The Morning Brief – 07.16.20

By Bruce Carson

Economy—OPEC+ and Allies, including Russia, Agree to Ease Production Cuts to allow more oil to hit the Markets

Bank of Canada and Interest Rates—Provide Certainty in an Uncertain World

Bank of Canada Central Planning Scenario—Spotlight on the future

OPEC Agreement to increase Production

It was only a few days ago when Chris Varcoe of the Calgary Herald wrote after a TD Securities conference held on July7, that “oil taps are coming back on, but industry keeps tight lid on spending.”

With WTI around US $40 per barrel for oil and global demand increasing the talk was about increasing production in Canada’s oil patch. Alex Pourbaix of Cenovus Energy was quoted as saying “I believe we have made it, by far, through the worst of the situation.”

He added “as we see commodity prices grow, we are seeing a strong price signal to bring production back.”

Mark Little of Suncor said “the price is actually pretty good right now. I think the price is strong enough that every producer in the world could justify bringing their crude back to market.” Jackie Forrest of ARC Energy Research Institute offered that “companies are no longer drowning, they are treading water.”

Well, according to the Associated Press, OPEC+ and Russia had the same idea and yesterday after a two day meeting of its Joint Ministerial Monitoring committee OPEC decided to ease production cuts and allow more oil production.

It is reported that ministers agreed to allow oil to flow, saying demand is growing as economies open up.

Ministers did caution that they would revisit this decision in an emergency meeting if there are serious lock downs that further reduce demand for oil.

The agreement is to cut production by at least 7.7 million barrels per day in August, about a 2 million barrels difference from what they plan to put into the market in July. Ministers also discussed the need for better compliance by such members as Iraq and Nigeria.

The question now is how will this decision by OPEC+ affect the fledgling recovery in Canada’s oil patch? If nothing else, this decision illustrates how fragile recovery is when dealing with the effects of COVID-19 and the rush to take advantage of economies opening up. At least for the moment Russia and Saudi Arabia continue to shelve their price war which severely hurt Canada’s oil economy.

Bank of Canada and Interest Rates

Yesterday, the Bank of Canada announced that it would maintain the current interest rate of 0.25% until inflation objectives of 2% are achieved. The Bank made it clear that the low rate would be kept so that households and businesses could at least count on this certainty when making decisions, in an uncertain economic world.

In addition to maintaining low rates the Bank will continue with large scale asset purchases of $5 billion per week of Government of Canada bonds. It will also continue to purchase provincial and corporate bonds on the secondary market.

In its media release the Bank stated that it “stands ready to adjust its programs if market conditions warrant.”

Bank of Canada Central Planning Scenario

This was the main event in the Bank’s announcement yesterday as it was thought this could fill some of the holes left by Finance Minister Morneau’s economic snapshot revealed a week ago, yesterday.

The Bank stated that both the global and Canadian economic outlook is “extremely uncertain.”  The Monetary Policy Report (MPR) contains a central planning scenario rather than the Bank’s usual economic projections. Overall it sees economic activity picking up as containment measures are relaxed and “extraordinary” fiscal and monetary support continues.

Before discussing the Bank’s central planning scenario it is important to note the assumptions upon which it is based. First, it is assumed that there will be no second wave of COVID-19 either in Canada or globally; second, most large scale containment measures will be gradually lifted and third, it is assumed that the pandemic will have largely run its course by mid-2022-because of widespread availability of a vaccine or effective treatment.

The assumption that there will be no second wave seems quite optimistic and could render the scenario quite fragile.

The scenario sees the global economy shrinking overall by 5% in 2020, then growing by 5% on average in 2021 and 2022.  But global output at the end of 2022 is still 4% below levels projected in the Bank’s January MPR. The timing and pace of this recovery varies among and across regions and of course, could be hampered by a resurgence of the virus and the limited capacity of some countries to contain it or support their economies.

In relation to Canada, it was noted that Q2 saw economic activity 15% below its level at the end of 2019. The Bank sees this as the lowest economic period. Fiscal and monetary actions supported incomes and kept credit flowing, providing a foundation for the recovery.

In the central scenario real GDP declines 7.8% in 2020 and then sees growth of 5.1% in 2021 and growth of 3.7% in 2022.

Early openings have led to an “initial bounce back” in employment and output. In the central scenario roughly 40% of the collapse in the first six months of the pandemic is made up in Q3. After this initial period of activity, the Bank then expects the recovery to slow. In this recuperative phase the pace of recovery will moderate due to slow rebound in foreign demand and subdued confidence on the part of households. Macklem described this recuperative period as “long and uneven” as well as “bumpy and uneven.”

During this period CPI inflation will be close to zero and remain weak before strengthening toward 2% as the drag from low gasoline prices dissipates and demand recovers. In the scenario supply initially recovers in line with the easing of containment measures but demand recovers only gradually.

The economy will need “extraordinary monetary policy support” as it moves from reopening to recuperation.

The MPR states that a lot remains uncertain, particularly how deeply the economy is scarred from business closures and massive job losses. Also when supply is restored it is unclear how quickly demand will come back.

The MPR states that the burden of the lockdown fell disproportionally on some segments of the workforce such as low income earners, young workers, recent immigrants and women. During the Q and A session yesterday Governor Macklem did not have an answer to the question of childcare which arguably would enable women and caregivers to resume employment. His only response was that the central scenario envisages a gradual lifting of containment restrictions.


The takeaways from yesterday are that after an initial spike in economic activity in Q3, the next phase of the recovery will be long and uneven. Interest rates will remain where they are for at least the foreseeable future. Macklem said the Bank will be looking for signs that the recovery is self-sustaining before it reduces quantitative easing.

And while the central planning scenario is useful, it was developed on the assumption that there will not be a second wave of the virus and for that reason may not survive until the end of this year.

The shortcomings in the economic snapshot and the Bank’s central planning scenario together demonstrate the need for a federal budget presented when Parliament reconvenes in September.

To Come

  • Today, the House Finance committee meets to deal with the WE contract. It is important to note here that invariably Memorandums to Cabinet from the public service contain three alternate recommendations for action—it would indeed be odd to only have one recommendation for action in the Memorandum as is suggested in this case.
  • FMM by teleconference
July 17
  • The House Ethics committee will meet
July 21
  • Retail trade numbers for May to be released
July 22
  • CPI numbers for June to be released
  • House of Commons resumes sitting for the day

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

– BC