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Jack M. Mintz: How uncertainty has played havoc with the real economy – Financial Post



As this decade comes to close, markets are at an all-time high. The Dow Jones index is finishing within sight of 29,000, almost three times its level on Jan. 2, 2010. In part, this reflects the seemingly unstoppable American expansion since the 2008 financial crisis. But two-fifths of the decade’s jump happened from Nov. 8, 2016, to Jan. 22, 2018. During those 15 months the Dow rose 41 per cent.

How come? The U.S. economy obviously didn’t expand by two-fifths. Nor did anyone expect it to. Interest rates didn’t fall — in fact, they stayed flat until the first quarter of 2018 when tighter monetary policy finally started nudging them up. Corporate profits were also pretty flat during that period.

No, the real reason for the super-charged Dow Jones was the shift in investor perception of risks after the election of Donald Trump as U.S. president on Nov. 8, 2016. In the wee hours of election night, after it first became clear Trump had won, the market fell sharply, with investors worried about a very unpredictable president-elect. By morning, however, as investors reassessed the election’s outcome, the Dow reversed itself and began its breathless climb of the next 15 months as the Republicans pushed deregulation and tax reform. Even the U.S. economy was uplifted, with GDP growth hitting close to three per cent and nominal wage growth besting five per cent by 2018, the highest levels since the third quarter of 2014.

Canadians have a very good life even if we seek to do better

Since the first quarter of 2018, however, things have been decidedly less rosy. The Dow has been choppy, rising not much more than 10 per cent since then. The reasons? Shifting monetary policy, a slowing world economy, stalled policy development in a divided Congress and uncertainty from trade disruptive negotiations.

Uncertainty plays havoc with the real economy. If households, businesses and investors perceive more upside than downside risk, they will consume and invest more. If the world looks more than normally uncertain, however, confidence declines. Economic forecasters rarely include uncertainty in their economic models since it relies on what John Maynard Keynes called “animal spirits,” which are not easily measurable.

On the other side of the pond, U.K. economic growth has dropped from an annual rate of 2.1 per cent in the second quarter of 2016 to 1.4 per cent in 2019. The June 2016 Brexit referendum clearly left businesses and investors uncertain about Britain’s future. After Theresa May gambled on an election that led to a minority Conservative government, Parliament was too divided to vote for any outcome to resolve Brexit one way or the other. Uncertainty began to pull the economy down.

This cost of Brexit uncertainty was analyzed recently by France’s Fabien Tripier, who estimated a £16 billion annual loss to the U.K. economy. He calculated the number of media reports that mention “economy,” “politics” and “uncertainty” to develop an index of uncertainty going back 21 years. With these data, he then estimated the impact of this uncertainty on GDP growth, keeping in mind that some shocks to the economy happen immediately (like stock market valuation) while other impacts take time to trend (consumption and investment). What Tripier finds is that instead of the U.K. economy growing 1.9 per cent per year after the 2016 Brexit vote, it should have been growing 2.3 per cent annually.

It is therefore no surprise that Boris Johnson won a large Conservative majority on the promise to get Brexit done. The electorate still remains closely split between Remainers and Leavers, but many voters wanted to see an end to the parliamentary stalemate. Despite uncertainties about the trade talks that will dominate Brexit news in 2020, the FTSE index has risen five per cent since election day, better than the Dow Jones (at just 1.5 per cent).

As for Canada, the TSE index has risen this past decade by 45 per cent, far less than the Dow Jones. And unlike U.S. exuberance since Jan. 1, 2017, the TSE rose by a meagre 1,260 points to 17,120, a total of just eight per cent in three years. Much of this reflects our mixed economic record, which has undermined confidence. The economy has been boosted by U.S. growth but has also been hurt by trade frictions, higher business taxes and regulatory obstacles that have deterred investment, especially in the resource sector. Overall employment has grown by a solid 4.5 per cent since January 2017 although not so quickly in the resource and manufacturing sectors. But nominal business investment has grown only four per cent during this time and remains below where it was in 2014. That compares with 15 per cent growth in the U.S. over the same period.

As for 2020, Canadian growth should continue without a recession this year even if the economy is not booming, especially in the resource-rich provinces. Forecasts are never sure things, however, and a recession, if one arrived, would surely blow a hole in federal and provincial budgets.

As we enter this new decade, we can at least be thankful we do not face a worldwide war or economic depression, as many of our grandparents did almost a century ago now. Canadians have a very good life even if we seek to do better. So to the many readers of this column, I wish you continued good health and success in the coming decade.

Jack M. Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy.

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More signals of a Roaring '20s rebound for Canadian economy when pandemic ends –



Gloomy headlines about the collapse of the Canadian economy, which faced its worst retreat since records began, may have obscured some startling new evidence for a strong rebound.

As we reported on Tuesday, the impact of the COVID-19 pandemic put Canada’s economy into a tailspin, making 2020 the worst year on record, with gross domestic product declining by 5.4 per cent.

But other data out this week, including some buried amidst those latest bleak GDP numbers, tells a different story. It shows that high levels of savings and government income support have bolstered the economic well-being of households — notably among the youngest groups and those with lower incomes.

At the same time, one fresh measure of consumer confidence shows Canadians more willing to go out and spend than at any time since 2018.

It all adds a little more evidence to the widely touted theory that, just like following the 1918 flu pandemic, the Canadian economy is heading for something like the Roaring Twenties — a period of economic, social and artistic innovation as people break out of cabin-fever mode.

Relentless joie de vivre

“What typically happens is people get less religious. They will relentlessly seek out social interactions in nightclubs and restaurants and sporting events and political rallies,” Yale University medical sociologist and physician Dr. Nicholas Christakis said on the CBC Radio program White Coat Black Art earlier this year.

“There’ll be some sexual licentiousness. People will start spending their money after having saved it. There’ll be joie de vivre and a kind of risk-taking, a kind of efflorescence of the arts, I think,” Christakis told host Dr. Brian Goldman.

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Like many others, Christakis in January foresaw the impact of the coronavirus lingering late into 2021, as the World Health Organization suggested herd immunity remained far away. But despite fears of more insidious variants, with a new flood of vaccines and signs of a sharp decline in cases south of the border, others have expressed greater optimism.

“By the time we get to the summer, we’re going to be in a different place,” Dr. Bonnie Henry, British Columbia’s provincial health officer, said last week. “In the coming months, we’re going to be able to do all those things that we have been missing for the last year.”

Bank of Canada governor Tiff Macklem has also weighed in on the side of a rebound beginning this year. Tuesday’s GDP figures showed the economy already starting to recover in the last three months of 2020, but that was before the most recent lockdown.

Despite beginning the year “in a deeper hole,” Macklem has forecast a strong revival in 2021 that would continue into next year, bolstered by the COVID-19 vaccine and low interest rates.

Not just for the rich

One criticism of the Roaring Twenties idea was that poorer households whose jobs have been most affected by the pandemic would be left out. But a report from Statistics Canada released on Monday dispelled some of those fears, demonstrating that the gap between the richest and poorest actually declined in the first nine months of last year.

“Although the everyday experiences of particular households may have differed, on average, the gap in household disposable income between the lowest- and highest-income earners declined,” the Statistics Canada report said.

In March 1929, the well-heeled strut their stuff at President Herbert Hoover’s inaugural ball, at the Mayflower Hotel in Washington, D.C. Before the year was over, the Roaring Twenties would come to an end and the Great Depression would begin. (Library of Congress/Handout via Reuters)

In fact, the data showed that “disposable income for the lowest-income households increased 36.8 per cent, more than for any other households.” Canada’s youngest households saw their net worth rise by 10 per cent. That may be a good sign for the economy once restrictions are reduced because unlike the rich or old, poorer and younger households are in a phase of life that requires them to spend more and save less, recirculating their money into the economy.

Besides government income-support programs, another reason for the increase in well-being is that families across Canada who already owned real estate have seen their wealth increase, even if the amount they owe has stayed the same.

Some studies have shown that “the wealth effect” — in other words, the feeling of being richer — can encourage people to spend more, but if people just sit on their savings, worried about the future, it won’t help the consumer-driven economy.

That’s why other sets of data out this week showing an increased willingness to spend adds a little more impetus to the Roaring Twenties argument.

Consumer-confidence measures use different methodologies to derive their results. The Conference Board of Canada — while seeing a rise in its index for February — still sees a ways to go before reaching pre-pandemic levels.

But a weekly index issued by Bloomberg and Nanos Research seems to show that consumers are ready to go shopping as confidence hits levels not seen since 2018.

If young people feel well-off once the pandemic ends, they’ll want to get out and kick up their heels, spreading money out into the wider community. Data from Statistics Canada shows that during the first nine months of 2020, the youngest households saw their net worth rise by 10 per cent. (Shannon Stapleton/Reuters)

“Anticipation of a vaccination rollout, even if not perfect, may be having a halo effect on the mood of consumers,” company boss Nik Nanos said in a release of his latest data on Monday. “Consumer confidence, as measured by the Bloomberg Nanos Canadian Confidence Index, continues on a positive trajectory and has hit a three-year high.”

Even if Canadians remain more restrained than in the 1920s post-pandemic revival, a new urge to go out and spend will spread the wealth, helping the economy to get back in gear.

Follow Don Pittis on Twitter: @don_pittis

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Australian economy storms ahead as COVID recovery turns 'V-shaped' – The Guardian



By Swati Pandey

SYDNEY (Reuters) – Australia’s economy expanded at a much faster-than-expected pace in the final quarter of last year and all signs are that 2021 has started on a firm footing too helped by massive monetary and fiscal stimulus.

The economy accelerated 3.1% in the three months to December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, higher than forecasts for a 2.5% rise and follows an upwardly revised 3.4% gain in the third quarter.

Despite the best ever back-to-back quarters of growth, annual output still shrank 1.1%, underscoring the havoc wreaked by the coronavirus pandemic and suggesting policy support will still be needed for the A$2 trillion ($1.57 trillion) economy.

The Australian dollar rose about 10 pips to a day’s high of $0.7836 after the data while bond futures nudged lower with the three-year contract implying an yield of around 0.3% compared with the official cash rate of 0.1%.

“The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market,” said Craig James, Sydney-based chief economist at CommSec.

James expects the economy to rebound 4.2% in 2021.

Data on credit and debit card spending by major banks as well as official figures on retail sales, employment and building activity point to a strong start for this year.

Marcel Thieliant, economist at Capital Economics, expects GDP growth of 4.5% in 2021, “which implies that allowing for the slump in net migration due to the closure of the border, the economy will suffer no permanent drop in output as a result of the pandemic.”


Australia’s economy has performed better than its rich-world peers thanks to very low community transmission of COVID-19 together with massive and timely fiscal and monetary stimulus.

Its economic output declined 2.5% in 2020, far smaller than a 10% drop in United Kingdom, falls of 9% in Italy, 5% in Canada and more than 3% in the United States.

“Our economic recovery plan is working, and today’s national accounts is a testament to that fact,” Treasurer Josh Frydenberg said in a news conference. “The job is not done,” he added.

“There are challenges ahead. But you wouldn’t want to be in any other country but Australia as we begin 2021.”

To help blunt the economic shock from the pandemic-driven shutdowns, the Reserve Bank of Australia (RBA) slashed interest rates three times last year to a record low 0.1% and launched an unprecedented quantitative easing programme. The government announced a wage subsidy scheme to keep people in jobs while banks deferred payments on home loans and cut borrowing rates to help boost credit growth.

On Tuesday, the RBA re-committed to keep three-year yields at 0.1% until its employment and inflation objectives are met, which policymakers don’t expect until 2024 at the earliest.

Indeed, Wednesday’s data showed there was barely any domestic-driven inflation in the economy with the biggest price rises coming from commodity exports.

The RBA has repeatedly said the unemployment rate must fall to around 4% from above 6% now to help drive wages growth above 3% and for inflation to pop back into its 2-3% target band.

“Stimulus and support measures are still very much required,” CommSec’s James said. “Spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1%.”

($1 = 1.2780 Australian dollars)

(Reporting by Swati Pandey; Editing by Sam Holmes)

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TSX boosted by better-than-expected GDP data



(Reuters) – Canada‘s commodity-heavy main stock index rose on Tuesday, tracking a rise in oil and bullion prices and as data showed faster-than-expected annualized GDP growth.

* At 9:45 a.m. ET (14:45 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 61.85 points, or 0.34%, at 18,361.47.

* Canada‘s economy grew at an annualized rate of 9.6% in the fourth quarter, beating analyst expectations of 7.5% as a result of a large change in business inventories, Statistics Canada said on Tuesday, while December’s real GDP edged up 0.1%.

* Nine of the index’s 11 major sectors were higher, led by the healthcare sector.

* The energy sector climbed 1.7% as U.S. crude prices were up 0.4% a barrel, while Brent crude added 0.3% ahead of an OPEC+ meeting this week where producers are expected to ease supply curbs as economies start to slowly recover from the coronavirus crisis.

* The financials sector gained 0.6%, while industrials fell 0.3%.

* The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.4% as gold futures rose 0.1% to $1,724.7 an ounce

* On the TSX, 134 issues were higher, while 76 issues declined for a 1.76-to-1 ratio favouring gainers, with 25.43 million shares traded.

* The largest percentage gainers on the TSX were Spin Master Corp, which jumped 24.4% after quarterly earnings report and Aphria Inc, which rose 8.8%.

* Cascades Inc fell 3.5%, the most on the TSX, while the second biggest decliner was Lundin Mining, down 2.3%.

* The most heavily traded shares by volume were Suncor Energy, up 2%; Medipharm Labs, down 20.6%, and Great-West Lifeco, down 0.2%.

* The TSX posted 7 new 52-week highs and no new lows.

* Across all Canadian issues there were 27 new 52-week highs and one new low, with total volume of 55.03 million shares.


(Reporting by Devik Jain in Bengaluru; Editing by Shailesh Kuber)

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