Now for the hard part

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

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

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

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

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

Justin Trudeau's wish list -- a closer look

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

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

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

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

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

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

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

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

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

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

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

Justin Trudeau's wish list

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

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

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

Laundry list

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

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

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

Canada CPI: looking behind the headlines

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

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

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

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

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

Saving grace

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

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

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

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

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

As long as it takes

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

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

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

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

Not good enough, apparently

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

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

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

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

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

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

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

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