This week has a very busy economic calendar and it will tell us a lot about the state of the Canadian economy, federal finances and the scope of additional fiscal stimulus.
On Tuesday, Statistics Canada will publish the national accounts for the third quarter and monthly real GDP for September. This starts the Deloitte Economic Advisory quarterly forecast cycle, which we will have done about two weeks later. The preliminary estimate for September provided by the statistical agency is for a 0.7% month-on-month gain. That puts the tracking for the third quarter at a stunning annualized gain of 48%, which would mean that roughly three-quarters of the contraction in the second quarter will have been reversed during the summer. That’s great news, but it is also looking in the rear-view mirror. We know that the loss of the reopening effect and the impact of the second wave means that the recovery is losing momentum and a renewed contraction is a distinct possibility.
I would expect that the preliminary estimate for October will be close to flat and that we are likely to see a contraction in November due to the impact of renewed government restrictions. However, it won’t be like March and April. So far, the degree of lockdown has been far less. Yes, people are being told to limit their gathering and trips to stores, but retail outlets are generally still open. Bars, gyms and restaurants will be suffering deeply again. Certain regions, such as parts of the Greater Toronto Area, are also facing restrictions. However, the economic impact will be limited since people in affected areas can drive to places where non-essential businesses are open.
The weakness in November will show up in next Friday’s Labour Force Survey, which I suspect will show the loss of around 55,000 jobs and record an increase in the unemployment rate to above 9%.
The headwinds on the economic recovery will be reflected in Monday’s federal government fall economic and fiscal update. There is little doubt that the fiscal deficit for the current fiscal year and next fiscal year will be greater than reported in July. For example, I would not be surprised by a deficit around $375 billion in 2020-21, up from $343 billion. The deficit next year will be significantly smaller, as emergency programs are wound down, but we could still see a deficit in the $100 to $150 billion range. The federal government’s net debt-to-GDP ratio will have soared from around 30% to above 50%. This will still be low by international standards, but the pandemic and the policy response adding up to a massive fiscal toll. If one adds in the provinces, the combined federal and provincial debt-to-GDP ratio will be close to 90%, which is much less favourable when making international comparisons.
The fiscal update document is likely to be exceptionally long, as there will be a summary of previously announced measures, such as expanded unemployment benefits and extension of the wage subsidy. However, the focus should be on any new stimulus measures. The policy actions should reflect some of the promises made in the Speech from the Throne. This will likely include the booking of funds to help hard-hit industries, which is all the more important given the strength of the second wave. It is likely, however, that some of the large investments signaled in the Speech from the Throne, like a national investment in early learning, may be put off to the federal budget next spring.
Despite the fiscal deterioration, I do not expect any new tax measures and the government has been clear that it will not be providing any guidance on fiscal rebalancing or any commitment to fiscal targets. This will provide fodder to the official opposition. The federal actions to secure the much-awaited vaccine will be trumpeted, but the opposition parties will focus on the prospects that Canada may be slower than other countries to receive the vaccine.
The bottom line is that although Canada had a stronger-than-expected rebound during the economic reopening that started in May, the near-term outlook is dominated by downside risks. The renewed government restrictions in Canada’s major trading partners and at home could cause the recovery to stall. The loss of US government income support is also a threat to America’s economic recovery. In my mind, the debate is whether the recovery stalls or whether there is a temporary renewed contraction.
However, and I cannot stress this enough, the outlook 6-9 months down the road has brightened. We know a vaccine with high effectiveness is coming. It is only a matter of time. That should help shore up consumer and business confidence during the second wave. Moreover, once the health risks diminish, there is scope for the economic recovery will surge ahead as pent-up demand is unlocked and savings are channeled into spending.
It is truly a glass half empty or glass half full economic environment. The former is the immediate downside risks, the latter is the prospects of an end to the pandemic.
Just to be complete, there is a host of international reports next week as well. In the US, there will be the ISM manufacturing report on Tuesday, ISM services report on Thursday, employment reports and durable goods orders on Friday. The data is uniformly expected to show slower economic growth. There is also a host of Federal Reserve speeches on the docket. We will also get purchasing manager reports in Europe and Asia. Chile will report retail sales, manufacturing and copper production on Monday, as well as the Chilean central bank economic activity index on Tuesday.
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