The Morning Brief – 06.03.20

By Bruce Carson


Economy—Bank of Canada deals with Interest Rates today

Governor Macklem’s first day on the Job

Yesterday was Governor Poloz’s last day on the job—Looking Back and Forward

The time between today and June 17 will be busy as the Bank of Canada under new Governor Macklem deals with interest rates today and tomorrow Deputy Governor Gravelle delivers a speech to the Greater Sudbury Chamber of Commerce. This is a practice begun under former Governor Poloz of having a senior Bank official explain the interest rate announcement when the rate announcement does not include a media availability by the Governor and Senior Deputy.

On the fiscal side, the Supplementary Estimates A were tabled yesterday setting out $87billion in spending, most related to COVID-19 measures. The estimates and all matters of government spending since the beginning of March will be the subject of four hours of questioning in Committee of the Whole House when it meets on June 17.

This was the result of the deal made between the governing Liberals and the NDP which basically shuttered the House of Commons as we have come to know it until September 21. In return for NDP support, Prime Minister Trudeau promised to push for two weeks of paid sick leave for every working Canadian.

The main task of the House is to hold the government to account and to scrutinize government spending. It is hard to say why NDP leader Singh gave up this fundamental role but he seems to have taken the position that being in opposition is all about time allotted to ask questions, nothing more and he is pleased that he is getting a few minutes more.

When asked about the deal he made with the Liberals that shutters the House, he continuously pushes back with the fact he has five minutes now to ask questions. At some point he may realize that being a leader of an opposition party is about more than the time spent asking questions and giving the government a free pass on spending, but that is a discussion for another time.

Back on the monetary side, The Bank will deal with interest rates by releasing a statement at 10 am Ottawa time, a release drafted and agreed to before Poloz left yesterday. There seems little doubt that interest rates will remain unchanged, but the statement from the Bank may deal with the other activities undertaken by it such as asset purchases since the start of pandemic mode of operating.

In his last public appearance, last week before the Senate Finance Committee, Governor Poloz said he was confident that the Bank’s response to COVID-19 was working. Interest rates are now effectively at zero and the Bank’s asset buying initiative expanded the Bank’s balance sheet by $300 billion.

This morning’s release will probably state the Bank’s continuing commitment to support the economy.

The numbers are stark as Tiff Macklem takes over as Governor. GDP is down 8.2% in Q1 and that will accelerate downward further in Q2. Job numbers to be released at the end of this week will show more jobs lost in addition to the ones noted in statistics for March and April. And there is the projection of $1 trillion in federal debt and a deficit of over $260 billion.

Kevin Carmichael in his article yesterday in the Financial Post on Poloz and the Bank indicated that RBC sees a turnaround in the economy in Q3 and Q4 of this year.

Carmichael notes that Poloz sees a surge next year as companies and entrepreneurs take advantage of the situation as the economy moves to recovery. Poloz suggested that the new governor would have to be an advocate for a long period of low interest rates as any hike would adversely affect the recovery.

The Bank’s Financial System’s Review released in the middle of last month concludes that at least the new Governor won’t have to worry about one of the big banks failing, but there is a problem with the high amount of debt being carried by households and businesses. Cash flow for businesses is tight and households could be crushed by the debt.

A program initiated by Poloz which should be continued by the new governor deals with corporate bond purchases which was announced on May 19.This program may be easier for large companies to navigate than trying to fit within the many criteria set out in the government’s LEEFF program.

The list of eligible bond issuers includes CNRL, Husky Energy and Suncor with TD Asset Management administering the program. It will handle the purchase of securities in the secondary market, not directly from the companies. The plan is to replace private capital which has essentially dried up.

Carmichael commenting on this program said it “could be a lifeline for some oil and gas companies” and “should give viable firms the opportunity to refinance on terms similar to those they would have been anticipating a few months ago.”

In his University of Alberta speech noted here a few days ago Poloz spoke about inflation as preferred to deflation but also about “getting the economy back into its growth track…as the surest means of servicing those debts (mentioned above) over time.”

He listed a number of questions that his successor and others will have to address. They were: how and when will the global trading system recover; how will companies rebuild supply chains; what structural damage will the pandemic cause; how quickly will labour markets recover and how complete will that recovery be; what are the policies needed to address high levels of household debt and high public debt?

The University of Calgary’s Jack Mintz in an article at the end of May pointed out the high level of public debt in Canada. He listed the total at $3.2 trillion, being 166% of GDP or four times the IMF forecast for 2020.

Mintz states that it is “unlikely we will get to a balanced budget for many years.” He believes economic recovery will come but “only with a plan that restores Canada’s fiscal health.”

It is not too early to demand to see such a plan as without it Canadians are flying blind into what could be severe headwinds.

A beginning would be a complete economic update from Finance Minister Morneau before the end of June.

This would give the Bank of Canada a good idea of Canada’s fiscal situation as it writes its next Monetary Policy Report to be released on July 15.

Governor Macklem takes over at a time of great uncertainty, certainly even more than was present in the 2008-2009 financial crisis, but the Bank is in a good position to help address that uncertainty. One of the main issues he will have to deal with is that high level of debt described by Mintz as it limits the manoeuverability of the Bank.

No doubt the next seven years in the Governor’s chair could be even more interesting and challenging than the last seven.

To Come

  • Bank of Canada deals with interest rates
June 4
  • Deputy Bank Governor Gravelle delivers a speech to the Greater Sudbury Chamber of Commerce
  • International trade numbers for April to be released
  • OPEC + meeting on oil output
  • First Ministers’ weekly conference call
June 5
  • Job numbers for May to be released
June 6
  • Anniversary of D-Day assault in 1944
June 8
  • Building permit numbers for April to be released
June 9-10
  • U.S. Fed meets