The Morning Brief – 04.16.20

By Bruce Carson


Economy — March GDP

Bank of Canada, Interest Rates and Monetary Policy Report

Potential Help for Provinces from the Bank of Canada

March GDP

It was not clear why Statistics Canada felt the need to get the March GDP numbers out the door yesterday. Maybe there was a feeling that while economic policy makers and other Canadians are dealing with bad economic news in the form of unemployment numbers, applications for the Canadian Emergency Response Benefit, they might as well have the full picture on the same day when the Bank of Canada might be releasing its fiscal forecast.

Regardless of the reason for setting out the March numbers before the scheduled release of the February numbers, due to come out at the end of this month, March saw the economy shrink by a record 9%.

This was described as a “deep and widespread economic disruption.” GDP declined 2.6% in Q1 of 2020. Presumably February numbers will be still be released on April 30.

It should be remembered that it was mid-March when non-essential businesses were ordered to be closed.

So now that we know the numbers for March, economists can begin to forecast what the first half of 2020 might look from an economic point of view.

While the Monetary Policy Report tabled yesterday by the Bank of Canada did not contain fiscal forecasts, as it usually does, it did set out two useful recovery scenarios.

Bank of Canada Statement Dealing with Interest Rates

There was no change to interest rates yesterday as they remained at .25%, consistent with Governor Poloz’s statement when that rate was announced, rates would not be reduced further.

Globally the economy experienced a “sudden and deep contraction in economic activity and employment worldwide.” Prices for commodities were pushed down, particularly oil. The Bank sees global recovery as being protracted and uneven.

Dealing specifically with Canada, it was noted that there was an unprecedented drop in employment in March, with one million jobs lost and six million applying for economic help under the CERB program.

The level of economic activity in Q2 of 2020 is predicted to be 15%-20% lower than in Q4 of 2019. Inflation is expected to be near zero in Q2 of 2020.

The Bank did praise the measures undertaken by the federal government to help businesses and individuals weather the economic storm.

The Bank noted the challenges facing the Canadian economy such as the need to keep “credit channels open.” The “next challenge for markets will be managing increased demand for near term financing by federal and provincial governments, businesses and households.”

In response to the challenge the Bank will continue to purchase at least $5 billion in government of Canada securities per week and will increase this number as necessary. It will also increase the amount of Treasury Bills it acquires at auction.

One of the two most important and helpful announcements yesterday was the Bank’s new Provincial Bond Purchasing Program of up to $50 billion to supplement the Bank’s Provincial Money Market Purchasing Program. Governor Poloz was asked during the media availability yesterday morning whether the Bank had been pressured into establishing this program to help the provinces. He made it clear that there was no pressure and added that the federal government had been “unwavering in its devotion to central bank independence.”

In addition, the Bank established a new Corporate Bond Purchase Program under which it will acquire up to $10 billion in corporate bonds on the secondary market.

These two measures are designed to work together to ease pressure on Canadian borrowers now and later as containment measures ease, help with confidence and stimulate spending by consumers and businesses to stimulate growth.

The statement concluded with “all the Bank’s actions are aimed at helping to bridge the current period of containment and create conditions for a sustainable recovery and achievement of the inflation target over time.” Poloz added yesterday morning that inflation could become a problem after COVID-19, after 2022.

He said it was difficult to forecast inflation because we don’t know what will happen with the supply side or demand side of the equation. Also, various sectors of the economy may not recover all at the same time. Prices will rise when supplies are short and supply chains are interrupted. We also don’t know whether people will be leaving their homes to go to work or for entertainment.

Monetary Policy Report

The Policy Report was notable for both what it did contain and what was omitted from this issue. The report stated that “uncertainty surrounding the outlook is exceptionally high.” For this reason the report contained no predictions regarding economic growth with the caveat that such predictions may come in the October issue of the report. But the report did contain two scenarios dealing with recovery.

With regard to global recovery, it is felt that full recovery will take time. Businesses will restart in stages and people will gradually return to work. Manufacturing will be slower to recover and operate under capacity for some time as supply chains have been disrupted. International trade will remain weak until COVID-19 is under control throughout the world.

Canada, it was noted, experienced “two significant and related shocks;” COVID-19 which shut down economic activity and the drop in oil prices.

The report presented two recovery scenarios. The first scenario envisages little structural damage to the economy with demand returning quickly and decline in activity short lived. Governor Poloz described this scenario happening should containment be lifted in early June.

The second scenario describes an economy where the virus has had severe impact on households and businesses. Some businesses may not open and workers may relocate or become involved in retraining. Future growth is severely dampened and economic activity remains low for longer. This scenario according to Poloz would see containment extended out a couple of more months and getting back to normal will take longer. This is the sluggish growth scenario which “could cause structural damage to the economy that might not be undone for several years, if ever.”

The Governor was asked if there was any good news. He responded with his view that we are doing a good job obeying the distancing and other rules. He is “reasonably optimistic that Scenario One is achievable.” He also said that CERB and the wage subsidy programs were major accomplishments in a short period of time and they provided a “confidence floor” for Canadians regarding a positive economic outcome as the virus is tackled.

Governor Poloz and his team have done as much or more than was needed from the Central Bank to take on COVID-19. It would seem that anything more will now be in the hands of his successor.

To Come

  • G7 leaders conference call, focus on recovery and the actions taken by the U.S. regarding the WHO
  • PM and premiers’ conference call
  • Monthly survey of manufacturing for February to be released
April 19
  • G20 health ministers’ conference call
April 20
  • House of Commons scheduled to return unless an arrangement is made among the parties to delay its return or return in reduced numbers or in some other form
April 21
  • Retail trade numbers for February to be released
April 22
  • CPI numbers for March to be released
  • Bank of Canada deals with interest rates and releases its Monetary Policy Update

As usual, The Morning Brief returns on Tuesday, April 21.

– BC