No, wait, silly me! That's the annualized rate -- I'm just trying to make a further point relating to the previous post about how the US reports growth data. Actually, Statistics Canada today reported a 4.5 percent increase in real GDP for May, an impressive rebound that still leaves GDP 15 percent below the pre-pandemic level recorded in February. The recovery was broad-based and reflected the steady opening up of Provincial economies from pandemic lockdowns during the course of the month.
In keeping with its recent practice, StatsCan is also providing preliminary estimates for more recent time periods. It currently estimates that GDP rose by a further 5 percent in June. That translates into a 12 percent decline in GDP for the second quarter as a whole, somewhat surprisingly a significantly worse showing than in the US, where the decline was 9.5 percent. StatsCan warns that these figures may be extensively revised when the actual data for both June and Q2 are released on August 28.
Canada's release of monthly GDP data separately from the more conventional quarterly data is unusual. It can seem like overkill, particularly in light of the extreme seasonal influence on all Canadian economic data thanks to the country's extreme weather. In current circumstances, however, the monthly data are much more useful than the quarterly figures. Cast your mind back again to the US Q2 GDP numbers. Not only did the media initially fail to report that the shocking 32 percent decline was an annualized figure -- they also, thanks to the absence of monthly data, were unable to point out that the extreme weakness in the quarter was entirely focused in the month of April.
We are now at the end of July, and it can be confidently asserted that Canadian GDP posted another strong gain in the month, likely topping the May and June reports, as the pace of reopening has noticeably quickened. A further strong gain is all but baked in for August, which will bring GDP back to within 5 percent of its February peak. And after that? Slower and more uneven growth is likely for the balance of the year, especially if the dreaded second wave of COVID materializes. We should also start to get a better handle on which sectors of the economy have been dealt a real hammer blow by the pandemic -- Air Canada's report this morning that its revenues fell 89 percent in Q2 is likely to be the first of many such horrors.
Friday 31 July 2020
Thursday 30 July 2020
Who'd be an economist?
Americans (and those of us watching twitchily from just across the border) woke this morning to an array of news outlets reporting that the US economy contracted by 32.9 percent in the second quarter of the year. In the meantime, over in Europe, it was reported that the German economy shrank by 10.1 percent in the same period. So, pop quiz: which of these two economies performed worse in the quarter. I'll give you a clue: it wasn't the English-speaking country.
The US Department of Commerce reports its GDP statistics on an annualized basis. The 32.9 percent figure thus shows how much GDP would decline if the rate of change seen in Q2 persisted for a full twelve months. The actual quarter-to-quarter change was 9.5 percent -- still a dire number and still the worst on record, of course, but nothing like the precipitous fall that the media seemed intent on playing up this morning.
It's also a smaller decline than was recorded in Germany, which reports the straight quarter-to-quarter change. That seems a bit surprising when you look at the relative performance of the two countries in dealing with the COVID pandemic. However, it should be recalled that the US was slower to lock down its economy than most countries in Europe, and quicker to reopen. Which approach turns out to provide the better basis for a sustained recovery remains to be seen.
With my economics background I don't get confused by numbers like these, but they clearly bamboozle the journalists, although to be fair, just about all of the media websites were reporting the numbers properly by later in the day. That in turn means that the public is probably getting a false reading too. It's not just that different countries report comparable data in different ways. Individual series within each country are reported differently too. To take just one example, the US reports its consumer inflation data on a year-on-year basis, rather than annualized or month-on-month.
Most of the time this probably doesn't matter: people who need to know precise numbers can figure them out quickly enough. But these are highly unusual times, and it would be good if regular citizens, who are relying on their political leaders to make literally life-and-death decisions, could form an accurate picture of what's going on in the world. The statistical agencies aren't going to change, so it's really up to the media to try a bit harder to explain the data, rather than just seizing in the scariest number and scrolling it in large type across the bottom of everyone's TV screen.
The US Department of Commerce reports its GDP statistics on an annualized basis. The 32.9 percent figure thus shows how much GDP would decline if the rate of change seen in Q2 persisted for a full twelve months. The actual quarter-to-quarter change was 9.5 percent -- still a dire number and still the worst on record, of course, but nothing like the precipitous fall that the media seemed intent on playing up this morning.
It's also a smaller decline than was recorded in Germany, which reports the straight quarter-to-quarter change. That seems a bit surprising when you look at the relative performance of the two countries in dealing with the COVID pandemic. However, it should be recalled that the US was slower to lock down its economy than most countries in Europe, and quicker to reopen. Which approach turns out to provide the better basis for a sustained recovery remains to be seen.
With my economics background I don't get confused by numbers like these, but they clearly bamboozle the journalists, although to be fair, just about all of the media websites were reporting the numbers properly by later in the day. That in turn means that the public is probably getting a false reading too. It's not just that different countries report comparable data in different ways. Individual series within each country are reported differently too. To take just one example, the US reports its consumer inflation data on a year-on-year basis, rather than annualized or month-on-month.
Most of the time this probably doesn't matter: people who need to know precise numbers can figure them out quickly enough. But these are highly unusual times, and it would be good if regular citizens, who are relying on their political leaders to make literally life-and-death decisions, could form an accurate picture of what's going on in the world. The statistical agencies aren't going to change, so it's really up to the media to try a bit harder to explain the data, rather than just seizing in the scariest number and scrolling it in large type across the bottom of everyone's TV screen.
Thursday 23 July 2020
Hey Greta -- read the room!
It took Greta Thunberg about a nanosecond to denounce the EU's hard-won 750 billion Euro COVID rescue package, on the grounds that it "fails to tackle climate change". To which one might respond that it was never intended to do so, but of course, for Ms Thunberg, everything must be about climate change. That being the case, she needs to prepare for a whole lot of disappointment, because COVID-19 is likely to set efforts to combat climate change back for a long time to come.
In the short term, COVID is making a big difference to the way people get around. Sure, plane travel has collapsed, which is a good thing for the climate. On the ground, however, it's a different story: the private car is making a big comeback at the expense of public transit. The UK publishes weekly data comparing the usage of various modes of transportation to year-ago levels. For the week ended July 20, journeys by train or subway stood at about 20 percent of prior-year levels. That's stunningly low until you realise that a few weeks ago, that figure stood at less than 10 percent.
What about car journeys? Those had recovered to about 85 percent of prior year levels and were moving up fast. As long as people perceive the car as the safer way to get around, that trend is likely to continue: experts are warning it could take years to rebuild confidence in public transportation. Similar trends are surely to be seen in many other countries, and as long as they persist, they bode ill for the climate.
If we now look at the longer term, there are two factors in play that stand to inhibit efforts to return climate change to the top of the policy agenda. The first is the macroeconomic impact of the virus itself: it's making every country poorer, while imposing massive costs. Countries facing falling GDP, stubbornly high unemployment and soaring healthcare costs (including the staggering bill for acquiring and administering a vaccine when one is found) are unlikely to put much money aside for climate change efforts. Senator Joe Biden might want to keep this in mind as he looks to place a "green New Deal" at the centre of his platform for November's election.
The second factor is sheer fatigue. Ms Thunberg and others have regularly suggested that the all-out international effort to combat COVID can be seen as a dry run for a similar mobilization to avert climate disaster. That seems downright Panglossian -- nobody is enjoying this, and the idea that as soon as COVID is beaten, people will be revved up to undertake a longer and more arduous effort to curb climate change is little short of ludicrous.
Most disturbing of all for Ms Thunberg, it seems to be people of her own age or just a bit older who are chafing the most under the restrictions imposed to fight COVID. People who can't stay away from the beach or from illegal raves for even a few weeks seem unlikely to sign up to Ms Thunberg's multi-year crusade.
COVID-19 has not diminished the importance of doing something about climate change, but it has drastically reduced the likelihood that voters and taxpayers will see that as a priority any time soon.
In the short term, COVID is making a big difference to the way people get around. Sure, plane travel has collapsed, which is a good thing for the climate. On the ground, however, it's a different story: the private car is making a big comeback at the expense of public transit. The UK publishes weekly data comparing the usage of various modes of transportation to year-ago levels. For the week ended July 20, journeys by train or subway stood at about 20 percent of prior-year levels. That's stunningly low until you realise that a few weeks ago, that figure stood at less than 10 percent.
What about car journeys? Those had recovered to about 85 percent of prior year levels and were moving up fast. As long as people perceive the car as the safer way to get around, that trend is likely to continue: experts are warning it could take years to rebuild confidence in public transportation. Similar trends are surely to be seen in many other countries, and as long as they persist, they bode ill for the climate.
If we now look at the longer term, there are two factors in play that stand to inhibit efforts to return climate change to the top of the policy agenda. The first is the macroeconomic impact of the virus itself: it's making every country poorer, while imposing massive costs. Countries facing falling GDP, stubbornly high unemployment and soaring healthcare costs (including the staggering bill for acquiring and administering a vaccine when one is found) are unlikely to put much money aside for climate change efforts. Senator Joe Biden might want to keep this in mind as he looks to place a "green New Deal" at the centre of his platform for November's election.
The second factor is sheer fatigue. Ms Thunberg and others have regularly suggested that the all-out international effort to combat COVID can be seen as a dry run for a similar mobilization to avert climate disaster. That seems downright Panglossian -- nobody is enjoying this, and the idea that as soon as COVID is beaten, people will be revved up to undertake a longer and more arduous effort to curb climate change is little short of ludicrous.
Most disturbing of all for Ms Thunberg, it seems to be people of her own age or just a bit older who are chafing the most under the restrictions imposed to fight COVID. People who can't stay away from the beach or from illegal raves for even a few weeks seem unlikely to sign up to Ms Thunberg's multi-year crusade.
COVID-19 has not diminished the importance of doing something about climate change, but it has drastically reduced the likelihood that voters and taxpayers will see that as a priority any time soon.
Tuesday 21 July 2020
Retail tales
Canada's retail sector bounced back strongly in May as Provinces reopened their economies, and StatsCan's preliminary estimate suggests that the retail sector may have recouped almost all of its COVID -related losses in June. Good news, but can it last?
StatsCan reports that retail sales rose 18.7 percent in May (17.8 percent in volume terms), which still left this key indicator 20 percent below its pre-COVID level. Sales were up in every Province, led by Quebec, which has been one of the most aggressive in reopening its economy. Almost all sub-sectors posted gains, led by auto sales. The only sub-sector to record lower sales was food, which never experienced the declines seen in other sectors in March and April. Indeed, food sales posted a record gain of 23 percent in March, spurred by a combination of restaurant closures and panic buying, so the May data reflect a return to more normal activity.
As with some other recent series, StatsCan has chosen to provide a very preliminary snapshot of how things unfolded in the most recent month. It estimates a further increase of 24.5 percent for retail sales in June. While this figure is liable to be revised, perhaps sharply, if achieved it would bring retail sales back to their pre-COVID level.
What happens next depends on a variety of factors, not least among them the pandemic. In Western provinces, which moved to reopen their economies at an early stage, there are signs of a rebound in COVID cases, although so far the numbers seem to be controllable. The most populous Province, Ontario, is reopening its economy on a region-by-region basis; any significant resurgence in the virus as that happens would seriously jeopardize the prospects for retail sales.
More positively, an under-reported factor supporting the retail sector in Canada is the continued near-closure of the border with the United States. Many Canadians regularly shop across the border in search of a wider variety of goods and (sometimes) lower prices. At least part of that spending must now be taking place domestically, which may help to explain why retail sales seem to be getting back to pre-COVID levels so quickly.
And then there's this surprising report that Canadians are actually feeling better about their debt levels than they were in the early days of the pandemic -- and indeed, more optimistic than they were even pre-pandemic. This is a testament to the success of the emergency measures put together by the Federal government to protect workers from the economic impact of COVID. Fewer Canadians than before are reporting that they are close to running out of money each month, partly thanks to the government assistance and partly because spending has been curtailed willy-nilly. Given Canadian households' proclivity to pile on debt in recent years, this has to be a welcome development; whether it translates into a longer-term change in behaviour remains to be seen.
StatsCan reports that retail sales rose 18.7 percent in May (17.8 percent in volume terms), which still left this key indicator 20 percent below its pre-COVID level. Sales were up in every Province, led by Quebec, which has been one of the most aggressive in reopening its economy. Almost all sub-sectors posted gains, led by auto sales. The only sub-sector to record lower sales was food, which never experienced the declines seen in other sectors in March and April. Indeed, food sales posted a record gain of 23 percent in March, spurred by a combination of restaurant closures and panic buying, so the May data reflect a return to more normal activity.
As with some other recent series, StatsCan has chosen to provide a very preliminary snapshot of how things unfolded in the most recent month. It estimates a further increase of 24.5 percent for retail sales in June. While this figure is liable to be revised, perhaps sharply, if achieved it would bring retail sales back to their pre-COVID level.
What happens next depends on a variety of factors, not least among them the pandemic. In Western provinces, which moved to reopen their economies at an early stage, there are signs of a rebound in COVID cases, although so far the numbers seem to be controllable. The most populous Province, Ontario, is reopening its economy on a region-by-region basis; any significant resurgence in the virus as that happens would seriously jeopardize the prospects for retail sales.
More positively, an under-reported factor supporting the retail sector in Canada is the continued near-closure of the border with the United States. Many Canadians regularly shop across the border in search of a wider variety of goods and (sometimes) lower prices. At least part of that spending must now be taking place domestically, which may help to explain why retail sales seem to be getting back to pre-COVID levels so quickly.
And then there's this surprising report that Canadians are actually feeling better about their debt levels than they were in the early days of the pandemic -- and indeed, more optimistic than they were even pre-pandemic. This is a testament to the success of the emergency measures put together by the Federal government to protect workers from the economic impact of COVID. Fewer Canadians than before are reporting that they are close to running out of money each month, partly thanks to the government assistance and partly because spending has been curtailed willy-nilly. Given Canadian households' proclivity to pile on debt in recent years, this has to be a welcome development; whether it translates into a longer-term change in behaviour remains to be seen.
Wednesday 15 July 2020
The long road back
As expected, Tiff Macklem's first Governing Council meeting as Bank of Canada Governor resulted in no change in the Bank's policy stance. The target rate remains at 0.25 percent, and the Bank will continue its quantitative easing programme, which sees it buying C$ 5 billion of Canada bonds each week.
The rate announcement was accompanied by the release of the Bank's updated Monetary Policy Report (MPR), giving the Bank the opportunity to offer more detail on the economic outlook and its policy response. The Bank estimates that by the end of Q2, Canada's real GDP had shrunk by about 15 percent from its end-2019 level, with most of the decline occurring in March and April. Bad as this is, it suggests that the economy avoided the worst-case outcome the Bank outlined in its April MPR.
Since the end of April, as the economy has started to emerge from its COVID-driven lockdown, there have been plenty of signs of a rebound in economic activity and employment. Just this morning, for example, Statistics Canada reported that manufacturing sales rose 10.7 percent in May, a jump that still leaves the series 28 percent below its pre-pandemic (i.e. February) level.
The Bank's central scenario seems a similar pattern, that is, a strong but only partial rebound from COVID-depressed levels, for the entire economy in the near term. It expects that about 40 percent of the decline seen in the first half of the year will be recouped in the current quarter. After that, the pace of recovery is likely to be much slower and more uneven. The extent of structural damage to the economy is only starting to become apparent. Moreover, the increasingly uncertain outlook for the US economy, reflecting the botched handling of the pandemic there, may weigh heavily on Canada's own rebound, although the Bank, somewhat surprisingly, did not focus on this risk in today's announcement.
Putting all of this together, the Bank's central scenario (a term it prefers over "forecast" in the current environment) sees real GDP falling by about 8 percent for 2020 as a whole. This is followed by growth of about 5 percent in 2021 and about 4 percent in 2022, which means real GDP does not return to its pre-pandemic level until the end of the latter year.
Given this growth outlook, it is no surprise that the Bank intends to maintain its current policy stance for the foreseeable future. It is also no surprise that Governor Macklem presented the rate outlook in the context of the Bank's tried-and-trusted 2 percent inflation target. In the words of the press release, "The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved." The QE programme will also continue as long as necessary. In the Bank's central scenario, these measures will be sufficient to get the economy back on track over time, but the press release concludes with a clear assurance that "the Bank is prepared to provide further monetary stimulus as needed."
The rate announcement was accompanied by the release of the Bank's updated Monetary Policy Report (MPR), giving the Bank the opportunity to offer more detail on the economic outlook and its policy response. The Bank estimates that by the end of Q2, Canada's real GDP had shrunk by about 15 percent from its end-2019 level, with most of the decline occurring in March and April. Bad as this is, it suggests that the economy avoided the worst-case outcome the Bank outlined in its April MPR.
Since the end of April, as the economy has started to emerge from its COVID-driven lockdown, there have been plenty of signs of a rebound in economic activity and employment. Just this morning, for example, Statistics Canada reported that manufacturing sales rose 10.7 percent in May, a jump that still leaves the series 28 percent below its pre-pandemic (i.e. February) level.
The Bank's central scenario seems a similar pattern, that is, a strong but only partial rebound from COVID-depressed levels, for the entire economy in the near term. It expects that about 40 percent of the decline seen in the first half of the year will be recouped in the current quarter. After that, the pace of recovery is likely to be much slower and more uneven. The extent of structural damage to the economy is only starting to become apparent. Moreover, the increasingly uncertain outlook for the US economy, reflecting the botched handling of the pandemic there, may weigh heavily on Canada's own rebound, although the Bank, somewhat surprisingly, did not focus on this risk in today's announcement.
Putting all of this together, the Bank's central scenario (a term it prefers over "forecast" in the current environment) sees real GDP falling by about 8 percent for 2020 as a whole. This is followed by growth of about 5 percent in 2021 and about 4 percent in 2022, which means real GDP does not return to its pre-pandemic level until the end of the latter year.
Given this growth outlook, it is no surprise that the Bank intends to maintain its current policy stance for the foreseeable future. It is also no surprise that Governor Macklem presented the rate outlook in the context of the Bank's tried-and-trusted 2 percent inflation target. In the words of the press release, "The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved." The QE programme will also continue as long as necessary. In the Bank's central scenario, these measures will be sufficient to get the economy back on track over time, but the press release concludes with a clear assurance that "the Bank is prepared to provide further monetary stimulus as needed."
Friday 10 July 2020
Canadian employment: a solid bounce in June
Statistical agencies have been reporting all kinds of data records this year, most of them bad, but the rebound in Canadian employment in June marked an impressive surprise to the upside. StatsCan reported today that total employment in the economy jumped by 953,000 in the month, dropping the national unemployment rate to 12.3 percent from the record 13.7 percent posted in May. Job gains were more or less equally divided between full-time and part time jobs.
The increase in employment was well above the analysts' consensus for a rise of about 700,000. Adding in the 290,000 job gain reported for May, this still leaves total employment 1.8 million below its pre-pandemic (i.e. February) level. At the same time, a decline of 823,000 in the number of people working less than half their normal hours is further evidence that the labour market is improving.
What happens next? StatsCan notes in today's report that the data relate to a survey taken in the period June 14-20. While much of the country had substantially relaxed its COVID lockdowns by then, parts of Ontario, including Canada's biggest city, Toronto, had not. Toronto and surrounding areas have now further relaxed restrictions, which should lead to further strong job gains for the July report, for which data collection will begin next week.
Beyond that immediate prospect, the outlook will depend on two factors. The first is the extent to which the surge in unemployment was the result of government "suppression" measures, which may quickly bounce back, and to what extent it is the result of structural changes that may be unwound only slowly, if ever. (Hat-tip for this useful distinction, and particularly for the term "suppression", to the US economist Justin Wolfers, who is well worth following on Twitter). Even if the most vulnerable sectors can be identified -- restaurants, airlines, bricks-and-mortar retail -- it is impossible to know the balance between these types of unemployment, and hence difficult to predict just how quickly employment may regain its pre-pandemic level.
The second factor, and the true wildcard in Canada's case, is the outlook for the US economy. Signs that the pandemic has spiraled out of control are everywhere and are starting to show up in economic activity. To give just one example, both United Airlines and Delta reported a strong rebound in bookings in June, but that is now falling away again as travelers re-assess their appetite for risk.
It's a truism that when the US sneezes, Canada catches a cold, and there is no real prospect of a sustained Canadian economic rebound as long as the US economy remains crippled by the virus. We see this very clearly in my own border region of Niagara. With the border effectively closed for leisure travel, attractions from Niagara Falls itself, to the local wineries, to the Shaw Festival are all experiencing difficulties. Indeed, even as the national unemployment rate fell in June, the rate in Niagara region actually increased slightly. With little appetite on this side of the border for letting our southern neighbours back in, the whole year already looks like a write-off.
The increase in employment was well above the analysts' consensus for a rise of about 700,000. Adding in the 290,000 job gain reported for May, this still leaves total employment 1.8 million below its pre-pandemic (i.e. February) level. At the same time, a decline of 823,000 in the number of people working less than half their normal hours is further evidence that the labour market is improving.
What happens next? StatsCan notes in today's report that the data relate to a survey taken in the period June 14-20. While much of the country had substantially relaxed its COVID lockdowns by then, parts of Ontario, including Canada's biggest city, Toronto, had not. Toronto and surrounding areas have now further relaxed restrictions, which should lead to further strong job gains for the July report, for which data collection will begin next week.
Beyond that immediate prospect, the outlook will depend on two factors. The first is the extent to which the surge in unemployment was the result of government "suppression" measures, which may quickly bounce back, and to what extent it is the result of structural changes that may be unwound only slowly, if ever. (Hat-tip for this useful distinction, and particularly for the term "suppression", to the US economist Justin Wolfers, who is well worth following on Twitter). Even if the most vulnerable sectors can be identified -- restaurants, airlines, bricks-and-mortar retail -- it is impossible to know the balance between these types of unemployment, and hence difficult to predict just how quickly employment may regain its pre-pandemic level.
The second factor, and the true wildcard in Canada's case, is the outlook for the US economy. Signs that the pandemic has spiraled out of control are everywhere and are starting to show up in economic activity. To give just one example, both United Airlines and Delta reported a strong rebound in bookings in June, but that is now falling away again as travelers re-assess their appetite for risk.
It's a truism that when the US sneezes, Canada catches a cold, and there is no real prospect of a sustained Canadian economic rebound as long as the US economy remains crippled by the virus. We see this very clearly in my own border region of Niagara. With the border effectively closed for leisure travel, attractions from Niagara Falls itself, to the local wineries, to the Shaw Festival are all experiencing difficulties. Indeed, even as the national unemployment rate fell in June, the rate in Niagara region actually increased slightly. With little appetite on this side of the border for letting our southern neighbours back in, the whole year already looks like a write-off.
Wednesday 8 July 2020
Canada's "fiscal snapshot"
After a whole lot of prompting from the opposition parties and the media, Canada's federal Finance Minister Bill Morneau today delivered a "fiscal snapshot" to outline how the government sees the economic and fiscal outlook almost half a year into the pandemic. The independent Parliamentary Budget Office (PBO) had already pegged the deficit for this fiscal year (April-March) at C$ 256 million, up from a pre-COVID forecast near C$ 28 billion. Morneau's main task today, aside from updating that estimate, was primarily to offer reassurance that the Government is at least thinking about what happens next.
So what did Morneau have to say? Considering that the PBO estimate was made less than three weeks ago, it is remarkable to see that the Government is now pegging the deficit for this year at $343 billion, twelve times the pre-COVID expectation. Interestingly, Morneau has now offered the Government's estimates for how that much higher figure is broken down. Much the largest part is accounted for by the array of programs hastily created and rolled out in the past four months: those amount to $212 billion of the projected shortfall. It appears the Government will soon announce the continuation of some of these measures beyond the current end date of August 31.
Aside from those programs, it is estimated that the impact of the economic slowdown on revenues and spending accounts for a further $ 81 billion. This can be seen as the economy's "automatic stabilizers" kicking in, on a scale never seen before, yet still far too small to cushion the economy from the impact of the pandemic -- hence, of course, the need for all the temporary programs.
All in all, the massive increase in the deficit will push net Federal debt to C$ 1.2 trillion and boost the debt/GDP ratio to 49 percent from 31 percent pre-pandemic. This is startling, but would still be well below even the pre-pandemic debt/GDPs ratio of other developed economies, and of course those countries are also seeing a huge deterioration in their fiscal outlooks this year. Morneau sought to stress the relative ease of servicing this debt in the current low interest rate environment: surprisingly, debt service costs for 2020/21 will actually be lower than in the preceding fiscal year.
As for the economy, Morneau reported that the Government is looking at a real GDP decline of 6.8 percent for this year. Most of that decline is concentrated in the second quarter, with a fall of close to 40 percent (at annualized rates) quite possible. In fact we can be even more specific than that: barring a second major wave of the virus, it is all but certain that the entire fall in GDP took place in the months of March and April, when lockdowns were at their most stringent.
The government expects GDP to grow 5.5 percent in real terms in 2021 -- a strong recovery by historical standards, but one that means that GDP will not regain its pre-COVID level until at least 2022. Statistically speaking, much of the growth projected for 2021 in fact reflects expectations of a sharp rebound in the current quarter: quarter-on-quarter growth rates through 2021 are expected to be relatively tepid. In keeping with the Government's normal practices, these projections all fall within the range of private sector forecasts provided by banks and other institutions.
The disappointing thing about this snapshot is the absence of any real indication of how the government will attempt to restore momentum to the economy once the crisis is fully in the rear view mirror. Lame duck Conservative leader Andrew Scheer has already pounced on this, saying the absence of such a plan means the fiscal snapshot is a "wasted opportunity".
Scheer is right about that, but one dreads to think what his successor as party leader, due to be selected in August, might think such a plan should contain. There are plenty of people on the right of the political spectrum warning of the need for massive tax hikes and spending cuts to deal with the "unmanageable" debt burden. That would, of course, be a sure-fire way to turn recession into depression, but the lessons of the 1930s or, more recently, the UK's disastrous austerity program after the 2008 financial crisis, never do seem to sink in.
.
Canada has dealt with a debt-and-deficit problem before, though on that occasion it could be described as chronic, where the current crisis is acute. Unfortunately, it's almost received wisdom among media commentators, and even many business economists, that Canada resolved its deficit problem in the 1990s through massive spending cuts. That's not really true, as I pointed out in this long-ago post. The key to eliminating the deficit back then was a huge jump in revenues. That can only happen if the economy is growing smartly. Trying to force down the deficit in short order by cutting spending and raising taxes will only make the post-COVID fiscal problem worse.
So what did Morneau have to say? Considering that the PBO estimate was made less than three weeks ago, it is remarkable to see that the Government is now pegging the deficit for this year at $343 billion, twelve times the pre-COVID expectation. Interestingly, Morneau has now offered the Government's estimates for how that much higher figure is broken down. Much the largest part is accounted for by the array of programs hastily created and rolled out in the past four months: those amount to $212 billion of the projected shortfall. It appears the Government will soon announce the continuation of some of these measures beyond the current end date of August 31.
Aside from those programs, it is estimated that the impact of the economic slowdown on revenues and spending accounts for a further $ 81 billion. This can be seen as the economy's "automatic stabilizers" kicking in, on a scale never seen before, yet still far too small to cushion the economy from the impact of the pandemic -- hence, of course, the need for all the temporary programs.
All in all, the massive increase in the deficit will push net Federal debt to C$ 1.2 trillion and boost the debt/GDP ratio to 49 percent from 31 percent pre-pandemic. This is startling, but would still be well below even the pre-pandemic debt/GDPs ratio of other developed economies, and of course those countries are also seeing a huge deterioration in their fiscal outlooks this year. Morneau sought to stress the relative ease of servicing this debt in the current low interest rate environment: surprisingly, debt service costs for 2020/21 will actually be lower than in the preceding fiscal year.
As for the economy, Morneau reported that the Government is looking at a real GDP decline of 6.8 percent for this year. Most of that decline is concentrated in the second quarter, with a fall of close to 40 percent (at annualized rates) quite possible. In fact we can be even more specific than that: barring a second major wave of the virus, it is all but certain that the entire fall in GDP took place in the months of March and April, when lockdowns were at their most stringent.
The government expects GDP to grow 5.5 percent in real terms in 2021 -- a strong recovery by historical standards, but one that means that GDP will not regain its pre-COVID level until at least 2022. Statistically speaking, much of the growth projected for 2021 in fact reflects expectations of a sharp rebound in the current quarter: quarter-on-quarter growth rates through 2021 are expected to be relatively tepid. In keeping with the Government's normal practices, these projections all fall within the range of private sector forecasts provided by banks and other institutions.
The disappointing thing about this snapshot is the absence of any real indication of how the government will attempt to restore momentum to the economy once the crisis is fully in the rear view mirror. Lame duck Conservative leader Andrew Scheer has already pounced on this, saying the absence of such a plan means the fiscal snapshot is a "wasted opportunity".
Scheer is right about that, but one dreads to think what his successor as party leader, due to be selected in August, might think such a plan should contain. There are plenty of people on the right of the political spectrum warning of the need for massive tax hikes and spending cuts to deal with the "unmanageable" debt burden. That would, of course, be a sure-fire way to turn recession into depression, but the lessons of the 1930s or, more recently, the UK's disastrous austerity program after the 2008 financial crisis, never do seem to sink in.
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Canada has dealt with a debt-and-deficit problem before, though on that occasion it could be described as chronic, where the current crisis is acute. Unfortunately, it's almost received wisdom among media commentators, and even many business economists, that Canada resolved its deficit problem in the 1990s through massive spending cuts. That's not really true, as I pointed out in this long-ago post. The key to eliminating the deficit back then was a huge jump in revenues. That can only happen if the economy is growing smartly. Trying to force down the deficit in short order by cutting spending and raising taxes will only make the post-COVID fiscal problem worse.
Tuesday 7 July 2020
New Zealand, now and then
New Zealand has been showered with plaudits for its success in controlling the coronavirus pandemic. This article, just a month ago, even reported that the virus had been "eradicated" locally. That didn't last long, as a pair of visitors from (surprise, surprise) the UK reintroduced the infection. Still, there's no doubt that under the leadership of the decisive but empathetic Prime Minister, Jacinda Ardern, and with a big helping hand from the country's geographical isolation, New Zealand has done a far better job than just about everyone else.
Long may Ms Ardern's success continue. But nothing lasts forever, and it might be worth remembering that not so long ago, New Zealand's economy was a complete basket case. This long paper describes how New Zealand failed to piggyback on the Volcker Fed's anti-inflation push in the early 1980s, resulting in a severe currency crisis in 1984.
That crisis was followed by a rapid deregulation and transformation of the economy on neo-liberal lines. This brought painful consequences for many previously protected sectors and greatly reduced the role of the state in the economy. Famously, a zoo had to kill a newborn baby hippopotamus because it could not afford to feed it, an event that provided the inspiration for an angry book by the Canadian leftist journalist Linda McQuaig.
Reflecting the post-1984 reforms, the nation Ms Ardern leads still has a much smaller government sector than most comparable countries. Government spending amounted to about 38 percent of GDP in 2018, very close to the figures for the United States and Australia, but below the levels posted by Canada (about 41 percent) and the EU (average of 45 percent, with France at 55 percent).* Evidently success against COVID is not so much about how much you spend as about how well you spend it. That appears to be something New Zealand is good at these days, but as events in the fairly recent past remind us, that wasn't always the case.
* Data from OECD and other sources; figures are of course reflective of the pre-COVID era.
Long may Ms Ardern's success continue. But nothing lasts forever, and it might be worth remembering that not so long ago, New Zealand's economy was a complete basket case. This long paper describes how New Zealand failed to piggyback on the Volcker Fed's anti-inflation push in the early 1980s, resulting in a severe currency crisis in 1984.
That crisis was followed by a rapid deregulation and transformation of the economy on neo-liberal lines. This brought painful consequences for many previously protected sectors and greatly reduced the role of the state in the economy. Famously, a zoo had to kill a newborn baby hippopotamus because it could not afford to feed it, an event that provided the inspiration for an angry book by the Canadian leftist journalist Linda McQuaig.
Reflecting the post-1984 reforms, the nation Ms Ardern leads still has a much smaller government sector than most comparable countries. Government spending amounted to about 38 percent of GDP in 2018, very close to the figures for the United States and Australia, but below the levels posted by Canada (about 41 percent) and the EU (average of 45 percent, with France at 55 percent).* Evidently success against COVID is not so much about how much you spend as about how well you spend it. That appears to be something New Zealand is good at these days, but as events in the fairly recent past remind us, that wasn't always the case.
* Data from OECD and other sources; figures are of course reflective of the pre-COVID era.
Monday 6 July 2020
You got the wrong St. John's
The weather guy on a Toronto TV station just now breathlessly announced that Tropical Storm Edouard, out there in the Atlantic, was a record breaker. It was -- wait for it -- the earliest ever fifth named storm for any Atlantic hurricane season. Seems like a pretty obscure record, but there we are.
Thing is, the previous four named storms haven't amounted to much, certainly not to anything like a hurricane. One of the four, Bertha, formed in the Pacific, crossed over Central America into the Caribbean and stayed active just long enough for NOAA to give it a name before it headed onshore and petered out. The other three (Arthur, Cristobal and Dolly) formed in the Atlantic but barely had time to get christened before quite literally going off the radar. The NOAA meteorologists have predicted an above-average hurricane season this year: giving every thundercloud a name is certainly one way to ensure they're right!
You can scroll through the NOAA website to find out all about Edouard. It was given a name (thus becoming the "earliest ever fifth named storm") when it was located about 36 degrees north of the equator. It's a long time since I studied geography, but I'm close to 100 percent sure that's a very long way north of the tropics. And check out the location -- the nearest land is the Avalon Peninsula in Newfoundland, where icebergs are a much more common sight than hurricanes.
This may well turn out to be an above-average hurricane season -- there are two more possible candidates out there even now -- but I'm not sure NOAA is doing anyone any favours by crying wolf so much. Serious suggestion: a depression that doesn't build up to the required windspeed until it moves out of the tropics really should not be called a tropical storm. Or here's an alternative rule: if a storm forms near St. John's, Antigua it could be a tropical storm; if it forms near St.John's, Newfoundland, it definitely isn't!
Thing is, the previous four named storms haven't amounted to much, certainly not to anything like a hurricane. One of the four, Bertha, formed in the Pacific, crossed over Central America into the Caribbean and stayed active just long enough for NOAA to give it a name before it headed onshore and petered out. The other three (Arthur, Cristobal and Dolly) formed in the Atlantic but barely had time to get christened before quite literally going off the radar. The NOAA meteorologists have predicted an above-average hurricane season this year: giving every thundercloud a name is certainly one way to ensure they're right!
You can scroll through the NOAA website to find out all about Edouard. It was given a name (thus becoming the "earliest ever fifth named storm") when it was located about 36 degrees north of the equator. It's a long time since I studied geography, but I'm close to 100 percent sure that's a very long way north of the tropics. And check out the location -- the nearest land is the Avalon Peninsula in Newfoundland, where icebergs are a much more common sight than hurricanes.
This may well turn out to be an above-average hurricane season -- there are two more possible candidates out there even now -- but I'm not sure NOAA is doing anyone any favours by crying wolf so much. Serious suggestion: a depression that doesn't build up to the required windspeed until it moves out of the tropics really should not be called a tropical storm. Or here's an alternative rule: if a storm forms near St. John's, Antigua it could be a tropical storm; if it forms near St.John's, Newfoundland, it definitely isn't!
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