The economic impact of COVID-19 will continue to erode near-term certainty. The road to recovery is challenging but these are extraordinary times. We truly are ‘all in it together’ within the global economy. The Business Development Bank of Canada (BDC.ca) examines how other countries are moving forward in a measured, yet complicated to restart their economies from a hard stop.
Enjoy the “Great Reboot” from BDC which aligns each Canadian province with various countries that are in the midst of similar COVID-19 conditions.
What does the COVID-19 recovery mean for Entrepreneurs?
Our partners at National Bank Financial examine a recent report from the Bank of Canada Financial System Review (FSR). The report provides a data driven perspective on how financial services have been impacted ” to identify the main vulnerabilities and risks to financial stability in Canada and explain how they have evolved over the past year.”
“By just looking at soaring stock markets you wouldn’t know the world economy is on track to grow this year at the slowest pace in a decade…as the MSCI All-Country World index soared to all-time highs in November amid investor confidence about de-escalation of the U.S.-China trade war.“
2020 begins with geopolitical fireworks in escalating tensions between Iran and the U.S. Oil prices shoot upwards of 4% or more. It is easy to forget that Brexit looms while the first phase of China-U.S. trade signals a deescalation in tensions.
GDP prospects for Canada in 2020 are forecasted to be similar to 2019. National Bank Financial Economics with an above-consensus call of 1.8% for 2020 real GDP growth. They assume some fiscal stimulus from the federal government. Barring a significant deterioration in the global economic outlook, National Bank Financial continues to expect the central bank to refrain from cutting interest rates over the near to medium term.
Our partners at National Bank Financial offer a 2019 fourth quarter perspective on changing global economic trends and what to expect for the balance of the year. What they are watching for:
September’s (Canadian) labour force survey will draw the most attention. No less than 304,000 jobs were added in the country in the first eight months of the year, the best tally since 2002
NBF Economics October 4, 2019
The Canadian economy saw a weaker GDP growth rate in July and coupled with a broader economic easing, along side the tumult in the U.S. on both a political and economic level, the fourth quarter will be choppy for investors, as often is the case.
Inflation is the thermometer of economic activity in Canada, which is heating up. Our partners at NBF Economics point out that inflation is rising in Canada led by food prices. These particularly impacts retirees and working families the hardest as they have rising expenses and/or fixed income lags the increases in inflation. May’s 2018 Canadian economic growth measured by Gross Domestic Product (GDP) results were better than expected, with solid headline growth and broad based gains. The dispersion of output gains, meaning the broad participation across the economy was actually the best since 2004 (See chart). The only sector seeing a decline was utilities, although a giveback was always in the cards there after colder-than-normal temperatures had boosted the prior month’s output.
Enjoy the detailed discussion and analysis from our team at NBF Economics
A little inflation measured by the Consumer Price Index (CPI) is not a bad thing. The North American central banks being the Bank of Canada (BoC) and the U.S. Federal Reserve (The Fed) manage monetary policy and set interest rates. Both are targeting to manage inflation. The good news is that the U.S. and Canadian monetary policies are aligned and not competing against each other.
How does the Inflation outlook impact interest rates?
The Canadian April employment numbers that were announced last week saw a “Cooling of employment” literally as a colder-than-usual April may have temporarily hurt hiring in some sectors. But the soft headline number doesn’t necessarily mean Canada’s labour market is struggling. Looking longer-term, the April jobs report does nothing to change our view that the labour market remains tight and will continue to fuel inflation pressures this year. As such National Bank Financial Economics Partners continue to call for a July interest rate hike from the Bank of Canada.
The Bank of Canada (BoC) announces to stay the course on April 18th as the Canadian economy manages mixed signals. As widely expected, the Bank of Canada (BoC) left the overnight rate unchanged at 1.25% today. The central bank acknowledged rising core inflation, saying this is “consistent with an economy operating with little slack”. The central bank sees total inflation averaging 2.3% this year.
Today, BoC Governor Poloz maintained its target for the overnight rate at 1¼%. The Bank Rate is correspondingly 1½% and the deposit rate is 1%. Inflation in Canada is close to 2% as temporary factors that have been weighing on inflation have largely dissipated, as expected. A reminder that these interest levels still remain low with interest rates averaging 5.90% from 1990 to 2018 (Source: Trading Economics).
Based on today’s message, a May rate hike looks unlikely at this point. That said, should the “data-dependent” Bank of Canada see upside economic surprises before the meeting of May 30th, e.g. monthly GDP, wage, employment and inflation, a change of stance remains possible. Recall that while the economy is currently at capacity, the overnight rate remains 175 basis points below the estimated neutral rate of 3%.
The core inflationary outlook is closing in on the estimates the Bank of Canada (BoC) has projected. While the target rate of 2% annual inflation may sound modest, overall inflation measures are running above the Bank of Canada mid-point target on a 6-month annualized basis (CPI-Trim at 2.3% and CPI-median at 2.2%). We believe this recent trend will persist reflecting a strong economy and labour market.
Yield Curve Changes in 2018
Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is under long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices and wages. This helps to keep inflation low. Are we in a period of sustained low inflation? It appears as bond market spreads have flattened at the long end of the curve with less than 25 basis points separating 10 years from 30 years maturities a transition is underway. This should alert investors to transitions in the economic cycle.
For a detailed analysis from our partners at National Bank Financial Economics, enjoy this review: https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/economic-news-cpi.pdf
After years of solid job creation, the labour market has tightened as evidenced by a U.S. jobless rate of just 4.1% (a multi-year low) and climbing job openings, both of which point to increases in wage inflation and hence overall inflation. Note that job creation now seems to be tilting towards sectors with higher wage inflation. This past week financial markets took note of the rising interest rates. The employment tracker jumped from 56.3 to 61.6, which reflected the strongest expansion in payrolls since data collection began in 1997. Fifteen of the eighteen non-manufacturing industries grew in the month. As a result, financial markets finally pulled back after over 400 trading days of positive returns. The decline in U.S. financial markets was a large point drop but the only the 100th largest percentage decline. While the financial markets volatility was historic, so too was the unprecedented pace of returns for over 18 months to this week’s point.
Canada’s Economy Softened as the U.S.
Canada’s economy diverted from the tax cut infused growth of the American economy. Our job announcements declined with a slump by 88,000 in January according to the Labour Force Survey. This ended the longest streak job growth for consecutive monthly gains since 2000 (17 months). Due to this drop, the unemployment rate rose one tick to 5.9%. Our economy cooled off in part under the short-term weighted on Ontario’s new minimum wage. Our partners at National Bank Financial Economics February 9th, 2018 discussion offers great detailed analysis.
2017 was a good economic year. “The world’s largest economy, the U.S., seemingly got back its mojo, while export powerhouses such as the Eurozone and Japan are on track to register above-potential growth courtesy of buoyant global trade. Emerging economies too likely grew faster than the prior year thanks to trade but also to stimulative policies. Slightly higher inflation could have some central banks tighten policy somewhat in 2018, although that’s unlikely to be enough to prevent a repeat of this year’s solid growth performance.” Our partners at National Bank Financial Economics offer a balanced view of 2017 and a positive but guarded perspective for 2018.
In Canada, a lot of attention will be on October’s inflation numbers. Given the record low unemployment rate in service-producing industries (hence rising wage pressure), we expect a reversal of the downward trend in service CPI inflation. As a result, headline price could have increased 0.1% m/m (not seasonally adjusted) but, due to the base effect, that may still translate into a small drop in the annual inflation rate to 1.4%. Meanwhile, CPI-common may have gained one tick to 1.6%, in line with recent economic momentum.
For a detailed perspective on current inflation expectations enjoy the detailed perspective from National Bank Financial Group Economics https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/weekly-economic-watch.pdf