Better times ahead (please!)

I have to say that I would have been happy to live out my days without experiencing a global pandemic, without having a front row seat for the increasingly erratic Trump presidency, and without watching from afar as the country of my birth puts itself through the self-imposed agonies of Brexit. Having to endure all three in one years has been, shall we say, something of a challenge.

But....the vaccines are rolling out, Trump is on the way out, and once the UK is actually out (of the EU), perhaps the future there can start to take shape. So maybe, after a tough first quarter, 2021 can be a better year, though it is likely to be many years before all of the damage inflicted by 2020 can be repaired.

Thank you to all who have read any of this blog over the past year. I hope to see you again in the new year. Best wishes for Christmas, and here's hoping for a much happier and safer 2021. 

Jim 

Canada GDP: still recovering

Per StatsCan, Canada's GDP rose 0.4 percent in October, down from the 0.8 percent gain posted in September Sixteen of the twenty industrial sectors expanded in the month, with the best results seen in service producing sectors, as goods production only rose 0.1 percent.  The increase beat expectations, with the analysts' consensus looking for a 0.3 percent gain and StatsCan's own preliminary estimate calling for 0.2 percent. Real GDP is still about 4 percent below its pre-pandemic (i.e. February) level.

StatsCan has also provided an initial estimate for growth in November. It looks for a further gain of 0.4 percent. Given the steady reimposition of restrictions and lockdowns as the month progressed, this seems  surprisingly optimistic.  However, it is now safe to say that, with the strong "handoff" from Q3 to Q4 provided by the September result, and the apparent continuation of growth for at least the first two months of the current quarter, the economy will post a positive GDP result for the quarter as a whole. 

The first quarter of 2021 will be a different story. December seems certain to post a flat result at best, and the tightest restrictions and lockdowns since April will be in place across large tracts of the country throughout January, if not longer. The rollout of vaccines looks likely to be slower than in many other countries, including the United States, thanks in large measure to the lack of any facilities for producing them domestically. Q1 is more than likely to see a renewed fall in GDP, though much less steep than that seen a year ago, with a gradual return to more sustainable growth by about mid-year.  

Just briefly....

 A few pre-holiday tidbits....

Canada's headline CPI rose 1.0 percent year-on-year in November, up from 0.7 percent in October. StatsCan's website seems to be taking an early Christmas break, so here is a link to the CBC's report. The increase was the fastest since pre-pandemic days and was also higher than the analysts' consensus, which looked for a 0.8 percent rise. Gasoline prices are still down by double digits from a year ago: the increase in CPI if gasoline is excluded stood at 1.3 percent.  We are still far from the point where the Bank of Canada would even begin to contemplate any sort of monetary tightening, but the upside surprise here is a useful reminder that once the pandemic starts to fade, inflation may well accelerate rather faster than the Bank is currently expecting. 

Speaking of the Bank of Canada, Governor Tiff Macklem offered some thoughts this week on the subject of "a sustainable recovery".  He cautioned that the strong second wave of COVID would weigh on growth in the early part of 2021, despite the hope offered by vaccines. Looking beyond that, he suggested that increased investment and increased trade would be needed to sustain the recovery, which could not simply depend on a rebound in consumption. He restated an old Canadian hope, largely a vain one, that the country could broaden its export markets away from its traditional dependence on the United States, but suggested even that would not be sufficient: "We do need to develop new, fast-growing markets for our products, but we also need to develop new, fast-growing products for our markets."

Lastly, and offered (almost) without comment, check out this column from the Financial Post. Considering the Post's habitual antipathy to government debt (well, to government anything, really) it is a surprisingly balanced view of the role of fiscal and monetary policy in facilitating Canada's recovery from the pandemic. If you look past the headline, you will find that it comes close to admitting that there is no real fiscal constraint in play right now. Can it be that Modern Monetary Theory has established a foothold at the FP? 

Canadian household debt burden rising again

One unexpected consequence of the COVID pandemic was a sharp decline in the household debt burden in Canada. Data from Statistics Canada revealed that the debt-to-disposable income ratio fell from a peak of 1.81 in the final quarter of 2019 to 1.63 in the second quarter of this year. The decline reflected the income supports provided by government as well as reduced spending amid restrictions and lockdowns. Repayment deferrals offered by financial institutions lowered the debt service burden and facilitated a record increase in household savings.

That was then; now, the debt situation seems to be heading back towards the pre-pandemic "norm". StatsCan reported this morning that the household debt-to-income ratio rose to 1.71 in the third quarter of the year.   The housing market has proved remarkably resilient in the face of the pandemic, and mortgage borrowing set new highs in both Q2 and Q3. Moreover, disposable income fell 3.1 percent in the quarter as government income support dropped, although income remained 9.2 percent higher than in the fourth quarter of 2019.  The household savings rate fell from the record 27.5 percent posted in Q2 to 14.6 percent in Q3, still very high by historical standards. The debt service ratio edged up from 12.4 percent in Q2 to 13.2 percent in Q3, as payment deferral schemes wound gradually wound down. 

Can we square these numbers with Finance Minister Chrystia Freeland's recent suggestion (see December 9 post) that unspent income support payments constitute "pre-loaded stimulus" as the economy moves toward a post-pandemic recovery?  StatsCan notes that household sector saving stood at C$ 56.8 billion in Q3, a sharp decline from the record $ 90.1 billion in Q2 but still very strong by historical standards. Household net worth increased 3 percent in Q3 after a 5.3 percent gain in Q2, largely reflecting the remarkable resilience of equity markets. 

This does appear to suggest that households will be in a position to help Canada spend its way out of the COVID downturn, as Ms Freeland evidently hopes. Not all households, however: it is worth quoting in full this caveat from today's StatsCan report: Household debt is aggregated across all income brackets; however, in general, credit market debt to disposable income tends to be higher for lower income quintiles. No surprise there, but it's an important point for policymakers to keep in mind. 

Is the Bank of Canada getting complacent?

As expected, the Bank of Canada kept its interest rate settings unchanged today, with the overnight rate staying at 0.25 percent. The Bank also committed to maintaining its quantitative easing (QE) program at the current level of C$ 4 billion per week. There was no press conference this time, so the press release itself provides the only evidence we have of the Bank's current thinking. 

In general, the Bank believes that both the real economy and inflation are evolving in line with the projections in its last Monetary Policy Report in October.  The timing and scale of the uplift expected from the early approval of COVID vaccinations remain uncertain, and further restrictions and lockdowns may set back recoveries in Canada and elsewhere.  Measures of core inflation are below the 2 percent target, and the presence of substantial slack in the economy is expected to weigh on inflation for some time. Based on this, the Bank intends to keep interest rates at current levels and maintain its QE program until inflation is sustainably above the 2 percent target, something it does not expect to happen until 2023. 

Even if we allow that most of this is true, is it too soon to suggest that the Bank may be underestimating the risk that inflation could start to move higher sooner than it expects? Consider food prices, for example: this article suggests that household grocery bills could rise by 3 to 5 percent in 2021, reflecting the impact of both COVID (as labour shortages and logistics issues push up production costs) and climate change. This is the fastest growth that the Canada Food Price Report has projected in its eleven year existence. The Bank of Canada might prefer to "look through" such an increase, but it is not at all clear that Canadians or their politicians will be prepared to do the same. 

Then there is the massive COVID stimulus to consider. In last week's Fall Update, Finance Minister Chrystia Freeland noted that a significant proportion of the various emergency benefits that the Government has paid out has gone into savings accounts, rather than being spent immediately. She referred to this money as "pre-positioned stimulus" for the post-pandemic recovery.* With vaccines on the horizon, there is every reason to expect that as we move through 2021, much of that money will flow back into the economy, as COVID fatigue gives way to a tsunami of pent-up spending on restaurants, travel and just about everything else.

It seems inevitable that this spending will start to push up inflation, as businesses take advantage of the boost in consumption to rebuild profit margins and balance sheets. This creates an issue for the Government in its management of fiscal policy: it is promising C$ 75-100 billion in new spending to jump-start the economy, but what happens if the "pre-positioned stimulus" makes that largely unnecessary? It also, of course, creates an issue for the Bank of Canada, if inflationary pressures begin to mount all across the economy well before 2023. The Bank's current forecast may well turn out to be correct, but there are good reasons to think that the inflationary risks may now be biased to the upside.  

* This is presumably more palatable politically than admitting that the Government gave a lot of money to people who did not actually need it. 

Canada's job market: still hanging in

Well, that was a bit of a surprise -- and evidently, not just to me. The consensus analysts' opinion for Canadian employment in November was a gain of 20,000, but Statistics Canada reported this morning that the actual increase was 62,000, with the unemployment rate falling to 8.5 percent. That is the smallest increase since May, as the ever-negative CBC website has been quick to emphasize, but it is important to bear in mind that in any more normal year, a 62,000 gain in one month would be a stunningly large number.   

Most of the details of the report were positive, most notably the fact that 99,000 full-time jobs were added in the month. Employment rose in six Provinces (BC, Ontario and all four Atlantic provinces), was largely stable in three, and only fell significantly in Manitoba. Total hours worked continued to grow, rising by 1.2 percent in the month, and the labour force underutilization rate, which takes account of involuntary part-time work and discouraged unemployed workers as well as those actually counted as unemployed, continued to edge lower. 

Encouraging as these statistics are, the job market remains well below its pre-pandemic (i.e February) peak. Overall employment remains about 600,000 lower than in February, the unemployment rate is 2.9 percentage points higher, and the labour force underutiliization rate, at 16.9 percent in November, almost 6 percentage points higher.   

The news on the job market is likely to get worse over the winter months. The renewed COVID-related restrictions and lockdowns across the country were by and large only in effect for the latter part of the month of November, while StatsCan compiled its data in the week of November 8-14. December will represent the first month of strong restrictions for most of the country since April, and this will inevitably translate into job losses. The promise of a vaccine roll-out offers hope that a return to pre-pandemic conditions in the job market can eventually be achieved, but significant improvement is not likely until the second quarter of 2021 at the earliest. 

What comes after V?

Whether you prefer to look at the quarterly change or the annualized rate, the rebound in Canada's real GDP in the third quarter was impressive -- V-shaped, you might say. The quarterly change, as reported by Statistics Canada this morning, was 8.9 percent, which annualizes to a rate of 40.6 percent. That comes after two quarters of decline, with Q2 particularly weak, and still leaves real GDP 5.3 percent below its pre-pandemic peak, which was reached, if you are using quarterly data, back in Q4/2019.*

The rebound in Q3 was broad-based and largely reflected the reopening of the economy after the lockdowns imposed for much of the prior quarter. Final domestic demand soared by 10.8 percent, as housing investment, business investment and household spending, particularly on durable goods, all recovered strongly. Exports also grew in volume terms as the US economy also bounced back, albeit not quite as strongly as Canada's. 

So, what comes after V? We can get some clues by looking at the monthly GDP data also released by StatsCan today. The bulk of the data relates to September, which saw a month-on-month gain of 0.8 percent, with both the goods and services sectors posting solid gains. However, StatsCan's preliminary estimate for October suggests a gain of only 0.2 percent. This undoubtedly reflects the accelerating second wave of COVID during the month, with the four most populous Provinces (Ontario, Quebec, Alberta and BC) all tightening restrictions as their case counts mounted. 

November has seen even worse COVID numbers and the imposition of more restrictions and lockdowns.  A decline in real GDP for the quarter as a whole seems unavoidable, though it is likely to be much less severe than that seen in Q2. The first quarter of 2021 is likely to see further weakness, potentially giving way to resumed growth by Q2 if the promised timetable for the rollout of a vaccine actually comes to pass. Appropriately enough then, it seems likely that what comes after V will indeed be W! 

* If you use monthly data, which have arguably been more instructive this year, the actual peak was in February 2020.