As sections of the global economy tip-toe toward reopening, it’s becoming clearer that a full recovery from the worst slump since the 1930s will be impossible until a vaccine or treatment is found for the deadly coronavirus.
Consumers will stay on edge and companies will be held back as temperature checks and distancing rules are set to remain in workplaces, restaurants, schools, airports, sports stadiums and more.
China — the first major economy consumed by the virus and the first to emerge on the other side — has been able to revive production but not demand. The lesson for other economies: it’ll be a stop-start path back toward normal.
There’s also the risk of new flare ups. Some 108 million people in China’s northeast region have been put back under varying degrees of lockdown amid a new cluster of infections. Doctors there are also seeing the coronavirus manifest differently, suggesting that it may be changing in unknown ways.
In South Korea – where the virus was controlled without a hard lockdown — consumer spending remains weak as infections continue to pop up.
Sweden’s highly contested response left much of the economy open, yet the country is still headed for its worst recession since World War II.
That means global policy makers — who have already announced trillions of dollars of fiscal and monetary support — will need to keep the stimulus flowing to avoid yet more company failures and job losses. Federal Reserve Chairman Jerome Powell has warned that a full recovery will need to wait until the scientists deliver, a warning echoed by his Australian counterpart.
“If we don’t get breakthroughs on the medical front, then I think it’s going to be quite a slow recovery,” Australia’s central bank chief, Philip Lowe, said this week. “We’ve got a lot resting on the shoulders of the scientists here.”
Harvard University professor Carmen Reinhart, who is the incoming chief economist of the World Bank, had a similar message. “We’re not going to have something akin to full normalization unless we (a) have a vaccine and (b) — and this is a big if — that vaccine is accessible to the global population at large,” she told the Harvard Gazette.
With global infections topping five million and a death toll of over 330,000, there’s an air of desperation for good news on either a vaccine or effective anti-viral.
Shares in Cambridge, Massachusetts-based Moderna Inc. hit a record on Monday on early data from a small trial of the company’s coronavirus vaccine. It gave up some of those gains in later days as investors weighed the early nature of the vaccine data.
A survey of money managers by Bank of America Corp. found the biggest tail risk is a second wave of the virus that means restrictions will have to be imposed again. Only 10% expect a rapid rebound, the bank said in a note titled “V is for Vaccine”.
The race for a cure has a geopolitical edge too. U.S. President Donald Trump has vowed a Manhattan Project-style effort dubbed “Operation Warp Speed” to develop a cure, while China’s President Xi Jinping has pledged to make one universally available once it’s developed.
The fusion of when successful drugs can be found and when economies can get back to normal is dominating sentiment in financial markets.
“There is a global bounty on the virus,” said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London. “I don’t see how it is wiser for investors to bet on the virus than to bet on science, technology, and unlimited political and financial capital in the world to contain and defeat the virus.”
Health experts caution that the process for developing an effective immunity will take time – possibly years. And even then it will need distribution on an unprecedented scale, according to Anita Zaidi, Director of Vaccine Development and Surveillance at the Bill & Melinda Gates Foundation.
“I am optimistic we can develop a vaccine by the end of 2020,” she said during a discussion hosted by Bloomberg New Economy. “I am not very hopeful that we can deploy a vaccine for mass use by the end of 2020 because of the unprecedented scale needed to immunize the whole world.”
Deutsche Bank AG economists are working on the basis that a vaccine or a cure won’t be widely available for the next year and a half.
In the meantime, the cogs of global commerce are in limbo. The International Monetary Fund has warned the “Great Lockdown” recession would be the steepest in almost a century. More than 1 billion workers are at high risk of a pay cut or losing their job, the International Labour Organization warned in April. World merchandise trade volume is likely to fall “precipitously” in the first half of 2020, according to the World Trade Organization.
Critically, consumer confidence is shattered. One example: U.K. retail sales dropped by almost a fifth in April.
Bloomberg Economics estimates the lockdowns triggered a drop in activity of around 30% and their research found that the first steps to relax controls will have a more positive impact on activity than later ones.
Central bank chiefs, who have had to resort to considering scenarios instead of hard forecasts, are staying in crisis mode.
Powell has pledged to keep using the Fed’s tools. The Bank of Japan, in an emergency meeting on Friday, launched a new lending program worth 30 trillion yen ($279 billion) to support small businesses as a key inflation gauge slid below zero in April for the first time in more than three years. India’s central bank cut interest rates in an unscheduled announcement on Friday to their lowest since 2000.
While the world waits for a vaccine, workers employed in areas like tourism will need to be reskilled and shifted to where there’s demand, a process that will take time, said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings.
“Without a medical solution, either a vaccine or effective therapy, persistent behavior change would lead to large structural shifts in the economy,” he said.
Big employers are already adapting to the new, new normal. Facebook Inc. plans to hire more remote workers in areas where the company doesn’t have an office, and let some current employees work from home permanently. JPMorgan Chase & Co. expects to keep its offices half full at the most for the “foreseeable future.”
The circuit breaker to all of this would be a scientific breakthrough, said Torsten Slok, Deutsche Bank Securities Chief Economist.
“A vaccine would change everything,” he said.
Canadian regulator lifts banks’ capital buffer to record, priming for post-pandemic world
Canada‘s financial regulator raised the amount of capital the country’s biggest lenders must hold to guard against risks to a record 2.5% of risk-weighted assets, from 1% currently, in a surprise move that could pave the way for them to resume dividend increases and share buybacks.
The new measures, which take effect on Oct. 31, is a sign that the economic and market disruptions stemming from the coronavirus pandemic have abated and banks’ capital levels have been resilient, the Office of the Superintendent of Financial Institutions (OSFI) said in a statement.
But the regulator acknowledged that key vulnerabilities, including household and corporate debt levels, as well as asset imbalances caused by steep increase in home prices over the past year, remain.
In a sign of concern about the housing market, OSFI and the Canadian government raised the benchmark to determine the minimum qualifying rate for mortgages, starting June 1.
The increase in the Domestic Stability Buffer (DSB) to the highest possible level raises the Common Equity Tier 1 (CET1) capital – the core bank capital measure – to 10.5% of risk-weighted assets; a 4.5% base level, a “capital conservation buffer” of 2.5%, and a 1% surcharge for systemically important banks, plus the DSB.
The change “gives OSFI more leeway to loosen a restriction down the road, namely the freeze on buybacks and dividend increases,” National Bank Financial Analyst Gabriel Dechaine said.
OSFI felt it was “useful for the banks to understand what our minimal capital expectations are and to give them time to adjust to that… ahead of any lifting of the temporary capital distribution restrictions,” Assistant Superintendent Jamey Hubbs said on a media call.
Even with the higher requirement, Canada‘s six biggest banks would have excess capital of about C$51 billion, dropping from C$82 billion as of April 30, according to Reuters calculations.
That was driven in part by a moratorium on dividend increases and share buybacks imposed by OSFI in March 2020, although a pandemic-driven surge in loan losses has so far failed to materialize.
The Canadian banks index slipped 0.25% in morning trading in Toronto, while the Toronto stock benchmark fell 0.1%.
The increase is the first since the last one announced in December 2019, which did not come into effect as planned in April 2020, as OSFI made an out-of-schedule change https://www.reuters.com/article/canada-mortgages-regulation-idUSL1N2B636J that dropped the rate to 1% in March. It has maintained that level at its twice yearly reviews.
Prior to that, OSFI had raised the required level by 25 basis points at every twice yearly review since it was introduced at 1.5% in June 2018.
($1 = 1.2326 Canadian dollars)
(Reporting By Nichola Saminather; Editing by Marguerita Choy and Jonathan Oatis)
Canada Economic Indicators
The economic indicators used to gauge the performance of an economy and its outlook are the same across most nations. What differs is the relative importance of certain indicators to a specific economy at various points in time (for instance, housing indicators are closely watched when the housing market is booming or slumping), and the bodies or organizations compiling and disseminating these indicators in each nation.
Here are the 12 key economic indicators for Canada, the world’s 10th-largest economy:1
Statistics Canada, a national agency, publishes growth statistics on the Canadian economy on monthly and quarterly bases. The report shows the real gross domestic product (GDP) for the overall economy and broken down by industry. It is an accurate monthly/quarterly status report on the Canadian economy and each industry within it.2
Employment Change and Unemployment
Key data on the Canadian employment market, such as the net change in employment, the unemployment rate, and participation rate, is contained in the monthly Labour Force Survey, released by Statistics Canada. The report contains a wealth of information about the Canadian job market, categorized by the demographic, class of worker (private sector employee, public sector employee, self-employed), industry, and province.3
Consumer Price Index
Statistics Canada releases a monthly report on the consumer price index (CPI) that measures inflation at the consumer level. The index is constructed by comparing changes over time in a fixed basket of goods and services purchased by consumers. The report shows the change in CPI monthly and over the past 12 months, on an overall and core (excluding food and energy prices) basis.4
International Merchandise Trade
This monthly report from Statistics Canada shows the nation’s imports and exports, as well as the net merchandise trade surplus or deficit. The report also compares the most current data with that for the preceding month. Exports and imports are shown by product category, and also for Canada’s top ten trading partners.5
Teranet – National Bank House Price Index
This composite index of house prices across Canada was developed by Teranet and the National Bank of Canada and represents average home prices in Canada’s six largest metropolitan areas. A monthly report shows the change in the index monthly and over the past 12 months, as well as monthly and 12-month changes in Canada’s six and 11 largest metropolitan areas.6
RBC Manufacturing Purchasing Managers’ Index – PMI
Released on the first business day of each month, this indicator of trends in the Canadian manufacturing sector was launched in June 2011 by Royal Bank of Canada, in association with Markit and the Purchasing Management Association of Canada. RBC PMI readings above 50 signal expansion as compared to the previous month, while readings below 50 signal contraction. The monthly survey also tracks other information pertinent to the manufacturing sector, such as changes in output, new orders, employment, inventories, prices, and supplier delivery times.7
The Conference Board’s Consumer Confidence Index
The Conference Board of Canada’s Index of Consumer Confidence measures consumers’ levels of optimism in the state of the economy. It is a crucial indicator of near-term sales for consumer product companies in Canada, as well as an indicator of the outlook for the broad economy since consumer demand comprises such a significant part of it. The index is constructed on the basis of responses to four questions by a random sampling of Canadian households. Survey participants are asked how they view their households’ current and expected financial positions, their short-term employment outlook, and whether now is a good time to make a major purchase.8
Ivey Purchasing Managers Index – PMI
An index prepared by the Ivey Business School at Western University, the Ivey PMI measures the monthly variation in economic activity, as indicated by a panel of purchasing managers across Canada. It is based on responses by these purchasing managers to a single question: “Were your purchases last month in dollars higher, the same, or lower than in the previous month?” An index reading below 50 shows a decrease; a reading above 50 shows an increase. Panel members indicate changes in their organization’s activity over five broad categories: purchases, employment, inventories, supplier deliveries, and prices.9
Canada Mortgage and Housing Corporation (CMHC) issues a monthly report on the sixth working day of every month, showing the previous month’s new residential construction activity. The data is presented by region, province, census metropolitan area, and dwelling type (single-detached or multiple-unit). The indicator is an important gauge of the state of the Canadian housing market.10
This key indicator of housing activity is compiled by the Canadian Real Estate Association (CREA) and is based on the number of home sales processed through the MLS (Multiple Listing Service) Systems of real estate boards and associations in Canada. The monthly report from the CREA shows the change in home sales across Canada, as well as for major markets, from month to month. The report also includes other important housing-related information, such as the change (as a percentage) in newly listed homes, the national sales-to-new listings ratio, months of housing inventory, the change in the MLS Home Price Index, and the national average price for homes sold within the month.11
Statistics Canada releases a monthly report on retail sales activity across Canada, with changes shown on month-over-month and year-over-year bases. The headline number shows the percentage change in national retail sales on a dollar basis; the percentage change in volume terms is also shown. The retail sales figures are shown by industry and for each province or territory, and provide insights into Canadian consumer spending.12
The building permits survey conducted monthly by Statistics Canada collects data on the value of permits issued by Canadian municipalities for residential and non-residential buildings, as well as the number of residential dwellings authorized. Since building permit issuance is one of the very first steps in the process of construction, the aggregate building permits data are very useful as a leading indicator for assessing the state of the construction industry.13
The Bottom Line
The 12 economic indicators briefly described above show the health of key aspects of Canada’s economy: consumer spending, housing, manufacturing, employment, inflation, external trade, and economic growth. Taken together, they provide a comprehensive picture of the state of the Canadian economy.
Canada adds jobs for fourth straight month in May
Canada added 101,600 jobs in May, the fourth consecutive month of gains, led by hiring in the education and health services sector as well as in professional and business services, a report from payroll services provider ADP showed on Thursday.
The April data was revised to show 101,300 jobs were gained, rather than an increase of 351,300. The report, which is derived from ADP’s payrolls data, measures the change in total nonfarm payroll employment each month on a seasonally-adjusted basis.
(Reporting by Fergal Smith; Editing by Alex Richardson)