Canada GDP data: all over the place

Growth data released this morning by Statistics Canada are, well, confusing. Monthly data show that GDP rose a solid 0.7 percent in June after declining in April and May. The improvement reflected the easing of COVID restrictions across the country and was very broad-based. Of the twenty sub-sectors tracked by StatsCan, fifteen posted higher output in the month, with both goods and services showing gains. Even with the June rebound, however, real GDP remains about 1.5 percent below its pre-pandemic peak. 

But then there are the quarterly GDP numbers, which showed that real GDP fell almost 0.3 percent from Q1, its first decline since the corresponding quarter of 2020.  Just one month ago, when StatsCan released its May GDP data, it expressed confidence that the final data for Q2 as a whole would show a 0.6 percent gain, so this outcome is a nasty surprise. Key factors driving the weakness include housing retail activities, as that market comes off the boil, and exports, where the main contributing factor appears to be the ongoing semi-conductor shortage. 

Other elements of GDP, including residential and non-residential investment, business inventories and government spending, all posted gains in the quarter. Moreover, real gross national income and final domestic demand were both higher in the quarter, so the overall picture is not as bleak as the headline numbers suggest. However, that hasn't stopped some business economists from switching abruptly to a much gloomier tone -- check out one or two cliche-heavy examples of that in the final paragraphs of this CBC article. 

But then again -- I warned you the data were confusing -- StatsCan's preliminary estimate for GDP in July shows signs of further weakness. The agency expects a 0.4 percent fall in GDP for the month, with weakness in manufacturing, construction and retail trade. Given that July was the first full month in some time with only limited COVID restrictions in place in most Provinces, this outcome is surprising, to say the least. It also looks to be inconsistent with the job gains already reported for the month. Final GDP data for July will not be available until October 1.

If there is a fresh bout of economic weakness on the way, that's bad news for all Canadians, of course, but perhaps especially for Prime Minister Trudeau. His campaign for the September 20 election is off to a very bad start, amid moderately higher COVID case counts, the shambolic withdrawal from Afghanistan and a general sense among voters that he had no good reason to call an election at this time.  Bad economic data are the last thing Trudeau needs.  Opinion pollsters are starting to suggest that the Tories are looking like the likeliest winners of the election, albeit without an overall majority. That's something almost nobody expected when the election was called.   

Way down in the Hole, virtually

When might the US Federal Reserve start pulling back on monetary stimulus?  Investors had been hoping that today's presentation by Fed Chair Jerome Powell to the Kansas City Fed's virtual Jackson Hole symposium would provide some clues. And the takeaway is....the Fed is thinking about it, but is not yet ready to pull the trigger. 

The title of the symposium was "Macroeconomic policy in an uneven economy", and Powell chose to stress that "uneven" theme throughout his remarks.  After noting that the COVID recession of 2020 was the "briefest yet deepest on record", Powell talked up the recovery in output and employment that has ensued.  Output recovered to its previous peak in just four quarters, but while goods-producing sectors, particularly durables,  have flourished, services have not:

Even today, with overall gross domestic product and consumption spending more than fully recovered, services spending remains about 7 percent below trend. Total employment is now 6 million below its February 2020 level, and 5 million of that shortfall is in the still-depressed service sector.

Powell stated that "maximum employment" is one of the Fed's two principal goals. Job creation has been strong:

The pace of total hiring is faster than at any time in the recorded data before the pandemic. The levels of job openings and quits are at record highs, and employers report that they cannot fill jobs fast enough to meet returning demand.

....but the picture is not uniformly positive:

The unemployment rate has declined to 5.4 percent, a post-pandemic low, but is still much too high, and the reported rate understates the amount of labor market slack.  Long-term unemployment remains elevated, and the recovery in labor force participation has lagged well behind the rest of the labor market, as it has in past recoveries.

On balance, it appears that the Fed wants to see more sustained progress towards its maximum employment goal before it looks to start tightening policy.  As for its other principal goal -- achieving an inflation rate at or just above the 2 percent target -- Powell had this to say: 

Over the 12 months through July, measures of headline and core personal consumption expenditures inflation have run at 4.2 percent and 3.6 percent, respectively—well above our 2 percent longer-run objective. Businesses and consumers widely report upward pressure on prices and wages. Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary. 

Powell then adumbrated some of the factors that have convinced the Fed that price pressures are temporary. These include the absence of broad-based inflationary pressures, the persistence of well-anchored inflation expectations,  relatively tame wage growth and, perhaps surprisingly "the prevalence of global disinflationary forces over the past quarter century".

It seems odd that the Fed would place any faith in the continuation of historical price trends, in the context of an economy that has been roiled by a once-in-a-century pandemic and kept afloat by unprecedented stimulus measures. The core PCE deflator referred to by Powell became a Fed favourite during the Greenspan era, as the Maestro shopped around for a price index that would support his view that no monetary tightening was needed. The July increase of 3.6 percent is the biggest in three decades -- longer than Powell's "quarter century" reference period -- and represents a remarkably sharp increase from just a few months ago. The corresponding figure for March was 2.0 percent.

So, finally, to the policy implications, first as regards quantitative easing:

We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals.....My view is that the "substantial further progress" test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. 

The wording here makes it unlikely that there will be any "taper" at the September FOMC meeting, but the market's expectations for things to change in November or December look well-founded. As for the much more significant step of actual rate hikes, that seems much further into the future:

The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.

Markets have taken Powell's response in stride, with no sign of a "taper tantrum". If the Fed really is for the moment more focused on employment than inflation, then the August non-farm payrolls report, due a week from today, will be even more important than normal in shaping expectations.

 

The dumbest idea (so far)

The Conservatives are the first party to produce a full-fledged policy platform for Canada's Federal election. We have several weeks to go, but the Tories have already managed to float a proposal that must even now be a front-runner for the dubious honour of being the most bone-headed idea of the campaign.

The Tories want to have a one-month sales tax "holiday" for the month of December.  Party leader Erin O'Toole says this would "give Canada's families a break and...help Canada's small retailers to get back on their feet".  Amazingly, Canada's small retailers are less than impressed. Their spokesmen, Dan Kelly of the Canadian Federation of Independent Business (CFIB) calls the idea "gimmicky" and worries that it might simply "shift consumer demand from one month to another without boosting it overall". I don't often find myself in agreement with Dan Kelly, but he's surely right about that.

The more broad-based Retail Council of Canada also sees the problem. Announcing a December tax holiday would very likely prompt consumers to delay purchases they would otherwise consider making in the fall:  "The last thing retailers are looking for is to flatten their sales in the fall. In that sense, the lag is a drag on sales." 

The Retail Council includes larger retailers than those represented by the CFIB.  Some of those retailers, the Amazons and Walmarts of the world, would undoubtedly be bigger beneficiaries of this half-baked idea than the small businesses that O'Toole supposedly wants to help -- but they're still not in favour of it. 

And then, of course, there's the cost. The centrepiece of the Tory election platform is the need to restore fiscal balance within a decade.  Spending a month's sales tax revenue on a scheme that is highly unlikely to benefit the overall economy is a strange way to start that process.  

Those darn special factors again

Canada's consumer price index rose significantly faster than expected in July. Data from Statistics Canada show that headline CPI rose 3.7 percent year-over-year, up from a rise of 3,1 percent in June and well above the analysts' consensus expectation of a 3.4 percent gain.  That represents the fastest pace of annual headline inflation since 2011. 

As is usual these days, StatsCan is able to point to a number of one-off or special factors behind the higher-than-expected print. The so-called base effect, notably for gasoline, continues to contribute, though at a slightly lesser pace as the data for the early months of the COVID pandemic fall out of the calculation. CPI excluding gasoline rose a more modest 2.8 percent in July, though it hardly need be said that that is still well above the Bank of Canada's 2 percent target.

Two more novel factors are in play this time. First, the homeowners' replacement cost index, which is how the CPI takes account of the cost of new homes, rose 13.8 percent in the year to July, the fastest pace since 1987.  There are growing signs that the housing market has come off the boil, so this may indeed be a transitory factor. More worrisome is the rise in durable goods prices, which rose 5.0 percent from a year ago, led by prices for passenger autos (reflecting the global semi-conductor shortage, which will not be going away any time soon) and furniture (reflecting new tariffs imposed by Canada on imports from Asia, which are unlikely to be removed). 

The Bank of Canada will be keeping a wary eye on its three preferred measures of inflation, which have been edging higher for some time. Two of the three measures rose in July with one, CPI-trim, moving above 3 percent. The average of these measures now stands just shy of 2.5 percent. 

One-off or special factors are only one-off or special until they're not. The risk for the Bank of Canada is that as the sequence of above-target CPI numbers gets longer, the 2 percent inflation target loses its credibility as a policy anchor.  The COVID pandemic and its after effects are making the data harder to interpret, but there are surely enough worrying signs to keep Governor Tiff Macklem and his team awake at night.

Just what I wanted!

To the surprise of absolutely nobody, Prime Minister Justin Trudeau has called a Federal election, to be held on September 20.  So much for the concept of fixed election dates, passed into law by PM Stephen Harper more than a decade ago but largely ignored by everyone (including Harper) ever since. An election is not actually due until October 2023, but Trudeau thinks he spies an opportunity to win back the majority that he lost in the 2019 election. 

Trudeau's suggestion that Canadians "deserve a say" is in effect his first untruth of the election campaign. Opinion polls suggest Canadians don't want an election right now, with a fourth wave of the COVID pandemic starting to spread across the country. The main national opposition parties -- the Conservatives and the left-leaning New Democrats (NDP), both running behind Trudeau's Liberals in the opinion polls -- don't want an election either, which is precisely why Trudeau is so keen to have one as soon as possible. 

The parties' full platforms for the election are not available yet, but many of the key elements for the three main parties can already be discerned.

The Liberals will largely run on their record, especially in regard to COVID. After what was perceived as a slow start, Canada's vaccination program has been one of the most effective in the world. Although the first wave of COVID back in 2020 took a severe toll on the economy, Canada is much closer to regaining its pre-pandemic GDP than the US is; Trudeau will claim that this is thanks to the myriad support schemes his Government introduced and will assure Canadians that the fiscal cost of these schemes can be afforded as the economy returns to normal growth.

If the Liberals have a weakness, it may be on foreign policy,  not normally much of an issue in Canadian politics.  Relations with China are positively frosty, thanks to Canada's failure to duck a US request to detain a Huawei executive, Meng Wangzhou, as she passed through Vancouver airport two years ago. Extradition proceedings are still underway, on charges that are frankly a textbook example of US legal over-reach. In retaliation, China has held two Canadian citizens on dubious spying charges and has sentenced a third to death on drug smuggling charges.  Trudeau has been unable to break this logjam, and appeals for help from Washington have gone unheeded, just one example of Canada's lack of influence there, even with President Biden in the Oval Office. 

The Conservatives' opening pitch will be that they are not Justin Trudeau, which will be sufficient to win them plenty of seats in some parts of the country, particularly Western Canada. Party leader Erin O'Toole's platform will focus heavily on the need to return to balanced budgets as soon as possible. His finance expert (and presumptive Finance Minister, if the Tories win the election), Pierre Poilievre, is borderline rabid on fiscal matters, an approach that may not play well in the heat of a seven-week election campaign.

The Conservatives' main weakness may turn out to be their lack of cohesion as a party. Non-Canadians might be surprised to learn how much US-style religious fundamentalism and pro-gun sentiment there is in Canada, especially in the West.  Those folks lean heavily Tory. There is also an evident east-west divide on energy policy, with the producing Provinces in the west (Alberta, Saskatchewan) keen to maximize revenues from their fossil fuel resource, while the rest of the country is turning ever so gradually greener.  It will be tough for O'Toole to thread this needle.

The NDP has been whining that an election is not needed because it has been supporting Trudeau in making the minority government work, which is a peculiar way to launch an election fight, to say the least. The only substantive pledge the party has made so far has been the introduction of a national pharmacare plan. This would be a good thing, but will lay the party open to accusations of spendthriftery from both of the other parties.  NDP leader Jagmeet Singh seems like a nice guy -- and his wife has just revealed an amazingly opportune pregnancy -- but the NDP has never formed a government at the national level and is highly unlikely to get close this time. 

It's possible that Trudeau will pay a price for inflicting an election on Canadians in the final weeks of summer, and in this year of all years, but for now this looks like the Liberals' election to lose. As for me, well, as I was doing a few errands this morning a catchy little reggae number came on the radio:  Conscious Party, by Ziggy Marley. Wonder if they'll be running a candidate in Niagara? 

Biden's time

Canadians watched the Trump era with a mixture of horror, apprehension and amusement, perhaps not all that different from the reaction of the millions of Americans who are not part of Trump's "base". The Trudeau government often seemed to be walking on eggshells in its dealings with Washington, but the Trump period was not without its achievements for the bilateral relationship, most notably the successful negotiation of a new trade agreement to replace the NAFTA treaty. 

Most Canadians, including the Trudeau government, breathed a quiet sigh of relief when Joe Biden won last November's election, and looked forward to calmer times to come. But if we were expecting the Biden era to mark a huge sea-change from Trumpism, we have by and large been disappointed. Oh, sure, the tone in Washington is a bit more civil, but just consider this little list, not all of which is specific to Canada.

• Literally on his first day in office, President Biden moved to cancel the Keystone XL pipeline project, which would have carried Canadian tar sands crude to refineries on the Gulf Coast. And yet, after this blatant piece of virtue signalling, the Biden administration has quietly given the go-ahead for a number of other fossil fuel projects. 
• This very week, as the IPCC releases its doom-and-gloom report on global warming,  we find Biden reacting to rising US gasoline prices by demanding that oil producing countries ramp up their output.  Going all the way back to the 1970s and 1980s, Presidents have regularly hectored OPEC about production levels whenever gas prices have spiked. For a government keen to portray itself as "green", it's not a good look. 
• In time-honoured Democrat fashion, Biden has tightened up "Buy America" provisions for public sector procurement. It will be enlightening to see how much of the business generated by the sprawling "infrastructure" package will be open for bidding by non-US companies, including Canadians..
• Biden has done nothing to smooth down the more abrasive edges of Trump's foreign policies. There is no sign of any return to the slightly less aggressive policy towards Cuba that the Obama administration briefly initiated: Cuba's very survival after six decades of US intransigence is almost miraculous. Policy towards China, at least measured by the tone of the rhetoric from Washington, has become even more confrontational, with experts now openly worried about a spiral towards armed conflict.

In the end, the rest of the world just has to remember that for every US President, regardless of their party label, America always comes first. President Biden may be a whole lot more subtle about it than his predecessor was, but in practical terms, the rest of us still have to be ready to stand up for our own interests. 

July jobs jump

Statistics Canada reported this morning that the Canadian economy added 94,000 jobs in July, with the unemployment rate falling 0.3 percentage points to 7.5 percent. The increase was below the analysts' extravagant consensus expectation, which called for a rise of 165,000. Still, combined with the 231,000 jobs added in June, today's data mean that all the jobs lost during the most recent round of tight COVID restrictions in April and May have been recovered. Total employment remains 246,000 below its pre-pandemic (February 2020) peak. 

StatsCan's release analyzes the data in a wide variety of ways, but a few key points stand out.  Most notably, the job gains were heavily concentrated in Ontario, which saw an increase of 71,000. Premier Doug Ford was widely castigated for being too quick to reopen the Province's economy earlier in the pandemic; this time he has been more cautious, with reopening moves at the end of June and the middle of July driving the job gains seen in today's report.

All the job gains reported in July are in the services sector, with a rise of 35,000 in the accommodation and food services category, which has been whipsawed throughout the pandemic. Virtually all of the month's new jobs are full-time in nature. The private sector accounted for 124,000 new positions in the month as public sector employment declined for the first time in more than a year. In further indications of the improving health of the jobs market, the percentage of Canadians working from home edged lower and the underutilization rate fell by 1.2 percentage points to 14.4 percent, though both of these measures remain above pre-pandemic levels. 

There are early signs of an emerging fourth wave of COVID in Canada. The country's high vaccine uptake is likely to mean that further tight lockdowns will not be needed, but continued easing of the remaining restrictions may have to be delayed. Job gains in August may again be strong, as the full impact of Ontario's mid-July easing feeds into the data, but the pace is likely to slow in the Fall, especially if the US COVID picture continues to darken.

US jobs data for July were also reported today and came in well above expectations, with a rise of 943,000 positions in the month, just above an upward-revised gain of 938,000 in June. The unemployment rate fell to 5.4 percent. Nevertheless, the US recovery from the worst impact of the pandemic lags behind Canada's, with employment still 5.7 million, or about 3 percent, below its pre-pandemic peak.

President Biden has been quick to claim credit for the jobs surge, but is wisely warning that "we doubtlessly will have ups and downs along the way as we continue to battle the Delta surge of COVID." That seems almost certain, given the remarkably rapid rise in the case count in recent weeks.  The US economy undoubtedly has considerable momentum, but unless vaccination rates increase sharply, its prospects for further gains in the coming months seem more uncertain than Canada's. 

A big boost from trade

I rarely comment on Canada's international trade performance here, because the numbers are so volatile. I once tried to explain to a colleague in London why the monthly trade balance was almost impossible to predict: "it's the difference between two large numbers". That explanation got the response it probably deserved, even though it's true.  All of that said, however, Canada's trade data for June, released by Statistics Canada this morning, are surely worthy of comment. 

Thanks to a record-breaking surge in exports, Canada's trade surplus for the month of June hit C$ 3.2 billion, the highest figure for any month since 2008.  This marks the fourth monthly surplus so far this year. The rebound in the US economy, as the COVID pandemic appeared to wane,  accounts for most of the improvement in Canada's trade. Energy exports rose 23 percent to their highest level in more than two years, led by crude oil shipments. There were also strong gains in exports of vehicles and parts and metals and non-metal minerals, reflecting the broad-based recovery in US economic activity.

One thing hasn't changed in all the years (indeed, decades) I have been following Canada's trade sector: dependence on the United States as an export market remains startlingly high. In June, shipments to the US accounted for just short of 75 percent of Canada's exports, a proportion that is almost unchanged from the 1970s. Canada continues to run deficits in its trade with countries other than the US; what is somewhat different about this year is that these deficits are being outweighed by surpluses with the US.   

Governments as far back as PM Justin's daddy, Pierre Trudeau, have regularly proposed plans to reduce the country's trade dependence on its southern neighbour, with no apparent impact whatsoever.  Most of the time it's not really a big issue, but in the near term it may start to present a problem. If the US sleepwalks into a severe fourth wave of COVID in the coming months, demand for Canada's exports is likely to take a hit. The Canadian dollar has been doing well in response to strength in oil and other commodity prices, but renewed weakening in the US economy could put the currency at risk.