Better times ahead (please!)

I have to say that I would have been happy to live out my days without experiencing a global pandemic, without having a front row seat for the increasingly erratic Trump presidency, and without watching from afar as the country of my birth puts itself through the self-imposed agonies of Brexit. Having to endure all three in one years has been, shall we say, something of a challenge.

But....the vaccines are rolling out, Trump is on the way out, and once the UK is actually out (of the EU), perhaps the future there can start to take shape. So maybe, after a tough first quarter, 2021 can be a better year, though it is likely to be many years before all of the damage inflicted by 2020 can be repaired.

Thank you to all who have read any of this blog over the past year. I hope to see you again in the new year. Best wishes for Christmas, and here's hoping for a much happier and safer 2021. 

Jim 

Canada GDP: still recovering

Per StatsCan, Canada's GDP rose 0.4 percent in October, down from the 0.8 percent gain posted in September Sixteen of the twenty industrial sectors expanded in the month, with the best results seen in service producing sectors, as goods production only rose 0.1 percent.  The increase beat expectations, with the analysts' consensus looking for a 0.3 percent gain and StatsCan's own preliminary estimate calling for 0.2 percent. Real GDP is still about 4 percent below its pre-pandemic (i.e. February) level.

StatsCan has also provided an initial estimate for growth in November. It looks for a further gain of 0.4 percent. Given the steady reimposition of restrictions and lockdowns as the month progressed, this seems  surprisingly optimistic.  However, it is now safe to say that, with the strong "handoff" from Q3 to Q4 provided by the September result, and the apparent continuation of growth for at least the first two months of the current quarter, the economy will post a positive GDP result for the quarter as a whole. 

The first quarter of 2021 will be a different story. December seems certain to post a flat result at best, and the tightest restrictions and lockdowns since April will be in place across large tracts of the country throughout January, if not longer. The rollout of vaccines looks likely to be slower than in many other countries, including the United States, thanks in large measure to the lack of any facilities for producing them domestically. Q1 is more than likely to see a renewed fall in GDP, though much less steep than that seen a year ago, with a gradual return to more sustainable growth by about mid-year.  

Just briefly....

 A few pre-holiday tidbits....

Canada's headline CPI rose 1.0 percent year-on-year in November, up from 0.7 percent in October. StatsCan's website seems to be taking an early Christmas break, so here is a link to the CBC's report. The increase was the fastest since pre-pandemic days and was also higher than the analysts' consensus, which looked for a 0.8 percent rise. Gasoline prices are still down by double digits from a year ago: the increase in CPI if gasoline is excluded stood at 1.3 percent.  We are still far from the point where the Bank of Canada would even begin to contemplate any sort of monetary tightening, but the upside surprise here is a useful reminder that once the pandemic starts to fade, inflation may well accelerate rather faster than the Bank is currently expecting. 

Speaking of the Bank of Canada, Governor Tiff Macklem offered some thoughts this week on the subject of "a sustainable recovery".  He cautioned that the strong second wave of COVID would weigh on growth in the early part of 2021, despite the hope offered by vaccines. Looking beyond that, he suggested that increased investment and increased trade would be needed to sustain the recovery, which could not simply depend on a rebound in consumption. He restated an old Canadian hope, largely a vain one, that the country could broaden its export markets away from its traditional dependence on the United States, but suggested even that would not be sufficient: "We do need to develop new, fast-growing markets for our products, but we also need to develop new, fast-growing products for our markets."

Lastly, and offered (almost) without comment, check out this column from the Financial Post. Considering the Post's habitual antipathy to government debt (well, to government anything, really) it is a surprisingly balanced view of the role of fiscal and monetary policy in facilitating Canada's recovery from the pandemic. If you look past the headline, you will find that it comes close to admitting that there is no real fiscal constraint in play right now. Can it be that Modern Monetary Theory has established a foothold at the FP? 

Canadian household debt burden rising again

One unexpected consequence of the COVID pandemic was a sharp decline in the household debt burden in Canada. Data from Statistics Canada revealed that the debt-to-disposable income ratio fell from a peak of 1.81 in the final quarter of 2019 to 1.63 in the second quarter of this year. The decline reflected the income supports provided by government as well as reduced spending amid restrictions and lockdowns. Repayment deferrals offered by financial institutions lowered the debt service burden and facilitated a record increase in household savings.

That was then; now, the debt situation seems to be heading back towards the pre-pandemic "norm". StatsCan reported this morning that the household debt-to-income ratio rose to 1.71 in the third quarter of the year.   The housing market has proved remarkably resilient in the face of the pandemic, and mortgage borrowing set new highs in both Q2 and Q3. Moreover, disposable income fell 3.1 percent in the quarter as government income support dropped, although income remained 9.2 percent higher than in the fourth quarter of 2019.  The household savings rate fell from the record 27.5 percent posted in Q2 to 14.6 percent in Q3, still very high by historical standards. The debt service ratio edged up from 12.4 percent in Q2 to 13.2 percent in Q3, as payment deferral schemes wound gradually wound down. 

Can we square these numbers with Finance Minister Chrystia Freeland's recent suggestion (see December 9 post) that unspent income support payments constitute "pre-loaded stimulus" as the economy moves toward a post-pandemic recovery?  StatsCan notes that household sector saving stood at C$ 56.8 billion in Q3, a sharp decline from the record $ 90.1 billion in Q2 but still very strong by historical standards. Household net worth increased 3 percent in Q3 after a 5.3 percent gain in Q2, largely reflecting the remarkable resilience of equity markets. 

This does appear to suggest that households will be in a position to help Canada spend its way out of the COVID downturn, as Ms Freeland evidently hopes. Not all households, however: it is worth quoting in full this caveat from today's StatsCan report: Household debt is aggregated across all income brackets; however, in general, credit market debt to disposable income tends to be higher for lower income quintiles. No surprise there, but it's an important point for policymakers to keep in mind. 

Is the Bank of Canada getting complacent?

As expected, the Bank of Canada kept its interest rate settings unchanged today, with the overnight rate staying at 0.25 percent. The Bank also committed to maintaining its quantitative easing (QE) program at the current level of C$ 4 billion per week. There was no press conference this time, so the press release itself provides the only evidence we have of the Bank's current thinking. 

In general, the Bank believes that both the real economy and inflation are evolving in line with the projections in its last Monetary Policy Report in October.  The timing and scale of the uplift expected from the early approval of COVID vaccinations remain uncertain, and further restrictions and lockdowns may set back recoveries in Canada and elsewhere.  Measures of core inflation are below the 2 percent target, and the presence of substantial slack in the economy is expected to weigh on inflation for some time. Based on this, the Bank intends to keep interest rates at current levels and maintain its QE program until inflation is sustainably above the 2 percent target, something it does not expect to happen until 2023. 

Even if we allow that most of this is true, is it too soon to suggest that the Bank may be underestimating the risk that inflation could start to move higher sooner than it expects? Consider food prices, for example: this article suggests that household grocery bills could rise by 3 to 5 percent in 2021, reflecting the impact of both COVID (as labour shortages and logistics issues push up production costs) and climate change. This is the fastest growth that the Canada Food Price Report has projected in its eleven year existence. The Bank of Canada might prefer to "look through" such an increase, but it is not at all clear that Canadians or their politicians will be prepared to do the same. 

Then there is the massive COVID stimulus to consider. In last week's Fall Update, Finance Minister Chrystia Freeland noted that a significant proportion of the various emergency benefits that the Government has paid out has gone into savings accounts, rather than being spent immediately. She referred to this money as "pre-positioned stimulus" for the post-pandemic recovery.* With vaccines on the horizon, there is every reason to expect that as we move through 2021, much of that money will flow back into the economy, as COVID fatigue gives way to a tsunami of pent-up spending on restaurants, travel and just about everything else.

It seems inevitable that this spending will start to push up inflation, as businesses take advantage of the boost in consumption to rebuild profit margins and balance sheets. This creates an issue for the Government in its management of fiscal policy: it is promising C$ 75-100 billion in new spending to jump-start the economy, but what happens if the "pre-positioned stimulus" makes that largely unnecessary? It also, of course, creates an issue for the Bank of Canada, if inflationary pressures begin to mount all across the economy well before 2023. The Bank's current forecast may well turn out to be correct, but there are good reasons to think that the inflationary risks may now be biased to the upside.  

* This is presumably more palatable politically than admitting that the Government gave a lot of money to people who did not actually need it. 

Canada's job market: still hanging in

Well, that was a bit of a surprise -- and evidently, not just to me. The consensus analysts' opinion for Canadian employment in November was a gain of 20,000, but Statistics Canada reported this morning that the actual increase was 62,000, with the unemployment rate falling to 8.5 percent. That is the smallest increase since May, as the ever-negative CBC website has been quick to emphasize, but it is important to bear in mind that in any more normal year, a 62,000 gain in one month would be a stunningly large number.   

Most of the details of the report were positive, most notably the fact that 99,000 full-time jobs were added in the month. Employment rose in six Provinces (BC, Ontario and all four Atlantic provinces), was largely stable in three, and only fell significantly in Manitoba. Total hours worked continued to grow, rising by 1.2 percent in the month, and the labour force underutilization rate, which takes account of involuntary part-time work and discouraged unemployed workers as well as those actually counted as unemployed, continued to edge lower. 

Encouraging as these statistics are, the job market remains well below its pre-pandemic (i.e February) peak. Overall employment remains about 600,000 lower than in February, the unemployment rate is 2.9 percentage points higher, and the labour force underutiliization rate, at 16.9 percent in November, almost 6 percentage points higher.   

The news on the job market is likely to get worse over the winter months. The renewed COVID-related restrictions and lockdowns across the country were by and large only in effect for the latter part of the month of November, while StatsCan compiled its data in the week of November 8-14. December will represent the first month of strong restrictions for most of the country since April, and this will inevitably translate into job losses. The promise of a vaccine roll-out offers hope that a return to pre-pandemic conditions in the job market can eventually be achieved, but significant improvement is not likely until the second quarter of 2021 at the earliest. 

What comes after V?

Whether you prefer to look at the quarterly change or the annualized rate, the rebound in Canada's real GDP in the third quarter was impressive -- V-shaped, you might say. The quarterly change, as reported by Statistics Canada this morning, was 8.9 percent, which annualizes to a rate of 40.6 percent. That comes after two quarters of decline, with Q2 particularly weak, and still leaves real GDP 5.3 percent below its pre-pandemic peak, which was reached, if you are using quarterly data, back in Q4/2019.*

The rebound in Q3 was broad-based and largely reflected the reopening of the economy after the lockdowns imposed for much of the prior quarter. Final domestic demand soared by 10.8 percent, as housing investment, business investment and household spending, particularly on durable goods, all recovered strongly. Exports also grew in volume terms as the US economy also bounced back, albeit not quite as strongly as Canada's. 

So, what comes after V? We can get some clues by looking at the monthly GDP data also released by StatsCan today. The bulk of the data relates to September, which saw a month-on-month gain of 0.8 percent, with both the goods and services sectors posting solid gains. However, StatsCan's preliminary estimate for October suggests a gain of only 0.2 percent. This undoubtedly reflects the accelerating second wave of COVID during the month, with the four most populous Provinces (Ontario, Quebec, Alberta and BC) all tightening restrictions as their case counts mounted. 

November has seen even worse COVID numbers and the imposition of more restrictions and lockdowns.  A decline in real GDP for the quarter as a whole seems unavoidable, though it is likely to be much less severe than that seen in Q2. The first quarter of 2021 is likely to see further weakness, potentially giving way to resumed growth by Q2 if the promised timetable for the rollout of a vaccine actually comes to pass. Appropriately enough then, it seems likely that what comes after V will indeed be W! 

* If you use monthly data, which have arguably been more instructive this year, the actual peak was in February 2020. 

Could have been worse

Prior to Finance Minister Chrystia Freeland's Fall Economic Update today, there had been widespread speculation that she might announce a budget deficit for the current fiscal year (ending March 2021) of more than C$ 400 billion. In the event, the figure actually tabled was "only" $381 billion. The increase from the $343 billion projected back in July reflects the severity of the second wave of COVID, and of course there remains the possibility that the final figure could be even higher, depending mainly on how long current lockdowns and restrictions last.

The Government has been trailing the idea of a "Great Reset" for the economy in a post-pandemic world, and today's statement provides a "down payment" on the cost of that, which doubles as a post-pandemic shot of stimulus to get the economy back on track. The stimulus will amount to $70-100 billion over three years, with a focus on developing "a greener, more inclusive, more innovative and competitive economy". The new spending will start once a vaccine has been deployed and life begins to return to normal. Note that Prime Minister Trudeau suggested yesterday that he expects most Canadians will be vaccinated by September 2021, so the new spending will presumably kick in around that time.  

The Government warned some weeks ago that the Fall Update would not include any form of so-called "fiscal anchor", such as a target for the debt/GDP ratio. Somewhat surprisingly, however, Freeland did provide a longer-term fiscal projection, covering the same five-year term offered under more normal circumstances. This shows the deficit falling by more than two-thirds in FY 2021/22, to $121 billion, and continuing to move steadily downwards to $24.9 billion by 2025/26.  In current circumstances, these projections must of course be treated with even more caution than usual.  However, they do appear to show that leaks attributed to Ottawa insiders in recent weeks, suggesting that Freeland's fiscal plans were "terrifying", might have been exaggerated.

We wait to see how the Opposition parties will respond. The NDP will no doubt be happy to see a commitment to child care and "green" spending. The Tories will probably focus almost exclusively on the short-term deficit projections, while aiming a few blows at the whole idea of a "Great Reset".  The Government will likely see its fiscal plans as an issue of confidence, so one or two cliffhanger votes in Parliament may be in prospect.  

Think twice, act once

My late father-in-law, an architect, frequently used the aphorism "measure twice, cut once". It's certainly good advice if you are a carpenter or a builder, but it has much broader applicability. It's advice that seems to have been lost on politicians as they struggle to come up with policy responses to the COVID pandemic. Here are a couple of local examples. 

The Premier of the Province of Ontario, Doug Ford, was initially judged by the media and public to be doing a good job of handling the pandemic. He was empathetic -- which not even his closest friends would have predicted -- and seemed willing to listen to experts.  No longer: as the second wave of the pandemic has unfolded, Ford has been unable to strike the right balance between keeping people safe and keeping as much of the economy open as possible. Given that he is a businessman, it is perhaps not surprising that the interests of the business community have seemed  to be top of mind for him.

Ford, flanked by a rotating cast of members of his Cabinet, holds a news conference just about every day. And just about every day, he has a new announcement to make -- tighter restrictions here, looser restrictions there, seemingly driven by the news cycle of the past 24-hours rather than by any overriding strategy. The latest set of Province-wide rules, establishing five colour-coded regimens based on the severity of the outbreak in each location, was introduced barely two weeks ago, yet already the Province has tabled fresh guidelines for household gatherings during the Christmas season.  It's no wonder people are confused, no wonder that willingness to comply with the restrictions is waning.  

Now we hear that Ford is looking to micro-manage the food delivery business, which has seen booming business in the past few months.  Responding to complaints from restaurants, he wants to limit delivery fees to 15 percent of the value of the food order. Now I hold no brief whatsoever for Uber Eats and the like, but I can do the math. Most of the restaurants in my small town are about five miles from my front door. If I order a couple of burgers and some fries for say $20, the delivery service will be allowed to charge me just $3 for a delivery run that is likely to take them at least twenty minutes. For comparison, the minimum wage in the Province is currently $14.25. If Ford's idea is put into practice, it will be a whole lot harder to get food delivered during the winter months. 

There's folly at the local level too. The region of Peel, west of Toronto, is currently under strict lockdown rules because of the high incidence of COVID.  Bonnie Crombie is the Mayor of Mississauga, the largest city in Peel. The lockdown rules there mean that small non-food businesses can only offer curbside delivery, whereas big box stores like Costco or Walmart are allowed to offer in-store shopping for food and non-food items alike.

Small business owners are upset and Ms Crombie wants to help. Her proposal is to ban the big box stores from selling non-food items for as long as the lockdown remains in place. That may or may not help the little guys -- we don't know how much appetite there will be for curbside pickup when the curb is covered by a foot of snow -- but there is one very predictable consequence. A whole lot of minimum wage workers at Costco and Walmart will find themselves out of a job just before Christmas. That's not what Ms Crombie wants, but it's what her city may well get if she doesn't take time to think again.  

Is that all there is?

Canada and the United Kingdom have announced a new trade deal to govern economic relations between the two countries once the UK-EU transition period ends on January 1. Bizarrely, the deal was announced on Saturday, via an international Zoom call featuring Justin Trudeau, Boris Johnson and their respective trade ministers.  The timing was presumably set to coincide with the G-20 summit hosted by Saudi Arabia over the weekend. 

Johnson's trade minister, Liz Truss, is certainly all in on the deal, writing in the Daily Telegraph (behind a paywall, sorry!) that it will allow the UK to change the world. That seems just slightly exaggerated. What has actually been agreed is that the terms of the existing EU-Canada trade deal, CETA, will be extended bilaterally by the UK and Canada once the transition period ends. It is simply the status quo, in other words, although the two countries will now embark on negotiations that may lead to a "bespoke" agreement at some point in the future.

The deal with Canada comes just a month after the UK scored its first post-Brexit bilateral deal, with Japan. The UK government, with Ms Truss again front-and-centre,  celebrated this deal by crowing that it would allow UK consumers to pay less for soy sauce, only to have it pointed out that soy sauce already attracted a zero tariff under the existing EU-Japan trade deal. As with the Canada deal, the UK's "new" deal with Japan is in effect just a rollover of the existing trade agreement with the EU, though with the addition of a new chapter on digital trade. It is expected to boost UK GDP by.....0.07 percent. 

This, then, is how the UK's trade relations are shaping up as it exercises the independence it has supposedly regained by leaving the EU. Trade with important but geographically distant countries like Canada and Japan will continue on almost exactly the same basis as before: no country can be expected to afford the UK a better deal than it affords the much larger EU bloc. UK trade with the larger and much closer EU, by contrast, will take place on significantly worse terms than at present -- possibly even on WTO terms, if last-ditch efforts to come up with a deal fall short. This is not what voters were promised back in 2016 when they voted for Brexit, and it is now too imminent and concrete a prospect to be written off as "Project Fear".

There may be no real economic benefit to the UK from these deals, but Boris Johnson may well have other things in mind. With deals in place with two G-7 countries, it will be easier for Boris Johnson to place the blame on the "intransigent" EU if those last-minute trade negotiations fail. In Brexit world, that blame game seems to be all that counts.   

Trudeau's zero content, zero emissions plan

The Justin Trudeau government has unveiled its "plan" or "road map" for Canada to achieve zero net carbon emissions by 2050.  I have placed those terms in quotes because this isn't much of a plan, and it's no kind of a road map. It is at most a statement of intent, another example of the government's addiction to virtue signalling.

The zero emissions by 2050 goal is one the government has been talking about for some time. Today it has tabled legislation, Bill C-12, which the CBC website, quoting Trudeau, portrays as "an accountability framework that will "ensure we reach this net-zero goal in a way that gives Canadians confidence."  At first blush that sounds pretty vague, and the details do nothing to correct that impression. Let's return to the CBC article for more:

" (The) bill doesn't set out exactly how the federal government should go about reducing emissions — it does not mandate further increases to the carbon tax, for example. It simply stipulates that Ottawa must set a goal and work to achieve it through measures that are deemed effective".

So there are no details?  How about a timetable, then? Well, sort of: 

"The legislation also requires that the minister table a plan in Parliament outlining how Ottawa plans to meet those targets. The legislation does not stipulate what role the provinces and territories will play in this national emissions reduction plan.

The first emissions reduction target, and the plan to meet it, would be tabled nine months after the bill is passed through Parliament. That first target would be for the year 2030.

Nine months after the bill is passed, so in all likelihood a year or more from today! Didn't Trudeau tell the media this morning that Canadians "want climate action now"? Oh well, there must at least be meaningful consequences if the interim or final targets are not reached, right? Far from it!

"While the government describes this legislation as "legally binding," there would be no tangible penalty applied if the country fails to drive down emissions as promised.

The government would simply have to state publicly in Parliament that it failed to meet its goals. There would be no meaningful legal consequences if Ottawa falls short. "

What's more, "A future government also could simply repeal the law and do away with reporting obligations altogether."

I accept the science regarding climate change and accept that we have to do something about it, though I'm no eco-warrior. This legislation is astoundingly vacuous and almost completely pointless. Can't wait to hear what Greta Thunberg has to say about it. 

It's all about the lettuce

Statistics Canada reported this morning that Canada's headline consumer price index (CPI) rose 0.7 percent year-on-year in October, up from 0.5 percent in September. The increase was mainly attributable to higher prices for food, notably lettuce, up more than 25 percent as a result of supply issues, and fresh meat, particularly chicken. The increase was significantly above the analysts' consensus expectation, which called for an increase of 0.4 percent.

Excluding gasoline, which remains more than 10 percent lower in price than a year ago, the annual increase in CPI was 1.0 percent, the same as in September.  The Bank of Canada's three preferred measures of core inflation also show a rate significantly above the headline, averaging an increase of just below 1.8 percent for October, up from 1.7 percent in September. Since the COVID pandemic began, these measures have been receiving even less attention than they did previously. In any case, there is nothing in today's data to suggest any change in the Bank's policy stance. Now Governor Tiff Macklem has indicated that the Bank wants to see CPI consistently above the 2 percent target before it considers tightening policy, which means rates are likely to remain on hold for a long time to come.

As promised last month, the Bank has now provided Canadians with an early Christmas gift: a Personal Inflation Calculator for people to figure out their own inflation experience, based on their personal spending patterns.  It is simple enough to use, though it is doubtful that most people will have to hand the data they need to use it accurately. 

As an experiment, I entered some very rough estimates of my own household spending patterns into the calculator. The results suggested that my personal rate of inflation pre-pandemic was slightly lower than the headline figure, which makes sense, given that I neither pay rent nor have a mortgage. Ever since the pandemic began, however, my rate has been consistently above the headline figure. Anecdotal evidence suggests that this is most Canadians' perception of the underlying inflation picture. We can confidently expect that plenty of journalists are running various scenarios through the calculator even as we speak. It will be interesting to see how they use and interpret the results in the weeks and months ahead.  

Weird science

The astrophysicist Neil deGrasse Tyson likes to say that the great thing about science is that it's true whether you believe it or not.  That proposition has been tested to the breaking point during the coronavirus pandemic as expert advice, from the WHO down to your local health authority, seems to have lighted on a different definition of the truth on almost a weekly basis.

Masks!  From the outset of the pandemic, the advice has been to wear masks whenever social distancing is difficult, particularly in indoor settings. We should do this, so we were told, not because the masks protected the wearer from inhaling the virus, but because they helped reduce the quantity of virus particles that an infected person might breathe out and pass on to others.

This never did seem entirely logical. Layers of fabric don't have any way of distinguishing whether a wearer is breathing in or out.  If a mask can intercept virus particles on their way out of the lungs, it seems more than likely that it can also intercept some on their way in. 

Lo and behold, the Centers for Disease Control (CDC) in the United States are now admitting this. This week the CDC has updated its guidance on mask wearing: it now says that cloth masks act both as a "source control" to limit exhalation of virus particles, and as "filtration for personal protection" to limit inhalation of particles shed by others. The new guidance quotes various studies on the benefits of increased mask usage, including the suggestion that a 15 percent increase in mask usage could prevent economic losses of as much as $ 1 trillion.

A lot of people have been conscientiously following masking rules for many months now, so does this  change of heart really matter? It almost certainly does. In societies with relatively limited social cohesion -- a category in which I would include most of the developed world, including the US and Canada -- asking people to do something purely for the benefit of others is not going to work for a significant portion of the citizenry. Asking them to do it for their own health and safety is likely to produce a much higher level of compliance. If the CDC had issued this advice months ago, and if it had been backed up by local health authorities, it's not hard to imagine that many thousands of lives would have been saved. 

Still, better late than never, right? Not necessarily. It's a safe bet that there are plenty of people out there who will ignore the CDC's advice -- I mean, you're admitting that what you told us all along was wrong, so why should we believe that you've got it right now? 

Canada's job market in October: not too shabby

Statistics Canada reported this morning that employment across the country grew by 84,000 in October, leaving the unemployment rate unchanged at 8.9 percent. This was a better than expected outcome, and came despite the imposition of new restrictions all across the country as the second wave of the pandemic set in. 

The media, predictable as ever, opted to focus on the fact that this was the slowest growth in employment since May. This headline on the CBC website, for example, refers to "only 84,000 jobs", even though that pace, if it lasted for a full year, would see employment grow by a full million jobs, something that has never even come close to actually happening. However, it must be acknowledged that there are still 630,000 fewer persons employed in Canada than there were before the pandemic hit, with a further 430,000 working less than 50 percent of their normal hours.   

The details of the report were generally favourable. Full-time jobs accounted for 69,000 of the monthly increase. Although there remains a hard core of over 800,000 part-time workers who would prefer to have full-time positions, total hours worked across the economy grew faster than employment, as underutilization in the labour force continues to edge lower. Three sectors -- wholesale trade, professional services and educational services -- have now surpassed their pre-COVID employment levels.  

It is inevitable that employment growth will slow further in the coming months. The "easy" part of the bounce-back from the first wave of the pandemic is over, and it is only now becoming clear which sectors of the economy may never regain their pre-pandemic levels of activity and employment. Moreover, new restrictions are now in place across most of Canada, although as StatsCan notes, these are more targeted than the restrictions imposed in March, and should thus have a smaller impact on employment. A fresh round of outright job losses may be avoided between now and year-end, but employment will not complete its return to pre-pandemic levels until a vaccine becomes widely available. 

Meanwhile in Toronto...

It's hard to know if the Province of Ontario scheduled its much-delayed 2020 budget for this week in the hope that the bad news would be overshadowed by the US Presidential election. You wouldn't entirely blame them if they did, because the budget tabled on Thursday contains a whole lot of red ink, and no path back to balance. 

The projected budget deficit for this fiscal year (which is, of course, already half over) is C$ 38.5 billion, almost four times larger than the pre-pandemic forecast. Total spending is projected at a record $185 billion, but the forecast deficit is also the result of a sharp fall in major revenue streams as a result of the pandemic*. The Government promises to set out a path for a return to balance in next year's budget but in the meantime offers three scenarios. In the base case, which assumes moderate but steady economic growth, the deficit falls to $ 33 billion in fiscal 2021/22 and $ 28 billion in the year after that. Slower growth would see a deficit of almost $ 36 billion in 2021/22, while a more optimistic economic scenario would cut that figure to under $ 28 billion.  

There are a lot of new measures in the budget, some specifically relating to the pandemic, others designed to help the economy to recover once the situation starts to improve. Total COVID-related spending is estimated at $ 45 billion over three years, although as much as two-thirds of this has already been spent. There will be $ 7.5 billion in new health care spending over the three year budget horizon, but this does not include any costs for the Government's recently-announced plan for improvements to the long-term care home sector. 

In terms of plans to boost the economic recovery, the budget offers relief for  businesses' electricity bills and property taxes. Smaller businesses will be relieved of the burden of paying a portion of their employees' health care costs. Interestingly, the Province will also make permanent a measure it introduced earlier in the year to allow restaurants to sell alcohol for consumption off the premises, for example with take-home meals -- one more remnant of "Ontario the Good" cast into the garbage can of history. 

Truth to tell, the Doug Ford government is at the mercy of events here, as it has been basically since the pandemic started. Depending on how things evolve, the actual outcomes, especially beyond this year, may be very much different from what was tabled yesterday. One striking thing about the deficit projections is worth noting: although the Provincial deficit has ballooned to unprecedented levels, the projected 300 percent increase in the shortfall for this year is way smaller than more than tenfold increase projected at the Federal level. It's Ottawa that has been carrying most of the weight here, and will continue to do so. No wonder Doug Ford is making nice with Justin Trudeau.  

* The major exceptions to this: revenue from liquor and cannabis sales, both of which are sharply higher. 

Canada GDP rebound: four months, and counting

Statistics Canada reported today that real GDP grew 1.2 percent in August, marking the fourth straight month of gains after the first wave of the COVID pandemic. Preliminary estimates suggest a further 0.7 percent growth for September, which would mean that growth for the third quarter as a whole would be close to 10 percent. That is on a non-annualized basis: it annualizes to more than 46 percent, significantly stronger than the 33 percent annualized rate posted by the US in the same quarter. One wonders if Conrad Black has noticed.

Despite the rebound, August's GDP reading remained about 5 percent below its pre-pandemic (i,e, February) peak. Even allowing for the likelihood that growth persisted through September, it seems inevitable that things will only get more difficult from here. Renewed lockdowns in the more populous Provinces, though less stringent than in March and April, mean it is unlikely that any further growth will be seen in the last three months of the year, even with the customary stimulus from Black Friday and the holiday season. 

The takeaway from today's numbers, on the part of the media and Bay Street analysts alike, is generally downbeat, even though the August number is higher than the analysts' consensus, and even though nobody expected the rapid growth seen earlier in the summer to continue. Back in March or April,  anyone who dared to forecast that the economy would post double-digit growth in the third quarter would have been shouted down, but here we are.     

Looking beyond the difficult fourth quarter, the outlook for growth depends on two main factors: the progress of the pandemic, which will in turn depend on whether the hoped-for vaccine materializes, and the support provided by policy-makers. The Bank of Canada has already laid its cards on the table: monetary policy will remain stimulative. New Federal Finance Minister Chrystia Freeland also made her stance clear this week. The Federal Government will continue to spend money to promote full economic recovery, in the belief that Canada can afford the future deficits and debt that this implies.    

Freeland is expected to provide an updated fiscal statement in the next few weeks. The Government has already indicated that this statement will not contain a "fiscal anchor", such as a commitment to reducing the debt-to-GDP ratio, although Freeland appears to accept that the current level of largesse cannot continue indefinitely. The statement will update the Government's fiscal position in light of developments over the past six months, which gives rise to an intriguing possibility: given that the economic rebound in Q3 was so far above expectations, is it possible that this year's deficit projection may actually be lower than the current C$ 340 billion forecast? We shall see.  

Bank of Canada: on the sidelines until 2023?

As expected, the Bank of Canada left its target rate at 0.25 percent at today's Governing Council meeting.  It stated that it will not consider tightening policy settings until it sees CPI hitting the 2 percent target on a sustained basis, something it does not expect to happen until 2023.  

Alongside the policy decision, the Bank also published its updated Monetary Policy Report (MPR). The last such report appeared in July, when Provinces were still in the midst of lifting the lockdown measures that had been imposed in the spring, and reflected extreme uncertainty over the economic impact of the pandemic. Today's report shows rather more confidence in the outlook for the economy, allowing the Bank to resume its normal practice of publishing forecasts for both growth and inflation.

The Bank expects that for 2020 as a whole, real GDP will show a 5.7 percent decline, even as most data show significant improvement from the record declines posted in March and April. The strongest phase of the recovery is already over, giving way to less impressive gains that will see GDP rising about 4 percent in both 2012 and 2022, which the Bank characterizes as a "recuperation phase". This implies that real GDP will not return to its pre-pandemic level unto the summer of 2023. 

Tabling the MPR, Governor Tiff Macklem was at pains to emphasize that this forecast is heavily dependent on how the COVID pandemic plays out. The Bank assumes there will be no return to the blanket lockdowns seen across the country in the second quarter of this year. Given the rise in cases in recent weeks in the four most populous Provinces (Quebec, Ontario, Alberta and BC), it is far from certain that this assumption will hold. Even if blanket lockdowns are avoided, the Bank accepts that stringent local measures will be needed from time to time, so the recuperation phase will not be smooth.  

The slack created in the economy by the coronavirus is illustrated by the fact that the level of employment across Canada is still 700,000 below its pre-pandemic level. That slack means that inflationary pressures are not expected to surface any time soon. The latest CPI reading was 0.5 percent and the Bank expects it to stay below the 1-3 percent target range until early 2021. After that, CPI is expected to move gradually higher, but the base case forecast sees it remaining below the 2 percent mid-point of the range throughout the 2-year forecast horizon. On that basis, the Bank is not contemplating any tightening of its monetary settings until 2023. 

In addition to maintaining its ultra-low rate settings, the Bank also announced a recalibration of its quantitative easing program. It will gradually reduce the overall scale of the program, while shifting the emphasis towards purchasing long term bonds, on the grounds that this "focuses more directly on the borrowing rates that are most relevant for households and businesses".  This is perhaps a little surprising: Canada's housing market is once again attracting unwanted attention as one of the most overvalued and bubble-prone in the world, and the promise of a sustained period of ultra-low mortgage rates can only exacerbate that situation. 

Even if you are not an aficionado of modern monetary theory, it is legitimate to wonder how much all of this matters. Governor Macklem characterized the Bank's stance as "monetary policy stimulus", but experience in Japan and elsewhere casts doubt on the ability of ultra-easy policy to accomplish any such thing. The Bank is right to ensure that its policies do not get in the way, but producing an actual recovery in growth and inflation is likely to depend much more on fiscal policy.  

The Black plague

When it comes to governments' response to the COVID pandemic, there is plenty of scope for civil disagreement. We can all come up with ways that our local jurisdiction, whether at the national or sub-national level, could have done a better job. With the benefit of hindsight, we might conclude that an earlier, much tougher but very short lockdown would have arrested the spread of the disease, allowing us to rely on localized measures and shielding the vulnerable once the peak had passed. You might have a different view, but it should be something we can address rationally.

What we probably can't discuss civilly, however, is the whole idea that the pandemic is some kind of a hoax or giant conspiracy -- the "scamdemic".  Conspiracy theories are always hard to credit because it is an observable fact that people are terrible at keeping secrets: someone is always going to blurt the story out, usually for personal gain or glory. In the particular case of COVID, there is the added question of cui bono?  If there is a giant conspiracy under way, who is benefiting from it? 

All of which brings us to this article from Conrad Black, which manages in remarkable fashion to combine reasoned discussion of policy alternatives with a fully-fleshed out version of the conspiracy theory, including an answer to the cui bono question. 

Black's cavalier treatment of the statistics related to the pandemic is bizarre: if you don't believe that all the deaths reported as being caused by COVID are in fact virus related, then to what do you attribute the hundreds of thousands of "excess deaths" being reported around the world? The latest figure for "excess deaths" in the US is actually larger than the number of deaths attributed to COVID, which seems to suggest the virus death toll is actually being under-counted.  That said, however, Black's preference for targeted measures to protect the vulnerable, together with mandatory mask wearing, is clearly a better policy choice than a full lockdown. 

So far so good, but now Black goes full-on conspiracy theorist. Let's hear it in his own words:

The incumbent administration was practically certain of re-election prior to the outbreak of the COVID-19 crisis. The Democratic opposition saw a path to victory by agitating for a gigantic economic shutdown, which would lead to an economic recession that could then be portrayed as a needless depression generated by incompetent public-health management on the part of the Trump administration, even though the administration was following its opponents’ advice in shutting down, and is bringing the nation back to work more quickly than had been thought possible. The U.S. economic growth rate was 32 per cent in the third quarter and the United States has vastly outperformed all other advanced countries in the world since coming out of lockdown.

So much is factually wrong there. Opinion polls prior to the pandemic certainly did not suggest that Trump was "practically certain of re-election". The administration has never followed its opponents' advice in shutting down -- to the extent that there has been any effective response to the virus in the US, it has been at the State and local level. Lastly, despite Black's attempt to exaggerate the recovery by annualizing the third quarter growth rate*, it simply is not true that the US economy has "vastly outperformed". Since he now lives in Canada, you might think that Black would know that the True North has recouped a significantly larger proportion of the jobs lost in the early stages of the pandemic than the US has.

Still, at least we now know, courtesy of Conrad Black, the answer to that maddening cui bono question. It's the Democratic Party, of course!  Anyone surprised? 

* Actually he has done more than annualize it!  The advance estimate for this measure is not due for release until October 29, so it is not clear what number His Lordship is using here. Would that be "fake news"?

Canada CPI: Cannot Properly Interpret?

The year-on-year increase in Canada's consumer price index (CPI) accelerated modestly to 0.5 percent in September, up from 0.1 percent in August. The increase was quite broadly-based, with the sub-indices for transportation, education, recreation and shelter all moving higher, according to Statistics Canada. The increase in the headline index was moderated by continuing weakness in the price of gasoline, which stood 10.7 percent below its September 2019 level. Excluding gasoline, the year-on-year increase in CPI was 1.0 percent in September, up from 0.6 percent in August.  

There is nothing particularly surprising about any of this, but today's release contains all sorts of tantalizing hints about possible changes in how we look at CPI in the future. It's worth recalling that Bank of Canada Governor Tiff Macklem has expressed his concern over the fact that many Canadians do not feel that the official inflation data do not reflect their own daily experience. It appears that StatsCan is on the same page as the Governor here, and plans to do something about it.

Today's release links to a special report which looks at how the COVID pandemic has moved consumer spending patterns away from the basket weights used to construct the CPI. Spending related to household operations has gone up, while spending on travel and on new motor vehicles has fallen. Adjusting for these and other changes, StatsCan estimates the year-on-year rise in adjusted CPI for both July and August was 0.4 percent, compared to the reported 0.1 percent gain for the headline measure; note that September data are not yet available. These revisions certainly move the numbers closer to what most Canadians would perceive their experienced inflation rate to be, though it is all but certain that a survey would find that most people would estimate that inflation is considerably higher than any of these figures.  

And here's the most intriguing twist of all: very soon, people will not longer have to guess what their own actual inflation rate is. At the end of today's release StatsCan reveals that the "Personal Inflation Calculator" is "coming soon". Canadians will be able to use their own spending figures to create their own basket weights and generate their own CPI, which they can then compare to the published data. It seems unlikely that many people will go to the trouble of doing this, but it may well provide a useful tool for journalists and bloggers looking for ways to second guess the Bank of Canada.

Decades ago, while working in a bank economics department in Toronto, your humble blogger took a call from a female client who felt that the CPI was understated -- this in an era when the headline number was almost certainly in the double digits. She revealed that she did not own a car, so what was the increase in CPI excluding the price of gasoline, insurance and so on? I wasn't able to help her then, but if she happened to get in touch again in a few months' time, I might be able to do a better job.  

Bank of Canada steps back

With a very low-key announcement on Thursday, the Bank of Canada scaled back the emergency measures it had put in place to ensure liquidity in financial markets. Specifically:

• The Bankers' Acceptance Purchase Facility and the Canada Mortgage Bond Purchase Program will both be terminated by the end of this month: 
• Term Repo operations will move from weekly to twice monthly, effective from next week, and the range of securities eligible for these operations will be cut back. Only Federal or Provincial government securities will now be eligible. 

Bank Governor Tiff Macklem signaled recently that the use of these facilities had dwindled sharply since the peak of the pandemic.  The Bank's announcement observes that "overall financial market conditions continue to improve in Canada" , so these moves are not a surprise. Needless to say, however, the Bank stresses its continuing commitment to ensuring adequate liquidity in financial markets, up to and including a restart of the discontinued facilities "if necessary".  

Although the second wave of the pandemic is well under way in Canada, there is no evidence of a return of the panic that gripped markets back in March and April.  For now it seems unlikely that the Bank will have to take further emergency measures to support liquidity in the coming months.   

It won't work

The Bank of England is consulting the UK's big banks to ask them how they would cope if official interest rates were to move into negative territory. Right now the Bank's target rate is set at 0.1 percent. It does not appear that a move to negative rates is imminent: the banks have been given a deadline of November 12 to provide their response, which happens to be after the BoE's next rate-setting date. Still, there is market speculation that official rates could be pushed into negative territory by the spring of 2021. possibly after another round of quantitative easing. 

Does anyone seriously think that either QE or negative rates will help in any way? The efficacy of monetary policy in general is in doubt, with fiscal policy once again regarded as by far the more potent policy tool for dealing with a stagnant economy. Keynes expressed major doubts about about monetary policy as a stimulus tool all those years ago, with the concept of the liquidity trap. QE only increases the monetary base, which does nothing to boost the real economy unless it translates into actual spending. As for ultra low or negative rates, the main effect of Japan's decades-long experiment with such an approach  has been to create a cohort of zombie banks, with little demonstrable effect on the economy.  

There's no reason to think that things would go any differently in the UK. You have to wonder if the Government is onside with what the Bank of England is considering here, but with the COVID pandemic ramping up again and the prospect of a no-deal Brexit looming ever larger, this issue may not be at the top of anyone's mind.

The last of the good news?

Canadian employment data for September, released this morning by Statistics Canada, were remarkably strong, at both the headline and the detailed level. Employment rose by 378,000 in the month, more than twice what the analysts' consensus had foreseen.  This reduced the national unemployment rate to 9.0 percent from 10.2 percent in August. For the second straight month, almost all of the job gains represented full-time employment.  

In terms of the details, there were job gains in all Provinces except New Brunswick and PEI. There were strong job gains in the goods producing sector, led by manufacturing. The services sector also posted solid gains, led by the accommodation and food services sub-sector, and by educational services as schools reopened in most Provinces. The number of Canadians working fewer than their usual hours as a result of the pandemic continued to fall, and the number of people still working from home edged lower. 

It scarcely needs to be pointed out that the labour market remains far below its pre-pandemic levels. The 9.0 percent unemployment rate compares to a 5.6 percent rate recorded in February, the last pre-pandemic month. Aggregate employment remains 720,000 (about 3.7 percent) below its February level. Although manufacturing employment is close to recouping al the jobs lost to the pandemic, and employment in educational services is actually above February's level, employment in both accommodation and retail trade remains far short of its peak. 

Sad to say, it is very likely that today's data represent the last positive news on employment that Canada will see for many months. The emergence of the feared second wave of COVID-19 has seen a rapid spike in cases in the most populous Provinces. In response, BC started to reimpose lockdown measures in early September; Quebec followed suit at the end of the month, and Ontario has just today announced fresh restrictions in its worst-affected regions, including Toronto and Ottawa.  StatsCan's monthly survey to collect job market data for October takes place next week; the new restrictions, though less severe than those imposed in the spring, are sure to weigh heavily on the data for this month and, in all likelihood, the rest of the year.     

Tiff talks

Even as the second wave of the COVID pandemic sweeps across the country, Bank of Canada Governor Tiff Macklem is looking ahead to the risks that litter the path to eventual recovery. In remarks to the Global Risk Institute this morning, he focused on risks to the recovery itself, risks that may arise during the recuperation phase, and risks related to by climate change. Unsurprisingly, many of the risks he addressed are related to debt. 

After briefly summarizing the steps that Canadian governments and the Bank itself have taken since the pandemic hit, Macklem moved on to discuss the financial risks. Intriguingly, he drew a parallel with the disastrous Fort McMurray fires of 2016, which the Bank has studied closely. "Then, as now, we saw a rapid stop in economic activity caused by a sudden shock. Then, as now, much of the lost ground was regained quickly. But the episode left economic scars that took a long time to heal."

Macklem noted that Canada's banks have provided mortgage relief to hundreds of thousands of borrowers over the past six months, but these deferrals are coming to an end. Moreover, the pandemic has severely hampered the ability of businesses to meet their fixed obligations, although the extension of emergency wage subsidies into 2021 will provide relief. Macklem described the financial system as well-capitalized and able to act as a shock absorber for households and businesses, but cautioned that the Bank is continuing to monitor the level of credit losses.  

As regards risks during the recuperation phase, Macklem's focus was squarely on household debt. A commitment to maintaining low interest rates sine die is a key element of the Bank's support to the economy, but the Bank is aware that low rates can foster both speculative buying and over-borrowing. The Canadian housing market experienced a remarkable bounce as the first wave of the pandemic faded: though Macklem did not mention this, Toronto was recently identified as one of the most over-extended housing markets in the world in a report by UBS. For the moment it appears that Macklem is confident that the Bank has the macroprudential tools it needs to cope with these risks. 

Finally, as regards climate change, Macklem stated that the financial system has a "critical role to play" in supporting the real economy's transition to a low carbon future. "If we are going to do a better job assessing, pricing and managing climate risks, we need better and more decision-useful information that combines climate-data analysis with economic and financial information. This will make the financial system and the real economy more resilient. And it will strengthen the ability of the financial system to fulfill its most critical role, which is to allocate savings to its most productive uses. This will help Canadians take advantage of sustainable investment opportunities."

Macklem's summing-up of the challenges ahead is worth quoting in full:

"The COVID-19 pandemic has made it painfully clear that how well we manage risks has a huge impact on our well-being. Globally, I don’t think it’s an exaggeration to say that the quality of risk management will increasingly influence the success and stability of societies. Of course, I’m talking about much more than financial-risk management. But the financial services sector has a leadership role to play. Two historic recessions in just over a decade have underlined just how much managing risks in our financial system matters to the livelihoods of Canadians. As we begin to recover from the economic fallout of the pandemic and look to the vulnerabilities ahead, sound risk management is more critical than ever."

A full agenda indeed.

V U W L.....K?

The use of letters of the alphabet to describe the possible shape of the recovery phase of the pandemic is nothing new. The V-shape is Donald Trump's fever dream, and just for a while there it seemed possible that it might happen. Given the rebound that we have already seen, U and L -- denoting respectively a long spell of low activity before a gradual recovery, and a long spell of low activity with scarcely any rebound at all -- no longer seem to be in contention. Right now, with the second wave of the pandemic well under way in Canada and many other places, W seems like the likeliest prospect.  In this scenario the May-September bounce gives way to a renewed decline in activity as lockdown measures are tightened again, with a further sharp rebound in prospect as the second wave eases in a few months' time.

But what's this? On the CBC website, columnist Don Pittis is talking up the prospects for a K-shaped recovery.  His suggestion is that some segments of the economy will continue to see a strong rebound, while others will inexorably weaken. This is in effect a variant of the view that some sectors are temporarily weak because they have been intentionally "suppressed" by governments in an effort to control the virus, while others have been dealt a mortal blow that may take years to recover from, if indeed recovery is even possible.  

A closer read of Pittis's piece suggests that a K shape might be an oversimplification. His list of occupations that are likely to enjoy a steady rebound, including those able to work from home, retirees and people such as Amazon workers who provide services to those two groups, looks reasonable. However, his list of those facing long term decline is less certain.  Hospitality and restaurant workers may indeed suffer another blow as the second wave unfolds, but those sectors should bounce back to pre-COVID levels once the pandemic is really in the past. Boeing workers and those associated with the cruise ship sector? Not so much. 

As Pittis suggests, the Canadian employment data for September, due out on Friday, may give us some  indication of how all this is unfolding. With fresh lockdowns only now starting to bite, however, the October numbers will probably be even more revealing. 

Infrastructure or austerity?

Last week's Canadian Throne Speech was full of ideas for recovery from the COVID pandemic but very short on details (and costs). Today the Federal Government has announced something much more specific: a plan for the lightly-regarded Canada Infrastructure Bank (CIB) to spend C$ 10 billion on a range of new initiatives.  

The $10 billion will be divided up between plans to provide broadband internet in underserved areas, energy efficiency retrofits,  clean power generation, irrigation improvements and the adoption of low-emission buses.  These goals are all consistent with the Throne Speech's underlying theme of "building back better", and with the pledge to use the pandemic recovery phase to move the economy in a greener direction.

Tory leader Erin O'Toole, just back at work after a bout of COVID-19, is not impressed. He pledges to abolish the CIB outright, calling it "a waste of taxpayer dollars".  The Tories made the same pledge ahead of last year's election. More surprisingly, so did the left-leaning NDP, which might be expected to look more favourably on the public sector taking a leadership role here. 

The CIB's problem is that in its three years of existence, it has proved to be a whole lot better at making high-profile announcements than at actually getting anything done. The CIB is supposed to act as a catalyst for private sector firms to invest alongside it, but there has been precious little evidence of that happening, and it is not clear how today's announcements will help to move things along.

We are now getting a clearer idea of how the major parties propose to handle the pandemic recovery phase. The Throne Speech and today's CIB announcement demonstrate that the Liberals intend to continue to deploy the public purse to help bring the economy back to health. In sharp contrast, the Tories (with support from much of the media) are warning that the emergency spending programs set up in recent months must inevitably give way to fiscal austerity sooner rather than later -- yet at the same time they advocate tax cuts for both businesses and individuals. It's hard to think of any country that has ever succeeded in solving its fiscal problems through austerity, but that seems to be the Tories' agenda. 

Now for the hard part

Statistics Canada reported this morning that Canada's GDP rose 3.0 percent in July, down from a 6.5 percent gain in June.  The increase was broad-based, with all twenty sectors of the economy posting gains, but GDP is still 6 percent below its February peak.

Several sectors have, in fact, moved above their pre-pandemic level, including agriculture, utilities and finance. The fastest-growing sectors in July were those that were hit hardest by the pandemic lockdowns. Food services and drinking places (i.e. restaurants and bars) posted a 17.6 percent gain, while accommodation services grew 27 percent, but both sectors are rebounding from a very low base and remain below pre-pandemic levels. The important manufacturing sector saw a gain of 5.9 percent in July, down from 15 percent in June, but is still 6 percent below its February peak. 

Unsurprisingly, the rebound from the worst effects of the pandemic is slowing, a trend that is likely to continue. StatsCan's preliminary estimate for August's GDP points to a further 1 percent increase. September may see a similar result, but the emergence of the feared second wave of COVID in recent weeks has prompted a return to tighter restrictions, especially in the two most populous Provinces, Ontario and Quebec. 

Governments are anxious to avoid a return to the kind of lockdowns seen in March and April. Even if these can be avoided, however, growth prospects for October and indeed the entire fourth quarter look distinctly weak. Sectors that were hard hit in the first wave of COVID, especially the hospitality and travel sectors, are warning of outright disaster with the approach of the colder season. 

If there is any good news to be found this week, it is the fact that an extended COVID relief package is rapidly making its way through Parliament. Expanded access to Employment Insurance and provision of new emergency benefits for those not covered by EI will bolster household finances and consumer confidence, providing a boost to the entire economy. The contrast with the situation in the US, where a much-needed second stimulus package has been tied up in Congress for weeks, could scarcely be more stark.    

Justin Trudeau's wish list -- a closer look

On Wednesday, embattled Governor-General Julie Payette delivered the so-called "Throne Speech", which traditionally outlines the Federal Government's agenda for the new session of Parliament.  The speech, titled A Stronger and More Resilient Canada,  was unusually long, lasting almost an hour. Later in the day Prime Minister Justin Trudeau took to the airwaves to deliver a message to Canadians.  This was (mercifully) much shorter, but still, there is a lot to digest here.

You might think that a minority government in the midst of a pandemic would keep its agenda fairly limited, but that's far from the case here. The Throne Speech outlined the four foundations of the government's approach thusly:

The first foundation of this plan is to fight the pandemic and save lives.

The second foundation of the Government’s plan is supporting people and businesses through this crisis as long as it lasts, whatever it takes........ 

The third foundation is to build back better to create a stronger, more resilient Canada........ 

The fourth and final foundation of this plan is to stand up for who we are as Canadians. 

Yes, COVID is at the top of the list here, but the remaining items are made up of an extensive grab-bag of new and recycled ideas that would take even a majority government many years to implement. Not surprisingly, the, the Speech is being widely interpreted as the first draft of a Liberal election platform. More on this later.

In terms of the details behind the "four foundations", the Government's specific proposals include:

• Continued efforts to enhance testing, ensure adequate supplies of personal protective equipment and (when available) a vaccine against COVID-19.
• Starting a campaign to create over one million jobs, which would restore employment to its pre-COVID level.
• Maintaining the Canada Emergency Wage Subsidy through to summer 2021; scaling up the Youth Employment and Skills Strategy; setting up a Canada Recovery Benefit for workers (such as the self employed) who do not qualify for standard Employment Insurance.
• Creating an Action Plan for Women in the Economy to "ensure a feminist, intersectional approach" to the recovery phase.
• Improving standards for long-term care homes and ensuring access to medical care in remote areas.
• Setting up a Disability Inclusion Plan, including a new targeted benefit payment.
• Working towards a universal, national pharmacare plan -- an oft-repeated promise to fix one of the largest gaps in the existing medicare system.
• Additional investments in infrastructure, including public transit and broadband internet, as well as further initiatives to reduce homelessness and provide more affordable housing.     
• "The largest investment in Canadian history" in training for workers.
• "Immediate" introduction of a plan to meet and exceed Canada's climate targets for 2030 (as set out in the Paris Accords) and legislation to mandate a zero-carbon economy by 2050. 
• Further efforts toward reconciliation with Canada's Indigenous Peoples; combating systemic racism and protecting Canada's two official languages.

It is an astonishing list -- and those are just the highlights. There is very little in the speech about how all this is to be paid for, though there are suggestions of higher taxes on the wealthy and new levies on "web giants". An update of the COVID-19 Economic Response Plan is promised for later in the Fall, and will outline the Government's financial position and provide fresh fiscal projections. 

The Throne Speech is already being debated in Parliament, a debate that will culminate in a vote of confidence in the Government. The Conservatives and Bloc Quebecois have already stated that they will vote against the Government, so the prospect of an election depends on the position taken by the NDP.  That party has so far been non-committal, while calling on the Government to do more for workers affected by the pandemic. Justin Trudeau says he does not seek an early election, but the Throne Speech sets him up to be first out of the blocks if the confidence vote goes against the Government.   

Justin Trudeau's wish list

This is just a preliminary assessment of today's Throne Speech, which supposedly sets the agenda for the coming session of Parliament. I will provide an expanded version on Thursday. 

With an extensive list of aspirational programs that could only ever be enacted over a period of years, little attempt to prioritize among those programs, and no attempt whatsoever to cost any of them, Wednesday's Throne Speech in Ottawa did not seem much like a plan for a session of Parliament, particularly for a minority government in the midst of a pandemic. 

It seemed much more like an election manifesto -- and that is what it may well turn out to be.  Both the Conservatives and the Bloc Quebecois have indicated they will not support it when it goes to a confidence vote in Parliament. That leaves the Liberals depending on the NDP, which has not yet committed itself. If it does indeed come to a Fall election, the Liberals have already come up with one key slogan:  "this is no time for austerity".  

Laundry list

The leak of the so-called FinCEN papers has put money laundering back on the business pages for the first time in a while. It has also taken a heavy toll on the shares of some of the world's biggest banks, including Deutsche Bank and HSBC. That's a little odd, inasmuch as these 2500-plus documents are mainly "SARs", or Suspicious Activity Reports. Rather than evidence of wrongdoing by the banks, these reports are proof that they have been reporting such transactions to the monetary authorities, which is exactly what they are supposed to do.   

Detection and prevention of money laundering was a pervasive concern during my thirty years in the banking business, particularly when I moved from Canada to London just before the millennium. There were regular (and very tedious) sessions aimed at teaching staff members how to identify transactions that might constitute money laundering. Everyone was trained in the importance of KYC -- Know Your Client. The Compliance Department grew larger, more powerful and more intrusive year by year.

What was my takeaway from all this?  Sadly, it was that you can never quite keep up with the launderers. Every major bank in the world is just about certain that it is laundering money every day -- it just can't effectively identify every single suspect client and every single suspect transaction. Neither can the financial authorities.  That hasn't changed over the years, and it is unlikely that it ever will.      

Canada CPI: looking behind the headlines

Canada's headline consumer price index rose 0.1 percent in the year to August, according to data released this morning by Statistics Canada.  This matched the increase previously reported for July.  The Bank of Canada has been expressing concern that many Canadians simply do not believe that inflation is so low, so it's worth looking behind the headline number to see how some of the sub-components are faring.

One figure that immediately jumps out of the detailed breakdown is the price of gasoline -- down 11.1 percent year-on-year.  This is the principal reason that the headline number is so low, and reflects the fact that the North American "summer driving season" has been much less active than usual, courtesy of the COVID pandemic. For the same reason air transportation prices remain low -- down 16 percent year on year as airlines offer deep discounts in an effort to entice customers, though of course, this is not a regular purchase for most people.

If we look at the important food component of the index, we find a different story.  Food prices were up 1.8 percent year-on-year in August, although they actually fell slightly from the previous month.  That monthly slowdown reflected a recovery in beef supply, which had been severely affected by COVID outbreaks in packing plants during the second quarter of the year. The equally important shelter component of the index rose 1.5 percent in the year to August. If we recognize that food and shelter are major (and largely non-discretionary) components of the average household's budget, it becomes easier to understand why the general public may distrust the headline inflation data.  

Finally we can consider some of the special aggregates that StatsCan calculates each month.  Excluding food and energy, CPI was up 0.5 percent in the year to August;  excluding only energy, up 0.7 percent; and excluding only gasoline, up 0.6 percent. Then there are the Bank of Canada's three preferred measures of core inflation, which averaged a 1.7 percent year-on-year gain. 

These are all very low numbers by historical standards, and well within the Bank's 2 percent inflation target. However, they do provide at least some support for the idea that the inflation that regular households are facing is a little higher than the media headlines suggest. It will be interesting to see what changes the Bank makes to its inflation targeting goals to address this discrepancy.   

Saving grace

A couple of months ago, Justin Trudeau defended his Government's massive spending on pandemic relief by saying "the Government is going into debt so Canadians don't have to". This was met with howls of outrage and scorn from the "all debt is debt" crowd, but data published by Statistics Canada today seem to bear out what Trudeau said.

The data in question form part of the quarterly report on Canada's National balance sheet and financial flow accounts, and relate to the second quarter of this year, when the impact of the pandemic was at its worst. The financial flow accounts can be baffling, but on this occasion StatsCan has provided a detailed commentary on the household sector, where there have been some surprising and indeed unprecedented developments. Some highlights:

• Household income rose 10.8 percent in the quarter, as government support programs easily outweighed the loss in conventional employment income.
• Household spending fell 13.7 percent in the quarter, no doubt reflecting, at least in part, the absence of many of the things that people habitually spend money on.
• As a result of these income and spending changes, the household savings rate jumped to 28.2 percent in the quarter -- in Q4/2019 it had been a mere 3.6 percent!
• Household net worth grew by a record 5 percent in the quarter after a record decline in the first three months of the year.
• Consumer borrowing in credit markets was only $0.9 billion in Q2, down from $26 billion in Q1.
• The household debt service ratio (interest and required principal payments) fell to 12.4% from 14.5% in the prior quarter, a record decline. Lenders' temporary deferrals of required principal payments were a key factor here. 
• The household debt to disposable income ratio fell to 158 percent from 175 percent in the prior quarter. This is a somewhat odd statistic, in that it compares a stock (debt) to a flow (income), but it has been widely followed because it has been rising steadily since the Global Financial Crisis, raising fears about the ability of the household sector to deal with an economic crisis.

These are extraordinary numbers and StatsCan is careful to qualify them. Most notably, it warns that the figures are aggregates across the whole economy.  In normal times, higher income groups unsurprisingly tend to have higher savings rates and lower debt burdens than lower income groups. To the extent that government pandemic relief efforts were directed towards the most vulnerable households, this historical pattern may have been altered somewhat in Q2. Even so, it is unlikely that the remarkable improvement in households' aggregate financial position in the quarter was shared equally across all income groups.  

Will all of these trends persist?  It seems unlikely.  Both government income support programs and lenders'  mortgage deferrals are set to wind down. Opportunities for spending are steadily increasing as lockdowns are relaxed, so there is certain to be some catch-up self-gratification spending in the months ahead, barring a second COVID wave of such severity that restrictions are reimposed. It may be that some Canadians have been weaned off their debt addiction by the pandemic, but it seems likely that the abrupt turnaround in household finances is just one more effect of the pandemic that will fade away when more normal conditions return.     

As long as it takes

At today's Governing Council meeting, the Bank of Canada kept its target interest rate unchanged at 0.25 percent, and pledged to keep monetary policy stimulative "until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved".  Despite encouraging signs of a rebound in the economy since the middle of the third quarter, it is clear that the Bank is prepared to maintain its current policy stance for an indefinite period.

Building on the recovery that began in Q2, the Bank believes that domestically, "the bounce-back in activity in the third quarter looks to be faster than anticipated in July".  It also notes that "The rebound in the United States has been stronger than expected."  However, it cautions that it expects "this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support".  This is in line with the view already expressed on this blog and elsewhere, that the easy part of the recovery from coronavirus lockdowns may already be largely behind us: going forward, progress will be much slower as the extent of structural damage to the economy becomes more evident. 

The Bank sees very little reason for concern about inflation: "CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth".  It is worth remembering, however, that the Bank recently expressed concern that existing inflation measures might be unreliable in current circumstances, with much of the general public believing that actual inflation is significantly higher than the official data suggest. This seemed to set the stage for some tweaks to the Bank's approach in the coming months, though there is no reference to this in today's release. 

In addition to committing to keep its target rate low until the economy returns to full capacity, the Bank pledges to continue "its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective".  Two weeks from now, the Government is expected to table a Throne Speech that will pledge long-term fiscal stimulus to promote the recovery of the economy.  There are already cries of alarm from conservative quarters (see this panicky screed from a former Finance Minister), but in current circumstances, it's hard to imagine that Canada will prove to be an outlier in pulling out all the stops to get its economy back on track.   

Not good enough, apparently

Both Canada and the United States today reported further significant employment gains for the month of August, though that's not the message the media in either country seem to want people to hear. Let's look at the data first, and then consider the media reaction.

According to Statistics Canada, employment rose by 246,000 in the month, with the unemployment rate falling to 10.2 percent.  Together with the very strong gains posted in June and July, the August data mean that the economy has recovered about two-thirds of the jobs lost to the pandemic in March and April, though that still leaves the number of persons employed about one million below its February peak. Strength in full time jobs (up by 206,000 in the month), a rising participation rate and a fall in the number of persons working from home all reinforce the message that the labour market is improving.

Meanwhile, the Bureau of Labor Statistics reported that US non-farm payrolls rose by 1.4 million in the month, dropping the unemployment rate to 8.4 percent. This was a stronger outcome than analysts had predicted, although it still leaves total US payrolls some 11.5 million below their pre-pandemic peak. As was the case in Canada, rising full-time employment and a rising participation rate underscore the improvement in the jobs market.

And yet, what do we see in the media?  Here is the report from the CBC website on the Canadian data, and here is how the US data are reported by CNN. In both cases, the emphasis is much more the extent to which employment remains below its peak, rather than on the positive aspects of the August data. Check out the first sentence of the CNN report: "The US job market remains in a deep hole during the ongoing pandemic, and now the recovery is losing some of its momentum".  That "recovery is slowing" theme was the first thing the "Chyron" on CNN conveyed to viewers when the data came out. It seems a sour and churlish way to report a rise in employment that is one of the strongest ever recorded in any single month, beaten only by the outsize gains in June and July.  

No reputable analyst has suggested that the strong gains seen in June and July could possibly persist, so the fact that the US job gains were above analyst expectations might have been a good point to emphasize. It is hard to think of anyone, whether journalist or expert, who was foreseeing such a strong, early rebound in employment back when the pandemic was laying waste to the economy in March and April. Well, there was one person who said it -- and, the Lord help us all, that person was Donald Trump.

The tone of reporting on the economy, and on employment in particular, is important right now, because we are probably about to enter a phase in which the situation will become trickier, even if there is no major "second wave" of COVID-19. The job gains seen in both Canada and the United States in the past three months largely represent the steady loosening of the lockdowns imposed in both countries in an effort to control the pandemic. That process has further to run, but will inevitably end soon.

Looking ahead, we are facing a period in which the structural damage caused by the pandemic will start to become much more apparent. Airlines on both sides of the border are readying mass layoffs, amid predictions that the industry will not fully recover for four years. Small businesses that have hung on through the summer season may not survive as the seasons change. Think, for example, of all the restaurants here in Canada that have opened patios to serve their clients safely in these warmer months, but will soon be forced to fall back on interior spaces with strictly reduced seating capacity as the frosts start to arrive.    

There is likely to be plenty of gloomy economic news for the media to obsess over in the coming months. It would be nice if they would allow themselves (and their audiences) to celebrate the better news as well, as long as it lasts. 

The Price is wrong? Part 2: the United States

Federal Reserve Chair Jerome Powell used his speech to the KC Fed's Jackson Hole conference to signal changes to the Fed's policy approach. His speech gives a concise summary of the history of inflation targeting at the Fed, but one or two points deserve further emphasis. 

First, the Fed was late to adopt formal inflation targeting, only taking its final step in that direction under the Chairmanship of Janet Yellen, less than a decade ago. Its earlier resistance to such a move can be blamed  at least in part on Alan Greenspan. The wily and ultra-political "Maestro" never wanted to have his hands tied in any way.  The Fed's inflation focus during his term in office was very much a moving target. Believing that the CPI overstated inflation pressures, Greenspan first shifted his attention to the previously obscure Employment Cost Index. When that no longer passed muster, he switched to the even more arcane core personal consumption expenditure deflator, a GDP-related figure that has the distinct disadvantage of being a quarterly number, rather than monthly like the CPI. This is not a sound approach to making policy.  

Second, the Fed, unlike, say, the Bank of Canada, is already tasked with a dual mandate that calls on it to pay attention to both inflation and employment as it sets its policy course. It would perhaps be gratuitous to suggest here that under Greenspan, that seemed to expand to a triple mandate, with propping up the stock market becoming a central pre-occupation: the so-called "Greenspan Put". Leaving that aside, the dual mandate carries over into the changes that Chairman Powell announced this week.  Here is how Powell described those changes: 

Regarding employment: "Our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement. This change...reflects our view that a robust job market can be sustained without causing an outbreak of inflation.  In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market. It was sometimes appropriate for the Fed to tighten monetary policy as employment rose toward its estimated maximum level in order to stave off an unwelcome rise in inflation. The change to "shortfalls" clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals."

And regarding inflation: "our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

These are subtle shifts in wording, and as we move towards the post-COVID world, it may be quite some time before they result in any noticeable changes in the Fed's actual policy stance. However, they are an important recognition by the world's most important central bank that the old assumptions about a direct trade-off between inflation and employment no longer apply. For what it may be worth -- doubtless very little! -- I was never a fan of the Phillips curve that Powell refers to here. It looks as if it is about to join the Phlogiston Theory on the scrapheap of old ideas.