The Morning Brief – 06.11.20

By Bruce Carson


Economy—OECD, Worst Recession in a Century

U.S. Federal Reserve, Interest Rates and Outlook

Need for a Federal Fiscal Update


Just because one international organization believes the world is facing record tough economic times, doesn’t mean another can’t jump in and say matters could get worse.

That’s exactly what has happened this week as first The World Bank predicted that we are experiencing the “worst recession in eighty years” in its Global Economic Prospects Report and yesterday the OECD from its perch in Paris declared that the “world is in the grips of the worst peace time recession in a century.”

This forecast dealt directly with Canada as it predicted the Canadian economy shrinking 8% this year and recovering to over 3% in 2021, but if the virus continues shrinkage will come in at 9.4% and with recovery only at 1.5% in 2021.

The global economy is to contract 6% this year but bounce back 5.2% in 2021, but that is only if the virus is kept under control. A second wave this year would see the contraction come in at 7.6% with recovery at only 2.8% in 2021.

By the end of 2021, loss of income will exceed that of any previous recession outside of wartime. The OECD stated there  “would be long lasting consequences for people, firms and governments.” The OECD urged governments to cooperate on finding a treatment and vaccine for the virus.

Most important for Canada, the OECD sees the U.S. economy contracting by 7.3% this year but rebounding by 4.1% in 2021. This is obviously important to Canada with the United States as Canada’s largest trading partner. If the U.S. is not doing well economically, that is not good for Canadian exports and Canadian suppliers. Scarier, with a second wave, the contraction comes in at 8.5% and growing only 1.9% in 2021.

Another of Canada’s trading partners; Great Britain will see GDP shrink 11.5% and recover at 9%. With a second wave shrinkage goes to 14% with a rebound of only 5% in 2021.

Certainly the numbers for the U.S. and Great Britain will have a negative effect on Canada’s economy illustrating the need to protect as best one can against a second and more devastating wave of the virus.

Coincidentally with the OECD release, yesterday was the end of the U.S. Fed’s two day meeting which terminated with a press conference given by Chair Jerome Powell.

U.S. Federal Reserve

In its statement following the meeting  the Fed indicated that the “health crisis being experienced will weigh heavily on economic activity, employment and inflation in the near term and poses considerable risk to the economic outlook over the medium term.”

It was for these reasons that the Fed decided to maintain rates between 0% and .25%. The Fed stated that it “will maintain this rate until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Sounding very much like the Bank of Canada, the Fed will monitor incoming data-public health and global developments as well as muted inflation pressures and will use its tools “to act as appropriate to support the economy.” It will also act to support the flow of credit to households and businesses over the coming months.

In his opening statement at the media availability, Powell spoke of being in difficult and challenging times. The Fed will use its tools to make sure there is no lasting damage to the economy.

He said that GDP in Q2 would see its largest drop in history and that this situation was disproportionately affecting women and minorities.

The Fed sees GDP falling 6.5% in 2020 but rebounding to 5% next year. Unemployment is to decline to 6.5% in 2021.

Powell is concerned about unemployment, despite the surprising May job numbers. He believes a full recovery will not occur until people are confident that they can once again enter and participate in the marketplace. He sees the job of the Fed as maintaining the flow of credit in the economy to households and businesses and this will set the stage for recovery. Businesses needing an immediate cash infusion should be looking to governments for this type of fiscal help.

In the Q and A session following his statement he stressed two things; his commitment to low interest rates and his concern about high rates of unemployment.

He was asked if the economy recovered at a pace faster than envisaged, would the Fed begin to raise interest rates?  He responded by saying there will be no interest rate hikes. He added that “he is not thinking about thinking about rate increases.

On unemployment, Powell is very concerned with approximately 25 million seeking work and that many won’t find jobs quickly. An environment should be created where people can go back to jobs or create new jobs.

He is worried about long term damage if millions of people are not going back to work and will need support which would have to occur fiscally. He would not be drawn into criticizing Congress as he said the political response was large, forceful, progressive and it occurred very quickly.

Also on long term unemployment, he is concerned about worker’s skills atrophying and workers losing connection with the workplace.

The Fed had projections of growth and unemployment and was unafraid to put them out, not fearing that they might be contradicted in two or three months.

The Bank of Canada should find comfort in the fact that interest rates in the U.S. will not rise for many, many months.

Need for a Federal Fiscal Update

One of the more constant and continuing questions at the prime minister’s morning briefings at the “Tent of Commons” is why the government, having spent or committed to spend billions upon billions of dollars can’t or won’t produce a fiscal update.

The exercise here today illustrates that both the World Bank and the OECD can produce growth and employment projections and so can the U.S. Federal Reserve. While those receiving the reports may not like the information they can, that doesn’t mean they shouldn’t be released.

The constant answer from Prime Minister Trudeau is that there is such a high degree of uncertainty as to the future of the economy that a fiscal update would be useless. That of course makes no sense because the government continues to spend so it must know that there is money in the treasury to be accessed.

Last evening, Vassy Kapelos convened a panel consisting of former federal finance senior official and chief economist of the TD Bank, Don Drummond, as well as Kevin Page, now head of the Institute for Fiscal Studies and Democracy at the University of Ottawa and Mostafa Askari, also with the Institute to discuss whether a fiscal update is needed.

Drummond made it clear that such an update exists in the finance department but the question is whether anyone is prepared for the measure of transparency that would be required with the release of an update. His conclusion was “probably not” and that’s why we don’t have one. But Canadians need to know what the financial situation is, before the government starts spending on infrastructure to stimulate recovery.

Page believes that an update is needed even though the level of uncertainty is “extreme.” An update would put this economic shock into perspective. Canadians need to see what the government is planning for the future, perhaps set out in a series of scenarios.

Askari said that we need a sense of where the economy is going and we need to know the range of the economic shock that Canadians will have to absorb. The government should also provide a framework for the recovery and its planned stimulus spending.

An update should be provided before the end of June.

To Come

  • First Ministers Meeting on COVID-19
June 15
  • Monthly survey of manufacturing to be released
June 17
  • CPI numbers for May to be released
  • Vote on UN Security Council seat
June 19
  • Retail trade numbers for April to be released

As usual, The Morning Brief returns on Tuesday, June 16.

– BC