Canada GDP: a strong start to the year

The Canadian economy continues to surprise to the upside. Today Statistics Canada reported that real GDP rose 0.7 percent in January, beating the agency's own preliminary estimate of a 0.5 percent gain and easily topping the 0.1 percent gain eked out in December. This marks the ninth straight monthly rise in GDP since the sharp falls recorded in the first wave of the pandemic in Q1/Q2 of 2020, although real GDP remains about 3 percent below its pre-COVID peak. 

A business commentator from Bloomberg, who might have been expected to know better, described the gain as "small", notwithstanding the fact that monthly increases of this size annualize to a growth rate near 9 percent.  Aside from the size of the monthly gain, the composition of the increase was generally encouraging. Both services and goods output rose in the month, with gains in the latter category driven by both primary industries and manufacturing. The only notable weakness was recorded in retail sales and the hospitality sector, which continue to be hobbled by COVID restrictions. 

StatsCan's estimate for GDP growth in February calls for a further increase of 0.5 percent, and with some easing of restrictions in March, a further gain in that month seems all but assured. This means that the almost universal expectation for a fall in GDP in the first quarter of the year will turn out to be well wide of the mark.  The second quarter may be a different story, however. Despite an accelerated rollout of vaccines, COVID case numbers are accelerating in many areas of the country, and tighter restrictions are imminent. Ontario, for example, may well announce a third lockdown as early as tomorrow. 

The arrival of warmer weather and the continuing progress in vaccinations should mean that any economic impact of a third lockdown will be muted, in the same way that the second lockdown had far less impact than the first. Even so, the prospect of at best zero growth in the second quarter means that real GDP is unlikely to regain its pre-pandemic level until the final quarter of the year.  

Nobody knows anything

I've blogged several times over the years about the deterioration of traditional media, in terms of both content and literacy. The events of the past week surrounding the cargo ship Ever Given have provided plenty of gruesome opportunities to observe today's journalists at work. No names, no pack drill, but everything that follows is true!

Person A is a newsreader at breakfast time on a Toronto TV station. A couple of days into the Ever Given stranding, this person worriedly informed the sleepy-eyed audience that the Ever Given's cargo was crude oil, so that any attempt to lighten the ship would create a severe pollution risk. Eighteen thousand containers of crude oil perched up on deck, is it? Amazingly Person B, the station's business whiz, on air at the same time, chose not to correct this piece of misinformation, possibly so as not to embarrass Person A. 

Person B's own chance to shine came right after the ship had been freed, in the form of a statement that the seven-day blockage might cause "some empty shelves" in Canadian stores, to which Person A nodded sagely. Let's think about that. The Ever Given had sailed from two ports in China, one in Taiwan and one in Malaysia, through the Indian Ocean and Red Sea into the south end of the Suez Canal. It still had to negotiate the Canal itself, the Mediterranean, the Bay of Biscay, the English Channel and the North Sea to reach its destination, Rotterdam. 

Two thoughts here. First, even without the delay, the ship was not scheduled to arrive in Rotterdam until March 31. Allowing time for unloading and trans-shipment, any containers headed for Canada would not be arriving until late April at best, so the "empty shelves" threat seems a bit premature. More importantly, though, how likely is it that any goods coming from East Asia to Canada take this absurdly convoluted route?  The Pacific is a whole lot more direct, and the scale of the container ports along the littoral from Vancouver down to San Diego suggests that the Chinese and Japanese have figured that out. Maybe we can get them to tell Persons A and B. 

On a separate channel, Person C told evening viewers that the Ever Given incident was not likely to lead to fresh food shortages in Canada, as most of our food imports come from the US and Mexico. That's certainly a relief. You wouldn't have wanted to contemplate containers of bok choy and ramen rotting in the Suez heat as efforts to free the ship dragged on and on. 

In the past I've been kinda sorta charitable and assumed that some of the failings of today's journalists arise from the fact that they aren't able to specialize any more -- it's "next man up" when a fresh story breaks. But this is surely a bit beyond that.  A reporter who doesn't know the difference between a container ship and a tanker, another who has little evident grasp of geography? When I was in school, this kind of thing was considered "general knowledge'. Not so general any more, it seems. 

That's a lot of money for Band-aids!

My old investment banking colleague Peter Bethlenfalvy (hereafter, for obvious reasons. Peter B) is now Ontario Finance Minister. On Wednesday he tabled his first budget, Ontario's second of the pandemic. There's a torrent of red ink in there, but before we get to that, let's take a step back to look at the context.

Canadian governments at all levels, from the Feds in Ottawa to the smallest municipality, have seen their finances wrecked by the pandemic. Revenues have fallen while demands for additional spending have soared. The Federal government, as the issuer of the national currency, has by far the most latitude to act, and it has done so in spades: most international studies suggest that Canada has spent more to combat the pandemic than any other country. 

The Federal deficit for the 2020/21 fiscal year, which is just ending, is set to be around C$ 400 billion, give or take.  Ontario is home to about 40 percent of Canada's population, so you can say that Ontario's "share" of the Federal shortfall is about C$ 160 billion. That's not a number that has any practical implications, but it does allow us to put the Ontario deficit projections into some sort of perspective.

That's important because, as big as the numbers unveiled by Peter B are, they're a small fraction of the fiscal effort the Feds are exerting in the Province.  The Ontario deficit for the year just ending is pegged at C$ 38.5 billion. With an anticipated recovery in the economy and the removal of some COVID-specific spending, the deficit is projected to fall to C$ 33 billion in FY 2021/2022.  The budget includes projections for the entire decade; the Province does not expect a return to balance until 2029/30. Projecting that far out is frankly almost meaningless, but it's reasonable to assume that Peter B and his boss Doug Ford wanted at least to pay lip service to that great Tory shibboleth, fiscal responsibility. 

With the Feds doing most of the heavy lifting, Peter B's budget mainly consists of Band-aids for particularly hard-hit sectors. There's about C$ 5 billion for spending specifically on the pandemic, including the vaccination rollout;  there's expanded support for small businesses and families; and there's fresh funding for long-term elder care, in response to severe criticism of how poorly that sector has performed during the pandemic. 

Between the time that he and I worked together in a Bay Street trading room and his reincarnation as a politician, one of Peter B's most significant gigs was as head of Dominion Bond Rating Service. One of the key reasons he decided to enter politics seems to have been his concern over the way Ontario's finances were deteriorating under the feckless McGuinty and Wynne governments. Tabling large and long-lasting deficits like those in this week's budget must be painful for him, but here's an interesting quote: "Economic growth is the key to our fiscal recovery. That growth will create jobs, provide revenues to support critical public services and ensure a sustainable fiscal position."

That's very close to the infamous "budget will balance itself" comment by Justin Trudeau a few years ago, an insouciant attitude that Conservatives (of whom Peter B is one) have been mocking ever since. But of course Peter B is correct here: Ontario will never be able to reduce its deficit if it imposes as austerity program once the pandemic is over. It's tempting to think that the economy will grow faster and the deficit will shrink faster than the budget is projecting, but for now at least, the Ford Government is avoiding doing anything to make the situation worse. That's good.

Now we can sit back and wait for the Federal Budget, which after much humming and hawing has been set for April 19. That will almost certainly be a pre-election budget, setting the stage for a Federal vote in early summer or early fall. Just what we all need.   

The Fed hangs loose

Today's FOMC announcement has been one of the most widely anticipated in some time, given the emerging fears of inflation that have been steadily pushing Treasury bond yields higher in recent weeks. As expected, the FOMC statement left both the Fed funds target and the monthly pace of QE bond purchases unchanged for now.  The wording of the statement strongly suggests that the Fed sees no likelihood of that changing any time soon.  It appears that the decision was unanimous. 

The lengthy and slightly tortuous main paragraph of the release sums up the Fed's approach in light of its policy mandate:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. 

Those of us who have lived through major inflation spikes in decades past may feel slightly queasy about this.  Markets are already displaying jitters over the mere hint of inflationary pressures. If CPI is allowed to stay above 2 percent for some time, as the FOMC baldly state here, how long will bond investors tolerate that outcome before they conclude that the Fed is losing control of the situation? It may not be as long as the Fed would like. 

Also somewhat concerning is this statement of the factors the Fed will focus ob in the months ahead.

The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Missing from that list is any mention of fiscal policy. Of course the Fed can hardly be expected to cast direct doubt on the wisdom of President Biden's hard-won $1.9 trillion stimulus package. However, given the evidence, in the jobs market and elsewhere, that the US economy is well on the road to recovery, that package may well be adding more fiscal stimulus than the economy needs -- and there is the promise of an equally large infrastructure package still to come. It may not be too long before the Fed starts to feel pressure to lean against some of that fiscal stimulus, something that never ends well.  

Canada CPI -- here comes the uptick

Canada's headline consumer price index (CPI) rose 1.1 percent year-on-year in February, up slightly from a 1.0 percent increase in January, according to new data from Statistics Canada this morning. The increase was almost entirely the result of a jump in gasoline prices, which rose 6.5 percent in the month to stand 5.0 percent higher than in February 2020. Excluding gasoline the year-on-year rise in CPI for February, at 1.0 percent, was actually lower than the 1.3 percent rise posted in January.

The Bank of Canada's three preferred measures of core inflation all posted the same year-on-year increase in February as they had in January, for an average rise of just over 1.7 percent.  Taken together with the headline number, these aggregates show that inflation remains well below the 2 percent midpoint of the Bank's target range. 

All the same, gasoline prices have continued to rise during March, against a background of rising global oil prices. The analysts' consensus is already looking for headline CPI to edge up again this month, and further increases are likely in the next few months as last year's low gas prices and the impact of the first wave of the pandemic fall out of the calculation. This will bring the headline figure close to or even slightly above 2 percent by mid-year. 

The Bank of Canada has already made it clear many times that it will look through this spike, which it expects to be short-lived. It intends to keep rates on hold until CPI is sustainably at the 2 percent level, something it does not expect to happen until 2023. It will be interesting to see how the media will react as CPI continues to tick higher in the next few months. With the Canada ten-year bond yield above 1.60 percent at the time of writing, financial markets continue to signal that they do not entirely share the Bank of Canada's optimism. 

Canada employment data -- what's not to like?

Canada's monthly employment data are notoriously volatile and the analysts' consensus expectation is regularly way off the mark. Even so, the discrepancy between the consensus and the actual figures has rarely been more marked than today. The expectation for the February report was for the addition of 75,000 jobs, dropping the unemployment rate a couple of ticks to 9.2 percent. The actual outcome, per Statistics Canada: the economy added 259,000 jobs in the month and the unemployment rate fell to 8.2 percent, its lowest level since March 2020.

Even if you pick away at the details of the data, it's hard to find much to lessen the impact of the headline number.  The overall job gains almost entirely offset the weakness seen in the two preceding months, when 266,000 jobs were lost. Part-time positions accounted for 171,000 of the positions added in February, but it's important to note two things here. First, since the bulk of the jobs lost as a result of pandemic-related lockdowns have been part time in nature, it's only to be expected that such positions will account for the bulk of the rebound as those restrictions are eased. Second, there were in fact 88,000 full time positions created in the month, which would represent a very strong report in its own right.

There has been some grumbling in sections of the media that the public sector has been shielded from the worst effects of the pandemic. This may be true, though it is hard to see who would have been helped if tens of thousands of public servants had been furloughed. In any case, today's numbers evidence a strong rebound in the private sector, which accounted for 226,000 of the new jobs created. 

The regional pattern is similarly encouraging. Only Newfoundland and Labrador posted job losses, and there were gains in excess of 100,000 in both Ontario and Quebec. Smaller gains were also reported in Alberta, BC and Manitoba, meaning that all five of Canada's most populous Provinces reported some job gains in the month. 

If there is anything not to like about this report, it lies in the fact that the employment market has till not regained its pre-pandemic levels. There are still 599,000 or 3.1 percent fewer people working in Canada than was the case in February 2020. Then again, the labour force underutilization rate continues to improve, falling to 16.6 percent in the month, its lowest level since February 2020.

What happens next? It is interesting to note that the strongest job gains in February were reported in Quebec, which began relaxing restrictions ahead of the rest of the country. Most other Provinces have now followed suit, suggesting that a similar effect will be seen across the country in the March data. There are fears that the emergence of COVID "Variants of Concern"* may trigger a third wave of the pandemic, but as the survey week for the March data is just about to begin, that is an issue for a future date.  The March report looks certain to be strong: it will be interesting to see if the analysts consensus is closer to the mark this time. 

* A great name for a rock band!

Bank of Canada: tightening? Don't even think about it!

Bond yields around the world have been rising as investors fret about the possibility that economic recovery and massive monetary stimulus will trigger a surge in inflation.  Here in Canada the benchmark 10-year yield, which started the year below 0.7 percent, has topped 1.5 percent in recent days.  The rise in market rates has spilled over into banks' mortgage rates, which have started to move up from rock-bottom levels.

Against this background, the Bank of Canada today issued its latest interest rate decision. As expected, it left its key target rate unchanged at 0.25 percent and committed to maintaining its quantitative easing program at current levels for the foreseeable future. The press release issued with the decision made it quite clear that the Bank still does not expect to start raising rates until 2023. 

The Bank acknowledges that the economy is proving more resilient than expected in the face of the second wave of the COVID pandemic. At the time of its last rate announcement in January, it expected GDP to decline in the current quarter, but it now expects positive growth. Nevertheless, it still sees both considerable uncertainty, mainly over the risk posed by COVID variants, and economic slack, particularly in some segments of the labour market. 

Inflation is likely to be tricky for the Bank in the very near term, at least in terms of optics. Headline CPI is near the bottom of the 1-3 percent target range. However, the "base effect" as extremely low monthly readings at the height of the first wave last year fall out of the computation will push it near the top of the range towards mid-year. The Bank is confident that persistent economic slack will then force inflation lower again; it will be interesting to see if markets and the media share that confidence as the numbers start to move higher in the next month or two.

The final paragraph of the release is an unequivocal restatement of the Bank's continuing commitment to easy policy, but there is one small hint of how it will eventually start to remove stimulus:

While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway.  As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.

That penultimate sentence indicates that the first step the Bank will take towards tightening will be to scale back its monthly QE program. That's something for markets to look out for; it will be interesting to see if the Bank offers any kind of a heads-up before actually taking this very significant step. On the basis of today's announcement, however, any move of this sort is still many months away. 

You can't always want what you get

 A few thoughts about an exchange I was involved in over on Twitter yesterday.Names have been changed to protect the guilty. 

The first tweet was from a reasonably well-known TV reporter:

* Another $15-billion-plus in new spending announced today by Justin Trudeau to extend wage and rent subsidies and boost innovation. And we haven't even got to a budget yet. This government sure knows how to spend even though many Canadians have never had more in savings.

This promptly got this response from a Toronto Star columnist:

* Which Canadians?

The obvious implication, given the political leanings of the Star, was that it was only rich Canadians. Thus these responses soon afterward:

* Best question of the day! These sweeping statements and "headlines" now are purely to trigger and very uninformed. " I was talking to some people" ....

* Canadians who had high-profile careers in media, had employers to indemnify them when they wrote defamatory articles, and retired to play golf and opine.

* (reasonably well-known TV reporter) and his friends.

The next response was from your esteemed blogger, as follows:

* StatsCan data just yesterday showed that the household savings rate in Q4/2020 was over 12 percent. Also showed that lower income groups fared surprisingly well in terms of incomes in 2020.

I was braced for some insulting responses basically calling for me to eff off along with the StatsCan I rode in on, but to my great surprise, the comments virtually dried up right away. My real issue, though, is with the Toronto Star columnist. You might think that the Star, which is unbendingly pro-Liberal, would have seen the StatsCan data as proof that the Federal Government's pandemic income support schemes, while they are wildly expensive, are working well. That is, after all, the truth, as was well explained by columnist Don Pittis over at the CBC website. Instead all we got from the Star was a snarky comment from a columnist who had likely not bothered to look at the actual data.

This points to an essential truth about the Star's journalism. It's heavily based on giving a platform to victimhood, both real and manufactured. If that's your world view and indeed your raison d'etre, there's really no place for good news. If the world's problems were put to rights, what would be the point of the Toronto Star?

The final count: down

No surprise here: the media take on this morning's Canadian GDP data for 2020 accentuated the negative. This headline from the CBC website is typical: "2020 was the worst year on record for Canada's economy. It shrank 5.4 percent".  That's factually correct: the decline in GDP for the year was the worst since quarterly data were first collected in 1961. But it's not even close to being the full story -- indeed it's old news, inasmuch as all of the "worst" stuff happened way back in the spring of 2020. A look at the actual report conveys a different picture, both for the current situation and for what might unfold next.

Even the CBC sort of recognizes this, The sub-head on the linked article admits that "economic activity has slowly, steadily grown" since the summer. Grown it certainly has, but slowly and steadily are not the best qualifying adverbs to use. Growth in the third quarter was at an annual rate of over 40 percent, easily the fastest ever. For Q4 -- and this is the new data released today -- growth slowed markedly to an annual rate of about 9.6 percent, which is still very robust by historical standards and beat market expectations.

Along with the quarterly data, StatsCan also published monthly GDP data for December.  This revealed that GDP edged up only 0.1 percent in the month, well below the 0.8 percent seen in November. As a result GDP remained about 3 percent below its pre-pandemic (i.e. February 2020) peak. Given the re-imposition of COVID restrictions across the country during the month, this was no real surprise. 

However, StatsCan also published its preliminary take on growth for January, and this was unexpected: the agency estimates the economy grew 0.5 percent in the month. The growth was by no means broad-based, as mining, quarrying and energy production, plus the public sector, accounted for all of the gains. Even so, with Provinces starting to lift restrictions again in February and vaccination programs finally accelerating, earlier expectations for a decline in GDP in the first quarter of the year clearly need to be rethought.

The fact that the economy is continuing to move ahead should influence the budget decisions now being taken by Finance Minister Chrystia Freeland and her team. They also need to take account of one other statistic from today's Q4 data.  Canadians are not great savers, but the household savings rate in Q4 stood at 12 percent; for the year as a whole it was above 15 percent. 

Freeland has coined the term "pre-loaded stimulus" to describe this fattening of Canadians' bank balances.  This is certainly more politically palatable than admitting that maybe the pandemic benefit schemes were excessively generous or too indiscriminate. But if we assume that Freeland really believes in it, the "pre-loaded stimulus" should surely dictate how much more spending the Government needs to add on budget day. There's no case for wholesale elimination of the emergency benefits just yet, but with bond markets starting to sound the alarm about inflation risks, this may not be the time for a whole raft of new spending.