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How many times have Canadians been warned that
interest rates will increase eventually? What a surprise
when the Bank of Canada lowered the rate to 0.75%, a
move that no economist had predicted.
The big question
is what does it mean for Canadian business?
The first and most immediate effect was to weaken the
dollar, which fell 1.5 cents following the Bank’s
announcement to $0.81. Going forward, we’ll see even
more pressure on the loonie. The market expects the U.S.
Federal Reserve to start raising interest rates sometime
in the second quarter of 2015. That’s not going to happen
in Canada, and in fact, there is a slim chance that our
rates could go even lower. As a result, investors will
move out of Canadian securities towards the U.S.,
weakening the loonie even further.
In terms of the actual cost of business loans, we are
unlikely to see much change. In normal times, the Bank
of Canada’s official overnight rate provides a basis for
the private sector banks’ prime rate. But when official
rates get really low, this relationship breaks down.
Banks have to cover their cost of funds—the amount
they pay to borrow plus their administrative costs—
which is higher than 0.75%. This means that banks
probably won’t lower their prime rate; most will keep it
at 3%. In the U.S., the prime rate is 3.25% even though
the Fed’s official rate is near zero.
What about longer-term bonds? Those yields edged
downwards, but these have been headed lower for a
very long time. In fact, they’ve been trending downward
for the past 15 years right across the developed world.
According to the IMF, this is because emerging markets
like China have accumulated huge amounts of reserves
and as they keep buying rich country bonds, rates are
held down. At the same time, market crises have pushed
investors away from riskier assets into sovereign bonds,
while uncertainty has depressed global business
investment so there is little demand from borrowers
competing for funds. The IMF believes that long-term
interest rates will eventually return to the 3-4% range
but not much higher.
Finally, last week’s rate cut speaks volumes about the
Canadian economy. There has been a lot of speculation
in the media that maybe lower oil prices could help keep
Canada on balance if the negative impact on oil
producers is offset by stronger manufacturing in Ontario
and Quebec. The Bank clearly disagrees: Governor Poloz
called low oil prices “unambiguously bad” for Canada.
In fact, a lower loonie is good for some manufacturers,
but the beneficial effects could take time to materialize,
and consumers may not rush out and spend the money
they save on gas.
Nevertheless, we believe oil prices will get back to the
$60-$70 range by year-end. An accelerating U.S.
economy combined with an 80-cent dollar will
eventually boost our exports. Stronger economic growth
is ahead, even if 2015 is a rough ride. And eventually,
interest rates will rise. When we joke that interest rate
warnings are like “the boy who cried wolf,” remember
the moral of the story. The wolf eventually does show
up (though not until the second quarter of 2016).
-Hendrik Brakel, CCC
What an exciting year for business! The Canadian
Chamber of Commerce just published its Crystal Ball –
Outlook 2015 Report, and big changes are coming to
the global economy. Canada performed well last year,
but there are vulnerabilities just over the horizon, from
highly indebted consumers to worries about our
housing market and now weaker oil prices. But, there
are also big opportunities as the U.S. economy is
accelerating into a booming recovery while the weak
loonie is boosting our exports.
Around the world, we’ve been seeing signs of
weakness even after last year’s dismal results.
Emerging markets, which used to be the engines of
global growth, have slowed and are much more
vulnerable than in the past. Brazil is struggling with
stagnation, Russia is in a deep recession and even
mighty China was forced to lower interest rates to
prop up its bubbly housing market and reduce
financing costs for business.
Across the Atlantic, the euro crisis is back, as
disappointing growth combined with mild deflation.
The 18 countries of the euro zone will see growth of
around 1% in 2015. And, there are risks to even this
gloomy scenario as a radical leftist Syriza party is
leading the polls in Greece and could form the next
government on January 25. European governments
may find themselves in a showdown with a Greek
prime minister demanding debt relief and an end to
austerity. Markets will be troubled by renewed fears of
a euro break-up, even though that remains unlikely.
There is really only one major economy that is picking
up strength. Fortunately, it’s the world’s largest, the
United States of America, with 20% of global GDP. The
U.S. economy grew a staggering 5% in the third
quarter of 2014 thanks to a resurgent consumer and
astonishing strength in the corporate sector.
Unemployment in the U.S. is down to just 5.8% and
wages are rising.
The big question for 2015 is whether the U.S. economic
resurgence can pull other markets along with it, like a
huge locomotive dragging the global economy
forward. We think it can, and that’s why we’re
optimistic that global growth can accelerate to 4.1% in
2015 from 3.3% in 2014. The second big question for
2015: Is Canada ready?
Exports to the U.S. rose 12% last year in spite of weak
energy prices. Some of the fastest growing sectors were
auto parts, lumber, aircraft, plastics, medicines and
machinery. With a rip-roaring U.S. economy and a
weaker loonie, the growth could be even better this
year. That’s why many Canadian companies may have
to scramble to build the capacity, in terms of
investment and human capital, to keep growing.
The main challenge for our economy is that, in order to
maintain a healthy rate of growth, we have to shift
away from domestic consumption, as consumers put
their credit cards away, and focus more on exports and
business investment. Oil prices are likely to remain
weak through 2015, and the Bank of Canada warned
that this could subtract 0.3% from GDP growth.
This means Canada’s manufacturing, technology and
service sectors will need to shift into high gear. Risks
abound, but there are so many opportunities, and 2015
will be an exciting year for Canadian business. Are you
-Henrick Brakel, CCC
What do we, as women, need in order to be successful
leaders? Tara Cookson, our latest speaker for the Kelowna Chamber of Commerce Inspire
Series [a branch of the Women’s Leadership Network], points out that maybe what
we need most, are other strong female leaders to look up to.
Cookson is a PhD researcher at the University of Cambridge,
where she is also founding director of the Gates Cambridge Professional
She is the second recipient of the Bill Gates Sr Prize in
recognition of her remarkable research, demonstration of leadership and
dedication to improving the lives of others. Needless to say, she fits the image
of a strong female leader.
Cookson spoke to her moments of obligation, the times in her
life where she knew she had to dive in and do the work. For her, her journey
started with her involvement at the Kelowna Women’s Resource Centre.
One thing that really stuck with me was a point that Cookson
posed towards the end of her speech, “is there a woman on this wall?” Cookson
told the story of an experiment that was done with students giving
presentations to a panel of judges with various images on the back wall; one of
the images being a strong male leader, one of a strong female leader, and one
of a blank space. To summarize: a significant improvement was seen in the
female students’ volume, confidence, and overall speech when facing the wall
with the image of a strong female leader.
So, this is my question: how do we get more ‘women on the
wall?’ If we need more strong female leaders to look up to, we really need to
start giving each other that helping hand. We need to encourage, to motivate,
and to help on another in our journeys so that we can cultivate more of these leaders.
Another question Tara posed: if we feel we need more women leaders, why not
start with ourselves?
We need to change our mindsets and to recognize not only the
potential of those around us, but our own potential as well. We need to help
each other through our struggles and we need to create a network of people who
can help make things happen and support one another.
If you are a strong female leader, or are inspired to do
more, we would love to hear from you. Email firstname.lastname@example.org for
more information or to find out how you can get involved.
To sponsor any of the Kelowna Chamber events please contact us.