COVID modelling update

Time to revisit our old friends at the Ontario Science Table, who have just published the results of their latest attempt at modelling the course of the pandemic. Throughout this ordeal, Ontario Premier Doug Ford has insisted that he is "following the science", but the Science Table has not always made that easy. Regardless of how much work has gone into the models behind the scenes, politicians and the media have tended to jump on the worst case scenarios, which are generally just extrapolations. When those scenarios don't materialize -- which is, of course, the probable outcome -- public faith in both politicians and scientists gets eroded just a bit further. 

With that in mind, let's look at the slide deck the Science Table published on Tuesday. Clearly,  things are going much better than the scientists expected earlier in the fourth wave of COVID.  After Ontario relaxed many of its restrictions in mid-July, there were fears that the case count would soar, with the return to in-class schooling in September set to add to the toll. The worst case scenario was that cases, which had fallen to around 200 per day before the reopening, would soar to as many as 4000 per day by October.

There was certainly an uptick through August, with the daily case count seemingly heading north of 1000 at one point, but then the numbers stabilized and started to decline. For the past two days the number has been below 500. The Science Table acknowledges this, but in the most unenthusiastic way imaginable. Its first "key finding' begins thus: "New cases, hospitalizations and ICU admissions are not increasing".  You would think that was good news, but the scientists seem to want to play it down, calling the situation "fragile".  They attribute the fall in cases to rising vaccination rates and Ontario's decision to keep some of its public health measures in place.  Given that both of these factors were evident a couple of months ago, this rather begs the question of why the earlier projections were so much gloomier. 

In any case, the "fragility" of the situation leads the scientists to warn that the range of possible outcomes as the colder weather arrives is very wide, albeit starting from a much lower base than seemed likely earlier in the fourth wave. It's interesting to look at the graphics for cases and ICU admissions. Some smart person has chosen to print the worst case lines much thinner than those for the base case and more optimistic scenarios. Given the tendency of the media and politicians to glom onto the worst case at every opportunity, it seems unlikely that this is accidental.

These projections emerge as something interesting seems to be happening with the pandemic across the globe.  The WHO just reported that cases fell by 10 percent over the past week. Even jurisdictions that have handled this whole nightmare badly -- Boris Johnson's UK, Ron DeathSentence's Florida -- are seeing lower case counts than the gloomsters had predicted.  Some scientists in the UK are suggesting that the virus is set to run out of ways to spin off ever more dangerous mutations, and will soon be no more lethal than the common cold. That may be a premature call and it won't make forecasting any easier, but it might mean (please!) that the rest of us don't have to pay quite so much attention. 

Any day now...

As expected, the Federal Reserve kept both its interest rate settings and its quantitative easing program unchanged this week. In the customary press release and in his subsequent remarks, Fed Chair Jerome Powell stressed that progress continued to be made towards the Fed's two main policy goals -- inflation moderately above the 3 percent target and "maximum employment".  He hinted that gradual reduction of QE, the so-called "taper", could begin soon, which markets seem to be interpreting as November, but rate hikes are unlikely to come until well into 2022.

That press release is an odd piece of work. Check out the very long fourth paragraph, which reads as if it was created by merging drafts written by two or three junior staffers, with no attempt at eliminating duplication, let alone actual editing. It's more useful to consider Powell's remarks, which clearly convey his belief that the Fed's aim of achieving inflation above target has now been achieved (overachieved, one  might say) and its maximum employment goal is within reach, despite continuing COVID-related risks. 

The changes in the Fed's economic projections are quite drastic and cast serious doubt on its ability to fine-tune the economy.  As recently as June, it was forecasting GDP growth of 7 percent for this year, but the spread of the Delta COVID variant has led it to scale this back to 5.9 percent. This naturally means that the unemployment rate at year-end will be a little higher than previously expected, at 4.8 percent.  

In a similar way, inflation is also diverging from earlier expectations. Although year-on-year CPI edged down to 5.3 percent in August, it shows few signs of returning closer to the 2 percent target any time soon.  The core personal consumption expenditure deflator, a measure favoured by the Fed, is now expected to average 4.2 percent for the year, up from an earlier projection of 3.4 percent. It seems unlikely that Powell had numbers like these in mind when he first suggested that the rise in inflation was the result of "transitory" factors.

Just to make things tougher for Powell and his team, the US is once again facing a deadline to increase the insane "debt ceiling". Failure to do so by the end of this month could lead to a government shutdown, and possibly see the US default on its debt obligations for the first time since the Civil War.  Powell warned that it would be unwise to assume that the Fed could protect the US economy from damage if this were to happen. You don't say, Jay.  A US default would render any consideration of tapering moot for some time to come.

Sound and fury, signifying nothing

Those words from Macbeth seem like the perfect way to sum up Canada's Federal election, which took place on Monday. After a clamorous 35-day campaign, the outcome is a House of Commons eerily similar in composition to the one it replaces. The Liberals were about a dozen seats short of a majority before the vote; subject to any last minute corrections, they will be about a dozen seats short of a majority in the new Parliament. The Conservatives, despite again winning more votes than the Liberals, will again be about forty seats behind them. The NDP and Bloc Quebecois, both with around thirty seats previously, will again each have about thirty seats.

Evidently $ 600 million, which is what this election is estimated to have cost, doesn't get you what it used to.  It's hard to pick out any winners here, unless you count the manufacturer of the millions of stubby pencils handed out to voters at polling stations as a COVID precaution. Plenty of losers, though. Let's look down the list, starting with....

Erin O'Toole, the Conservative leader, had little public profile ahead of the election campaign. He seems likeable enough, unlike some of his caucus, but he failed to capitalize on a variety of issues that could have been used to bring down the Liberals -- the sheer pointlessness of the election, Justin Trudeau's perceived lack of gravitas, the mounting cost of COVID benefit schemes that may no longer be needed. Unlike his feckless predecessor, Andrew Scheer, he is unlikely to be ditched as a punishment for failure, but his party will not be merciful in a year or two if he is unable to make an impact in  Parliament.  

Jagmeet Singh, leader of the ever-so-slightly leftist NDP, is widely admired for his intelligence, even by  those who would never vote for him. The NDP is often described as "Liberals in a hurry"; in the last Parliament they regularly propped up Trudeau's government in the House of Commons, getting precious little in return and, as the vote count suggests, doing nothing to build on their support base. Singh's smart nice guy act may start to pall if the party continues to keep Trudeau afloat in the new Parliament.

Canada -- yes, the whole country -- is a clear loser here, and not just because of that wasted 600 mil'.  There's some small consolation to be had in the fact that the perfectly odious People's Party of Canada (populist, nativist) failed to elect anyone to Parliament. But this election served yet again to underline the deep divisions within the country.  The Liberals were elected by the country's poorest region (the Atlantic Provinces) and its three most cosmopolitan cities, Montreal, Toronto and Vancouver. The prairie provinces and most of Ontario were solidly Tory, while the Bloc Quebecois continues its hold on most of Quebec.  In their six years in office, the Trudeau Liberals have done nothing to bring the country together.

And lastly, we come to Justin Trudeau himself, probably the biggest loser of all. The election was his gamble and it failed to net him a majority government. His flimsy rationale for having an election at all centered on the fact that the House of Commons was hard to manage -- evidently he has not spent much time studying how things go in the US Congress or the UK House of Commons, let alone the Israeli Knesset.  Ottawa is a bastion of politeness and tranquility by comparison. He is unlikely to find things any easier now.

Many years ago Trudeau's father, Pierre, famously took a walk in an Ottawa snowstorm and decided to resign the Prime Ministership. Justin may soon start hearing subtle hints that it's time for him to strap on his snowshoes and take a walk of his own. His Deputy (and Finance Minister) Chrystia Freeland has been doing most of the top job for the past couple of years anyway, and is almost embarrassingly keen to take over. If that happens, it won't be long before she sees the need to obtain a personal mandate from the people, in the form of yet another election. Better put another $ 600 million aside -- we may be needing it soon.  

You sure about that, Tiff?

 A week ago I noted that the newly-released Canadian employment data for August looked reassuring from the Bank of Canada's viewpoint. A second strong month of employment growth seemed like evidence that the fall in GDP around mid-year was, as the Bank maintained, a temporary setback. Inflation, though? That may be a different matter.

This past Wednesday, Statistics Canada reported that headline CPI rose 4.1 percent in the year to August, up from  3.7 percent rise in July. That was well above consensus expectations and represented the fastest gain since 2003. As CPI has moved steadily higher during this year, StatsCan's commentary has generally focused on "base effects" -- a lot of prices, with gasoline at the forefront,  plummetted in the first wave of COVID, and year-on-year numbers were inflated as more "normal" prices were re-established.  Now the wording is different. The second sentence of StatsCan's press release says the August bounce "mainly stems from an accumulation of recent price pressures and from lower price levels in 2020".

The Bank of Canada has regularly expressed confidence that the rise in inflation is the result of transitory factors. That argument holds as long as base effects bear the brunt of the blame, but that "accumulation of recent price pressures" is another matter.  Gasoline prices are still a major wild-card, rising 32 percent from a year ago, but there is now much more to the story.  In August, seven of the eight sub-categories in the index moved higher.  On a seasonally adjusted basis, headline CPI rose 0.4 percent from July to August which, if it persisted, would annualize to an even faster rate than we have seen so far this year.

The Bank of Canada, as we know, likes to look through short-term trends and movements in volatile components such as gasoline. For that purpose it uses three "preferred measures" of inflation, which StatsCan faithfully computes and publishes each month. Those measures are no longer providing much comfort. All three ticked higher in August, and their mean value is now above 2.5 percent.

The 2 percent inflation target has been the Bank of Canada's lodestone for decades now. Every governor has reiterated that keeping inflation expectations anchored at that level is a key policy goal. It is completely understandable that the Bank wants to reassure itself that the deflationary effects of the COVID pandemic have passed before it contemplates any significant removal of monetary stimulus. However, each month of rising inflation, and the apparent broadening of price pressures, erodes the hard-won credibility of the inflation target just a little further. Governor Tiff Macklem and his colleagues need some good news on the inflation front, sooner rather than later. 

Canada jobs data: hold the doom and gloom

 A week ago, in the wake of the report of falling Canadian GDP in Q2 and July and the disappointing US jobs report for August, I posted about the sudden outbreak of doom and gloom among economists: It's legitimate to wonder if the dreaded Delta variant may have a negative effect on the economy, but the speed with which economists have swivelled to adopt that as their base case scenario is surprising.    Then the Bank of Canada came out with a rather more balanced take on the growth outlook,  noting that the only real source of weakness in the economy was the export sector, and that Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent.

So today we saw Canada's employment data for August, and at this point, it looks as though the Bank of Canada's view is more valid than the suddenly-changed consensus among analysts. The economy added 90,000 jobs in the month, well above market expectations. This was the third straight monthly gain and brought the national unemployment rate down to by 0.4 percentage points to 7.1 percent, its lowest level since the onset of the pandemic.   Full-time employment accounted for 69,000 of the new jobs, with service industries leading the way as pandemic restrictions were generally eased across the country.

Some economists are trying to pooh-pooh the data -- check out the bank economist quoted here who claims to be able to spot some "flies in the ointment" -- but the numbers seem to suggest that the Canadian economy's recovery is continuing,  as the Bank of Canada said.  This is not to suggest that everything is back to its pre-COVID normal: total employment is still 0.8 percent below its pre-pandemic level, and of course the labour force has grown in the interim, which is why the unemployment rate is still so high.  Data for overall labour market underutilization and the percentage of persons working from home also indicate that the recovery still has some way to go. But the fears that were being expressed a week ago seem to have been seriously overstated.

Canada's Federal election campaign has ten days to run. Opposition parties have seized on the weak GDP data and recent high inflation numbers to argue that the Liberals are mismanaging the economy. It will be interesting to see if Trudeau and his team will try to capitalize on these strong employment numbers in the dying days of this entirely unnecessary campaign.   

 

Bank of Canada sits tight

With election day less than two weeks away, there was little likelihood that the Bank of Canada would make any policy changes at today's Governing Council meeting. And so it proved: the Bank kept its target rate unchanged at 0.25 percent and committed to maintain its quantitative easing program at the current pace of C$ 2 billion per week. 

Most of the Bank's press release was devoted to explaining why both growth and inflation have deviated from earlier expectations, and why those deviations do not signal any need for policy adjustments.

As regards growth, the Bank blames the unexpected fall in Canada's GDP in the second quarter (and in July) on global supply chain issues. The GDP decline was concentrated in the export sector,  with autos particularly hard-hit.  Aside from that weakness and some pullback in housing, the Bank paints a relatively rosy picture of current and future growth:

Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.

In terms of inflation, the Bank's stance is almost identical to the Fed's: yes, inflation is well above target now, but only for transitory reasons:

CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen, but by less than the CPI.

As regards that final sentence, it should be noted that while core measures of inflation are indeed below headline CPI, they have moved steadily above the 2 percent target in recent months, something the Bank cannot simply ignore. 

Given the Bank's views on growth and inflation, its decision to stand pat is no surprise. It will continue its QE program and still does not expect to raise rates until late next year:

Governing Council judges that the Canadian economy still has considerable excess capacity, and 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 July projection, this happens in the second half of 2022.... We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.

There is a small risk that the ongoing pandemic will require even more support, but the economy's resilience has increased greatly as each wave of COVID has unfolded. The bigger risk, for the Bank no less than the Fed, is that inflation proves stickier than expected, which could force the Bank's hand if it wishes to maintain the credibility of its inflation target.  

A pizza the action

The August non-farm payrolls report for the US, released this morning, has set off some alarm bells. The economy added "only" 235,000 jobs in the month, well below expectations. It's hard not to conclude that those expectations may have been unduly influenced by the very strong results seen in the previous couple of months.  The July job gain was revised upwards to more than one million, a pace that was clearly not likely to be sustained for very long. In more normal times (remember those?) a rise of 235,000 would be considered respectable, especially as it served to bring the unemployment rate down by two ticks, to 5.2 percent. It's legitimate to wonder if the dreaded Delta variant may have a negative effect on the economy, but the speed with which economists have swivelled to adopt that as their base case scenario is surprising.  

This is yet another of those months in which Canada's jobs report comes out a week after the US. Canada's July jobs data were strong, but StatsCan reported just a couple of days ago (see previous post) that the economy actually shrank in that month. Since employment normally tracks behind changes in overall activity, does this mean we can expect a weak August jobs report next Friday? 

Maybe, maybe not. Economists are not supposed to rely on anecdotal evidence,  though it has been suggested that the plural of anecdote is data. But anyway, here goes. Last night we headed out to the  excellent pizza patio at one of our local wineries.  As I was parking the car I could see that there were lots of empty tables, and yet when we made it to the front of the short line at the door, we were told there would be a wait of at least half an hour before we could be served. As more patrons arrived, that wait moved up to 45 minutes, then a full hour. Many people simply gave up and left. 

We sat on a couple of stools at the bar and quickly saw that only about a third of the tables were in use, and there were only a couple of servers on duty. A chat with the manager confirmed that they were unable to find enough staff to open the place up completely. A survey of our local newspapers or social media groups would indicate that any number of restaurants in the region are facing the same issue, which must be disheartening for them as the busy tourist season starts to wind down. 

What does this imply for next week's official data? The puzzling combination of high unemployment and widespread labour shortages has been around for some months now, and may well show up again in the August numbers. There's not much solid evidence that continuing COVID-related income support plans are disincentivizing people from taking jobs, but depending on how the numbers come out, that could well become an important debating point in the final week of the election campaign.