Canada GDP rebound: four months, and counting

Statistics Canada reported today that real GDP grew 1.2 percent in August, marking the fourth straight month of gains after the first wave of the COVID pandemic. Preliminary estimates suggest a further 0.7 percent growth for September, which would mean that growth for the third quarter as a whole would be close to 10 percent. That is on a non-annualized basis: it annualizes to more than 46 percent, significantly stronger than the 33 percent annualized rate posted by the US in the same quarter. One wonders if Conrad Black has noticed.

Despite the rebound, August's GDP reading remained about 5 percent below its pre-pandemic (i,e, February) peak. Even allowing for the likelihood that growth persisted through September, it seems inevitable that things will only get more difficult from here. Renewed lockdowns in the more populous Provinces, though less stringent than in March and April, mean it is unlikely that any further growth will be seen in the last three months of the year, even with the customary stimulus from Black Friday and the holiday season. 

The takeaway from today's numbers, on the part of the media and Bay Street analysts alike, is generally downbeat, even though the August number is higher than the analysts' consensus, and even though nobody expected the rapid growth seen earlier in the summer to continue. Back in March or April,  anyone who dared to forecast that the economy would post double-digit growth in the third quarter would have been shouted down, but here we are.     

Looking beyond the difficult fourth quarter, the outlook for growth depends on two main factors: the progress of the pandemic, which will in turn depend on whether the hoped-for vaccine materializes, and the support provided by policy-makers. The Bank of Canada has already laid its cards on the table: monetary policy will remain stimulative. New Federal Finance Minister Chrystia Freeland also made her stance clear this week. The Federal Government will continue to spend money to promote full economic recovery, in the belief that Canada can afford the future deficits and debt that this implies.    

Freeland is expected to provide an updated fiscal statement in the next few weeks. The Government has already indicated that this statement will not contain a "fiscal anchor", such as a commitment to reducing the debt-to-GDP ratio, although Freeland appears to accept that the current level of largesse cannot continue indefinitely. The statement will update the Government's fiscal position in light of developments over the past six months, which gives rise to an intriguing possibility: given that the economic rebound in Q3 was so far above expectations, is it possible that this year's deficit projection may actually be lower than the current C$ 340 billion forecast? We shall see.  

Bank of Canada: on the sidelines until 2023?

As expected, the Bank of Canada left its target rate at 0.25 percent at today's Governing Council meeting.  It stated that it will not consider tightening policy settings until it sees CPI hitting the 2 percent target on a sustained basis, something it does not expect to happen until 2023.  

Alongside the policy decision, the Bank also published its updated Monetary Policy Report (MPR). The last such report appeared in July, when Provinces were still in the midst of lifting the lockdown measures that had been imposed in the spring, and reflected extreme uncertainty over the economic impact of the pandemic. Today's report shows rather more confidence in the outlook for the economy, allowing the Bank to resume its normal practice of publishing forecasts for both growth and inflation.

The Bank expects that for 2020 as a whole, real GDP will show a 5.7 percent decline, even as most data show significant improvement from the record declines posted in March and April. The strongest phase of the recovery is already over, giving way to less impressive gains that will see GDP rising about 4 percent in both 2012 and 2022, which the Bank characterizes as a "recuperation phase". This implies that real GDP will not return to its pre-pandemic level unto the summer of 2023. 

Tabling the MPR, Governor Tiff Macklem was at pains to emphasize that this forecast is heavily dependent on how the COVID pandemic plays out. The Bank assumes there will be no return to the blanket lockdowns seen across the country in the second quarter of this year. Given the rise in cases in recent weeks in the four most populous Provinces (Quebec, Ontario, Alberta and BC), it is far from certain that this assumption will hold. Even if blanket lockdowns are avoided, the Bank accepts that stringent local measures will be needed from time to time, so the recuperation phase will not be smooth.  

The slack created in the economy by the coronavirus is illustrated by the fact that the level of employment across Canada is still 700,000 below its pre-pandemic level. That slack means that inflationary pressures are not expected to surface any time soon. The latest CPI reading was 0.5 percent and the Bank expects it to stay below the 1-3 percent target range until early 2021. After that, CPI is expected to move gradually higher, but the base case forecast sees it remaining below the 2 percent mid-point of the range throughout the 2-year forecast horizon. On that basis, the Bank is not contemplating any tightening of its monetary settings until 2023. 

In addition to maintaining its ultra-low rate settings, the Bank also announced a recalibration of its quantitative easing program. It will gradually reduce the overall scale of the program, while shifting the emphasis towards purchasing long term bonds, on the grounds that this "focuses more directly on the borrowing rates that are most relevant for households and businesses".  This is perhaps a little surprising: Canada's housing market is once again attracting unwanted attention as one of the most overvalued and bubble-prone in the world, and the promise of a sustained period of ultra-low mortgage rates can only exacerbate that situation. 

Even if you are not an aficionado of modern monetary theory, it is legitimate to wonder how much all of this matters. Governor Macklem characterized the Bank's stance as "monetary policy stimulus", but experience in Japan and elsewhere casts doubt on the ability of ultra-easy policy to accomplish any such thing. The Bank is right to ensure that its policies do not get in the way, but producing an actual recovery in growth and inflation is likely to depend much more on fiscal policy.  

The Black plague

When it comes to governments' response to the COVID pandemic, there is plenty of scope for civil disagreement. We can all come up with ways that our local jurisdiction, whether at the national or sub-national level, could have done a better job. With the benefit of hindsight, we might conclude that an earlier, much tougher but very short lockdown would have arrested the spread of the disease, allowing us to rely on localized measures and shielding the vulnerable once the peak had passed. You might have a different view, but it should be something we can address rationally.

What we probably can't discuss civilly, however, is the whole idea that the pandemic is some kind of a hoax or giant conspiracy -- the "scamdemic".  Conspiracy theories are always hard to credit because it is an observable fact that people are terrible at keeping secrets: someone is always going to blurt the story out, usually for personal gain or glory. In the particular case of COVID, there is the added question of cui bono?  If there is a giant conspiracy under way, who is benefiting from it? 

All of which brings us to this article from Conrad Black, which manages in remarkable fashion to combine reasoned discussion of policy alternatives with a fully-fleshed out version of the conspiracy theory, including an answer to the cui bono question. 

Black's cavalier treatment of the statistics related to the pandemic is bizarre: if you don't believe that all the deaths reported as being caused by COVID are in fact virus related, then to what do you attribute the hundreds of thousands of "excess deaths" being reported around the world? The latest figure for "excess deaths" in the US is actually larger than the number of deaths attributed to COVID, which seems to suggest the virus death toll is actually being under-counted.  That said, however, Black's preference for targeted measures to protect the vulnerable, together with mandatory mask wearing, is clearly a better policy choice than a full lockdown. 

So far so good, but now Black goes full-on conspiracy theorist. Let's hear it in his own words:

The incumbent administration was practically certain of re-election prior to the outbreak of the COVID-19 crisis. The Democratic opposition saw a path to victory by agitating for a gigantic economic shutdown, which would lead to an economic recession that could then be portrayed as a needless depression generated by incompetent public-health management on the part of the Trump administration, even though the administration was following its opponents’ advice in shutting down, and is bringing the nation back to work more quickly than had been thought possible. The U.S. economic growth rate was 32 per cent in the third quarter and the United States has vastly outperformed all other advanced countries in the world since coming out of lockdown.

So much is factually wrong there. Opinion polls prior to the pandemic certainly did not suggest that Trump was "practically certain of re-election". The administration has never followed its opponents' advice in shutting down -- to the extent that there has been any effective response to the virus in the US, it has been at the State and local level. Lastly, despite Black's attempt to exaggerate the recovery by annualizing the third quarter growth rate*, it simply is not true that the US economy has "vastly outperformed". Since he now lives in Canada, you might think that Black would know that the True North has recouped a significantly larger proportion of the jobs lost in the early stages of the pandemic than the US has.

Still, at least we now know, courtesy of Conrad Black, the answer to that maddening cui bono question. It's the Democratic Party, of course!  Anyone surprised? 

* Actually he has done more than annualize it!  The advance estimate for this measure is not due for release until October 29, so it is not clear what number His Lordship is using here. Would that be "fake news"?

Canada CPI: Cannot Properly Interpret?

The year-on-year increase in Canada's consumer price index (CPI) accelerated modestly to 0.5 percent in September, up from 0.1 percent in August. The increase was quite broadly-based, with the sub-indices for transportation, education, recreation and shelter all moving higher, according to Statistics Canada. The increase in the headline index was moderated by continuing weakness in the price of gasoline, which stood 10.7 percent below its September 2019 level. Excluding gasoline, the year-on-year increase in CPI was 1.0 percent in September, up from 0.6 percent in August.  

There is nothing particularly surprising about any of this, but today's release contains all sorts of tantalizing hints about possible changes in how we look at CPI in the future. It's worth recalling that Bank of Canada Governor Tiff Macklem has expressed his concern over the fact that many Canadians do not feel that the official inflation data do not reflect their own daily experience. It appears that StatsCan is on the same page as the Governor here, and plans to do something about it.

Today's release links to a special report which looks at how the COVID pandemic has moved consumer spending patterns away from the basket weights used to construct the CPI. Spending related to household operations has gone up, while spending on travel and on new motor vehicles has fallen. Adjusting for these and other changes, StatsCan estimates the year-on-year rise in adjusted CPI for both July and August was 0.4 percent, compared to the reported 0.1 percent gain for the headline measure; note that September data are not yet available. These revisions certainly move the numbers closer to what most Canadians would perceive their experienced inflation rate to be, though it is all but certain that a survey would find that most people would estimate that inflation is considerably higher than any of these figures.  

And here's the most intriguing twist of all: very soon, people will not longer have to guess what their own actual inflation rate is. At the end of today's release StatsCan reveals that the "Personal Inflation Calculator" is "coming soon". Canadians will be able to use their own spending figures to create their own basket weights and generate their own CPI, which they can then compare to the published data. It seems unlikely that many people will go to the trouble of doing this, but it may well provide a useful tool for journalists and bloggers looking for ways to second guess the Bank of Canada.

Decades ago, while working in a bank economics department in Toronto, your humble blogger took a call from a female client who felt that the CPI was understated -- this in an era when the headline number was almost certainly in the double digits. She revealed that she did not own a car, so what was the increase in CPI excluding the price of gasoline, insurance and so on? I wasn't able to help her then, but if she happened to get in touch again in a few months' time, I might be able to do a better job.  

Bank of Canada steps back

With a very low-key announcement on Thursday, the Bank of Canada scaled back the emergency measures it had put in place to ensure liquidity in financial markets. Specifically:

• The Bankers' Acceptance Purchase Facility and the Canada Mortgage Bond Purchase Program will both be terminated by the end of this month: 
• Term Repo operations will move from weekly to twice monthly, effective from next week, and the range of securities eligible for these operations will be cut back. Only Federal or Provincial government securities will now be eligible. 

Bank Governor Tiff Macklem signaled recently that the use of these facilities had dwindled sharply since the peak of the pandemic.  The Bank's announcement observes that "overall financial market conditions continue to improve in Canada" , so these moves are not a surprise. Needless to say, however, the Bank stresses its continuing commitment to ensuring adequate liquidity in financial markets, up to and including a restart of the discontinued facilities "if necessary".  

Although the second wave of the pandemic is well under way in Canada, there is no evidence of a return of the panic that gripped markets back in March and April.  For now it seems unlikely that the Bank will have to take further emergency measures to support liquidity in the coming months.   

It won't work

The Bank of England is consulting the UK's big banks to ask them how they would cope if official interest rates were to move into negative territory. Right now the Bank's target rate is set at 0.1 percent. It does not appear that a move to negative rates is imminent: the banks have been given a deadline of November 12 to provide their response, which happens to be after the BoE's next rate-setting date. Still, there is market speculation that official rates could be pushed into negative territory by the spring of 2021. possibly after another round of quantitative easing. 

Does anyone seriously think that either QE or negative rates will help in any way? The efficacy of monetary policy in general is in doubt, with fiscal policy once again regarded as by far the more potent policy tool for dealing with a stagnant economy. Keynes expressed major doubts about about monetary policy as a stimulus tool all those years ago, with the concept of the liquidity trap. QE only increases the monetary base, which does nothing to boost the real economy unless it translates into actual spending. As for ultra low or negative rates, the main effect of Japan's decades-long experiment with such an approach  has been to create a cohort of zombie banks, with little demonstrable effect on the economy.  

There's no reason to think that things would go any differently in the UK. You have to wonder if the Government is onside with what the Bank of England is considering here, but with the COVID pandemic ramping up again and the prospect of a no-deal Brexit looming ever larger, this issue may not be at the top of anyone's mind.

The last of the good news?

Canadian employment data for September, released this morning by Statistics Canada, were remarkably strong, at both the headline and the detailed level. Employment rose by 378,000 in the month, more than twice what the analysts' consensus had foreseen.  This reduced the national unemployment rate to 9.0 percent from 10.2 percent in August. For the second straight month, almost all of the job gains represented full-time employment.  

In terms of the details, there were job gains in all Provinces except New Brunswick and PEI. There were strong job gains in the goods producing sector, led by manufacturing. The services sector also posted solid gains, led by the accommodation and food services sub-sector, and by educational services as schools reopened in most Provinces. The number of Canadians working fewer than their usual hours as a result of the pandemic continued to fall, and the number of people still working from home edged lower. 

It scarcely needs to be pointed out that the labour market remains far below its pre-pandemic levels. The 9.0 percent unemployment rate compares to a 5.6 percent rate recorded in February, the last pre-pandemic month. Aggregate employment remains 720,000 (about 3.7 percent) below its February level. Although manufacturing employment is close to recouping al the jobs lost to the pandemic, and employment in educational services is actually above February's level, employment in both accommodation and retail trade remains far short of its peak. 

Sad to say, it is very likely that today's data represent the last positive news on employment that Canada will see for many months. The emergence of the feared second wave of COVID-19 has seen a rapid spike in cases in the most populous Provinces. In response, BC started to reimpose lockdown measures in early September; Quebec followed suit at the end of the month, and Ontario has just today announced fresh restrictions in its worst-affected regions, including Toronto and Ottawa.  StatsCan's monthly survey to collect job market data for October takes place next week; the new restrictions, though less severe than those imposed in the spring, are sure to weigh heavily on the data for this month and, in all likelihood, the rest of the year.     

Tiff talks

Even as the second wave of the COVID pandemic sweeps across the country, Bank of Canada Governor Tiff Macklem is looking ahead to the risks that litter the path to eventual recovery. In remarks to the Global Risk Institute this morning, he focused on risks to the recovery itself, risks that may arise during the recuperation phase, and risks related to by climate change. Unsurprisingly, many of the risks he addressed are related to debt. 

After briefly summarizing the steps that Canadian governments and the Bank itself have taken since the pandemic hit, Macklem moved on to discuss the financial risks. Intriguingly, he drew a parallel with the disastrous Fort McMurray fires of 2016, which the Bank has studied closely. "Then, as now, we saw a rapid stop in economic activity caused by a sudden shock. Then, as now, much of the lost ground was regained quickly. But the episode left economic scars that took a long time to heal."

Macklem noted that Canada's banks have provided mortgage relief to hundreds of thousands of borrowers over the past six months, but these deferrals are coming to an end. Moreover, the pandemic has severely hampered the ability of businesses to meet their fixed obligations, although the extension of emergency wage subsidies into 2021 will provide relief. Macklem described the financial system as well-capitalized and able to act as a shock absorber for households and businesses, but cautioned that the Bank is continuing to monitor the level of credit losses.  

As regards risks during the recuperation phase, Macklem's focus was squarely on household debt. A commitment to maintaining low interest rates sine die is a key element of the Bank's support to the economy, but the Bank is aware that low rates can foster both speculative buying and over-borrowing. The Canadian housing market experienced a remarkable bounce as the first wave of the pandemic faded: though Macklem did not mention this, Toronto was recently identified as one of the most over-extended housing markets in the world in a report by UBS. For the moment it appears that Macklem is confident that the Bank has the macroprudential tools it needs to cope with these risks. 

Finally, as regards climate change, Macklem stated that the financial system has a "critical role to play" in supporting the real economy's transition to a low carbon future. "If we are going to do a better job assessing, pricing and managing climate risks, we need better and more decision-useful information that combines climate-data analysis with economic and financial information. This will make the financial system and the real economy more resilient. And it will strengthen the ability of the financial system to fulfill its most critical role, which is to allocate savings to its most productive uses. This will help Canadians take advantage of sustainable investment opportunities."

Macklem's summing-up of the challenges ahead is worth quoting in full:

"The COVID-19 pandemic has made it painfully clear that how well we manage risks has a huge impact on our well-being. Globally, I don’t think it’s an exaggeration to say that the quality of risk management will increasingly influence the success and stability of societies. Of course, I’m talking about much more than financial-risk management. But the financial services sector has a leadership role to play. Two historic recessions in just over a decade have underlined just how much managing risks in our financial system matters to the livelihoods of Canadians. As we begin to recover from the economic fallout of the pandemic and look to the vulnerabilities ahead, sound risk management is more critical than ever."

A full agenda indeed.

V U W L.....K?

The use of letters of the alphabet to describe the possible shape of the recovery phase of the pandemic is nothing new. The V-shape is Donald Trump's fever dream, and just for a while there it seemed possible that it might happen. Given the rebound that we have already seen, U and L -- denoting respectively a long spell of low activity before a gradual recovery, and a long spell of low activity with scarcely any rebound at all -- no longer seem to be in contention. Right now, with the second wave of the pandemic well under way in Canada and many other places, W seems like the likeliest prospect.  In this scenario the May-September bounce gives way to a renewed decline in activity as lockdown measures are tightened again, with a further sharp rebound in prospect as the second wave eases in a few months' time.

But what's this? On the CBC website, columnist Don Pittis is talking up the prospects for a K-shaped recovery.  His suggestion is that some segments of the economy will continue to see a strong rebound, while others will inexorably weaken. This is in effect a variant of the view that some sectors are temporarily weak because they have been intentionally "suppressed" by governments in an effort to control the virus, while others have been dealt a mortal blow that may take years to recover from, if indeed recovery is even possible.  

A closer read of Pittis's piece suggests that a K shape might be an oversimplification. His list of occupations that are likely to enjoy a steady rebound, including those able to work from home, retirees and people such as Amazon workers who provide services to those two groups, looks reasonable. However, his list of those facing long term decline is less certain.  Hospitality and restaurant workers may indeed suffer another blow as the second wave unfolds, but those sectors should bounce back to pre-COVID levels once the pandemic is really in the past. Boeing workers and those associated with the cruise ship sector? Not so much. 

As Pittis suggests, the Canadian employment data for September, due out on Friday, may give us some  indication of how all this is unfolding. With fresh lockdowns only now starting to bite, however, the October numbers will probably be even more revealing. 

Infrastructure or austerity?

Last week's Canadian Throne Speech was full of ideas for recovery from the COVID pandemic but very short on details (and costs). Today the Federal Government has announced something much more specific: a plan for the lightly-regarded Canada Infrastructure Bank (CIB) to spend C$ 10 billion on a range of new initiatives.  

The $10 billion will be divided up between plans to provide broadband internet in underserved areas, energy efficiency retrofits,  clean power generation, irrigation improvements and the adoption of low-emission buses.  These goals are all consistent with the Throne Speech's underlying theme of "building back better", and with the pledge to use the pandemic recovery phase to move the economy in a greener direction.

Tory leader Erin O'Toole, just back at work after a bout of COVID-19, is not impressed. He pledges to abolish the CIB outright, calling it "a waste of taxpayer dollars".  The Tories made the same pledge ahead of last year's election. More surprisingly, so did the left-leaning NDP, which might be expected to look more favourably on the public sector taking a leadership role here. 

The CIB's problem is that in its three years of existence, it has proved to be a whole lot better at making high-profile announcements than at actually getting anything done. The CIB is supposed to act as a catalyst for private sector firms to invest alongside it, but there has been precious little evidence of that happening, and it is not clear how today's announcements will help to move things along.

We are now getting a clearer idea of how the major parties propose to handle the pandemic recovery phase. The Throne Speech and today's CIB announcement demonstrate that the Liberals intend to continue to deploy the public purse to help bring the economy back to health. In sharp contrast, the Tories (with support from much of the media) are warning that the emergency spending programs set up in recent months must inevitably give way to fiscal austerity sooner rather than later -- yet at the same time they advocate tax cuts for both businesses and individuals. It's hard to think of any country that has ever succeeded in solving its fiscal problems through austerity, but that seems to be the Tories' agenda.