A Bank of Canada quandary
Stephen Poloz, governor of the Bank of Canada, has retreated from his avowed determination to achieve what the central bank calls a “neutral range” for interest rates. That would be a key lending rate of 2.5 per cent to 3.5 per cent, a sort of perfect rate that keeps inflation under control without stifling economic growth. The Bank’s plans were upended, though, by this year’s sharp fall in oilpatch revenues and employment, along with America’s trade punishment of Canada and uncertainty about global economic growth brought on by an apparent end to the bull market in stocks and a Brexit that has not gone easily as Brexiteers had promised. In late October, this space wondered if the optimism behind Poloz’s latest rate hike was premature. About six weeks later, the Bank began soft-pedalling on its once adamant insistence that rates need to climb to 3.5 per cent from the current 1.75 per cent. Poloz’s chief worry for 2019 is an escalation in the U.S.-China trade war. If U.S. President Trump can’t be dissuaded from his threatened 25 per cent tariff on all Chinese goods imported by the U.S. by March 1, the result could be an inflationary firestorm afflicting the global economy, one that central banks would be severely challenged to contain. The resulting price spikes in consumer and industrial goods would lower living standards worldwide. It’s a frankly ugly scenario and one that is self-inflicted, originating — though Poloz is too polite to say so — with a protectionist White House. Should that catastrophe be avoided, the Bank expects a difficult 2019 for resource-based Western Canada but quite strong growth elsewhere in the country.
Trump’s biggest blunder yet
Donald Trump has alienated America’s allies, including Canada; exploded the U.S. deficit; and slowed world economic growth with his trade wars. But the worst thing the U.S. president has done so far is to threaten the independence of the U.S. Federal Reserve Board, the most powerful economic institution on Earth. In September, this space warned that Trump’s increasing belligerence toward Jerome Powell, his own nominee to chair the Fed, was troubling. Matters have since gotten worse. Trump is now seeking Powell’s removal, and never mind recent assurances by unidentified Trump officials to the contrary. (Those same dubious sources said other Trump officials were safe, and they weren’t.) At the very least, Powell and the Fed are now compromised given White House hostility.
That Trump is scapegoating Powell’s appropriate interest-rate hikes as the cause of a long overdue correction in the stock market is more proof that the world’s largest economy is headed by an economic dunce. The unprecedented removal of a Fed chair would destroy the Fed’s autonomy, and raise doubt about the independence that all central banks require in order to function. More frightening still, the folks on the bridge to handle a future U.S. catastrophic economic collapse will be a team the Washington Post has dubbed the Keystone Cops, not a “no drama (Barack) Obama” and a competent, autonomous Fed chair, Ben Bernanke, who ably stabilized the global financial system during the nightmarish Wall Street meltdown of 2008-09. American Banker asks: “Has Trump become a systemic risk to the U.S. economy?” The answer is yes. For as long as he is in office, Trump will be a clear and present danger to the world economy.
The Gap’s futile bid at recovery
For those of us of a certain age, and that take a strong interest in retailing, an infrequent visit to The Gap is both painful and instructive. The brand’s death spiral, dating from the early 2000s, continues. A Gap that invented and perfected a new and widely popular type of merchandising in the 1990s is poised to close several hundred stores. That’s a lot of abandoned bricks and mortar for a brand with just 800 stores in North America, including 61 in Canada. But the drastic step is necessary. Indeed, it’s long overdue — lack of urgency in confronting problems being among the chronic shortcomings of Gap. Comparable, or same-store, sales — a key measure of retail performance — have been dropping all year, and by a sharp 7 per cent in the latest quarter. Stock in San Francisco-based The Gap Inc. has lost 40 per cent of its value in the past five years, and profits are down 35 per cent in that period. The firm’s Old Navy chain is thriving, and its Banana Republic brand is on the mend. But the firm’s namesake Gap brand is a lesson in doing everything right in the 1990s — irresistible merchandise, alluring store design, brilliant marketing — and then getting it all wrong: overexpansion; a hodgepodge of goods, which arrive in stores late or too early, and have fit and quality faults, leading to markdowns; and short-staffed, dumpy stores. Killing a Gap brand that long ago lost consumer relevance would mean cutting the parent’s sales by one-third. But after two decades of failing to fix the brand, that option seems the only hope of restoring the parent company’s profitability and a respectably valued stock.