The Morning Brief – 10.14.20

By Bruce Carson


Bank of Canada Governor Macklem on Risks

Employment Numbers for September

Shutting down the Economy once again

New Support Programs

It would be understandable if the speech by the Governor of the Bank of Canada, Tiff Macklem on the risks that could be encountered along the path to economic recovery was either missed or received second billing as major parts of the country moved once again towards at least some form of modified shut down-not as severe as in March, but could become so, depending on the severity and number of COVID-19 cases.

Also there were encouraging job numbers released for September with 328,000 jobs gained. This was significantly better than the forecast of around 150,000 jobs recovered. The unemployment rate is now at 9%, but Canada is still playing catch up to the situation that existed prior to the pandemic.

Given the September numbers we are at three-quarters recovery of the three million jobs lost due to the COVID-19 shutdown, 720,000 jobs to go to get back to where we were in January and February.

It should be noted that one-quarter of the Canadian workforce is still working from home. It was also noted from the numbers, that the swell in employment could have resulted from students going back to school, freeing up a significant portion of the adult workforce.

But as the increasing numbers demonstrate, the second wave has infected at least a large portion of the country, even starting to move within the Atlantic bubble, which seemed impregnable for a number of months.

The Macklem speech while focussing on risks involved in the recovery, whenever we get to that stage, set out lessons that could be applied now.

One of the major risks he identified was debt; companies and households not being able to keep up with liability or mortgage payments. Another risk is the economic vulnerability of the country to future shocks. Macklem then adds the long term impact of climate change on financial systems and the domestic economy.

As a result of accumulated debt by households, corporations and governments, Canada will, Macklem forecasts, emerge from COVID-19 in a more fragile state than before the pandemic. Debt will expose weak spots in the economy.

The Governor makes it clear that his concern with accumulated debt and risk is not an indictment against government spending and measures taken to ameliorate the effects of the virus on the health of Canadians or the economy.

However, he is concerned about Canada’s ability to withstand a third shock.

On climate change, his third risk, he states that banks must understand the vulnerabilities and be transparent about their exposure to weather events that will certainly increase.

But, the most immediate threat is the one posed by the unintended consequences of lower for longer interest rate policies.

Debt will grow and could eventually become a drag on a future economic recovery and related activity. Should there be a future economic crisis, households and companies will be at greater risk of default, particularly if interest rates begin to rise.

Macklem states “the bottom line is that the private and public sector together need to be acutely aware of financial system risks and vulnerabilities as the economy recovers.” The longer the recovery, the greater the risk that cash flow problems will turn into solvency issues.

While Macklem didn’t provide any numbers regarding how much debt is too much, he did say that the higher level of government debt does make “the economy and financial systems more vulnerable to economic shocks down the road.”

As the speech and its warnings are being digested, a second wave of COVID-19 is upon us with a number of economic, social and health challenges similar to the first wave.

The second wave has prompted a number of new relief programs such as moving CERB into a greatly expanded EI program and creating the Canada Recovery Benefit for those who don’t fall within the EI criteria. Other benefits were announced along with the Canada Recovery Benefit and last Friday, the federal government announced a new commercial rent relief program focussed on tenants, not landlords. The government is also putting another $11 billion into the Business Loan Program.

At the same time, the employment numbers for September which looked so good, only a few days ago, may not flow through into October and November as business closures are put in place once again, at least in Ontario and Quebec.

Trevor Stratton, chief economist at the Canadian Chamber of Commerce commented that the growth in job numbers was for those hardest hit earlier in the year in the service sector and among visible minorities, but now with closures this group will be hit once again. And Heather Scoffield pointed out in a recent Toronto Star article that if schools begin to shut down, mothers will see another employment setback.

While Finance Minister Freeland says that the government will spend whatever it takes for as long as it takes to keep Canadians whole, we are still not seeing consistent economic growth and as Armine Yalnizyan points out “gender equity in the labour force is poised to go backwards by decades.”

What we are witnessing now is the perfect storm of the health care system once again being tested and stretched at the same time that Canada’s economic system is tested.

On health care, the federal government needs to move promptly on delivering rapid testing kits. It is not satisfactory for Public Services and Procurement Minister Anand to say as she did on Evan Solomon’s Question Period on Sunday that the government has purchased millions of rapid test kits, knowing that they may not be widely available for weeks and months.

Vassy Kapelos yesterday on Power and Politics questioned Intergovernmental Affairs Minister LeBlanc on the same matter and was unable to get a firm date for deployment except perhaps later next week, but no idea how many will be made available.

While Canadians were willing to give the government the benefit of the doubt in the spring when everything associated with COVID-19 was new, Canadians are losing patience.

The same applies to the economy, given the warnings contained in Macklem’s speech, Minister Freeland should announce either this week or immediately after the Thanksgiving break week a date for the Fall Economic Update which should include a fiscal anchor.

To Come

October 16
  • Monthly survey of manufacturing for August to be released
October 19
  • Bank of Canada releases its Business Outlook Survey
  • Wholesale trade numbers for August to be released
  • OPEC meeting
October 21
  • CPI numbers to be released for September
  • Retail sales numbers for August to be released
October 22
  • Last presidential debate is still scheduled to take place