That was then....

In more normal times, Statistics Canada's monthly GDP data are a useful way of keeping tabs on the economy while waiting for the more comprehensive quarterly data to appear.  However, at this stage of the COVID era, with restrictions changing almost week by week, the monthly numbers are effectively out of date or even irrelevant by the time they are published.

GDP data for May, released by StatsCan this morning, are a perfect example of this. With restrictions in place across the country for most of the month, it is no surprise to learn that GDP fell by 0.3 percent, with 12 of the 20 industrial sectors posting declines. Coming on top of a 0.5 percent decline for April (revised from an initially reported 0.3 percent decline), the May data mean that real GDP for the month was about 2 percent below the pre-pandemic peak set in February 2020.  

However, many Provinces started to ease their pandemic restrictions in June as the third wave of the pandemic showed signs of slowing.  As a direct result, GDP promptly bounced back, with StatsCan's preliminary estimate suggesting a 0.7 percent gain for the month, thereby recouping most of the decline seen in April and May. Based on that preliminary monthly figure, StatsCan now estimates that real GDP for the second quarter of the year eked out a 0.6 percent gain, a slightly better outcome than seemed likely a month or two ago.  Actual data for both June and Q2 as a whole will be reported on August 31. 

As things stand at the end of July, the third quarter is looking very strong. COVID restrictions have eased across the country and despite real concerns over the delta variant, the success of Canada's vaccine rollout means that there is little likelihood of their being re-imposed any time soon.  It seems very likely that real GDP will be back to its pre-pandemic peak by September. Does this seem like an auspicious time for Justin Trudeau to call the Federal election he is lusting for? You might think that...

Is the Fed getting nervous?

The tone of the statements issued after the US Fed's FOMC meetings has been rather odd in recent months. Instead of providing a detailed analysis of the current economic situation and the near-term outlook, the FOMC has chosen mainly to restate the general principles underlying its policy approach.  The statement after the July 28 FOMC meeting is a further example of this, right from the very first paragraph: 

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

Sure, this is followed by a brief but detail-free paragraph on the growth outlook, but the really striking thing about the whole document is the treatment of the elephant in the room: the recent surge in inflation to more than 5 percent. There's a whole long paragraph on the Fed's wish to see inflation stabilize at the long-established 2 percent target, but the surge to a way higher level is virtually dismissed in one short sentence:

Inflation has risen, largely reflecting transitory factors.

The press conference after the statement was released suggests that the Fed may not be as confident about the "transitory" part as the statement implies.  Chair Jerome Powell's comment about the inflation picture is ever so slightly evasive:

“Inflation is running well above our 2% objective, and has been for a few months, and is expected to run certainly above our objective for a few months before we believe it’ll move back down toward our objective. The question of whether we’ve met that objective, formally, is really one for the committee to make,” Powell said.

So the FOMC gets to set the exam, take the exam and then decide whether it has passed the exam? Powell certainly does not want the markets to make that decision for the Fed: if that were to happen, the supposedly "well-anchored" expectation of 2 percent inflation might quickly evaporate. There can be little doubt that the rise in inflation has been hotter and more prolonged than the Fed expected, and Powell is now admitting that it may persist much longer than the term "transitory" initially seemed to suggest. 

This all suggests that the Fed's accommodative approach is riskier now than it has been at any time since the pandemic began. To no-one's surprise, the FOMC left the funds target unchanged this week, but markets are looking for tightening to come some time in 2022.  There is the faintest of hints in the wording of the statement that the Fed is thinking about how and when it might be advisable to "taper" its quantitative easing program, but for now those asset purchases will continue. If the Fed is wrong about the inflation outlook, things could get interesting, and not in a good way. 

That's a relief

There were likely a few sighs of relief at the Bank of Canada this morning, as Statistics Canada released June CPI data that showed an apparent easing in underlying inflation pressures. On a seasonally adjusted basis, headline CPI rose just 0.1 percent in the month, with the year-on-year rate falling to 3.1 percent from May's 3.6 percent increase.

Base effects relating to the impact of the pandemic last year continue to cause gyrations in the data, making it hard to interpret the data with any certainty. Two examples from today's report: beef prices were down about 11 percent year-on-year because in June 2020, many processing plants were closed because of the pandemic, whereas chicken prices are about 11 percent higher now after being weak a year ago. 

A further factor complicating the data is the movement in energy prices, particularly for gasoline. The overall energy price sub-index is up 19 percent from a year ago, with gasoline a full 32 percent higher. However, in a sign that the base effects are starting to unwind, the year-on-year increase for gasoline is actually down from the 43 percent rise reported in May.  

StatsCan's report offers some insight into the impact of the well-publicized problems that have arisen in global supply chains as a result of the pandemic. Mere months ago, the main focus here was lumber, but all recent evidence suggests that skyrocketing prices brought about by shortages have choked off demand, with the result that lumber prices have fallen back.  StatsCan's current focus is on the shortage of semiconductors -- likely attributable to Bitcoin mining as much as to the pandemic -- which has driven up the price of various categories of consumer durables, including vehicles and household appliances, up 4.1 percent and 5.2 percent respectively from a year ago. 

Today's headline data appear to support the Bank of Canada's view that the modest spike in inflation is likely to be temporary. However, the Bank will want to keep a close eye on its three preferred measures of core inflation. The average of these measures showed a year-on-year rise of just under 2.3 percent in June, the same as in May, so still above the Bank's 2 percent target. It will take a few more months of cleaner data, as economic conditions continue to normalize, before the Bank can be completely sure of the underlying inflation trend. 

This year's model (UK remix)

I have posted several times about the COVID-19 modelling that governments in Canada (specifically my home Province of Ontario) have been relying on to guide policies aimed at combatting the pandemic. As each successive wave of infections has started to build, governments have released modelling that supposedly shows catastrophic rises in infections lying just over the horizon. Without fail, these warnings seem to have been followed by a prompt reversal in the course of the disease, with new infections starting a steady decline.

I have tried to make the point that there is or at least should be a distinction between modelling, which takes account of a range of causative factors, and extrapolation, which simply assumes that the most recently observed growth rate will continue indefinitely. Just about every scary model here in Ontario has been extrapolation, sometimes from a very flimsy base indeed -- in one case, back in the winter months,  it appears to have been a projection based solely on the worst single day of the pandemic!

It's no surprise, but also no consolation, to find that the same thing may be happening in the UK. Boris Johnson's decision to proceed with his fatuous "Freedom Day" on July 19 led to an outcry from scientists and physicians. With cases of the delta variant rising sharply, they predicted an apocalyptic outcome, with cases soaring from the then-current rate of under 50,000 per day to 100,000 or even 200,000 in a matter of mere weeks.

Less than a week on from Freedom Day, what has actually happened?  Cases have begun to fall, and not just marginally. The daily infection count briefly moved above 50,000, but in recent days the figure has been around 30 percent below prior week levels -- and the number published today (July 25) was a startling 40 percent lower. Epidemiologists are lost for an explanation and are warning that this may be a false dawn, not least because Freedom Day itself may trigger a rise in new infections, which might not show up for another week or so. Fair enough, but when your forecast is wrong not just as to magnitude but as to the actual direction of change, you surely have some explaining to do.

I don't write these posts because I'm anti-vax or anti-lockdown -- very far from it. Nor am I anti-statistician -- that was part of my professional education. But the fact is, forecasts that consistently appear to overstate the threat run the very obvious risk of triggering a backlash: you were dead wrong the last time, and the time before that, and the time before that, so why should we believe you now?  Brits were on the streets of London yesterday protesting against the COVID restrictions, even though Freedom Day saw most of those restrictions removed across England. That's dumb -- although the English do love a good ruck --  but politicians need to ask themselves just what that kind of dumbness might be telling them. 

UPDATE, 27 July: This quote from the BBC website, attributed to one Professor Adam Kucharski, may inadvertently tell us more about the "modelling" than the Professor intended: "One of things you've got to remember is there is a lot of infection still out there. If behaviour changes, then you're only two doublings away from 100,000 (25,000 cases to 50,000 cases to 100,000 cases)."  Right. And if my granny had wheels she'd be a streetcar. 

Easing up on the gas

As expected, the Bank of Canada left its key overnight interest rate unchanged at 0.25 percent after today's Governing Council meeting. However, it signalled its confidence in the continuing recovery of the economy by cutting its weekly bond buying (QE) program to C$ 2 billion from the current C$ 3 billion. The Bank also issued an updated Monetary Policy Report in which it offered more detail regarding its forecasts for growth and inflation. 

GDP growth in the first half of this year has been slightly below the Bank's earlier expectations, reflecting the impact of the most recent round of COVID restrictions at the provincial level and supply chain issues affecting the global economy.  However, with restrictions easing again and Canada's vaccination program powering ahead, it expects faster growth in the second half of this year and beyond. Its real growth projection for 2021 as a whole is now 6 percent, marginally below its earlier forecast, but it now expects further growth of 4.5 percent in 2022, higher than previously expected, tapering slightly to 3.25 percent in 2023.

The key issue these forecasts raise for policymakers is, how quickly will surplus capacity in the economy be absorbed, raising the risk of increased inflationary pressures?  The Bank notes that estimating the degree of slack is always difficult and has only been made more so by the impact of the pandemic.  It still projects that slack will be absorbed by the second half of 2022, but intends to follow a wider range of indicators over the coming months so as to keep a close eye on this. It will pay particularly close attention to labour markets, which is potentially significant given that the job market has so far recovered more slowly than real output. 

Given the Bank's focus on its 2 percent inflation target and its commitment to maintaining stimulative policy until actual inflation is sustainably at that level, this growth outlook seems to keep the Bank's plan not to raise rates until late 2022 intact. However, in Canada as in the US, the latest inflation readings have been well above the target. The Fed has continued to express confidence that above-target inflation in the US -- above 5 percent in June -- is transitory, and the Bank believes the same is true for Canada.  

The Bank sees the current uptick in inflation to 3.6 percent in May (June data will be not be available until July 28) as attributable to three main factors. First, gasoline prices plummeted at the start of the pandemic but have now bounced back to and above their pre-pandemic levels, producing the so-called base effect on CPI measures. Second, other prices that fell in the early stages of the pandemic are now recovering. Third, supply chain issues throughout the global economy have pushed up prices for a range of goods from semi-conductors to cars to lumber.

There are signs that some of these supply chain issues, especially for lumber, are easing, but it is much less obvious that upward pressure on gasoline prices will wane any time soon. It has to be said that the Bank's definition of "transitory" has taken on a little more flexibility. Previously it expected CPI to head back to the target level by the end of the summer, but it now expects it to be above target for the rest of this year and to move back towards 2 percent in 2022.

For now, it appears that bond markets are happy to take the Bank's word for it. Futures markets are showing no expectation of any rate moves until at least the third quarter of 2022. That said, the CPI figures that will appear at the end of this month will be well worth watching.   

  

Waiting for the call

It seems likely that a Federal election will be called in Canada very soon. Justin Trudeau's Liberal government does not have a majority in the House of Commons and the PM would, understandably, like to change that. Were it not for the pandemic, an election would probably have taken place several months ago -- the last election was in October 2019, and minority governments rarely last much more than a year. Now, however, Trudeau must surely see that conditions are looking very auspicious for his party. Here are some of the main factors.

COVID:  this is the key factor in a couple of ways. 

• First, it would have been grossly irresponsible to start an election while the pandemic was at its height. However, the infection rate in Canada has fallen sharply over the past two months, so the health risk posed by holding a vote is very much less than it was. That said, health professionals are still warning of a possible resurgence in infections, possibly accompanied by a worse-than-usual flu season, once the colder weather returns. An election soon after Labour Day would almost certainly take place against a background of very low COVID; wait until closer to Thanksgiving and the picture might be rather worse.

• Second, the successful vaccine rollout will be one of the Liberals' key campaign issues. Going back a few months, the Government was facing harsh criticism for failing to procure enough vaccines and for adopting a single-dose strategy (not initially recommended by the pharma companies) to spread the doses around. Now we find Canada is near the top of the international list for first doses (close to 80 percent of adults) and moving up fast on second doses (well over 50 percent). The public has a short memory, however, so the Liberals would probably be well advised to get the election underway while this success is still top of mind.    

The economy: Canada's economy took a bad beating during the first wave of the pandemic but has come through the second and third waves with much less damage. Real GDP will probably surpass its pre-pandemic high in the next two or three months. Although unemployment is still elevated, there should be strong job gains in the next few months. This is a good scenario for a government seeking re-election, especially if you believe (as you should) Bill Clinton's old adage that "it's the economy, stupid".  To delay the election into the Fall would be to risk the economy losing some momentum, particularly if there is a resurgence in the pandemic.

The opposition: it's hard to know where to start here, but suffice it to say that the parties that would be seeking to replace the Liberals are an unimpressive bunch.

• The Conservatives have contrived to select themselves another unattractive leader, Erin O'Toole. Their "front bench" consists mainly of faceless nonentities, with a few exceptions such as their attack dog finance critic, Pierre Poilievre. The party is widely perceived to have been captured by its right-wing elements, a group that bears more than a passing resemblance to the Trump GOP.

• The left-of-centre NDP is seen by many as nothing more than enablers for the Liberals, voting with the government on issues of confidence that could have triggered an early election. Its leader Jagmeet Singh is amiable but is unlikely to offer any real alternative to Trudeau.

• As for what we might call the single-issue parties, the Bloc Quebecois has recovered from a near-death experience a year or two ago, but still seems unlikely to take many seats from the Liberals in that Province. The Green Party is quite simply in chaos, with party insiders, seemingly goaded on by the party's former leader, turning on the newly leader they themselves chose not many months ago. 

To be clear, I don't relish the prospect of one of Canada's endless election campaigns and I don't in any way endorse the present government.  But if you put all of these factors together you can easily see why Trudeau will probably call an election as soon as he decently can.

Canada jobs data: mostly good

Canada's economy added 231,000 jobs in June, according to data released today by Statistics Canada, largely reversing the loss of 275,000 jobs over the previous two months.  This was above market expectations and, let it be said, higher than predicted in this blog.  The unemployment rate fell to 7.8 percent. Behind the headline numbers, however, details of the report can best be described as mixed. 

Part-time employment more than accounted for the rise in overall employment, posting a gain of 264,000. Full-time employment actually edged lower in the month and remains 2.2 percent below its pre-pandemic peak. Predictably, the majority of the jobs added were in the hospitality and retail sectors, as COVID restrictions were gradually lifted across the country. It is worth noting that even though StatsCan's survey was taken before a significant lifting of restrictions in Ontario, that Province led the way in job gains, with 117,000. 

Among the positives in the report, private sector employment rose 251,000 in the month after falling in both April and May.  The number of people working from home fell by 400,000 or about 8 percent in the month. The degree of labour force underutilization declined, as shown by falls in the number of people working short hours and the number not counted in the labour force but seeking work. Despite this, underutilization remains well above its pre-pandemic level.  Lastly, the labour force participation rate rose 0.6 percent to 65.2 percent, suggesting improved confidence in the employment situation.  

Continuing relaxation of COVID restrictions points to further strong job gains in July and August, with the emphasis likely to remain on the hospitality and retail sectors. As noted above, relaxation of some of Ontario's restrictions came after StatsCan's survey in June, so the data in the survey may well be understated. The same may well happen again in July, as the Province has just announced further re-opening that will again take place after this month's survey. This means that jobs created by that re-opening will only show up in the August data. 

This all sounds good, as indeed it is.  Still, total employment in the economy remains more than 340,000 or about 1.8 percent lower than it was in February 2020, and total hours worked remain 4 percent below their pre-pandemic peak. Provided there is no further significant setback in the fight against COVID, employment may fully recover last year's losses in the next two months. Given the growth in Canada's population and labour force, however, it will still be many more months before the unemployment rate falls back to its pre-COVID level. 

The paradoxical jobs market

Today brought another non-farm payrolls report for the US that seems to ask more questions than it answers. The headline figure, 850,000 new jobs created in June, was way stronger than expected. However, the unemployment rate ticked up to 5.9 percent and the total number of jobs in the economy is still 6.8 million (or about 4 percent) below its pre-pandemic peak, seen in February 2020.  But despite these indications of continued slack in the jobs market, there are persistent reports that employers are finding it hard to attract workers back as the economy reopens. 

It's popular in Republican circles to suggest that the benefits introduced to ease the impact of the pandemic are creating an incentive for people to stay home a little longer rather than returning to the daily grind. That's almost certainly not the case in a broad-brush sense. As the linked article points out, states that have already withdrawn those benefits have not yet seen any change in the willingness of workers to seek employment.

All the same, it would be absurd -- and a denial of some fairly basis tenets of economics -- to deny that these benefits may be having some impact at the margin. As the benefits programs lapse in more states in the coming months, the labour force participation rate is likely to increase. In the meantime, the perceived shortage of labour is having the largely beneficial effect of pushing up wages as employers try to overcome any reluctance to return to work. Rising compensation even as employment remains significantly below its peak is a paradox few would have predicted a few months ago. 

This happens to be one of the months in which the Canadian employment report is released a week later than its US equivalent. With pandemic restrictions still in place north of the border, the data next Friday are likely to be materially weaker than today's US numbers. Interestingly, however, a new report from Capital Economics suggests that Canada will soon be seeing the same scale of labour shortages as the US, but for a very different reason. 

Even with a setback likely to show up in the June data, Canada's jobs market has recovered better than the US. Canada could well be back to pre-pandemic levels of employment by October, according to the report. A survey by the Canadian Federation of Independent Business, a small-business lobby group, suggests that almost 70 percent of firms are already being held back by labour shortages of one sort or another. 

The cause of this is not work-shyness on the part of the current labour force, but a slowdown in immigration as a result of the pandemic.  Inflows of new immigrants have all but ceased over the past year, and though they are set to resume now,  numbers will remain low into next year. Canada's willingness to take in new immigrants has for many years allowed it to cushion the impact of an aging population. Removal of that cushion will put pressure on the jobs market, leading to labour shortages and, most likely, to upward pressure on wages.