Statistics Canada reported this morning that Canada's real GDP declined by 11.6 percent in April. Combined with the 7.5 percent fall previously reported for March, this means that in May real GDP stood a remarkable 18.2 percent below its February (pre-pandemic) level.
All twenty sectors in the StatsCan data reported declines in April, but there were wide variations. Manufacturing output fell 22.5 percent, largely reflecting shutdowns in non-essential segments, and retail sales fell 22.9 percent as a rise in online shopping failed to offset plummeting sales in many segments -- clothing sales, for example, fell by two-thirds in the month of April. The transportation sector posted a 23 percent decline in the month, propelled by a stunning 93 percent fall in the airline sector. Equally predictably, accommodation and food services output fell 42 percent in the month, to stand 64 percent below its February level.
Sectors posting much more favourable results included utilities, as well as businesses that adapt readily to working from home. The output of the utilities sector fell by only 1.8 percent in April, while output of the financial services sector fell 1.0 percent, with the decline concentrated in the insurance segment.
StatsCan also took the unusual step of providing an early hint of where it expects GDP to go for the month of May. It sees a rebound of 3 percent for the month, as provincial economies progressively but unevenly moved out of lockdown. The unwinding of restrictions has gathered pace through June, so a significantly stronger rebound is all but baked in for the month just ending*. This may have been Canada's steepest recession, but it also seems destined to be the shortest on record, with only two months of actual declines in aggregate output.
Looking further ahead, further GDP gains can be expected through the rest of the summer and into the fall, always assuming that there is no severe second wave of coronavirus. However, the climb out of the abyss will be much more prolonged than the plunge into it, and even aside from the risk of the dreaded second wave, there is one major uncertainty. How much of the decline in activity has been due to government steps to put the economy into a temporary freeze, and how much will prove to represent a more permanent setback? Just today we have seen Air Canada announce a significant pruning of its domestic network, with the threat of more to come. Transportation and accommodation, which as related above have seen some of the sharpest declines in the last few months, may well take many years to return to their pre-pandemic levels.
*Anecdotally, a visit earlier today to a nearby BestBuy store, just reopened after a three-month hiatus, revealed long lines to get into not only that store, but several others in the same plaza, including a liquor store and a WalMart.
Tuesday 30 June 2020
Tuesday 23 June 2020
Tiff sets out his stall
New Bank of Canada Governor Tiff Macklem made his first major policy speech on Monday -- remotely, of course -- to every Canadian club and cercle canadien across the country. The speech was titled "Monetary policy in the context of COVID-19". Macklem addressed the key issues of the day by reference to the Bank's long-established 2 percent inflation target, a clear sign that he intends to make no major changes in policy, at least for the time being.
The economic background against which the Bank must now make its policy decisions is well known. The economy has suffered simultaneous supply and demand shocks. Supply chain disruptions, the closure of non-essential businesses and the imposition of physical distancing led to "a massive decline in supply". At the same time, the rapid surge in unemployment led to "a very large drop in spending power across the economy", although Macklem notes that government measures to support labour incomes during the pandemic have laid the foundations for recovery.
The shape of the recovery in supply and demand will be the key determinant of the Bank's policy actions going forward. It appears to consider that the most likely scenario is one in which "supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation." This implies that monetary policy will have to remain highly accommodative for the foreseeable future, since as Macklem notes, "Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work."
Macklem's remarks did not disclose the reasoning or research behind the Bank's belief that supply will rebound faster than demand. That analysis will no doubt come when the Bank releases its updated Monetary Policy Report in July. It is certainly possible to argue the opposite case. The support that the Government has provided to households is likely to mean that in a national accounts context, the hit to household incomes from the pandemic will be surprisingly small.
By contrast, many sectors of the economy will take a long time to return to anything like their previous normality, if indeed they ever do. Many businesses that are coming back to life are facing considerably higher costs in order to keep everyone safe. All those masks, plexiglass screens and sanitizers don't come free, and operating at less than full capacity makes it harder to cover fixed costs. Many businesses will be looking for ways to pass on those higher costs to their customers, which they may well be able to do if demand proves resilient.
The Bank currently expects economic growth to resume in the third quarter. This certainly looks to be true in the aggregate, but there is plenty of evidence that after precipitous falls in March and April, output began to revive in May, which would mean that the COVID recession will go down as both the deepest and the shortest in history. The Bank expects the recovery to be "prolonged and bumpy", with setbacks along the way. Macklem ended his remarks by describing the trusty inflation target as "our beacon that is guiding our actions". Evidently, the Bank thinks there is quite enough uncertainty in the world right now, without policymakers adding to it.
The economic background against which the Bank must now make its policy decisions is well known. The economy has suffered simultaneous supply and demand shocks. Supply chain disruptions, the closure of non-essential businesses and the imposition of physical distancing led to "a massive decline in supply". At the same time, the rapid surge in unemployment led to "a very large drop in spending power across the economy", although Macklem notes that government measures to support labour incomes during the pandemic have laid the foundations for recovery.
The shape of the recovery in supply and demand will be the key determinant of the Bank's policy actions going forward. It appears to consider that the most likely scenario is one in which "supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation." This implies that monetary policy will have to remain highly accommodative for the foreseeable future, since as Macklem notes, "Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work."
Macklem's remarks did not disclose the reasoning or research behind the Bank's belief that supply will rebound faster than demand. That analysis will no doubt come when the Bank releases its updated Monetary Policy Report in July. It is certainly possible to argue the opposite case. The support that the Government has provided to households is likely to mean that in a national accounts context, the hit to household incomes from the pandemic will be surprisingly small.
By contrast, many sectors of the economy will take a long time to return to anything like their previous normality, if indeed they ever do. Many businesses that are coming back to life are facing considerably higher costs in order to keep everyone safe. All those masks, plexiglass screens and sanitizers don't come free, and operating at less than full capacity makes it harder to cover fixed costs. Many businesses will be looking for ways to pass on those higher costs to their customers, which they may well be able to do if demand proves resilient.
The Bank currently expects economic growth to resume in the third quarter. This certainly looks to be true in the aggregate, but there is plenty of evidence that after precipitous falls in March and April, output began to revive in May, which would mean that the COVID recession will go down as both the deepest and the shortest in history. The Bank expects the recovery to be "prolonged and bumpy", with setbacks along the way. Macklem ended his remarks by describing the trusty inflation target as "our beacon that is guiding our actions". Evidently, the Bank thinks there is quite enough uncertainty in the world right now, without policymakers adding to it.
Wednesday 17 June 2020
What's the point?
The Federal Government has been under pressure from the opposition parties and the media to provide an update on the state of Canada's finances. It now appears that Finance Minister Bill Morneau, who postponed the budget that had been due in March, will table such an update on July 8. In principle it's always a good thing for governments to keep the electorate informed about what's going on, especially when it concerns money. In this case, however, anything that Morneau chooses to say will amount to little more than a guess.
The Government's budget watchdog has already projected the deficit for this fiscal year (April to March) at more than C$ 250 billion, about ten times larger than seemed likely before the pandemic hit. Can Morneau meaningfully update that estimate? The Government has just announced the extension of some of its emergency benefit programs, which will presumably cost money. At the same time, there are signs both in Canada and the US that the reopening of economies is producing a surprisingly sharp rebound which should translate into somewhat higher revenues, and lower takeup of emergency assistance, than seemed possible just a few weeks ago.
Remember back a couple of weeks, when experts on both sides of the border were completely wrong about the employment situation in May? That can't even be called a forecasting error, given that the data related to a time period that had already passed. How much harder will it be for anyone to provide a meaningful forecast for the next nine months? Think of the uncertainties -- will there be a second wave of the pandemic? Will there be a vaccine by year end, as Donald Trump and even Dr Anthony Fauci seem to be suggesting? How much of the job shedding we have seen in the last three months will be reversed as to demand recovers, and how much will turn out to be permanent?
Morneau will no doubt spell out his Department's assumptions on all of these issues, but the range of possible outcomes is so wide that anything he says can hardly be taken as a forecast in any traditional sense. And given that opposition politicians and media types have trouble interpreting forecasts at the best of times, it's not apparent that we will be any the wiser. One sure prediction though: the deficit figure, whatever it may be, will prompt all manner of hand-wringing from the Tories about the inevitability of massive tax hikes once the crisis abates. In fact, they've already started.
Update, 18 June: the official budget watchdog has now updated his estimate of this year's deficit to C$ 256 billion. Since that's the only number the Tories and the media really care about, Morneau's presentation in July seems entirely superfluous.
The Government's budget watchdog has already projected the deficit for this fiscal year (April to March) at more than C$ 250 billion, about ten times larger than seemed likely before the pandemic hit. Can Morneau meaningfully update that estimate? The Government has just announced the extension of some of its emergency benefit programs, which will presumably cost money. At the same time, there are signs both in Canada and the US that the reopening of economies is producing a surprisingly sharp rebound which should translate into somewhat higher revenues, and lower takeup of emergency assistance, than seemed possible just a few weeks ago.
Remember back a couple of weeks, when experts on both sides of the border were completely wrong about the employment situation in May? That can't even be called a forecasting error, given that the data related to a time period that had already passed. How much harder will it be for anyone to provide a meaningful forecast for the next nine months? Think of the uncertainties -- will there be a second wave of the pandemic? Will there be a vaccine by year end, as Donald Trump and even Dr Anthony Fauci seem to be suggesting? How much of the job shedding we have seen in the last three months will be reversed as to demand recovers, and how much will turn out to be permanent?
Morneau will no doubt spell out his Department's assumptions on all of these issues, but the range of possible outcomes is so wide that anything he says can hardly be taken as a forecast in any traditional sense. And given that opposition politicians and media types have trouble interpreting forecasts at the best of times, it's not apparent that we will be any the wiser. One sure prediction though: the deficit figure, whatever it may be, will prompt all manner of hand-wringing from the Tories about the inevitability of massive tax hikes once the crisis abates. In fact, they've already started.
Update, 18 June: the official budget watchdog has now updated his estimate of this year's deficit to C$ 256 billion. Since that's the only number the Tories and the media really care about, Morneau's presentation in July seems entirely superfluous.
Tuesday 16 June 2020
Trade versus aid
A loud blast from my past today, with Boris Johnson announcing that the UK will be merging its Foreign and Commonwealth Office (FCO) with the Department for International Development (DfID). My first job after graduating university, exactly fifty years ago this summer, was in the economics department of the FCO in Whitehall. I was particularly interested in development economics, so I soon found myself working on aid-related issues.
The UK aid program at the time was run by a body called the Overseas Development Administration or ODA. It had recently lost its status as a separate ministry and become part of the FCO, but was very prickly about asserting its independence as much as possible. The FCO had an interest in using aid funds to pursue the UK's overall foreign policy interests, while the ODA stood for aid pure and simple, directed to those most in need.
The ODA even resisted pressure to "tie" UK aid to UK exports, something the FCO and the Trade Department strongly favoured. If the UK gave a country money to buy a fleet of ambulances, the FCO view was that the vehicles should be UK made. The ODA always said no to this, and at least in my day, the ODA usually prevailed*.
Over the years there have been a lot of changes, well summarized in this Wikipedia article. The ODA re-acquired full status as a Ministry, becoming the ODM, then lost its independence and was folded into the FCO. It assumed its present identity as DfID in 1997. In general, Labour governments have tried to keep the aid agency independent, while Tories have preferred to lump it back in with the FCO, so Johnson's announcement today is in keeping with history.
It is clear that Johnson's government seeks to make the UK's aid program highly political. It appears, for example, that the government is much more inclined to direct UK aid funds to countries bordering Russia which, based on their income levels, are arguably not appropriate recipients of aid at all, rather than to genuinely poor Third World countries. Unsurprisingly, then, the announcement has been met with a chorus of dismay, not just from aid-oriented charities but also from some of Johnson's predecessors, including Tony Blair and, more surprisingly, David Cameron.
The result of this merger, set to happen in the fall, is depressingly predictable: it will be bad for aid and it will be bad for UK diplomacy. And there's one practical consideration that could have big ramifications. In my day, attending a meeting at the ODA involved a pleasant ten-minute walk through St James's Park to their offices. Now, much of the DfID workforce is located in East Kilbride, just south of Glasgow. With Scottish nationalist sentiment on the rise again, will BoJo dare to shift some of those jobs back to London? Stay tuned.
* I must have been reasonably diplomatic in my dealings with the ODA, because when an opportunity came up for someone to work for the Caribbean Development Bank in Barbados, paid out of the ODA budget, I got the gig. That ultimately led to me pitching up here in Canada, but that's another story.
The UK aid program at the time was run by a body called the Overseas Development Administration or ODA. It had recently lost its status as a separate ministry and become part of the FCO, but was very prickly about asserting its independence as much as possible. The FCO had an interest in using aid funds to pursue the UK's overall foreign policy interests, while the ODA stood for aid pure and simple, directed to those most in need.
The ODA even resisted pressure to "tie" UK aid to UK exports, something the FCO and the Trade Department strongly favoured. If the UK gave a country money to buy a fleet of ambulances, the FCO view was that the vehicles should be UK made. The ODA always said no to this, and at least in my day, the ODA usually prevailed*.
Over the years there have been a lot of changes, well summarized in this Wikipedia article. The ODA re-acquired full status as a Ministry, becoming the ODM, then lost its independence and was folded into the FCO. It assumed its present identity as DfID in 1997. In general, Labour governments have tried to keep the aid agency independent, while Tories have preferred to lump it back in with the FCO, so Johnson's announcement today is in keeping with history.
It is clear that Johnson's government seeks to make the UK's aid program highly political. It appears, for example, that the government is much more inclined to direct UK aid funds to countries bordering Russia which, based on their income levels, are arguably not appropriate recipients of aid at all, rather than to genuinely poor Third World countries. Unsurprisingly, then, the announcement has been met with a chorus of dismay, not just from aid-oriented charities but also from some of Johnson's predecessors, including Tony Blair and, more surprisingly, David Cameron.
The result of this merger, set to happen in the fall, is depressingly predictable: it will be bad for aid and it will be bad for UK diplomacy. And there's one practical consideration that could have big ramifications. In my day, attending a meeting at the ODA involved a pleasant ten-minute walk through St James's Park to their offices. Now, much of the DfID workforce is located in East Kilbride, just south of Glasgow. With Scottish nationalist sentiment on the rise again, will BoJo dare to shift some of those jobs back to London? Stay tuned.
* I must have been reasonably diplomatic in my dealings with the ODA, because when an opportunity came up for someone to work for the Caribbean Development Bank in Barbados, paid out of the ODA budget, I got the gig. That ultimately led to me pitching up here in Canada, but that's another story.
Wednesday 10 June 2020
Circling the drain
The Government of Canada has been throwing money in all directions since the COVID-driven economic lockdowns began. Much of the spending has been essential to prevent a complete collapse in demand -- the CEWS and CERB benefits for individual workers, for example, although there is mounting evidence of a significant number of fraudulent claims. Bailout funds directed to businesses present more of a mixed picture, especially in cases where a company has taken all the money on offer and still resorted to mass layoffs, Air Canada being a prominent example.
It's no surprise to find that one company with both hands out is Bombardier, which has been effectively a ward of the Federal and Provincial governments for many years. The company has been selling itself off piecemeal, with the rail, commercial jet and regional jet divisions disposed of, to Alstom, Airbus and Mitsubishi respectively. Through good luck or good judgment, the company has actually done very well here: none of those assets would be easy to sell in today's market, and all would be bleeding the company of cash it simply doesn't have.
By selling these substantial divisions, however, Bombardier has in effect bet its future on its business jet operation. You can make a case that companies will want more of these for their top brass in a post-COVID world, given the shrinkage of commercial airlines. (The opposite argument can also be made, given the ease with which many companies have taken to work-from-home in recent months). For the moment, however, demand for these jets has dried up, and the company recently announced it would be laying off 2500 workers, about one-quarter of its much-reduced labour force.
Even in its shrunken state, Bombardier retains direct access to the spigot for public funds. Quebec Finance Minister Eric Girard has offered to help the company through "this difficult period", citing the unfortunate precedent of a bailout loan recently offered to, of all things, Cirque du Soleil. And that's not all -- the Federal government has announced a deal, without going to tender, to buy two Challenger jets for early delivery, paying what looks like full list price and more for the privilege. There's not much of Bombardier left to save, but I suppose in current circumstances you can't really blame the owners for asking, or the governments for ponying up yet again.
It's no surprise to find that one company with both hands out is Bombardier, which has been effectively a ward of the Federal and Provincial governments for many years. The company has been selling itself off piecemeal, with the rail, commercial jet and regional jet divisions disposed of, to Alstom, Airbus and Mitsubishi respectively. Through good luck or good judgment, the company has actually done very well here: none of those assets would be easy to sell in today's market, and all would be bleeding the company of cash it simply doesn't have.
By selling these substantial divisions, however, Bombardier has in effect bet its future on its business jet operation. You can make a case that companies will want more of these for their top brass in a post-COVID world, given the shrinkage of commercial airlines. (The opposite argument can also be made, given the ease with which many companies have taken to work-from-home in recent months). For the moment, however, demand for these jets has dried up, and the company recently announced it would be laying off 2500 workers, about one-quarter of its much-reduced labour force.
Even in its shrunken state, Bombardier retains direct access to the spigot for public funds. Quebec Finance Minister Eric Girard has offered to help the company through "this difficult period", citing the unfortunate precedent of a bailout loan recently offered to, of all things, Cirque du Soleil. And that's not all -- the Federal government has announced a deal, without going to tender, to buy two Challenger jets for early delivery, paying what looks like full list price and more for the privilege. There's not much of Bombardier left to save, but I suppose in current circumstances you can't really blame the owners for asking, or the governments for ponying up yet again.
Friday 5 June 2020
Eye-witness economics
Economists making forecasts are regularly warned against using anecdotal evidence -- just because your neighbour splashed seven large on an 80-inch outdoor TV last month, that doesn't mean national retail sales numbers are going to be strong. For the most part that's good advice, but not getting caught up in anecdotes doesn't mean that you have to walk around with your eyes shut. The stunning failure of the Wall Street and Bay Street experts to predict today's US and Canadian employment data suggests that's exactly what has happened.
Let's start with the US, where the Bureau of Labor Statistics reported that the economy added 2.5 million jobs in May, dropping the unemployment rate to 13.3 percent. Considering that forecasters had been looking for the loss of several million more jobs and an unemployment rate of 20 percent, that's quite startling. We have been regularly reading about the fact that "40 million Americans have lost their jobs", an entirely bogus number obtained by summing the weekly initial claims data; it turns out the actual number of unemployed as of mid-May was 21 million!
The BLS report notes that the job gains are widely spread across different sectors of the economy, with leisure, construction and retail all showing strong gains. The only laggard is, oddly enough, the public sector. The opening-up of state economies throughout the month, alongside stories such as Walmart hiring 250,000 workers across the country, seems to have completely escaped the attention of the prognosticators. It's slightly surprising that the impact of these developments has shown up so soon, but the general direction should have been apparent -- see my post "It's a start" back on 28 May.
It's a similar story for Canada, where the economy demolished experts' gloomy expectations by adding 290,000 jobs in May, the vast majority of them full-time. The number of employees working severely reduced hours also fell sharply. Paradoxically, the unemployment rate rose to a record 13.7 percent, thanks to a big jump in labour force participation. In assessing this "record" number, keep in mind that the data series only goes back to 1976; things were surely much worse in the 1930s.
A quick look at the details of the data shows the significance of paying attention to what's going on. The strongest job gains were seen in Quebec (up more than 230,000), BC and Alberta, which have been easing lockdowns since the start of May. In contrast Ontario, which is being more cautious, saw a further loss of 65,000 jobs in the month. Just about the only economist to have got this right is a guy at Desjardins in Montreal, who presumably noticed things changing all around -- well done him!
We should not extrapolate from this one number, advice already lost on Donald Trump, who is portraying the US data as not just a V but a "rocket ship". Both the BLS and StatsCan are cautioning that the definition of unemployment is a bit slippery these days. To see why, just consider what has happened in recent weeks at Air Canada, That company grounded most of its fleet and laid off half its staff, only to hire them back when the government's emergency wage supports came into play. Then it promptly furloughed them, while announcing plans to lay them off again as it looks to emerge from the pandemic as a much smaller airline. How can a statistician accurately account for that?
The lesson to be taken from this and other similar stories is that for the next few months, two contrasting trends will be at play in the employment data. The reopening of states and provinces is set to continue, and that will lead to further hiring of the kind we have just seen for the month of May. At the same time, many firms will be looking to downsize for the new reality they will be facing post-pandemic; that will transform thousands of today's furloughs into more permanent job losses. We will climb out of the chasm much more slowly than we plunged into it, and the landscape on the other side promises to be quite different.
Let's start with the US, where the Bureau of Labor Statistics reported that the economy added 2.5 million jobs in May, dropping the unemployment rate to 13.3 percent. Considering that forecasters had been looking for the loss of several million more jobs and an unemployment rate of 20 percent, that's quite startling. We have been regularly reading about the fact that "40 million Americans have lost their jobs", an entirely bogus number obtained by summing the weekly initial claims data; it turns out the actual number of unemployed as of mid-May was 21 million!
The BLS report notes that the job gains are widely spread across different sectors of the economy, with leisure, construction and retail all showing strong gains. The only laggard is, oddly enough, the public sector. The opening-up of state economies throughout the month, alongside stories such as Walmart hiring 250,000 workers across the country, seems to have completely escaped the attention of the prognosticators. It's slightly surprising that the impact of these developments has shown up so soon, but the general direction should have been apparent -- see my post "It's a start" back on 28 May.
It's a similar story for Canada, where the economy demolished experts' gloomy expectations by adding 290,000 jobs in May, the vast majority of them full-time. The number of employees working severely reduced hours also fell sharply. Paradoxically, the unemployment rate rose to a record 13.7 percent, thanks to a big jump in labour force participation. In assessing this "record" number, keep in mind that the data series only goes back to 1976; things were surely much worse in the 1930s.
A quick look at the details of the data shows the significance of paying attention to what's going on. The strongest job gains were seen in Quebec (up more than 230,000), BC and Alberta, which have been easing lockdowns since the start of May. In contrast Ontario, which is being more cautious, saw a further loss of 65,000 jobs in the month. Just about the only economist to have got this right is a guy at Desjardins in Montreal, who presumably noticed things changing all around -- well done him!
We should not extrapolate from this one number, advice already lost on Donald Trump, who is portraying the US data as not just a V but a "rocket ship". Both the BLS and StatsCan are cautioning that the definition of unemployment is a bit slippery these days. To see why, just consider what has happened in recent weeks at Air Canada, That company grounded most of its fleet and laid off half its staff, only to hire them back when the government's emergency wage supports came into play. Then it promptly furloughed them, while announcing plans to lay them off again as it looks to emerge from the pandemic as a much smaller airline. How can a statistician accurately account for that?
The lesson to be taken from this and other similar stories is that for the next few months, two contrasting trends will be at play in the employment data. The reopening of states and provinces is set to continue, and that will lead to further hiring of the kind we have just seen for the month of May. At the same time, many firms will be looking to downsize for the new reality they will be facing post-pandemic; that will transform thousands of today's furloughs into more permanent job losses. We will climb out of the chasm much more slowly than we plunged into it, and the landscape on the other side promises to be quite different.
Wednesday 3 June 2020
Handover day at the Bank of Canada
In line with market expectations, the Bank of Canada kept its key overnight target rate unchanged at 0.25 percent today. The Governing Council meeting that made this decision was Stephen Poloz's final responsibility as the Bank's Governor; Tiff Macklem assumed that role today, and the press release notes that he participated as an observer in the rate decision and supports it.
The contents of the press release suggest that the job is not quite the poisoned chalice that it seemed just a few weeks ago, when Macklem was appointed. The Bank feels that the impact of the COVID-19 pandemic on the global economy "appears to have peaked, although uncertainty about how the recovery will unfold remains high." Despite unprecedented policy measures, and even though financial market conditions and commodity prices have improved, it still expects that "the global recovery likely will be protracted and uneven."
As for the domestic situation, "the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent." Consistent with its outlook for the global economy, the Bank expects that growth will resume in the third quarter of this year, although the outlook for the rest of 2020 and beyond is "heavily clouded".
While keeping its rate target unchanged, the Bank announced that it will be reducing the frequency of two of the emergency asset purchase programs it put in place to provide liquidity to financial markets. This reflects its view that short-term funding conditions have improved. Programs for the purchase of public sector and corporate debt will remain in place for now.
The Bank's next rate decision day is July 15, and an updated Monetary Policy Report is scheduled for release at the same time. It is unlikely that Governor Macklem will make any significant policy shifts so early in his tenure: expect rates to remain at current levels for the rest of this year.
The contents of the press release suggest that the job is not quite the poisoned chalice that it seemed just a few weeks ago, when Macklem was appointed. The Bank feels that the impact of the COVID-19 pandemic on the global economy "appears to have peaked, although uncertainty about how the recovery will unfold remains high." Despite unprecedented policy measures, and even though financial market conditions and commodity prices have improved, it still expects that "the global recovery likely will be protracted and uneven."
As for the domestic situation, "the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent." Consistent with its outlook for the global economy, the Bank expects that growth will resume in the third quarter of this year, although the outlook for the rest of 2020 and beyond is "heavily clouded".
While keeping its rate target unchanged, the Bank announced that it will be reducing the frequency of two of the emergency asset purchase programs it put in place to provide liquidity to financial markets. This reflects its view that short-term funding conditions have improved. Programs for the purchase of public sector and corporate debt will remain in place for now.
The Bank's next rate decision day is July 15, and an updated Monetary Policy Report is scheduled for release at the same time. It is unlikely that Governor Macklem will make any significant policy shifts so early in his tenure: expect rates to remain at current levels for the rest of this year.
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