The Morning Brief – 06.23.20

By Bruce Carson


Economy—Economic “Snapshot” Coming on July 8

Conference Board of Canada –Economic Outlook, Summer, 2020

Bank of Canada Governor, Tiff Macklem delivers first speech on Inflation and Monetary Policy in the time of COVID-19

Conference Board, Economic Outlook, Summer, 2020

Yesterday, on the same day as Bank of Canada Governor Macklem delivered his first major speech as Governor, the Conference Board released its Summer, 2020 Economic Outlook.

The Outlook describes the effect of COVID-19 on the economy as “severe” with mandated business closures and collapse of business and consumer confidence. The Conference Board forecasts an 8.2% contraction for the Canadian economy in 2020.

At its peak, 3 million lost their jobs but the Board believes the worst is over with the rebound in May of 300,000 jobs regained.

The Board concludes that the “road to recovery will be long and employment will still be 1.1 million lower for 2020 that in 2019.”

Household consumption is down 11.3% in Q1 and it is expected that there will be a 57.5% drop in Q2. There will be a recovery in the second half of 2020, but “spending will not return to pre- pandemic levels until the second half of 2021.”

Global demand will decline and as a result exports are forecast to contract 14.3% in 2020. Private sector investment is expected to drop by 11.3%.

As we move into 2021, the outlook is brighter with economy forecast to rebound 6.7% and then by 4.8% in 2022.

However the Board adds it is critical that the withdrawal of support is managed as that will be a “crucial determinant of the economy’s trajectory over the next several years.” In other words, the supports provided by CERB, the wage subsidy and the alphabet soup of loan programs and low interest rates should not be terminated quickly and particularly without considering the effect such withdrawal will have on employment and overall economic health going forward.

Debut Speech by Bank of Canada Governor Tiff Macklem

Before getting into the speech itself there are four important takeaways:

  1. The recovery will take place in two stages. The first, coming this fall will show a sharp increase in economic activity resulting from re-opening of the economy after being closed for months. A second stage will follow which will be slower and a more gradual recuperative phase. As with the Conference Board, the Bank believes that supports will be needed throughout these phases.
  2. Interest rates will not go below 0.25% and the Bank will continue with quantitative easing and corporate bond buying.
  3. The recovery as seen by the Bank will be “prolonged and bumpy” and there is potential for setbacks along the way to full recovery.
  4. Perhaps the most important phrase used in the speech was Macklem’s view that “if you have a real crisis, you need to ‘crush’ it. He believes this has been done by the combination of fiscal and monetary policy.

In the speech Macklem referred to COVID-19 as a human tragedy that has precipitated an economic catastrophe, the likes of which we have not experienced in our lifetime.

He described inflation “as our beacon through the pandemic.” He said “our framework is designed to deliver low, stable and predictable inflation as a foundation for sustainable economic growth.”

While the inflation target is 2%, being halfway between 1% and 3% as the annual rate, these are not normal times. Macklem set out that the CPI index is designed to measure spending in normal times but now Canadians are spending less on gasoline and travel but more on food. The Consumer Price Index isn’t fully reflective of the current inflationary experience. The Bank is consulting with Statistics Canada on this.

The pandemic has caused a “massive decline” in supply and on the demand side; millions have lost jobs or have seen their hours scaled back with a resultant “large drop in spending power.” There has also been a large drop in consumer confidence.

The Bank wants “to avoid a persistent drop in inflation by helping Canadians get back to work.”

Macklem described the present situation as the “fog of uncertainty.” Uncertainty surrounds the virus, global trade, supply chains and supply and demand. We don’t know how business and consumer confidence will rebound nor do we know what lasting changes will take place in savings and spending habits.

On July 15, a week after the Trudeau government presents its economic “snapshot” the Bank will release its Monetary Policy Review (MPR) which will provide a “central planning scenario for output and inflation and present a discussion of the main risks facing the economy.”

One wonders why the government didn’t wait until after the MPR was presented before delivering its snapshot as the House of Commons will be meeting on July 22, just a week after the MPR is delivered. One would have thought that the government would want the benefit of the Bank’s thinking on the economy before presenting its snapshot; curious.

During the Question and Answer session that followed the speech,  Macklem was asked about vulnerabilities, and he began his answer by saying that Canada was in a good position prior to the virus except for the oil and gas sector. He noted that this sector had suffered the double whammy of decreased demand brought on by COVID-19 and low prices. While stating that prices are coming back, he added that the “weakness in oil prices could last longer than the pandemic.”

On the United States he said there is a lot of uncertainty; uncertainty about the virus, the economy, the election cycle as well as social unrest. The Bank will be assessing the U.S. recovery carefully knowing that a stronger U.S. economy is good for us.

He believes the chartered banks have been part of the solution and it is the job of the Central Bank to ensure there is liquidity so the banks can continue to lend.

On the subject of a second wave, there needs to be a quick response containing the outbreak as well as contact tracing and testing. Also companies need to use their ingenuity to get people back to work and feeling safe doing so.

He concluded by saying “we will get through this,” but it will be a long slow recovery and there will be set backs. Not all jobs are coming back but the Bank is laser focussed on supporting the recovery.

If nothing else Governor Macklem presented a realistic and even handed view of what the near and medium term future will look like, post pandemic. The path he set out will be difficult and the future in many ways will not resemble the past. However, in his view many of the supports both fiscal and monetary will need to continue.

To Come

  • The Parliamentary Budget Officer will release a costing note “CERB-Eight Week Extension and Phase-out.”
June 25
  • First Ministers Meeting by teleconference
June 30
  • GDP numbers for April to be released