Ten in a row, and counting

Canada's real GDP grew 0.4 percent in February after rising 0.7 percent in January, according to data published by Statistic Canada today. This marks the tenth straight month of expansion since the sharp slowdown triggered by the first wave of COVID exactly a year earlier. Preliminary estimates for March point to a further 0.9 percent rise in the month. That would translate into a 6.5 percent annualized gain for Q1 as a whole, slightly outpacing the growth reported for the US earlier in the week. It would also bring real GDP back to within one percent of the peak level attained pre-pandemic. 

Growth in February was entirely concentrated in the services sector, as the goods-producing sectors of the economy posted a marginal decline for the first time since April 2020. The growth in services largely reflected the easing of COVID restrictions during February in several of the largest Provinces.  Most notably, retail trade grew 4.5 percent in the month, while accommodation and food services rose 3.5 percent after several months of decline. These sectors likely led the gains again in March, though there is also early evidence of a rebound in the goods-producing sector. 

All in all the predictions of a decline in GDP for Q1 (including such forecasts right here in this blog, mea culpa) proved spectacularly wide of the mark. Perhaps, though, the error will turn out to be mainly one of timing.  The powerful third wave of COVID compelled several Provinces, including Ontario, to impose some of the harshest restrictions of the pandemic to date, starting very early in April. Retailing and food services, the very sectors that led growth in the last month or two, have been very hard hit. Those restrictions will stay in place for much of May, with relief only expected in June as vaccine rollouts move us closer to herd immunity. So there is likely to be at least one quarter of declining GDP for Canada in 2021 -- it just won't be the quarter we all so confidently forecast a few months ago.  

Is your stimulus really necessary?

The US Department of Commerce announced this morning that real GDP grew at a 6.4 percent annualized rate in the first quarter of 2021. That's up from the 4.3 percent growth rate posted in the final quarter of 2020, and the fastest pace seen in any quarter since 1984. Real GDP for the quarter was only marginally below the level seen just before the start of the pandemic. With COVID restrictions being eased across the country, real GDP will undoubtedly post a new all-time high in the current quarter. 

The news on growth comes just a day after the Federal Reserve kept its rate target at historically low levels and committed to maintaining the pace of quantitative easing. It acknowledged that "the recovery has progressed more quickly than generally expected" since the beginning of the year. The Fed remains committed to maintaining its current policy settings until "inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent".  Unlike the Bank of Canada in its own policy update last week, the Fed has given no indication that it is even considering accelerating its move away from the current highly accommodative stance. 

With the economy growing quickly and monetary policy stimulative, is there any need for further support on the fiscal side? The ink is barely dry on President Biden's $ 1.9 trillion "American Rescue Plan", a COVID-related package that is now providing financial support directly to US households. Now, as it passes the traditional "first hundred days" marker, the administration is proposing close to a further $4 billion in new spending, in the form of the "American Jobs Plan" and the "American Families Plan". 

The proposed new measures, supposedly to be financed by higher taxes on corporations and wealthy individuals, are probably not best looked at primarily as stimulus to help the economy back to its feet. Rather, it seems President Biden is using the pandemic as cover to force through a "once in a generation investment" that would stand next to no chance of getting through Congress in more normal times. Even in today's highly unusual circumstances, the chances of spending on anything like the scale proposed getting passed into law seem very limited. The Republicans are predictably up in arms at both the spending plans and the tax hikes, and there are plenty of nervous voices to be heard on the Democrat side. 

Even if the real goal is not stimulus per se, there is no doubt that new spending on this scale will be massively stimulative. The additional Treasury debt may not be a problem in itself, but with the economy already growing at a breakneck pace and monetary policy set to remain highly accommodative, inflationary risks are bound to grow. The stock markets seem to like all this, but bond markets may start to tell a different story. 

Ontario's COVID "modelling" revisited

Apologies for coming back yet again to this rather parochial topic, but the "modelling" that the Province of Ontario keeps rolling out to justify its wildly-gyrating decisions on the pandemic really is the gift that keeps on giving. I'm in no position to comment on the medical qualifications of the so-called "Ontario Science Table" that keeps coming up with this stuff: for all I know, they are worthy successors to Banting and Best. I can, however, safely assert that as statisticians, they are clearly not worthy successors to Poisson and Bayes. 

Here are some extracts from a post I wrote on the subject back on January 13, around the height of Ontario's second wave of COVID:

....it's quite apparent that most of the modelling consists of simply projecting the current trends for infections, hospitalizations and so on into the future in a linear fashion. 

This naturally produces some scary-looking numbers -- the Science Table noted that "on the worst days" recently the case count has grown by 7 percent. You only need the "rule of 72" to know that extrapolating that growth rate gives you a doubling of cases every ten days. If you project that rate forward for a full month (i.e. three 10-day doublings), you get a daily case rate of 20,000-plus in mid-February, compared to the 3,000 or so we have been averaging recently. 

....this kind of modelling can produce some very weird results. One member of the Panel commented that a faster growth rate would potentially lead to a 40,000 per day case rate, as indeed it would. Then again, it happens that the number of new cases reported this week has actually been slightly below the levels seen a week ago. Is that a new trend? Maybe, maybe not, but simply projecting it forward would lead to a much different outcome from the one the Province is using to justify its decisions.   

So, back in January the modellers used the worst single day's data to project a couple of months ahead, a technique which falls rather a long way short of good practice. They ignored the fact that the actual case count was moving lower at the time they did their projections. And they turned out to be dead wrong, as daily cases in the Province slipped close to 1000 in the weeks after the forecast was issued, meaning that the modelling was off by a factor of twenty. 

This is not just about smartypants second-guessing of the experts. It's more serious than that. The fall in case counts led the Ford government to ease restrictions in the Province, with the disastrous results we are now seeing in the form of the third COVID wave. Did the fact that the experts had been so wrong help to convince Ford and his team that they knew better? It seems quite possible.

Let's turn now to the Science Table's most recent set of COVID projections, issued on April 16: here is a link to the slide deck. Once again the modelling shows a dire situation that is set to get worse, and this time the data appearing around April 16 were continuing to deteriorate, so the panel has not made the second error it made back in January.

Instead it's found a different error to make. I mentioned in the first paragraph that the Ontario Government's pandemic response has been "wildly gyrating", particularly in the last month or so. On April 1 it implemented an "emergency brake" shutdown across the Province, but the April 16 projections prompted it to introduce a stay-at-home order and tighten restrictions on businesses.   

These dates are important in understanding the statistical error that was made. It is generally accepted that any new restrictions take about two weeks to have a measurable effect. This means that the impact of the "emergency brake" was not yet evident in the data by April 16, but unless you think the April 1 measures were entirely ineffective, that impact was just about to show up. The data the Science Table was using as the basis for its extrapolations in effect reflected the situation that had existed before April 1 rather than the situation as it actually was at the time the projections were made public.

You can probably guess where this goes next. The daily case count for Province peaked precisely on April 16 -- a nice touch by the Gods of statistics -- at  4812. It has since moved gradually lower: the count published today (April 27) shows 3265 cases, the lowest in almost a month. The seven-day moving average has also rolled over and is starting to fall. That's good news, of course, and the fact that it was probably going to happen even before the April 16 stay-at-home order was proclaimed means we can look forward to a continuing steady decline in the case count in the weeks ahead.

What message should the Ford government to take from this? First, please listen to the scientists when they talk about the science. If you had done that back in January/February you wouldn't have seen the third wave we're enduring now, and I wouldn't be writing these snarky posts. Second, when you get presented with this modelling, and preferably before you release it to the public, have some non-medical person with statistical experience interpret it for you. You must have a few economists around the place who can do that, and it could save you from some very short-sighted decisions. 

  

Bank of Canada: a change of tone

It's a busy week on the policy front in Canada. In the wake of Monday's Federal budget, today saw a fresh interest rate announcement and updated Monetary Policy Report from the Bank of Canada. As expected, the Bank left its target interest rate unchanged, but it is now clearly warning markets that the gradual withdrawal of stimulus may start sooner than previously expected.

The tone of today's announcement, particularly as it relates to the growth outlook, is remarkably upbeat. In effect the Bank is admitting that its earlier caution about both the immediate economic outlook and prospects for growth in the medium term was too pessimistic. Here are some key quotes:

Global economic growth is stronger than was forecast in the January Monetary Policy Report .......After a contraction of 2 ½ percent in 2020, the Bank now projects global GDP to grow by just over 6 ¾ percent in 2021, about 4 percent in 2022, and almost 3 ½ percent in 2023. The recovery in the United States has been particularly strong, owing to fiscal stimulus and rapid vaccine rollouts. The global recovery has lifted commodity prices, including oil, contributing to the strength of the Canadian dollar.

In Canada, growth in the first quarter appears considerably stronger than the Bank’s January forecast, as households and companies adapted to the second wave and associated restrictions....... As vaccines roll out and the economy reopens, consumption is expected to rebound strongly in the second half of this year and remain robust over the projection.,,,,,,The Bank will continue to monitor the potential risks associated with the rapid rise in house prices. Meanwhile, strong growth in foreign demand and higher commodity prices are expected to drive a robust recovery in exports and business investment. Additional federal and provincial fiscal stimulus will contribute importantly to growth. The Bank now forecasts real GDP growth of 6 ½ percent in 2021, moderating to around 3 ¾ percent in 2022 and 3 ¼ percent in 2023.

The Bank has revised its estimate of potential GDP growth to the upside, which may give it latitude to keep monetary stimulus in place for a longer period. However, it still expects CPI to move to the top of the 1-3 percent target band in the near term, mainly because of base effects:

Over the next few months, inflation is expected to rise temporarily to around the top of the 1-3 percent inflation-control range. This is largely the result of base-year effects—year-over-year CPI inflation is higher because prices of some goods and services fell sharply at the start of the pandemic. In addition, the increase in oil prices since December has driven gasoline prices above their pre-pandemic levels. The Bank expects CPI inflation to ease back toward 2 percent over the second half of 2021 as these base-year effects diminish, and inflation is expected to ease further because of the ongoing drag from excess capacity. As slack is absorbed, inflation should return to 2 per cent on a sustained basis some time in the second half of 2022. 

As if to illustrate these points, this morning Statistics Canada published its report on consumer prices for March. Headline CPI (not seasonally adjusted) rose 0.5 percent in the month, but a powerful base effect meant that the year-on-year rise leapt to 2.2 percent from 1.1 percent in February.  The Bank of Canada will argue that it can "look through" this spike, since CPI ex energy rose only 1.1 percent year-on-year. However, it may be noted that two of its three "preferred" measures of core inflation moved above 2 percent in the month. If that were to continue, the market jitters that have been pushing bond yields higher in recent weeks might intensify. 

The Bank continues to believe that the economy requires extraordinary support from monetary policy, and is committed to providing such support until it sees inflation sustainably at the 2 percent midpoint of the target range. However, it is now suggesting that this may happen as soon as the second half of 2022, rather than in 2023 as it previously predicted.  This implies that the gradual tightening cycle may begin around that time. In addition, the Bank is moving immediately to reduce its weekly purchase of Government bonds under its quantitative easing program to C$ 3 billion from the present level of C$ 4 billion. All in all, today's announcement is a subtle but important change in the Bank's messaging.  

Finally, a Canadian federal budget

If you're a rookie Finance Minister in the midst of a pandemic, you have to take your little victories where you find them.  In her first interview after tabling the 2021 Federal Budget on Monday -- the first such accounting in two years -- Chrystia Freeland was quick to do just that. The budget shows that the fiscal deficit for the 2021/21 fiscal year, which ended at the start of April, was C$ 354 billion. In more normal times that would have been considered a disastrous result for a full decade, but Freeland pointed out to her interviewer that it was well below the C$ 380 billion the Government had projected a few months ago and lower than the forecast of the Parliamentary Budget Office. Her sly sidelong glance at the camera seemed to carry a hint that there might be more such news to come under her stewardship.

The Government is certainly forecasting a sharp decline in deficits in the years to come, although the levels remain eye-wateringly high. For the fiscal year just getting under way, the deficit is expected to fall by more than half to C$ 155 billion, as the economy continues to recover from the worst of the COVID pandemic. Smaller declines in the "out years" are projected to bring the deficit down to C$ 30 billion by fiscal 2025/26. That figure would represent about 1.1 percent of GDP, which is the closest thing to a "fiscal anchor" that can be found in this budget. The debt-to-GDP ratio will briefly move above 50 percent before falling to 49.2 percent at the end of the forecast period.

There has been a small groundswell of opinion among business economists in recent weeks suggesting that, with the economy doing much better than expected in dealing with each subsequent wave of the pandemic, the government should avoid providing new stimulus, so as not to risk causing overheating.  Freeland herself has seemed at times to be thinking on similar lines. She famously described the unspent portion of the COVID support payments provided to households as "pre-loaded stimulus", which might be taken to imply that further actual stimulus would not be needed.   

So much for that. The Government has clearly calculated that as long as the deficits are projected to shrink, it has plenty of room to slip in a few billion of extra spending here and there in pursuit of its longer-term policy goals. Prime Minister Trudeau has spoken in the past of a "great reset" for the economy as it exits the COVID era, and Freeland has somewhat bizarrely characterized the  pandemic as an "opportunity". For better or worse, this budget delivers on that.

In aggregate it's a lot more than a few billion dollars. Over the next three years the new spending announced yesterday amounts to C$ 101 billion. Some of that will pay for the extension of existing COVID support programs for a further few months, but much of it is entirely new. The big-ticket item, one with long-term fiscal implications, is a C$ 30 billion down-payment to set up a national child care program. There's also C$ 18 billion for Indigenous communities and a similar amount for "green" initiatives. There are few revenue-boosting measures, although there will be a small "Netflix tax" and a surtax on purchases of expensive cars and boats. 

Trudeau and Freeland would be happy to use this budget as a springboard for an election campaign. They may not get that opportunity as soon as they would like, however: while Conservatives are predictably up in arms over the budget's perceived fiscal irresponsibility, the smaller NDP has indicated that it will not look to bring down the minority government in the midst of the pandemic. Even so, Trudeau is unlikely to wait much beyond Labour Day before finding a way to trigger a poll. Canadians may be relaxed about all that red ink for the moment, but as things start to get back to some kind of normal, Conservative warnings about the perils of debt, however misguided those may be, will start to find an audience again.  

   

Plenty of blame to go around!

Canadians have spent much of the past year watching the progress of the COVID pandemic in the United States with a mixture of pity and scorn. Infection rates were much higher than in Canada and fingers of blame were being pointed in all directions. But suddenly we don't seem so clever. Our current infection rate is now higher than that in the US (although it is still much lower over the full course of the pandemic) and our vaccine rollout has been way slower, although we are starting to catch up.

So of course the finger-pointing is under way here, with parts of the media (led by the Toronto Star, for example here) blaming everything on failures at the Provincial level while other parts, (led by the National Post, for example here) lay all the problems at the foot of the Federal government. It's almost a straight-up political divide, as the Provinces the Star et al like to pick on the most (Ontario, Alberta) have right-wing Tory Premiers, while at the Federal level, Justin Trudeau is a Liberal.    

Let's look at some of the facts here, starting with the Federal government. Canada has come under some criticism internationally for allegedly "hoarding" vaccines.  Total orders placed with the manufacturers would be enough to vaccinate everyone in the country ten times over. There is, however, a big difference between placing orders and actually receiving the vaccines. Canada sold off its vaccine manufacturing capacity decades ago and is now entirely dependent on imports. With every country in the world clamoring for supply, Canada has had to wait its turn. This has meant that vaccine rollout has been much slower than in the US, UK and other countries, though it has picked up in recent weeks.

There's more...to compensate for the slow arrival of vaccines, Canada has opted to focus on giving as many first shots as possible, which means delaying second shots. For the Pfizer vaccine, the recommended gap between first and second shots is 21 days, but Canada is extending that to four full months!  This may well work out fine -- the 21 day recommendation is not cast in stone --  but it certainly leaves Trudeau open to criticism.  

If the main job of the Federal government has been to lay its hand on the vaccines, the Provinces have been tasked with distributing them to the public. The Provinces have also been responsible for day-to-day management of the response to the pandemic within their individual jurisdictions. If we focus particularly on Ontario, which accounts for 40 percent of the national population (including me), the report card is distinctly mixed.

All in all it would be fair to say that Doug Ford's government has been too slow to impose restrictions when they were clearly needed and too fast to loosen them at the first signs of any improvement in infection rates. We are now into our third lockdown and there is little sign that lessons are being learned. In a two-week period in late March/early April, Ford announced an easing of restrictions, then a Province-wide lockdown, and then a Province-wide stay-at-home order that is to last at least a month.

On the vaccine front we can be a little more forgiving. The huge variability in weekly shipments of doses has made it difficult for the Provinces to plan very far ahead.  For example, last week Canada received about 3 million doses (of which Ontario would likely get about 1.2 million), but this week only 1 million are expected to arrive for the whole country.  Pop-up clinics, including one bizarrely located at a theme park north of Toronto, have found it particularly difficult to maintain a reliable supply The Provincial booking system has mostly worked well, however, and the target of getting every adult in the Province a first shot by Canada day looks achievable.

Plenty of mistakes, then, at all levels, but we should perhaps be prepared to be a little charitable here. After all,  nobody has had to deal with this kind of problem on this kind of scale before. That's not likely to cut much ice with the politicians or their cheering sections in the media. There is every expectation that Justin Trudeau will look for an opportunity to call an early election in hopes of converting his current minority government into a majority. Next week's Federal budget (April 19) will very likely set out the Liberals platform for such a vote, which will probably come in early Fall. 

  

Black mark!

Here's another in my very occasional series of candidates for the worst sentence ever written. The author is none other than Conrad Black in the National Post:

Once the Liberals adopted the policy of alternating English and French-Canadian leaders, and the Conservatives obligingly recruited some prominent English-speaking Liberal politicians to mobilize the anglophone majority in the country to impose conscription on French-Canadians who had no particular reason to feel any filial loyalty to the British or the French in the hecatomb of the First World War, the preeminence of the Liberals was assured.

Got that?  Come to think of it, most of the column that contains this gem is similarly overwrought and under-edited. You can check it out here.  

Strong, but for how long?

Last week's US non-farm payrolls report, which showed that the economy added almost a million jobs in March, was widely viewed as firm evidence that full recovery from the pandemic is now under way. Can we say the same about the equivalent Canadian data, published by Statistics Canada this morning?  Measured by the relative sizes of the two economies, the Canadian headline data -- a gain of 303,000 jobs in March -- was even stronger than the US figure. However, recent developments in the pandemic suggest that this may be the best number we see for some time. 

Just about everything in the Canadian data looks positive. Aside from the headline increase, we can note that: the unemployment rate fell to 7.5 percent, its lowest level since the last pre-pandemic month (February 2020); both full and part time employment posted significant gains; employment rose in seven out of the ten Provinces; labour underutilization fell to its lowest level since February 2020; private sector employment accounted for over 200,000 of the jobs added in the month; and total employment is now back to just 1.5 percent below its pre-COVID level.

All good, but it looks very much as if the positive outcome for the month was heavily influenced by the timing of StatsCan's monthly survey. There was a sort of "sweet spot" in the middle of the month when several Provinces, including the most populous, Ontario, had lifted many of their COVID restrictions -- and the timing of the survey coincided exactly with that sweet spot. The impact of that can be seen in the sectoral composition of the data, which showed strong employment gains in precisely those parts of the economy that have been most affected by lockdowns and such: retail trade (up 95,000 in the month), culture and recreation (up 62,000) and accommodation and food services (up 21,000).

Sad to relate, the removal of restrictions across the country proved very short term as the third wave of the pandemic picked up steam. Ontario hastily reimposed a lockdown at the start of April and quickly segued into a stay-at-home order just a few days later. There are ominous trends also in BC (with the so-called Brazilian variant becoming a major threat), Alberta and Quebec.  The hasty return to much tighter restrictions is certain to have a significant impact on the April employment data, for which data collection starts in just a few days. The latest restrictions may or may not last long -- Ontario's are set to run initially for just four weeks -- but they will create the opposite of a sweet spot for the jobs market for at least one month, if not longer.   

 

Spring thoughts

Just a few random thoughts on a spectacular spring day here in God's Own (wine) Country. I promise they're not all about COVID.

Vaccinations....my wife and I had our first Pfizer shots this morning. Booking the two appointments (actually four as we also have dates for the second shots) took eight minutes on the much-criticized Ontario online portal. Delivery of the shots took thirty minutes from the moment we entered the testing site until the moment we left -- and that included the fifteen-minute wait after the injection to make sure we didn't have an immediate anaphylactic reaction. 

I mention this because the Province's COVID response has been viciously slated in the media almost from Day One of the pandemic. It's true that Premier Doug Ford has vacillated about locking things down and been too willing to reopen, with the result that we are now starting our third lockdown. But that hardly makes us unique;  you don't even need the fingers of one hand to count the number of politicians who have really shone in this crisis -- there's Jacinda Ardern and...that's about it.

Ford is getting the gears for the Province's vaccine rollout even though Ontario is actually slightly ahead of the rest of Canada in terms of the proportion of people who have been vaccinated.  Ford is an unlovable oaf who I would never dream of voting for, but in the eyes of most of his vocal critics (led by the Toronto Star), his biggest crime is that he's a Tory. I'm not sure who I think would have done a better job over the past year, but I'm quite sure that the owners and columnists at the Star and elsewhere would not be the first people I would turn to. 

Modelling....I have talked about the COVID modelling from Ontario and the Federal Government here before. Today I saw a tweet from a journalist that began "Models are not projections". This is true, but as I responded to him, as a former business economist I know that models are used to make projections. Economists might relish the insight that models provide into how variables interact, but the people who pay economists aren't interested unless the models generate some actionable information, which means a forecast or projection. 

Canada's tallest free-standing economist John Kenneth Galbraith reportedly once said that economists don't make forecasts because they think they know the future. They do it because someone asks them to -- or, if you were a private sector economist like me, because someone pays them to.

The journalist I am riffing off here is clearly getting comments from readers saying that actual case numbers are lower than the "models" suggested, so this latest lockdown is not needed. We are currently at around 3300 cases per day in Ontario (population of 14.4 million). Back in January the models were predicting 20,000 cases per day, something seized on by both Premier Ford and the all-knowing media. As I wrote at the time, that wasn't a model, it was just an extrapolation of the worst single day's rise in infections in the pandemic to date. That rise was 7 percent, which meant that cases would double every ten days (rule of 72). It doesn't take long at that pace to go from 2000 cases per day (the rate at the time) to 20,000, or even higher.

Projections based on models are only as good as the underlying assumptions. Journalists (most, but not all) are not very good at that kind of subtlety. If you didn't stress the assumptions when the forecasts were first published, you don't really have the right to criticize your readers if they don't understand the numbers later.

Ever Given....all credit to Egypt for freeing the ship that launched a thousand memes in just six days. The vessel is still in the Great Bitter Lake while the government of Egypt negotiates compensation from the owners. Now I don't for a moment begrudge Egypt the right to shake as much money as it can out of this situation, but I must take issue with some of the grounds it is using to bolster the bill.

Egypt makes about $15 million a day from transit fees from vessels transiting the canal. If media reports can be trusted, it is claiming recompense for the loss of that amount as part of the compensation deal. But the money wasn't really lost, was it? All 300 ships held for six days at Port Said or Port Suez have now completed their transit (well, all except the Ever Given), and presumably paid the standard fee for doing so. The payment was delayed, not cancelled -- but as I said, Egypt has every right to get while the getting's good here, as I've no doubt they will.