europe and Japan are all suffering from weak growth or worse. The debt crisis of eurozone countries threatens another financial crisis that could lead to another plunge in output, not just in Europe but throughout the world.

[…]

With the key actors in the wealthy countries either unwilling or unable to take the necessary steps to support the world economy, it is reasonable to ask whether China can fill the gap. Certainly, China has the ability to act as a backstop for the world economy, if it chooses to play this role.

[…]

If China were to take this path, it would provide enormous benefits to the world economy. The wealthy countries would have to acknowledge China’s role as the leading economic force in the world. They would also have to acknowledge the errors of their boneheaded economic leadership that put them in a situation where they could not rescue their own economies.

Are Europe and North America doomed to kowtowing before the newly rich and powerful Chinese?

Probably no more so than we were supposedly doomed to kowtow to “Japan Inc.” in the ’80s, when a confident, disciplined and seemingly wealthy Japan looked likely to end up dictating its terms to the soft, lazy North Americans and Europeans.

If Japan had its faults — most notably a corruption problem in its government — China’s faults are even worse. Take the World Bank’s latest Worldwide Governance Indicators for instance:

  • In 2009, China scored 5 out of 100 for Voice and Accountability, meaning that Chinese citizens had about as much say in how their country is run as did citizens of Belarus, Cuba, Iran, Libya or Saudi Arabia.
  • China scored 30 out of 100 for Political Stability, putting the country roughly on par with Cameroon, Guyana, Nicaragua and Serbia.
  • China’s strong point was Government Effectiveness, where it scored 58 out of 100. But even here, there was a danger: countries where the government is effective but still refuses to give citizens a say in running the country are at an elevated risk of revolution. Bahrain, Egypt, Jordan, Syria and Tunisia suffered from particularly large gaps between government effectiveness and accountability on the eve of the “Arab Spring”, and such problems persist in not just China, but also Cuba, Kuwait, Malaysia, Saudi Arabia, the United Arab Emirates and Vietnam, just to name a few countries.
  • China scored 44 out of 100 for Regulatory Quality, meaning that oversight of critical areas of the economy is likely no better than in the Dominican Republic, Egypt, Honduras, India or Senegal.
  • China scored 45 out of 100 for Rule of Law, suggesting that the idea of everyone playing by the same rules remains a hallucinogenic fantasy. In this case, China plays in roughly the same league as Belize, Serbia and the West Bank-Gaza.
  • China scored 36 out of 100 for Control of Corruption, down significantly from the turn of the century, when China was in the high-40s. By this standard, China is roughly as corrupt as Argentina, Guyana and Zambia.

Countries with poor-to-mediocre governance indicators are a risk to their neighbours, their trading partners and their investors. Government ceases to exist for the equal benefit of all, laws are enforced or ignored whimsically, and discontent is repressed and denied an outlet until one mistake by the government causes a sudden, violent backlash.

The risk is that, behind the happy face of an increasingly prosperous and self-confident China, is a country seething with discontent — and that one wrong move by the country’s leaders could produce the same sudden outburst of public anger that the world recently witnessed in Egypt, Libya and Tunisia.

The worst-case scenario would be to have such a flash-over happen back-to-back in China, the world’s third-largest economy, and in Saudi Arabia, the world’s largest oil exporter.

That could make the Greek debt crisis look like a walk in the park.

* – As an aside, I would say that the main threat to the U.S. is the perception that its government is too unaccountable (being roughly on par with Spain and Uruguay in this regard) and is in need of tougher anti-corruption safeguards (where America’s system of government is perceived to be no more honest than Japan’s, and less honest than Chile’s).

A possible explanation for the Weird Recession?

You have to be at least in your mid-thirties to have gone through the previous early ’90s recession as an adult. Those of us old enough to remember the bleakness of life between 1991 and 1993 are sometimes confounded by the fact that this recession seems kind of… weird.

Maybe it’s the fact that restaurants still seem to be doing good business, or that, in spite of economic shrinkage, it just doesn’t feel like we’re going through tough times, unlike the early ’90s when we really did feel it.

Two independent groups of researchers — at CIBC and the Certified General Accountants Association of Canada (CGA)  — might have found part of the reason.

The CGA has raised a red flag about consumer debt in Canada, noting that our use of credit for consumption rather than wealth-building has taken off, while our savings rate has plummeted. In particular, they blasted policies that promote “financing our consumption activity and… fuelling gross domestic product growth with unearned money.” (See page 67 of their report.)

Consumer indebtedness was also highlighted in a CIBC Economics report which notes that, as in previous recessions, personal bankruptcies have been rising.  But here’s where it gets weird:

Given the current fragile state of the Canadian economy and the likelihood that first-quarter GDP will be the steepest drop on record, one would expect the number of business bankruptcies in the economy to skyrocket. The reality, however, is surprisingly different. Not only are business bankruptcies not rising, but they are, in fact, falling. This trajectory is completely inconsistent with both the experience seen in any other recession and the current situation in the US, where business bankruptcies are rising at a rate not seen since 1975.

Could it be that instead of the broad-based suffering we saw in the early ’90s, we’re seeing a situation where the pain of the recession is being disproportionately borne by a smaller number of consumers who lived beyond their means thanks to easy credit and ‘paper wealth’, while those who stuck to financial orthodoxy are dismayed by the downturn in their RRSPs, but are still holding their own?

Or that the current recession, while sharp, is not being compounded by either the inflexibility of the gold standard (which was a contributing factor to the Great Depression) or the punitive 12-percent-plus interest rates of the years 1979-84 and 1988-91?

Just a couple of many possibilities why this recession  seems so weird.