David Olive: Bank of Canada continues to prove it can adapt to changing economic conditions
|Toronto Star 28 Apr 2019 at 17:50|
The Bank of Canada (BoC), which last week left its key lending rate unchanged at 1.75 per cent, is under fire for errant forecasts, causing some to wonder about its current projections for a Canadian economic rebound in the second half of this year.
GDP was expected to grow at an annual rate of 2.3 per cent in Q4 2018 and by 0.8 per cent in Q1 2019. But the actual numbers came in at 0.4 per cent and 0.3 per cent, respectively, which got some analysts worrying about a recession. The BoC was overly optimistic about growing strength in exports and business investment, neither of which picked up as expected.
“We were trying to capture something that is quite ephemeral, business sentiment, which translates into investment decisions,” Stephen Poloz, the BoC governor, said last week. The second-half rebound the BoC now forecasts is based on an expected housing-market recovery, wage gains and a revival in the global economy. You can see how unanticipated disruptions could make a hash of that forecast, too.
But what really matters is how a central bank responds to rapidly changing conditions. On that score, the BoC continues to shine, out front of its peers last year in “pivoting” away from its determined campaign of money-tightening. Expect the BoC to keep borrowing rates at their current accommodating level well into next year.
Canadians have been well-served by their non-ideologue central bankers, in contrast to certain U.S. Federal Reserve Board and European Central Bank counterparts. When economist John Maynard Keynes was accused of inconsistency, he said, “When conditions change, I change my views. What do you do?”
Counting the days to a Bombardier-Alstom tie-up
It’s been three months since European antitrust authorities blocked a planned merger of Siemens AG of Germany and Alstom SA of France, and still no Alstom-Bombardier Inc. merger. A tie-up between the two was widely rumoured at the time.
Instead, Bombardier last week disappointed investors again, cutting its revenue and profit forecasts for 2019. Bombardier’s rail division, the firm’s largest business, accounted for most of the $1-billion downward revision in 2019 revenue.
The latest bad news comes on the heels of a difficult debt refinancing at the firm. Bombardier remains among the financially walking wounded, and there’s no prospect of short-term recovery given the rail division’s stubborn inability to honour contracts with clients. With its rock-solid French state backing, Alstom could end Bombardier’s preoccupation with liquidity. And it could finance a ramp-up of Bombardier’s high-margin rail-signaling business, which Bombardier can’t afford to do. Bombardier is so underfunded it would not have been able to bid on castoffs from a Siemens-Alstom merger.
A Bombardier-Alstom union would be a homecoming of sorts for Bombardier, which used Alstom technology to expand into the rail market with its first, 1970s contract with the Montreal transit system. The clock is ticking. Bombardier has yet to endure the full effect of Chinese rail giant CRRC Corp. Ltd.’s nascent inroads on Bombardier’s European market. A Bombardier-CCRC merger would be vetoed by Quebec and perhaps Ottawa as well. But a tie-up with a fellow Francophone enterprise would have the blessing of Quebec City and key Bombardier investor Caisse de dépôt et placement du Québec.
We can already hear the sighs of relief in those quarters with the announcement of Bombardier-Alstom nuptials.
How not to run a business
The odds are against Miguel Patricio in turning around Kraft Heinz Co., the task he was given last week by controlling shareholder 3G Capital Partners Ltd.
Patricio is at least a marketing expert, replacing a financier CEO hapless at anticipating shifts in consumer tastes. Patricio might come up with more imaginative ways to rejuvenate flagship products than rebranding Kraft Dinner as “KD.” Trouble is, the Kraft Heinz pantry is overloaded with ancient brands, some dating from the 19th century, whose faded glory simply can’t be restored or will take years to successfully reformulate. It’s a similar story throughout the 3G empire, created with the expediency of takeovers, often hasty and overpriced, followed by obsessive cost-cutting at the expense of research and new-product development.
Since 2015, shares in Kraft Heinz have lost 61 per cent of their value. Stock in 3G’s Anheuser-Busch InBev SA, world’s biggest brewer, is down 30 per cent in that time. Shares in Restaurant Brands International Inc. (RBI), owner of Tim Hortons and Burger King, have gained 62 per cent, on the strength of Tim Hortons. But it appears that RBI’s fortunes have also peaked, with profits down 6 per cent last year.
“We are getting more and more consumer focused,” 3G lead partner Jorge Paulo Lehmann, 79, vowed earlier this month. But 79-year-old cost controllers don’t roll out of bed one day reborn as consumer champions.
The time to figure out how to serve the unmet needs of customers is when you first go into business, not after you’ve taken a massive $15-billion (U.S.) writeoff on aging brands customers no longer want, as Kraft Heinz was obliged to do in February.