They're baaack! Not in the usual numbers, at least not yet, but tourists are starting to come back to our little town, despite the pleas from all levels of government for people to continue staying at home. The town has put up some big electric signs on the approach roads with alternating messages -- PLEASE STAY HOME, LOCAL TRAFFIC ONLY and NO PUBLIC WASHROOMS. It doesn't seem to be working, not least because once people have defied the lockdown and driven the 120 km or so from Toronto, they're not going to turn back a the last minute because they see a sign.
Back before any of these lockdowns even began, experts in the UK were saying that the longest period you cold reasonably expect people to be obedient and stay home was probably about twelve weeks. Here in Ontario we have had the stay home orders in place for only about half that time, and yet compliance is already starting to fray. What can we make of this?
Many years ago, before we even met, my wife was involved in a bad car accident that left her with a broken femur. Initial attempts to set the bone failed, but a second surgeon was able to repair the damage, then warned her that she would be confined to hospital for.....twelve weeks. As she recalls it, this was a daunting prospect, but it was also in some sense a light at the end of the tunnel, and she was able to deal with it. Why, she wonders -- we often discuss things like this over a bottle of wine on a Sunday evening -- can't the population at large do the same now?
I think the key difference is this. There could be no doubt in my wife's mind, all those years ago, that bed rest was for her own good, and that the personal consequences of disobeying the doctors could be dire. For all the scary stories about the coronavirus, it is not easy to make everyone feel that way now. I'm not ill myself, so why can't I go out for a little drive as long as I obey the social distancing rules? Taking my family to the park, or down to Niagara for that matter, poses very little risk to others, so why shouldn't we go? We're going stir crazy here!
And it's true -- one family walking past a string of empty shops poses very little risk -- but it's never going to be just one family, is it? There's a fallacy of composition at work here. Each individual family out for a stroll poses minimal danger, but when there are a whole lot of families with the same idea, the risk level increases dramatically,
This is not an easy argument to make to a populace that feels it is already making huge sacrifices for the good of others. That's important to keep in mind as governments start to think about how we all come out of these lockdown phases. If Governments sound too optimistic about the timetable for a return to "normal", complacency will quickly set in and compliance with the lockdown will erode. If instead governments offer no light at the end of the tunnel, there will be at least a segment of the population that will throw up its hands and start disobeying the rules anyway.
Steering between these bad outcomes is a very tricky test for governments and not all of the early signs are promising. In the state of Georgia the Governor has seen fit to open up a ragtag set of businesses that should by all logic have been among the last things to reopen -- bowling alleys! tattoo parlors! salons! Mercifully it looks as if the population of the state may be smarter than its leader, so many businesses are staying shut and people are still staying home.
For a counter-example we can look closer to home, to Toronto, where Mayor John Tory has announced that the city's largest outdoor space, High Park, will be completely closed so as to prevent crowds from gathering to see the cherry trees come in to bloom in the next week or two. The cherry trees only occupy a small part of the park, but he's closing the whole, "out of an abundance of caution" as he would no doubt put it.
Unfortunately for Mayor Tory, as the weather gets better, people are going to want to get outside anyway. Closing off a huge park won't make then change their minds and stay inside -- they'll go somewhere else instead to get their fresh air fix. Who knows, some families deprived of the chance to see the blossoms in High Park might instead jump in the car and head somewhere else -- down to Niagara, perhaps?
Monday 27 April 2020
Wednesday 22 April 2020
Lower inflation, but will it last?
Statistics Canada reported this morning that Canada's consumer price index (CPI) fell 0.9 percent in the month of March. This dropped the year-on-year rate to 0.9 percent, from 2.2 percent in February. The weakness in the month was primarily due to the stunning fall in the price of energy, as six of the eight major components of the index actually rose in the month. Excluding energy, the year-on-year rise in CPI was 1.7 percent.
The deflationary trend is set to continue in the near term, not least because of the collapse in oil prices, though it is important to note that the widely publicized fall in oil prices to below zero earlier this week was mainly the result of a futures contract expiry. In the medium and longer term, however, things are less clear.
I have written previously that we are dealing with a combination of a demand shock and a supply shock, something that is without any real precedent and something that economics has few tools to analyze. The demand shock, with large numbers of people losing their jobs and the majority of the world's population under stay-at-home orders, is there for all to see. Most of the emergency measures that governments have announced have correctly been aimed at keeping workers and their families afloat through the worst of the pandemic. If that works as it should, demand could revive quite sharply when the lockdowns end.
Take a look at this story -- plenty of Canadian consumers, including your blogger, are spending far less than usual at the moment. Flush bank accounts could well translate into a surge in customer spending as and when the "new normal" starts to take shape, even if governments move swiftly to unwind some of the extraordinary stimulus that has been put in place over the last few weeks.
But what about the supply shock? Once consumers start opening their pocketbooks again, will there be an ample supply of goods and services for them to buy? Retailers have been falling by the wayside all around the world; airlines are in deep trouble; large numbers of small businesses have closed, never to reopen. If half the mom-and-pop burger joints in your town are gone forever, it isn't hard to guess what will happen to prices at the remaining half when the crisis is over. That may well be replicated in many sectors of the economy.
Right now, a modest uptick in inflation resulting from a rebound in the economy seems like it would be a nice problem to have. It's certainly a better outcome than the prolonged and painful deflation that some commentators seem to be predicting. It may also be the more likely outcome.
The deflationary trend is set to continue in the near term, not least because of the collapse in oil prices, though it is important to note that the widely publicized fall in oil prices to below zero earlier this week was mainly the result of a futures contract expiry. In the medium and longer term, however, things are less clear.
I have written previously that we are dealing with a combination of a demand shock and a supply shock, something that is without any real precedent and something that economics has few tools to analyze. The demand shock, with large numbers of people losing their jobs and the majority of the world's population under stay-at-home orders, is there for all to see. Most of the emergency measures that governments have announced have correctly been aimed at keeping workers and their families afloat through the worst of the pandemic. If that works as it should, demand could revive quite sharply when the lockdowns end.
Take a look at this story -- plenty of Canadian consumers, including your blogger, are spending far less than usual at the moment. Flush bank accounts could well translate into a surge in customer spending as and when the "new normal" starts to take shape, even if governments move swiftly to unwind some of the extraordinary stimulus that has been put in place over the last few weeks.
But what about the supply shock? Once consumers start opening their pocketbooks again, will there be an ample supply of goods and services for them to buy? Retailers have been falling by the wayside all around the world; airlines are in deep trouble; large numbers of small businesses have closed, never to reopen. If half the mom-and-pop burger joints in your town are gone forever, it isn't hard to guess what will happen to prices at the remaining half when the crisis is over. That may well be replicated in many sectors of the economy.
Right now, a modest uptick in inflation resulting from a rebound in the economy seems like it would be a nice problem to have. It's certainly a better outcome than the prolonged and painful deflation that some commentators seem to be predicting. It may also be the more likely outcome.
Monday 20 April 2020
Coronavirus and the climate
Not surprisingly, the virtual shutdown of much of the global economy is having a dramatic effect on air pollution, as this video, one of many to be found on the internet, illustrates. It remains to be seen how lasting this improvement will be, particularly if the world economy bounces back smartly. Still, it seems almost inevitable that the air travel sector will never recover to its pre-pandemic level, so those bluer skies you're seeing may be with us for years to come.
Climate scientists are warning that any pause in global warming resulting from the pandemic will be a respite rather than a reversal. Here, for example, is Thomas Friedman in the NYT, arguing that with the pandemic and global warming alike, "Mother Nature always wins", with the only difference being that pandemics inevitably fade, whereas global warming is inexorable if we stay on our current course.
And here is George Monbiot at The Guardian, arguing that COVID-19 is a wake-up call regarding humanity's mistreatment of Mother Nature. In Monbiot's opinion, The planet has multiple morbidities, some of which will make this coronavirus look, by comparison, easy to treat. Channeling his inner Thomas Malthus, who is never far from the surface, George's principal concern is how humanity will feed itself as global warming wreaks havoc with agriculture.
Commentators such as Friedman and Monbiot, and many others beside, appear to hope that the lessons learned from dealing with COVID-19 will readily transfer over into the fight against climate change. Seriously? We may have learned that shutting everything down and living like hermits reduces pollution, but we could surely have figured that out from first principles, without having to run the actual experiment.
People are starting to chafe quite badly under the enforced lockdowns, even though in most countries these have barely been in place for a month. The idea that anyone who has lived through this crisis will be up for a multi-year or even multi-decade rerun in order to set the climate right strikes me as naive in the extreme. Coronavirus may have cleared the air in New Delhi and Nairobi and Los Angeles for now, but it's very far from certain that it will ultimately change human behaviour in a climate-positive way.
Climate scientists are warning that any pause in global warming resulting from the pandemic will be a respite rather than a reversal. Here, for example, is Thomas Friedman in the NYT, arguing that with the pandemic and global warming alike, "Mother Nature always wins", with the only difference being that pandemics inevitably fade, whereas global warming is inexorable if we stay on our current course.
And here is George Monbiot at The Guardian, arguing that COVID-19 is a wake-up call regarding humanity's mistreatment of Mother Nature. In Monbiot's opinion, The planet has multiple morbidities, some of which will make this coronavirus look, by comparison, easy to treat. Channeling his inner Thomas Malthus, who is never far from the surface, George's principal concern is how humanity will feed itself as global warming wreaks havoc with agriculture.
Commentators such as Friedman and Monbiot, and many others beside, appear to hope that the lessons learned from dealing with COVID-19 will readily transfer over into the fight against climate change. Seriously? We may have learned that shutting everything down and living like hermits reduces pollution, but we could surely have figured that out from first principles, without having to run the actual experiment.
People are starting to chafe quite badly under the enforced lockdowns, even though in most countries these have barely been in place for a month. The idea that anyone who has lived through this crisis will be up for a multi-year or even multi-decade rerun in order to set the climate right strikes me as naive in the extreme. Coronavirus may have cleared the air in New Delhi and Nairobi and Los Angeles for now, but it's very far from certain that it will ultimately change human behaviour in a climate-positive way.
Wednesday 15 April 2020
Dire straits
The flow of bad economic news created by the COVID-19 pandemic is turning into a torrent. Employment indicators in both the United States and Canada responded shockingly fast to the virtual shutdown of the two economies in mid-March. This week has seen further evidence of damage south of the border, as retail sales, industrial production and sentiment all plummet.
Here in Canada, Statistics Canada has taken the unprecedented step of compiling a "flash estimate" for GDP for the month of March. It does not make for good reading. StatsCan estimates that real GDP fell by 9 percent in the month, which implies a fall in GDP of 2.6 percent (or more than 10 percent on an annualized basis) for the first quarter as a whole. It probably goes without saying that this is by far the fastest rate of decline seen since the monthly GDP series began in 1961. In case the raw data are not dispiriting enough, it needs to be borne in mind that the effective lockdown of "non-essential" sectors of the economy by the Federal and Provincial governments only took place in the middle of March.
So, what's next? Today was a scheduled rate announcement day for the Bank of Canada, as well as the release date for an updated Monetary Policy Report (MPR). Having cut rates three times already in response to the crisis, the Bank kept its key rate unchanged at 0.25 percent today, as markets had expected, and signalled very clearly its reluctance to move rates into negative territory. However, it announced further measures to inject liquidity into markets in order to keep the financial system functioning smoothly: it will now be buying Provincial and corporate bonds in the secondary market, in addition to the previously announced program of federal bond purchases.
In terms of the economic outlook, the Bank is predictably downbeat. It expects that economic activity for the second quarter of the year will be anywhere from 15 to 30 percent lower than it was at the end of 2019. That is an unusually broad range that encompasses two widely differing outcomes. The less pessimistic end of the range implies in a sense that March will come to be seen as the worst phase of the crisis, with declines during the second quarter itself taking place at a slower pace. By contrast the more pessimistic estimate sees the pace of decline continuing close to the March rate for at least the next two months or more.
Considering the problems in the real economy right now, it is perhaps surprising that much of the press release for the MPR focuses on the inflation outlook. It turns out, however, that this gives the opportunity to put the impact of the crisis and the policy response into better perspective. The Bank acknowledges that the near-term outlook has taken a deflationary turn, but does not believe that persistent price weakness will become an issue. Here is the relevant paragraph in full:
Fortunately, the risk of sustained deflation in Canada is low, for several reasons. First, there has been a vigorous and elastic response from governments to the pandemic. These actions will put a floor under the economy and lay the foundation for the subsequent recovery. This is especially true for wage subsidies, which are designed to maintain the employee-employer relationship, thereby buttressing confidence and facilitating the recovery. Second, Canada began the pandemic episode with the economy operating near potential and inflation around its 2 percent target. Just as a healthy, fit individual is more likely to shake off a COVID-19 infection, a healthy economy is more likely to recover quickly from a major negative shock. Third, Canada has enjoyed considerable success in keeping inflation close to target for more than 25 years. This means that investors, firms and households expect that the Bank will act to help return the economy to capacity and bring about stable, 2 percent inflation. The Bank’s recent actions should be seen in exactly that light.
The Bank's next scheduled policy statement date is June 3, though in current circumstances the need for earlier action cannot be ruled out. Just one day earlier, on June 2, Governor Stephen Poloz's term is set to end. No replacement has yet been announced, though the smart money must be on Senior Deputy Governor Carolyn Wilkins. There have been reports from Ottawa that Poloz has offered to stay on for a brief time, but that it is unlikely that the government will take him up on this. As someone who offered plenty of criticism of Poloz in his early days on the job, I am happy to admit that as he nears the end of his term he has proved me wrong. We can only hope that his successor can hit the ground running, amid the worst economic crisis in living memory.
Here in Canada, Statistics Canada has taken the unprecedented step of compiling a "flash estimate" for GDP for the month of March. It does not make for good reading. StatsCan estimates that real GDP fell by 9 percent in the month, which implies a fall in GDP of 2.6 percent (or more than 10 percent on an annualized basis) for the first quarter as a whole. It probably goes without saying that this is by far the fastest rate of decline seen since the monthly GDP series began in 1961. In case the raw data are not dispiriting enough, it needs to be borne in mind that the effective lockdown of "non-essential" sectors of the economy by the Federal and Provincial governments only took place in the middle of March.
So, what's next? Today was a scheduled rate announcement day for the Bank of Canada, as well as the release date for an updated Monetary Policy Report (MPR). Having cut rates three times already in response to the crisis, the Bank kept its key rate unchanged at 0.25 percent today, as markets had expected, and signalled very clearly its reluctance to move rates into negative territory. However, it announced further measures to inject liquidity into markets in order to keep the financial system functioning smoothly: it will now be buying Provincial and corporate bonds in the secondary market, in addition to the previously announced program of federal bond purchases.
In terms of the economic outlook, the Bank is predictably downbeat. It expects that economic activity for the second quarter of the year will be anywhere from 15 to 30 percent lower than it was at the end of 2019. That is an unusually broad range that encompasses two widely differing outcomes. The less pessimistic end of the range implies in a sense that March will come to be seen as the worst phase of the crisis, with declines during the second quarter itself taking place at a slower pace. By contrast the more pessimistic estimate sees the pace of decline continuing close to the March rate for at least the next two months or more.
Considering the problems in the real economy right now, it is perhaps surprising that much of the press release for the MPR focuses on the inflation outlook. It turns out, however, that this gives the opportunity to put the impact of the crisis and the policy response into better perspective. The Bank acknowledges that the near-term outlook has taken a deflationary turn, but does not believe that persistent price weakness will become an issue. Here is the relevant paragraph in full:
Fortunately, the risk of sustained deflation in Canada is low, for several reasons. First, there has been a vigorous and elastic response from governments to the pandemic. These actions will put a floor under the economy and lay the foundation for the subsequent recovery. This is especially true for wage subsidies, which are designed to maintain the employee-employer relationship, thereby buttressing confidence and facilitating the recovery. Second, Canada began the pandemic episode with the economy operating near potential and inflation around its 2 percent target. Just as a healthy, fit individual is more likely to shake off a COVID-19 infection, a healthy economy is more likely to recover quickly from a major negative shock. Third, Canada has enjoyed considerable success in keeping inflation close to target for more than 25 years. This means that investors, firms and households expect that the Bank will act to help return the economy to capacity and bring about stable, 2 percent inflation. The Bank’s recent actions should be seen in exactly that light.
The Bank's next scheduled policy statement date is June 3, though in current circumstances the need for earlier action cannot be ruled out. Just one day earlier, on June 2, Governor Stephen Poloz's term is set to end. No replacement has yet been announced, though the smart money must be on Senior Deputy Governor Carolyn Wilkins. There have been reports from Ottawa that Poloz has offered to stay on for a brief time, but that it is unlikely that the government will take him up on this. As someone who offered plenty of criticism of Poloz in his early days on the job, I am happy to admit that as he nears the end of his term he has proved me wrong. We can only hope that his successor can hit the ground running, amid the worst economic crisis in living memory.
Thursday 9 April 2020
What's up, stocks?
The bad economic news keeps pouring in from around the globe. More than 16 million jobless claims in the US in the past three weeks....Germany set for recession....Canadian unemployment up more than a million in March....UK retailers falling like flies...heavy crudes selling for as little as $3/bbl....the list goes on. Nouriel "Dr Doom" Roubini, never one to let a disaster go to waste, is dismissing all the conjecture about whether we will see a U-shaped, V-shaped or L-shaped recovery from all this, has flatly declared that the only shape he sees is an I, heading straight down.
And yet, after a precipitous decline that far outpaced the Great Crash of 1929, equity markets have not only stabilized but begun to show tentative signs of recovery. After acknowledging that the markets' ability to foretell the future can never be trusted, what can we make of this? It can't be hope that the virus will soon disappear, even though there are signs in many countries that the longed-for "curve flattening" is happening. At best this crisis still has months to run, especially in countries such as the United States that got off to a slow start in combatting it.
What seems to be driving the market action is a sense of relief that governments are taking unprecedented and aggressive steps to limit the impact of the pandemic on their economies. Some economists and commentators are referring to this as "stimulus", but that's not quite right, because nobody can seriously expect to generate any economic growth while the virus rages on. What we are seeing is, rather, efforts to create a state of suspended animation, closing off large parts of the economy to prevent the spread of the virus, while protecting as many people as possible from economic hardship.
The more effective this suspended animation phase is, the shorter it will have to be, and markets collectively seem to be making the judgment, at least for now, that it will be short enough not to cause permanent economic damage. One key risk here, of course, is that governments rush to end the lockdown before the virus is truly under control; probably no need to spell out here which government is most likely to get that wrong. Another risk, highlighted by Forbes Magazine, is that companies will revise their earnings guidance down so aggressively that investors will take fright, resulting in another sharp selloff -- though it seems unlikely that the all-knowing Mr Market is unaware of that risk, which should therefore be priced in already.
Everyone is looking for reasons to be cheerful right now, and after the panic seen a few weeks ago, equity markets seem, against all odds, to be offering just a little glimmer of hope.
And yet, after a precipitous decline that far outpaced the Great Crash of 1929, equity markets have not only stabilized but begun to show tentative signs of recovery. After acknowledging that the markets' ability to foretell the future can never be trusted, what can we make of this? It can't be hope that the virus will soon disappear, even though there are signs in many countries that the longed-for "curve flattening" is happening. At best this crisis still has months to run, especially in countries such as the United States that got off to a slow start in combatting it.
What seems to be driving the market action is a sense of relief that governments are taking unprecedented and aggressive steps to limit the impact of the pandemic on their economies. Some economists and commentators are referring to this as "stimulus", but that's not quite right, because nobody can seriously expect to generate any economic growth while the virus rages on. What we are seeing is, rather, efforts to create a state of suspended animation, closing off large parts of the economy to prevent the spread of the virus, while protecting as many people as possible from economic hardship.
The more effective this suspended animation phase is, the shorter it will have to be, and markets collectively seem to be making the judgment, at least for now, that it will be short enough not to cause permanent economic damage. One key risk here, of course, is that governments rush to end the lockdown before the virus is truly under control; probably no need to spell out here which government is most likely to get that wrong. Another risk, highlighted by Forbes Magazine, is that companies will revise their earnings guidance down so aggressively that investors will take fright, resulting in another sharp selloff -- though it seems unlikely that the all-knowing Mr Market is unaware of that risk, which should therefore be priced in already.
Everyone is looking for reasons to be cheerful right now, and after the panic seen a few weeks ago, equity markets seem, against all odds, to be offering just a little glimmer of hope.
Friday 3 April 2020
Corona-pourri
- It appears that the Trump administration is trying to stop 3M from exporting N95 masks, some of which are destined for Canada. At the same time there are reports that the US has effectively pirated a shipment of masks that were destined for Germany, diverting them to the US while they were being trans-shipped at an airport in Thailand. Anyone surprised by this?
- And on this very same day, Canada has formally advised the US and Mexico that it has ratified the deal to set up the USMCA (aka CUSMA), the replacement for NAFTA. If it was not already apparent, today's action over the masks has made it crystal clear that when the going gets tough, any deal with Trump is not worth the paper it's printed on.
- The Province of Ontario has bowed to pressure and made public its projections for the death toll from the virus. Without public health measures, it estimates 100,000 could have died. With the measures now in place, it foresees a death toll between 3,000 and 15,000. (Ontario's population is around 14 million). As someone with some experience in statistics and forecasting, I have to say I don't find that remarkably wide range to be very informative. The Federal government is now being pressed to reveal its own projections.
- And at a personal level, I suddenly find I know five people who have been stricken by the virus: two each in Canada and the US and one in the UK. Happy to say that they all seem to be doing reasonably well.
Thursday 2 April 2020
Gone and forgotten
The response to the coronavirus pandemic in the United States has been poor -- too late to respond, too little equipment on hand, no central co-ordination, outright denial by politicians, and so on. It's quite possible that 150,000 people will die of the virus in the coming weeks and months, a shocking outcome that could have been greatly mitigated by a better response, with proper leadership from the White House.
But can we, without disrespecting the victims of the virus, put this in perspective just for a moment? The total number of deaths in the United States for calendar year 2018 was about 2.85 million. So if, Heaven forbid, the coronavirus death toll does indeed reach 150,000, that would be roughly equal to the number that die of all causes every three weeks, year in and year out. I'm slightly surprised that nobody on CNN has pointed this out -- perhaps they think it sounds callous, but that doesn't mean it isn't true.
The 2.8 million Americans who will die from something other than coronavirus this year will leave behind grieving relatives, just as the virus victims do. They just won't get any kind of a sendoff from Wolf Blitzer and his colleagues.
But can we, without disrespecting the victims of the virus, put this in perspective just for a moment? The total number of deaths in the United States for calendar year 2018 was about 2.85 million. So if, Heaven forbid, the coronavirus death toll does indeed reach 150,000, that would be roughly equal to the number that die of all causes every three weeks, year in and year out. I'm slightly surprised that nobody on CNN has pointed this out -- perhaps they think it sounds callous, but that doesn't mean it isn't true.
The 2.8 million Americans who will die from something other than coronavirus this year will leave behind grieving relatives, just as the virus victims do. They just won't get any kind of a sendoff from Wolf Blitzer and his colleagues.
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