Statistics Canada released data on first quarter GDP this morning, and the numbers were as bad as expected. Real GDP fell 2.1 percent in the quarter, the worst showing for any quarter since Q1/2009, at the peak of the global financial crisis. Final domestic demand fell 1.5 percent, led by an unprecedented 2.3 percent fall in household spending.
The numbers are bad, but not so bad that at least one media outlet couldn't find a way to make them look much worse. The Financial Post, which really should know better, headlines its story "Canada's economy shrinks 8.2% in first quarter, worst showing since the financial crisis". Using annualized rates is something economists like me are comfortable with, but it's a bad way to present data to the general public, especially at a time when forecasts for the current quarter are even worse -- a projected 10 percent further decline, which Post readers are already seeing as a 40 percent fall.
If the Post wanted to quote a genuinely scary number, it should perhaps have looked at the monthly GDP data for March, released by StatsCan alongside the quarterly data. That showed a 7.2 percent month-on-month decline, an unwanted all-time record. That equates to an annualized rate of decline in excess of 50 percent, so perhaps it's a good thing the Post didn't spot it. However, that number also gives us a bit of a lead to what may be coming next, and here's where we can start to look at things in a slightly more optimistic light.
The March monthly number tells us that all, or at least substantially all, of the Q1 GDP decline happened in March, which is no surprise, because that's when all the lockdowns happened. April was the first full month in which the lockdowns were in effect, so the GDP report for that month will be as bad as March, or even worse. But.....April was also the only month in which the lockdowns were in full force: ever since the beginning of May, Provinces have been slowly reopening their economies. May GDP data are very unlikely to be as bad as April's, although they will still be far below the peaks seen in the long-ago heady days of ..... January and February.
It seems clear that the recession we are in is of unprecedented severity, but it may well also be one of the shortest on record, only just meeting the media's much loved definition, two consecutive quarters of decline. Full recovery will take much longer, but we do seem to be turning a corner, always assuming that we are not overwhelmed by a second wave of the pandemic later in the year.
So in summary: Q1 GDP data were bad, thanks to a precipitous fall in March; that created a weak "handoff" to Q2, and April was a very weak month, so Q2 GDP will fall more sharply than Q1; however, monthly data could signal a modest recovery as soon as May. This means that for my part, I will be watching the monthly GDP data more closely than the quarterly figures, at least until the second half of the year. Verb sap.
Friday 29 May 2020
Thursday 28 May 2020
It's a start
One of the most widely (and incorrectly) quoted US economic numbers since the start of the COVID-19 pandemic has been the Department of Labor's jobless claims data. It's been widely quoted because it's a weekly series released with very little time-lag. It's been incorrectly quoted because many journalists have been summing the weekly figures for initial jobless claims (i.e. people claiming for the first time in each reporting week) and presenting that number as an estimate of total job losses. The Department also publishes a series for continuing claims that gives a much better estimate of the cumulative impact of the virus, albeit with a one-week lag. It's part of the same press release -- you don't even have to go and search for it!
Data for the week ended May 23 were published this morning, and provide clear evidence that the gradual reopening of the economy is starting to have an impact. Initial claims for the week were 2,123,000, down more than 300,000 from the previous week's level. Initial claims have in fact been declining week by week since hitting a staggering 6 million at the end of March.
But check out this report from CNN: its very first sentence states that "More than 40 million Americans have filed for first-time unemployment benefits since the coronavirus pandemic forced the US economy to shut down in March." That's arithmetically accurate, but it would surely be better to quote the figure for "insured unemployment", which relates to the week ended May 16. That figure stood at 21,052,000, a decline of almost 3.9 million from the previous week. The "insured unemployment rate" fell to 14.5 percent from 17.1 percent in the same week.
Those are still awful numbers, but they seem to suggest that the worst of the job losses may now be in the past. Although the official May non-farm payrolls data, due for publication on June 5, are likely to be terrible, the fall in claims throughout May should translate into better numbers for June -- but as always, all such bets are off if the pandemic gears up for a second wave.
Wednesday 20 May 2020
Miley Cyrus update
I hear some folks in the UK have come up with a rhyming slang name for the novel disease: the Miley Cyrus. Here are just a few quick points about its impact on the economy...
Canada's headline consumer price index fell 0.2 percent year-on-year in April, its first such decline since 2009. The outcome was entirely due to the collapse in global energy prices, which found its way down to the consumer level in April, as retail gasoline prices recorded a remarkable 39 percent year-on-year decline. Excluding energy, the annual rise in CPI stood at 1.6 percent. This is well below the Bank of Canada's 2 percent target, but the Bank will undoubtedly have taken note of a potentially ominous 3.4 percent rise in food prices.
It is unlikely that the inflation rate will be quite so low in May. Global oil prices have been moving higher, despite significant short-term oversupply, and this has already started to show up at the pumps.
There are demands, in Canada and elsewhere, for governments to use their COVID-related handouts to push the economy in a greener direction -- a jump-start for the much-touted Green New Deal, if you will. Some movement in that direction may indeed occur. To take just one example, even if a vaccine is found soon, air travel will be slow to return to its pre-pandemic level. The aircraft being mothballed and retired by airlines all around the world are the older and more polluting models, so that's all to the good.
Any positive impact from a fall in air travel is, however, likely to be swamped by events at ground level. Even as cities attempt to open up and workers are urged to return to their jobs, civic leaders are warning against returning to public transit at pre-pandemic levels. A survey in Toronto just a few days ago revealed that about a third of that city's transit users plan to avoid the system until they are sure they will be safe. There are high hopes for a pickup in cycling and walking, but the fact of the matter is that for a lot of commuters, the only alternative to transit is, alas, to jump back in the car.
The shape of the eventual economic recovery from the pandemic has produced an alphabet soup of options -- will it be V-shaped, U-shaped, L-shaped, W-shaped? This article from the CBC website provides a good summary. I particularly like the idea from my long-ago home at TD Economics, that the shape of the recovery will vary by sector. Thus, grocery stores may have a V-shaped rebound, while at the other end of the spectrum, arts and entertainment and sports face a prolonged L-shaped slog, with most other sectors in between, in a U-shaped world.
One thing everyone can agree on is that the worst case is the dreaded W, in which a second severe wave of the virus forces a further round of lockdowns and pushes the economy back to square one. Are the steps governments are taking to restart their economies cautious enough to avoid this? We shall find out soon enough.
Canada's headline consumer price index fell 0.2 percent year-on-year in April, its first such decline since 2009. The outcome was entirely due to the collapse in global energy prices, which found its way down to the consumer level in April, as retail gasoline prices recorded a remarkable 39 percent year-on-year decline. Excluding energy, the annual rise in CPI stood at 1.6 percent. This is well below the Bank of Canada's 2 percent target, but the Bank will undoubtedly have taken note of a potentially ominous 3.4 percent rise in food prices.
It is unlikely that the inflation rate will be quite so low in May. Global oil prices have been moving higher, despite significant short-term oversupply, and this has already started to show up at the pumps.
There are demands, in Canada and elsewhere, for governments to use their COVID-related handouts to push the economy in a greener direction -- a jump-start for the much-touted Green New Deal, if you will. Some movement in that direction may indeed occur. To take just one example, even if a vaccine is found soon, air travel will be slow to return to its pre-pandemic level. The aircraft being mothballed and retired by airlines all around the world are the older and more polluting models, so that's all to the good.
Any positive impact from a fall in air travel is, however, likely to be swamped by events at ground level. Even as cities attempt to open up and workers are urged to return to their jobs, civic leaders are warning against returning to public transit at pre-pandemic levels. A survey in Toronto just a few days ago revealed that about a third of that city's transit users plan to avoid the system until they are sure they will be safe. There are high hopes for a pickup in cycling and walking, but the fact of the matter is that for a lot of commuters, the only alternative to transit is, alas, to jump back in the car.
The shape of the eventual economic recovery from the pandemic has produced an alphabet soup of options -- will it be V-shaped, U-shaped, L-shaped, W-shaped? This article from the CBC website provides a good summary. I particularly like the idea from my long-ago home at TD Economics, that the shape of the recovery will vary by sector. Thus, grocery stores may have a V-shaped rebound, while at the other end of the spectrum, arts and entertainment and sports face a prolonged L-shaped slog, with most other sectors in between, in a U-shaped world.
One thing everyone can agree on is that the worst case is the dreaded W, in which a second severe wave of the virus forces a further round of lockdowns and pushes the economy back to square one. Are the steps governments are taking to restart their economies cautious enough to avoid this? We shall find out soon enough.
Thursday 14 May 2020
Bank of Canada says financial system can cope with the pandemic
Today the Bank of Canada released its annual Financial System Review. Unsurprisingly, it is all about the impact of the coronavirus pandemic on the Canadian financial system, and the system's ability to cope with that impact. Equally unsurprisingly, the Bank's conclusion is that, thanks to the pre-pandemic strength of the economy, the soundness of the banking system and the raft of measures taken over the past two months, the system is in good shape to cope with what may be coming.
Some of the key points, with apologies for a much longer post than usual:
"Strong policies have put a floor under the economy and laid a strong foundation for its recovery. Concerted policy actions by the Bank and other authorities have helped restore market functioning, and liquidity conditions have improved significantly. Government support for households and firms is directly mitigating income losses. Lower policy interest rates are underpinning demand and helping to achieve the inflation target."
Whether this eventually turns out to be true remains to be seen. The scale, scope and speed of the actions taken by the Federal government, shutting down portions of the economy and providing income support to those most affected, have been impressive. However, while this may have "put a floor under the economy", the strength of the "foundation for its recovery" depends on the length of the shutdown. The longer it takes for the economy to reopen, the more likely it becomes that much of what existed pre-pandemic is effectively gone forever, as the Bank acknowledges later in the Review.
"The Bank of Canada has intervened to support liquidity in key funding markets. Starting in mid-March, the Bank established and expanded a range of facilities and large-scale asset purchase programs to address problems with market functioning......The size of the Bank’s balance sheet has roughly tripled, growing from $119 billion on March 4 to $392 billion on May 6. This increase is much larger and occurred much faster than the growth that occurred during the 2007–09 global financial crisis, when the Bank’s balance sheet increased by 50 percent from September 2008 to the peak of the crisis in March 2009."
What is remarkable here is the sheer scale and rapidity of the growth in the Bank's balance sheet. The Review goes on to note early evidence that these measures are having some success, including a surge in corporate bond issuance in the month of April.
"Canadian banks have allowed more than 700,000 households to delay mortgage payments and have also provided increased flexibility on payments for credit cards and lines of credit. This is keeping debt payments down for many households. However, after the six-month deferral period ends, debt-service payments will rebound. The proportion of households with debt-service payments of more than 40 percent of their income, an indicator of household vulnerability, is likely to rise. This will be particularly the case for households whose incomes do not fully recover."
The elevated level of household debt has been a long-standing theme for the Bank of Canada (and, for that matter, for this blog), with debt standing at close to 180 percent of household income. This situation will need to be watched closely as the deferral period nears an end, not least because the banks are rolling the deferred interest into the outstanding principal. The length of the shutdown in the economy will be the key to how this plays out.
"Policy actions are helping businesses manage their cash flow needs and prepare for the recovery. Government policies such as the Canada Emergency Wage Subsidy and the Canada Emergency Commercial Rent Assistance Program help firms continue to pay their workers and make rent payments despite significant declines in revenues.....What started as a cash flow problem could develop into a solvency issue for some businesses. This becomes more likely if the loss in revenues extends over a long period. Lingering concerns about COVID‑19 could lower demand in some industries, damaging their earning capacity. For example, demand for travel services may recover very slowly. The potential for solvency problems also depends on the ability of businesses to access credit from financial markets and banks and therefore becomes more likely if stress in the financial system returns."
Again we see the Bank pointing out that despite the aggressive measures taken to date, problems could become much more severe for the business sector if the slowdown is prolonged beyond a few months. The Bank is clearly correct in identifying the travel sector as being particularly vulnerable here; the restaurant sector, with a heavy predominance of smaller enterprises, seems equally at risk.
"The six largest banks entered the COVID‑19 period with strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system. The Canadian economy was also in a solid position before the onset of COVID‑19. With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences. Without the aggressive policy responses, banks would be faring much worse, with important negative effects on the availability of credit to households and businesses."
This is reassuring, though one would hardly expect the Bank to say anything different. The Bank and the Federal government trumpeted the success of their policies in keeping the domestic financial system safe after the global financial crisis. The current challenge appears to be much greater and a really prolonged downturn might start to impose further strains on the system.
In his remarks introducing the report, Bank Governor Stephen Poloz concluded by saying "To be clear, the pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake. The right combination of fiscal, monetary and macroprudential policies can ensure a return to economic growth and debt sustainability. Further, policy-makers have taken the lessons of past crises to heart and acted to strengthen the financial system. Canada’s adherence to reforms after the 2007–09 global financial crisis, which strengthened the banking sector, is paying off. I am confident that a strong financial system will help Canada emerge from this episode in relatively good shape."
Poloz's successor Tiff Macklem, who steps into the hot seat in three weeks' time, will be hoping Poloz is correct.
Some of the key points, with apologies for a much longer post than usual:
"Strong policies have put a floor under the economy and laid a strong foundation for its recovery. Concerted policy actions by the Bank and other authorities have helped restore market functioning, and liquidity conditions have improved significantly. Government support for households and firms is directly mitigating income losses. Lower policy interest rates are underpinning demand and helping to achieve the inflation target."
Whether this eventually turns out to be true remains to be seen. The scale, scope and speed of the actions taken by the Federal government, shutting down portions of the economy and providing income support to those most affected, have been impressive. However, while this may have "put a floor under the economy", the strength of the "foundation for its recovery" depends on the length of the shutdown. The longer it takes for the economy to reopen, the more likely it becomes that much of what existed pre-pandemic is effectively gone forever, as the Bank acknowledges later in the Review.
"The Bank of Canada has intervened to support liquidity in key funding markets. Starting in mid-March, the Bank established and expanded a range of facilities and large-scale asset purchase programs to address problems with market functioning......The size of the Bank’s balance sheet has roughly tripled, growing from $119 billion on March 4 to $392 billion on May 6. This increase is much larger and occurred much faster than the growth that occurred during the 2007–09 global financial crisis, when the Bank’s balance sheet increased by 50 percent from September 2008 to the peak of the crisis in March 2009."
What is remarkable here is the sheer scale and rapidity of the growth in the Bank's balance sheet. The Review goes on to note early evidence that these measures are having some success, including a surge in corporate bond issuance in the month of April.
"Canadian banks have allowed more than 700,000 households to delay mortgage payments and have also provided increased flexibility on payments for credit cards and lines of credit. This is keeping debt payments down for many households. However, after the six-month deferral period ends, debt-service payments will rebound. The proportion of households with debt-service payments of more than 40 percent of their income, an indicator of household vulnerability, is likely to rise. This will be particularly the case for households whose incomes do not fully recover."
The elevated level of household debt has been a long-standing theme for the Bank of Canada (and, for that matter, for this blog), with debt standing at close to 180 percent of household income. This situation will need to be watched closely as the deferral period nears an end, not least because the banks are rolling the deferred interest into the outstanding principal. The length of the shutdown in the economy will be the key to how this plays out.
"Policy actions are helping businesses manage their cash flow needs and prepare for the recovery. Government policies such as the Canada Emergency Wage Subsidy and the Canada Emergency Commercial Rent Assistance Program help firms continue to pay their workers and make rent payments despite significant declines in revenues.....What started as a cash flow problem could develop into a solvency issue for some businesses. This becomes more likely if the loss in revenues extends over a long period. Lingering concerns about COVID‑19 could lower demand in some industries, damaging their earning capacity. For example, demand for travel services may recover very slowly. The potential for solvency problems also depends on the ability of businesses to access credit from financial markets and banks and therefore becomes more likely if stress in the financial system returns."
Again we see the Bank pointing out that despite the aggressive measures taken to date, problems could become much more severe for the business sector if the slowdown is prolonged beyond a few months. The Bank is clearly correct in identifying the travel sector as being particularly vulnerable here; the restaurant sector, with a heavy predominance of smaller enterprises, seems equally at risk.
"The six largest banks entered the COVID‑19 period with strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system. The Canadian economy was also in a solid position before the onset of COVID‑19. With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences. Without the aggressive policy responses, banks would be faring much worse, with important negative effects on the availability of credit to households and businesses."
This is reassuring, though one would hardly expect the Bank to say anything different. The Bank and the Federal government trumpeted the success of their policies in keeping the domestic financial system safe after the global financial crisis. The current challenge appears to be much greater and a really prolonged downturn might start to impose further strains on the system.
In his remarks introducing the report, Bank Governor Stephen Poloz concluded by saying "To be clear, the pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake. The right combination of fiscal, monetary and macroprudential policies can ensure a return to economic growth and debt sustainability. Further, policy-makers have taken the lessons of past crises to heart and acted to strengthen the financial system. Canada’s adherence to reforms after the 2007–09 global financial crisis, which strengthened the banking sector, is paying off. I am confident that a strong financial system will help Canada emerge from this episode in relatively good shape."
Poloz's successor Tiff Macklem, who steps into the hot seat in three weeks' time, will be hoping Poloz is correct.
Friday 8 May 2020
Could have been worse, and probably will be soon
The US and Canadian employment data for April were expected to be a horror show. They were.
In the US, non-farm payrolls fell by more than 20 million in the month, pushing the unemployment rate to 14.7 percent. That marks the highest level for unemployment since the monthly BLS data began in 1948, though it remains far short of the 25 percent rate reported (on a different statistical basis) during the Great Depression. In effect virtually all of the jobs added in the decade-long recovery from the 2008 financial crisis have been wiped out in the past two months.
As for Canada, StatsCan reported that employment fell by almost 2 million in April, bringing the total job loss over the past two months to more than 3 million. The unemployment rate jumped by 5.2 percentage points to 13.0 percent, just short of the all-time high of 13.2 percent posted in December 1982. Comparisons with the Great Depression are not exact, but it appears the urban unemployment rate in 1931 was already about 19 percent, with a peak national rate of 30 percent two years later.
In assessing where the figures will go next, it is important to keep in mind the timing of the surveys on which the BLS and StatsCan base their data. By and large the figures reflect the position at mid-month. US weekly initial jobless claims data have continued to show job losses since that time, albeit at a reduced pace. The cumulative job loss shown by the claims data has reached 33 million, compared to the 22 million decline in non-farm payrolls in the past two months. This suggests more bad news in May, with some estimates pointing to an unemployment rate near 20 percent.
The StatsCan report linked above specifically addresses the timing issue, noting that lockdowns in all Provinces were fully in effect during the week of the survey. However, the report also notes that the headline statistics understate the degree of labour force underutilization in the month, suggesting that, as in the US, more bad news may be coming in May. The fact that the number of newly-unemployed for the past two months falls far short of the 7.5 million who have applied for emergency benefits points to the same conclusion.
A tentative conclusion from all this is that April may well turn out to have been the worst single month of the coronavirus-induced labour market meltdown, but May could mark the low point -- or, if you feel more optimistic, the turning point. States and provinces are starting to ease their lockdowns, so there should be some recovery in employment in both countries in the coming weeks, but this will probably become evident too late for the May surveys by the BLS and StatsCan. Jobs will reappear much more slowly than they vanished, and in the event of a serious second wave of the virus, all bets will be off.
In the US, non-farm payrolls fell by more than 20 million in the month, pushing the unemployment rate to 14.7 percent. That marks the highest level for unemployment since the monthly BLS data began in 1948, though it remains far short of the 25 percent rate reported (on a different statistical basis) during the Great Depression. In effect virtually all of the jobs added in the decade-long recovery from the 2008 financial crisis have been wiped out in the past two months.
As for Canada, StatsCan reported that employment fell by almost 2 million in April, bringing the total job loss over the past two months to more than 3 million. The unemployment rate jumped by 5.2 percentage points to 13.0 percent, just short of the all-time high of 13.2 percent posted in December 1982. Comparisons with the Great Depression are not exact, but it appears the urban unemployment rate in 1931 was already about 19 percent, with a peak national rate of 30 percent two years later.
In assessing where the figures will go next, it is important to keep in mind the timing of the surveys on which the BLS and StatsCan base their data. By and large the figures reflect the position at mid-month. US weekly initial jobless claims data have continued to show job losses since that time, albeit at a reduced pace. The cumulative job loss shown by the claims data has reached 33 million, compared to the 22 million decline in non-farm payrolls in the past two months. This suggests more bad news in May, with some estimates pointing to an unemployment rate near 20 percent.
The StatsCan report linked above specifically addresses the timing issue, noting that lockdowns in all Provinces were fully in effect during the week of the survey. However, the report also notes that the headline statistics understate the degree of labour force underutilization in the month, suggesting that, as in the US, more bad news may be coming in May. The fact that the number of newly-unemployed for the past two months falls far short of the 7.5 million who have applied for emergency benefits points to the same conclusion.
A tentative conclusion from all this is that April may well turn out to have been the worst single month of the coronavirus-induced labour market meltdown, but May could mark the low point -- or, if you feel more optimistic, the turning point. States and provinces are starting to ease their lockdowns, so there should be some recovery in employment in both countries in the coming weeks, but this will probably become evident too late for the May surveys by the BLS and StatsCan. Jobs will reappear much more slowly than they vanished, and in the event of a serious second wave of the virus, all bets will be off.
Thursday 7 May 2020
The road to recovery
The US and Canadian employment data for April, due out tomorrow morning (May 8) are certain to be ghastly. However, states and provinces are starting to think about easing their economic lockdowns, and some tentative steps in that direction have now been taken, so it's time to think about how a return to a more "normal" world can be achieved. It's apparent that the lessons that should have been learned from the Great Depression, or more recently from the insane austerity policies implemented in some countries (notably the UK) after the 2008 financial crisis, have been forgotten.
Look at the comments section of any media outlet that still has one and you will find people fretting about the spending cuts and tax hikes that will be imposed in order to pay off the debts that are being run up to keep economies afloat as we deal with the pandemic. Latest estimates of Canada's federal fiscal deficit for fiscal 2020 (April-March) stand at C$252 billion. That amounts to 20 percent of 2019 nominal GDP, which stood at C$1.74 trillion. Recouping that through higher taxes or reduced spending would be a scary prospect -- and would also be exactly the wrong thing to do.
To understand why, consider this story, which broke today in the Canadian media. A company associated with deep-pocketed Google has pulled out of a high-profile regeneration scheme for the Toronto waterfront, saying that unprecedented economic uncertainty has made it impossible to deliver a viable project. There will be other such cancellations in the coming days and weeks. Whole sectors of the economy (airlines and hotels being obvious example) will take years even to approach the scale they had achieved a few short months ago.
Now imagine that governments, confronting a painfully slow recovery in the private sector, jump in with wholesale spending cuts of their own, accompanied by steep tax hikes. You just have to look back at the UK's post-2008 austerity experience under the hapless/hopeless David Cameron and George Osborne to know what will happen. The economy will never recover, and you will never succeed in reducing the deficit, far less paying off the accumulated debt. That's a recipe for turning recession into depression. Cast your mind back to the Great Depression: what finally allowed the US to turn the corner in the 1930s was FDR's widely-opposed spending initiative, theNew Deal.
If the private sector can't or won't spend, the only way to avoid depression is for governments to step in. You can debate whether this is time for a Green New Deal or just a New Deal that tries to restore the status quo ante, but you can't really debate the need for deficit spending to continue after the worst of the coronavirus is behind us. It is, paradoxically, the only thing that will eventually allow the deficits and debt to come down.
Deficit spending is not without risks, the most obvious one being a spike in inflation. That's a prospect to induce queasy feelings in those of us old enough to recall the "stagflation" era in the 1970s and 1980s, but from where we now all stand, in a place we never expected to find ourselves, it's a risk we will have to take.
UPDATE, May 9: Someone agrees with me.
Look at the comments section of any media outlet that still has one and you will find people fretting about the spending cuts and tax hikes that will be imposed in order to pay off the debts that are being run up to keep economies afloat as we deal with the pandemic. Latest estimates of Canada's federal fiscal deficit for fiscal 2020 (April-March) stand at C$252 billion. That amounts to 20 percent of 2019 nominal GDP, which stood at C$1.74 trillion. Recouping that through higher taxes or reduced spending would be a scary prospect -- and would also be exactly the wrong thing to do.
To understand why, consider this story, which broke today in the Canadian media. A company associated with deep-pocketed Google has pulled out of a high-profile regeneration scheme for the Toronto waterfront, saying that unprecedented economic uncertainty has made it impossible to deliver a viable project. There will be other such cancellations in the coming days and weeks. Whole sectors of the economy (airlines and hotels being obvious example) will take years even to approach the scale they had achieved a few short months ago.
Now imagine that governments, confronting a painfully slow recovery in the private sector, jump in with wholesale spending cuts of their own, accompanied by steep tax hikes. You just have to look back at the UK's post-2008 austerity experience under the hapless/hopeless David Cameron and George Osborne to know what will happen. The economy will never recover, and you will never succeed in reducing the deficit, far less paying off the accumulated debt. That's a recipe for turning recession into depression. Cast your mind back to the Great Depression: what finally allowed the US to turn the corner in the 1930s was FDR's widely-opposed spending initiative, theNew Deal.
If the private sector can't or won't spend, the only way to avoid depression is for governments to step in. You can debate whether this is time for a Green New Deal or just a New Deal that tries to restore the status quo ante, but you can't really debate the need for deficit spending to continue after the worst of the coronavirus is behind us. It is, paradoxically, the only thing that will eventually allow the deficits and debt to come down.
Deficit spending is not without risks, the most obvious one being a spike in inflation. That's a prospect to induce queasy feelings in those of us old enough to recall the "stagflation" era in the 1970s and 1980s, but from where we now all stand, in a place we never expected to find ourselves, it's a risk we will have to take.
UPDATE, May 9: Someone agrees with me.
Friday 1 May 2020
A woman scorned
Well, that's a bit of a surprise! Finance Minister Bill Morneau announced this morning that the next Governor of the Bank of Canada will be Tiff Macklem, a former Senior Deputy Governor of the Bank. He will replace Stephen Poloz when Poloz's seven-year term expires on June 2.
There's no doubt that Macklem is well-qualified for the job, as a Bank of Canada veteran. Indeed, he was the prohibitive favourite to move into the top spot back in 2013, only to find himself pipped at the post by the relatively unknown Poloz. Since then he has been leading the B-school at the University of Toronto. Macklem played a key role in guiding the Bank through the global financial crisis a decade ago, and this experience is clearly at the top of Morneau's mind, given the even more challenging circumstances in which the country and the Bank now find themselves.
The reason the selection of Macklem is a surprise is that the Bank's current Senior Deputy Governor, Carolyn Wilkins, appeared to have the inside track here. (Apologies for all the horse racing metaphors!) She has had a much higher profile than any of her predecessors in the job, including Macklem himself, and has acquitted herself well. Indeed, she has been the public face of the Bank to almost the same degree as Governor Poloz himself for at least the last two years, and we can speculate that the only person almost as disappointed as Ms Wilkins today may in fact be Poloz. And perhaps it is crass to mention it, but it might have been expected that Ms Wilkins' gender would be to her advantage here, given Prime Minister Trudeau's self-proclaimed (albeit now rather tarnished) feminism.
As this article from the National Post suggests, it is becoming a tradition that the inside candidate for the top job at the Bank never gets it: the last three governors, Poloz, Mark Carney and David Dodge, were all outsiders at the time they were appointed. Ms Wilkins must be considering her options, but she is unlikely to resign immediately, given the extraordinary challenges the Bank is facing. Once the present crisis passes, it would be no surprise to see her taking up a more lucrative role outside Ottawa -- and who knows, when Macklem's term expires in 2027, her turn may yet come around.
There's no doubt that Macklem is well-qualified for the job, as a Bank of Canada veteran. Indeed, he was the prohibitive favourite to move into the top spot back in 2013, only to find himself pipped at the post by the relatively unknown Poloz. Since then he has been leading the B-school at the University of Toronto. Macklem played a key role in guiding the Bank through the global financial crisis a decade ago, and this experience is clearly at the top of Morneau's mind, given the even more challenging circumstances in which the country and the Bank now find themselves.
The reason the selection of Macklem is a surprise is that the Bank's current Senior Deputy Governor, Carolyn Wilkins, appeared to have the inside track here. (Apologies for all the horse racing metaphors!) She has had a much higher profile than any of her predecessors in the job, including Macklem himself, and has acquitted herself well. Indeed, she has been the public face of the Bank to almost the same degree as Governor Poloz himself for at least the last two years, and we can speculate that the only person almost as disappointed as Ms Wilkins today may in fact be Poloz. And perhaps it is crass to mention it, but it might have been expected that Ms Wilkins' gender would be to her advantage here, given Prime Minister Trudeau's self-proclaimed (albeit now rather tarnished) feminism.
As this article from the National Post suggests, it is becoming a tradition that the inside candidate for the top job at the Bank never gets it: the last three governors, Poloz, Mark Carney and David Dodge, were all outsiders at the time they were appointed. Ms Wilkins must be considering her options, but she is unlikely to resign immediately, given the extraordinary challenges the Bank is facing. Once the present crisis passes, it would be no surprise to see her taking up a more lucrative role outside Ottawa -- and who knows, when Macklem's term expires in 2027, her turn may yet come around.
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