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Canada has high levels of well-being but trade tensions and housing market pose risks

MD Staff

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Canada is one of the OECD economies delivering the best outcomes for its citizens, according to a new OECD report presented in Ottawa today by OECD Chief of Staff and G20/G7 Sherpa Gabriela Ramos. Canada scores highly in all dimensions of the OECD’s Better Life Index, especially in regards to self-reported well-being, personal security and health status. Canada is also undertaking several programmes to foster inclusive growth – with respect to childcare benefits, gender equality and social housing – in line with the OECD Framework for Policy Action for Inclusive Growth.

The 2018 OECD Economic Survey of Canada finds the macroeconomic situation to be broadly favorable, with low unemployment, inflation on target and growth expected to remain solid over 2018-19.

The greatest uncertainty weighing on the growth outlook stems from the possibility of new trade restrictions, principally in relation to the ongoing renegotiation of the North America Free Trade Agreement. The Survey points out that outcomes will depend on political decisions, notably in the United States, while showing that business investment is already being negatively affected. A second risk underlined in the Survey concerns the combination of elevated household debt and high housing prices, which could lead to a disorderly market correction, potentially reducing residential investment and household wealth and dampening consumption.

The Survey emphasises that the rapid growth of Canadian housing prices in recent years not only represents a macroeconomic risk but has also created affordability challenges that are most acute in fast-growing major cities. Since 2016, both the national and provincial governments have responded to housing market pressures with policies that have helped to cut the national average growth rate of real estate prices to 2.9% in the year to June 2018 from 14.2% in the previous twelve-month period. The government should monitor the effects of recent targeted regulations, paying close attention to high-debt, low-income borrowers most vulnerable to high debt-service loads as interest rates rise, the Survey says. It also recommends increasing the supply of affordable housing and better maintaining the existing social housing stock.

Much of the Economic Survey is devoted to improving inclusiveness for women, youth and older people. The report welcomes many of the efforts of the federal government to achieve more inclusive growth, including through the 2017 National Housing Strategy, the increase in parental leave benefits in the 2018 Budget and the establishment in 2017 of the Multilateral Early Learning and Child Care Framework. “Canada should continue leading by example and walk the extra mile to ensure inclusive labour outcomes for underrepresented groups such as women, youth and seniors. This will not only contribute to a more inclusive society, but also to a more productive economy, in the context of low productivity growth and the ageing of the population”, Ms Ramos said.

The gender employment gap remains virtually unchanged since 2009, and women, particularly mothers, continue to earn significantly less than men, in part due to a large disparity in unpaid childcare responsibilities. Outside the province of Quebec, low (but increasing) rates of government support for childcare should be expanded considerably, as should incentives for fathers to take parental leave. Skills development among youth should be prioritised to arrest declining skills and weak wage growth among young males with low educational attainment. Improving labour market inclusion of Indigenous Peoples in Canada is another way to boost labour force participation and well-being, and the Survey argues that better alignment between federal and provincial Indigenous labour market programmes, targeted work experience, expanded access to higher education and rigorous monitoring and evaluation are all important.

Growth in old-age poverty is linked to the indexing of minimum public pensions to the consumer price index, which has meant that they have grown more slowly than earnings. This should be tackled through further increases in basic pension payments over time. Increasing the age of eligibility for public pensions, in line with life expectancy, would boost growth by increasing the employment rate of older Canadians still willing and able to work. This should be accompanied by greater flexibility in working arrangements for older workers.

The Survey also devotes special attention to Canada’s immigration system, which has been highly successful, welcoming large numbers of immigrants from diverse backgrounds who contribute to the economic dynamism and cultural diversity of the country while maintaining high levels of social cohesion. With the introduction in 2015 of the Express Entry system, the focus has been on the selection of immigrants with higher levels of human capital and earnings prospects. Canada has also developed a range of successful settlement programmes and initiatives to facilitate immigrant integration.

To further enhance the benefits immigration generates for the Canadian economy, the Survey suggests increasing the weight given to skilled Canadian work experience in selection processes and prioritising applications from candidates with skilled work experience and relevant job offers before others. Canada should also expand bridge and mentoring programmes, which help immigrants with post-secondary credentials gain recognition and develop professional networks, and redirect resources for settlement programmes so that utilisation patterns better reflect needs. Immigration policy will also need to continue to strike a balance between maximising ease of integration through selection of highly skilled immigrants and maximising the welfare gains for migrants by supporting migration of less-skilled migrants.

On the key challenge of climate change – an area where Canada has scope to do better- the Survey welcomes the launch of the Pan-Canadian Framework on Clean Growth and Climate Change and recommends further steps by governments to progressively increase the carbon price, which would make it possible to reduce overlap between other measures and allow Canada’s greenhouse gas abatement objectives to be met in the most efficient way.

The Survey also notes Canada’s disappointing productivity growth, and reiterates past recommendations to close the gap with the OECD economies having the highest productivity levels. These include reducing barriers to entry in network industries and services as well as restrictions on internal trade.

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Post-Brexit UK will continue to offer significant opportunities

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PwC’s new report, Brexit and beyond: Assessing the impact on Europe’s asset and wealth managers, outlines the chief findings from qualitative interviews with senior executives at more than 20 global asset and wealth managers (AWMs) covering both the preparations for Brexit made by AWMs so far and their views of what the future holds for their businesses and the industry as a whole.

As the political and economic climate around Brexit continues to provide uncertainty across the globe, many AWMs feel confident that they are prepared for Day One following the UK’s departure from the EU – deal or no deal. But for them, this is only the beginning of the story. AWMs are now beginning to think hard about what comes next – above all, about how to best position their businesses for future growth and profitability.

“We received a clear message that the UK will remain a very important part of Europe’s finance ecosystem beyond Brexit. To this end, and to prevent further fracture, uncertainty and costs for business and investors, there is a strong desire among our clients for close alignment based on regulatory equivalence between the UK and the EU27,” said Andy O’Callaghan, Global Asset and Wealth Management Advisory Leader.

The report details the position of AWMs on Day One after Brexit, how they anticipate their operating models changing further in the months and years that follow, and how they see the long-term outlook for the industry as a whole.

Five key takeaways from the report:

More than three years after the referendum, there is still little clarity about the future relationship between the UK and the EU. While the EU’s equivalence regime offers a potentially powerful insurance policy against future uncertainty, AWMs may suffer collateral damage if trade negotiations become politicised.

Most AWMs we interviewed say they are ready for Brexit, helped by the interventions of Europe’s supervisory authorities, and should be able to continue operating largely seamlessly, even in the case of no deal. However, market and economic volatility is a concern.

The future for the UK’s AWM sector is now unclear. Policymakers and the AWM sector will need to focus on cementing the UK’s status as a centre of excellence for portfolio management while deciding the extent of tax and/or regulatory alignment is a viable option for driving funds growth.

EU27 centres such as Ireland and Luxembourg now have an opportunity to consolidate and grow their substantial funds industries, but fragmentation and domestic competition pose a potential risk to the industry.

EU27 AWMs are still unclear about the best way to access the lucrative UK market.

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Emerging East Asia Bond Market Growth Steady Amid Global Slowdown

MD Staff

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Emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019 despite persistent trade uncertainties and a global economic downturn, according to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.

“The ongoing trade dispute between the People’s Republic of China (PRC) and the United States and a sharper-than-expected economic slowdown in advanced economies and the PRC continue to pose the biggest downside risks to the region’s financial stability,” said ADB Chief Economist Mr. Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep financial conditions stable.”

Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Local currency bonds outstanding in emerging East Asia reached $15.2 trillion at the end of September. This was 3.1% higher than at the end of June. Local currency government bonds outstanding totaled $9.4 trillion, accounting for 61.8% of the total, while the stock of corporate bonds was $5.8 trillion. A total of $1.5 trillion in local currency bonds were issued in the third quarter, up 0.9% versus the previous three months.

The PRC remained emerging East Asia’s largest bond market at $11.5 trillion, accounting for 75.4% of emerging East Asia’s outstanding bonds. Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds.

A special theme chapter examines the relationship between bond market development and the risk-taking behavior of banks. The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions. This suggests bond market development can contribute to the soundness of the banking system.

An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018. It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.

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Job Quality in Cambodia is Improving, but New Policies Are Needed to Benefit from Global Markets

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The diversity and quality of jobs available in Cambodia is improving, yet new policies are needed for Cambodia to benefit from the opportunities available in future global markets, according to a World Bank report, Cambodia’s Future Jobs: Linking to the Economy of Tomorrow, released today.

Of the 8 million jobs in Cambodia, 37 percent are wage jobs, many of which offer higher earnings and more protections to workers. However, the other 63 percent of jobs remain more traditional. Such jobs on family farms or in household enterprises are weakly integrated in the modern economy and offer workers lower earnings.

“The diversity and quality of jobs in Cambodia has gradually improved,” said Inguna Dobraja, World Bank Country Manager for Cambodia. “But global trends, such as the growing Asian middle class, shifting trade patterns, and automation require that Cambodia re-think its jobs strategy as it advances to the next stage of export-led development.”

Foreign-owned firms have been significant contributors of higher quality jobs in Cambodia. By 2015, one-third of all wage jobs in Cambodia were in foreign-owned firms. During the period 2010-2015, the garments industry was the fastest-growing occupation sector, increasing its share of employment by 1.1 percent per year.

Domestic firms are more numerous than foreign-owned firms, but they do not contribute as many jobs. Domestic firms employ an average 8 workers, compared to 124 in foreign-owned firms. A key concern is ensuring Cambodian workers are equipped with the skills to compete with workers from other countries for jobs in foreign-owned firms. In 2016, 37.6 of exporters cited an inadequately educated workforce as a top business obstacle.

The report recommends a four-pronged strategy to securing more and better jobs in the future: diversify exports into higher value-added production; create a domestic business environment that supports local firms growth; strengthen linkages between the domestic and export sectors of the economy; and invest in workers’ skills and education. The report further details seven policy recommendations that would advance these strategic goals:

Diversify exports and foreign direct investment (FDI) into higher value-added value chains. Most current jobs are in low-value segments of global value chains. Simplifying processes, providing incentives to foreign investors, and creating quality assurance facilities will encourage diversification of exports and FDI into higher value-added value chains or segments of value chains.

Streamline procedures and reduce the costs of establishing and expanding small- and medium-size enterprises (SMEs), which have considerable potential to create jobs. Such policies would include reducing the cost of doing business for local firms, increasing firm contributions to worker skills development, increasing access to financing through grant programs and fiscal incentives, and providing support to firms to hire more workers.

Help household enterprises enhance their productivity and create better jobs. Household enterprises account for one out of every five jobs in Cambodia and this will grow with increased urbanization. Information technology, for example, can help household enterprises improve their basic business practices and access broader markets.

Support the development of links between exporting FDI firms and domestic input-supplying firms, by, for example, providing incentives to foreign firms to source their inputs from local SMEs, creating a directory of local suppliers with the capacity to partner with foreign firms, and establishing local supplier development programs.

Build a skills development system that will attract higher-value FDI and increase productivity across the economy. Cambodia’s workforce is getting by with only 6.3 years of education on average. Policymakers should focus on reforming today’s education system to help the tomorrow’s workers acquire the broad range of skills needed to work in a knowledge-intensive economy andengage enterprises in the design, financing, and support of a technical and vocational training system to serve today’s workers.

Promote efficient labor mobility and job matching by opening formal international migration channels and supporting programs that encourage circular migration, and by disseminating information about job opportunities inside and outside of the country to students, jobseekers, education and training institutes, and employers so that skills development choices are aligned with the changing labor market demand.

Regain macroeconomic independence and exchange-rate flexibility. US dollar fluctuations have a significant impact on Cambodia’s trade and commodities sectors, which are responsible for most of the country’s jobs. As Cambodia begins to export to a broader range of countries, macroeconomic and fiscal stability will help shield existing jobs from factors related to the US dollar.

“The success of Cambodia’s job strategy will depend on the participation and cooperation of stakeholders across the economy, not only policy makers and government leaders, but also entrepreneurs, investors, development partners, and, of course, workers themselves,” said Wendy Cunningham, Lead Economist and a lead author of the report.

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