Higher Inflation or Higher Rates?

Two interesting and conflicting headlines on inflation and rate hikes came out recently. One suggests that the BOC will wait on rate hikes until later than expected to stimulate recovery, while another says that the BOC will hike earlier than anticipated to head off persistent inflation. Let’s dig in.

Millan Mulraine of the OTPP (Ontario Teachers’ Pension Plan) was quoted in Bloomberg espousing the former views. David Wold, a portfolio manager for Fidelity Investments was quoted in the Financial Post expressing the latter view. Mulraine sees hikes coming not in 2022, but in 2023, thus ensuring a “full economic recovery” that is “self-sustaining”. Mulraine sees inflation, and a good amount of it – more so than expected. Other economists at TD and National Bank see rate hikes at the end of 2022, slightly sooner than Mulraine’s trajectory. All of their analysis revolved around the timing of when the economy recovers the output that was lost from COVID – and thus when rates no longer need to be ultra-low.

Wold, on the other hand, is more anxious about inflation and supply chain issues. He sees these problems persisting for some time longer than the BOC expects, and thus views a rate hike in 2022 as a must. Wold believes the BOC’s models do not sufficiently take into account the structural changes in the economy COVID has created (serious labour distortions and very challenging supply chain problems). Wold also argues that “spare capacity” and potential increased consumption the BOC is counting on is being soaked up by higher prices. Wold is counting on hikes coming earlier than expected. The disagreement between these two analysts is an interesting example of a growing lack of consensus on the BOC’s inflation and rate predictions from experts.

How is Canada’s Economy Doing?

Overall, we’re holding fast. August saw 90,000 jobs created across the country (when lockdowns are lifted, jobs come back, when they’re imposed – we lose employment). Our unemployment rate is at the overall historic average, more or less, at about 7.5%. If one were to broaden the definition of unemployment to include those who are ‘underemployed’ – or want to work more hours but can’t – the real rate of ‘labour underutilization’ is at around 15%. This underscores the impact of COVID. The CBC recently reported on ‘labour underutilization’, a rarity for mainstream media.

Some parts of the economy are still slowly recovering from COVID – retail, restaurants, small business, and hospitality. Others are going ahead at full steam (tech., services, fintech.). Amazon Canada recently announced it was raising the average wage of its frontline workers to just under $22 an hour, and that it was in the process of recruiting 15,000 new workers across Canada. The company is also going to pay for up to 95% of the tuition of many of its workers in Canada, as it is increasingly doing so in the U.S., as part of its Career Choice program.

The really big news though, is that there are over 800,000 job vacancies in Canada. This is staggering considering the levels of unemployment and underemployment in the country. Labour shortages are being felt across all regions of the country and in a wide range of economic sectors, from restaurants, to hospitality, to primary industries, the list goes on. Job vacancies increased 22% from May to June, and will likely continue to do so. The business lobby complains that COVID related government benefits and supports are the cause, as people are making more money collecting these benefits than working – especially working part-time.

On The Bank of Canada’s Latest Thoughts (on the economy and interest rates) Part II

Inflation took up a lot of the statement, as was expected. Let’s summarize what the BOC said. First, they acknowledged that the inflation rate exceeds their band. It’s not at a level they’re comfortable with. They then point out that the big driver was gasoline prices, which collapsed at the onset of COVID, and have now returned to their more historic norm – this had a very big impact on the CPI. The BOC continues this point, arguing that many other prices which fell from a drying up of demand when COVID hit rebounded, taking another hit to the CPI metric. And finally, they then point to the international supply chain situation (bottlenecks, shortages, logistical issues, border closures, lack of raw materials, pullbacks in production, etc.). They point out that the overall supply chain complication had a big and fast impact on prices.

Overall the Bank’s logic and argument is strong and well thought out. They humbly admit that “we expect the factors pushing up inflation to be temporary, but their persistence and magnitude are uncertain, and we will be watching them closely.” This is an important sentence. The key point the Bank is making is that high gas prices, price rebounds, and supply chain concerns will all more or less go away by the second half of 2022, when they expect inflation to return to 2%. This is the big question. Finally, the BOC says that their bond purchasing program, or QE, will continue until the economy goes back to more normal growth and inflation subdues.

We can’t underscore how important this statement is, and how important the BOC’s next steps will be. If their analysis holds, we’ll have low rates continue, growth and inflation normalize, and a very comfortable landing from the difficulties of COVID. If their analysis and decision making is off, and if the boat is rocked, we may be in for some ongoing and longer term financial and economic difficulties. Fingers crossed.

On The Bank of Canada’s Latest Thoughts (on the economy and interest rates) Part I

In this blog, Tembo will dig into the BOC’s latest major statement to the media and the public from mid July, to try to understand the Bank’s analysis of the macro-economic situation Canada finds itself in. What the Bank does in the coming months and years will be crucial to how our economy and society fares at this point of our history.

First and foremost, the BOC is very optimistic and confident of medium to long term economic recovery. The Bank sees the worst of COVID behind us. It cites the overall resilience of the economy and the high efficacy of vaccines as key pillars of stability and strength. Despite these positive forces, the BOC still expresses some uncertainty over how ‘smooth’ the recovery will be, the course of the virus, and how international economic, virus, and financial conditions change. They have no crystal ball, and they don’t pretend that they do. The BOC does point to strong U.S. economic growth and stimulus, along with oil prices recovering as key forces which will benefit Canada and uplift economic growth here.

The BOC sees consumption as being the key domestic driver of recovery: “Some of the sectors hit by lockdowns, including retail, restaurant, and other hard-to-distance sectors, are already seeing a rebound, while others, like business and international travel, may take longer to recover.” The BOC makes the important point that there’s still half a million jobs that must be regained for us to return to pre-COVID levels, but also says that many businesses have optimistic plans to return to full capacity soon. The expectation is that we’ll recover those jobs as people continue to engage economic sectors most hit by COVID (restaurants, retail, bars, services, etc.)

The BOC remains confident that the rest of this year and all of 2022 will see strong, consistent, and sustained economic growth. If the BOC is correct, GDP will go up 6% this year, 4.5% next year, and just over 3% in 2023 – marking a healthy period of recovery ahead. Let’s hope they’re correct, we continue with Part II.

Stay Positive But Be Mindful of Inflation

The latest Canadian inflation figures are out and are the highest in a decade at 3.4%. Similar data release in the U.S. shows inflation rising above 4%. The increase in April set a new pandemic-era high for the third time in as many months and was the highest reading since May 2011, when the consumer price index posted a year-over-year gain of 3.7 per cent. Gasoline prices in April were up 62.5 per cent on a year-over-year basis, the largest annual increase on record as prices at the pumps rebounded from an 11-year low in April 2020. The consensus, for now, is that this inflation is temporary, and that it will subside – but this remains to be seen. If more people start going back to work and if the economy re-opens, that could open up a flood of activity that will exacerbate inflation – we will see.

In response to this, BOC Governor Macklem had the following to say: “There are far too many Canadians unemployed, and that is putting downward pressure on inflation. So, yes, we expect it to go up to around three (per cent) and then diminish thereafter.” But Macklem also warned that rates will have to go up eventually, a big change of tune from a couple of months ago – when the BOC said that low rates would remain for years to come. Here’s what he said on rates: “Interest rates have been very low, and at some point they are going to go back up.” South of the border in the U.S., where money printing has been more intense and inflation spikes more poignant, banks are raising red flags on the long term stability of the U.S. dollar.

At the same time, the BOC is voicing more anxiety over the quality of mortgage debt that has been issued over the pandemic: “The quality of new mortgage borrowing deteriorated during the pandemic. The share of newly issued mortgages with a loan-to-income (LTI) ratio above 450 per cent rose substantially in the second half of 2020.” But at the same time, the BOC is again pointing to the importance of higher real estate prices: “”If house prices and household incomes were to fall in the future because of a shock to the economy, some households could need to cut back on spending. This would slow the economy and possibly put stress on the financial system.”

A Welcome Economic Respite From a Cold COVID Winter

February was a solid month for job growth in Canada and Ontario. While we gained over 250,000 jobs nationally, Ontario gained 100,000 jobs. Over 20,000 youth jobs were created in Ontario, and over 40,000 of the jobs were gained by women. COVID-19 cost Ontario 1.1 million jobs from its onset in early March to the beginning of recovery in May. Over the last 9 months of recovery, Ontario has recovered 829,000 jobs. As Tembo has reported, another big piece of positive economic news is that almost 30,000 MORE people work in manufacturing in Ontario than they did before the onset of COVID – it’s not just real estate that’s resilient in these parts.

Ontario’s unemployment rate is now 9.2%, a bit higher than the national average, but well below its COVID peak of some 14%. Most sectors saw gains, from accommodation, to utilities, to retail trade and food services. Many more urban areas gained jobs than lost them, and rural Ontario overall has generally fared well compared to urban centers. throughout the pandemic. Ottawa and London saw the most gains at +13,000 and +4,000 respectively. It’s important to note that London’s economy has consistently created jobs month over month for nine months, underpinning that region’s resilience and attractiveness. The cities that did worse were Toronto, which lost almost 40,000 jobs (shutdowns), and St. Catharines/Niagara (dependent on tourism). Quebec did even better than Ontario, gaining over 113,000 jobs. Jobs were gained in British Columbia, Alberta, and Manitoba. Newfoundland saw some modest declines.

All of these figures are available on StatsCan. As long as cases don’t skyrocket and lockdowns aren’t implemented again, it is likely that these positive economic trends will continue, and that recovery will accelerate – fingers crossed!

Introducing the Ontario Small Business Support Grant

The Ontario Government has recently unveiled a grant to support businesses that have been forced to close or restrict their operations due to the recent lockdown. The grant ranges from a minimum of $10,000 up to $20,000 in support. It can be accessed at ontario.ca/covidsupport. Tembo encourages its readers who have businesses who have been impacted to check out the site and see if they qualify for the grant. Businesses must demonstrate they experienced a revenue decline of at least 20 per cent when comparing monthly revenue in April 2019 and April 2020. The program will financially support a variety of businesses, including restaurants, retail and personal care services. It will help them pay their bills and meet their financial obligations so they can continue to employ people and support their local communities once it is safe to do so. This time period was selected because it reflects the impact of the public health measures in spring 2020, and as such provides a representation of the possible impact of these latest measures on small businesses.

Once the application is successfully submitted an eligible business can expect to receive payment within approximately 10 business days. Applications with incomplete or incorrect information, or that require additional review, will experience a delay and will not receive payment within 10 business days. The province also recently announced that it would extend the off-peak rate of hydro electricity charges to people until February 9th. This off-peak rate extends to 24 hours a day, and is one way the province is supporting people through COVID-19, especially given the impact of stay at home orders and the need to work from home. Another reason to check out the ontario.ca/covidsupport site is to see if one qualifies for the $1,000 PPE grant – to help businesses with the costs of buying the PPE and cleaning supplies they needed to comply with provincial orders.

There are other supports too. The Ontario Small Business Support Grant is just one of a number of these supports available to businesses during the pandemic, such as $600 million available in rebates to help offset fixed costs such as property taxes and energy bills, and grants to help cover the cost of personal protective equipment. Eligible business owners can apply for all of these supports through a single, hassle-free application.

What Will a Biden Administration Mean for the Canadian Economy?

COVID has put tremendous pressures on Canada’s economy and on our public and private balance sheets. Long term economic recovery and job creation will be a key policy objective for Canadian leaders. Given that over 70% of our national trade is done with the United States (over 80% of Ontario exports go to the United State), what happens in the U.S. will have dramatic impacts on Canada’s economic recovery and prosperity. With the election of Joe Biden over and done and his inauguration completed, Tembo will outline what some of the new Administration’s economic and trade policies could be.

Keystone XL

It now seems a done deal that Joe Biden will cancel the construction permit for the Keystone XL pipeline. The pipeline would have transported crude oil from Alberta to southern U.S. refineries. The project was supported by President Trump and is backed by a number of powerful Canadian political and business forces. News of the cancellation evoked strong responses from Premiers Kenney and Moe of Alberta and Saskatchewan. Keystone would have stimulated Alberta’s battered energy industry, and the pipeline would have contributed to some job creation. Premier Kenney views a cancellation as a move that would reduce North American energy independence and bilateral ties.


President Trump and his Administration did not shy away in using the powers of the U.S. Federal Government to unleash protectionist policies against sectors of the Canadian economy; including dairy, steel, aluminum, and lumber. The naive view is that these kinds of actions will cease altogether under a new and Democratic Administration. This is unlikely. Now U.S. Senate Majority Leader and New York Democrat Chuck Schumer wrote a letter demanding the Trump Administration impose sanctions against the Canadian dairy industry – likely to appease Democratic voters in key battleground agricultural states like Wisconsin, Michigan, and Iowa. Protectionism will not completely disappear under a Biden Administration.

Spending and the U.S. dollar

The Democrats have already unveiled a $1.9 trillion stimulus plan, with a $1,400 cheques to all Americans. This stimulus plan will place added pressure on the dollar, and will continue to force the Federal Reserve to continue its policies of ultra low interest and money printing. Higher rates on all of this debt would have serious repercussions to balance sheets. These forces of low rates and money printing will continue to weigh down on the Canadian dollar by forcing the Bank of Canada to keep its rates low. Although the Biden stimulus plan will likely have a difficult time of passing with ease, it represents just one portion of the multi trillions the U.S. has been spending to fight COVID and keep its economic system afloat.

The good news is that the new Administration is staffed by liberal internationalists, who are less likely to espouse nationalistic protectionism, and who are surely eager to position the U.S. as being warmer and friendlier to its Allies and partners. We will see how this new Administration wields the power it holds (as it controls the White House, the Senate, and the House of Representatives).

How is the government paying for all of its COVID spending?

A question many of you might have asked yourselves, and a question many Canadians are sure to be pondering. As many of us are aware, the federal government alone is set to spend almost $350 billion this year to manage the impact of COVID-19. The deficit could reach $400 billion in a worst case scenario of continued difficulties and unexpected negative surprises.  The answer is very simple, but worth considering. Obviously, the federal government doesn’t have $400 billion sitting around. The deficit will be accommodated through the bond market and by the Bank of Canada. The federal government will issue bonds that will be sold on the open market to domestic, international, and institutional investors. Whatever people, businesses, pension funds, companies, and foreigners don’t want will be bought up by the Bank of Canada. The Bank will print money to buy the bonds issued to facilitate the borrowing. In this sense, the Bank of Canada’s importance to our country and economy will only grow. Not only are their low interest rates supporting cheap debt, a strong property market, and easy access to credit for most, but now their bond purchasing will be critical to the country in getting out of the COVID mess. As many of us are aware, the federal government alone is set to spend almost $350 billion this year to manage the impact of COVID-19.

One must keep in mind though, that the provinces and municipalities are also loading up on debt to get through COVID. Like Ottawa, the hope is that whatever bonds aren’t bought by people and investors will be purchased by the Central Bank. Ontario touched upon this in their 2020 budget. With the province projecting an over $35 billion deficit, the bond market’s appetite for the Ontario bonds was strong enough for the government to project no major difficulties in getting the funds it needs to operate. Provincial bonds are a well respected financial product that is usually in high demand. British Columbia’s provincial bonds are the most highly rated in the country, as that province has low debt, a strong economy, huge natural resources, and a geographical position and outlook that’s favourable (access to Asia). Provinces like Alberta and Saskatchewan, which traditionally had triple AAA provincial bonds, have seen their scores fall given the collapse of commodity prices. Overall, there have been no red flags on the issue of demand for provincial or federal bonds. They’re being bought up, one way or another.

The big risk is that with all of this activity from the Central Bank, inflation will begin to rise. We’re already seeing it for the price of many commodities – steel, cement, lumber, machine parts. The supply chain issues brought on by COVID haven’t helped in this regard. If inflation does begin to pick up, the central bank will be trapped, as it can’t raise rates (we all depend on cheap debt), and higher rates would simply squeeze government capacity to borrow as debt servicing costs would spiral out of control. Inflation in food and basic commodities generally perpetuates when the money supply (money velocity) picks up. This hasn’t happened as most of the inflation we’ve seen has been soaked up by businesses, governments, or through asset prices, and not in the day to day goods we consume, so it hasn’t been a problem. While inflation is beginning to pick up, the good news is that government’s understand that this deficit spending is unprecedented and will have to be reduced in the coming years.

Six Straight Months of Job Growth

These are difficult times for all of us. Negative news jams the airwaves, and everyday a new challenge presents itself. The world is waiting anxiously for a vaccine for COVID even as case numbers rise and the death toll continues its upward climb. There’s light at the end of the tunnel but there’s more tunnel for us all to trudge through nonetheless. In an ocean of bad news, Tembo would like to outline some positive economic and financial news that’s accumulated in the last several days.

First, Statscan released its job numbers for the month of November. The results are positive nationally and provincially. Ontario gained over 36,000 jobs, while the national gain was over 60,000. This marks the sixth straight month of job gains for our province. COVID-19 cost Ontario 1,150,000 jobs, a huge hit to our economy. We’ve regained over 905,000 of the jobs we’ve lost. In addition, we’ve gained over 145,000 manufacturing jobs in Ontario in those six months, this takes total manufacturing employment to over 13,000 above our pre-COVID levels – a very impressive and positive feat. Keep in mind that there’s significant investment expected in the auto manufacturing sector in the next few years, over $5 billion. Ford, GM, and FCA (Fiat Chrysler). All of these firms have tentatively negotiated big plant investments with Unifor (the union that represents autoworkers). In one case, Ford is going to reconstruct the Oakville Assembly plant to build electric vehicles and GM is set to reopen its now closed Oshawa plant.

All of this manufacturing investment will have huge spin off implications, and will see smaller manufacturers increase hiring and invest more to service the production. And that’s just a snapshot of auto manufacturing, a small piece of the manufacturing puzzle. Despite all the ‘doom and gloom’, there’s lots of positive news out there. With these job gains, Ontario’s unemployment rate has fallen from 9.6% to 9.1%. There’s more. Further statistics showed that the household savings rate is up as people tighten their belts and put money aside. 3rd quarter GDP in Canada rose at its fastest rate in history, and national statisticians all noted the positive upswing and contribution the nation’s red hot real estate market has had on the overall economy. So, there’s a bit to smile about. Stay safe!