It is easy to understand why investors are resoundingly positive about the economic outlook this year. But are markets pricing in too much optimism?
The reopening of the US government’s spending spigots has fuelled the bullishness. President Joe Biden is pushing for a $1.9tn relief package on top of the $900bn bill passed in late December. Something in the ballpark of $1.5tn is now expected, or nearly 7 per cent of gross domestic product, according to Goldman Sachs.
Vaccine distribution is also accelerating, with the US now inoculating more than 1m people per day. The approval of the Johnson & Johnson jab could further bolster supplies, adding about 30m doses by early April and 100m by the end of June, according to Barclays.
The bank has raised its real US GDP growth forecast for 2021 to 6.3 per cent. Goldman, Morgan Stanley and NatWest Markets have recently upped their own predictions, as has research firm Oxford Economics. Its economists now expect a 5.9 per cent expansion in 2021, nearly 2 percentage points higher than their January estimate.
The reassessments have bolstered bets that Treasury yields and inflation expectations are heading higher. A sell-off in US government debt gained pace this week sending yields on 30-year bonds above 2 per cent for the first time in a year, having hovered around 1.6 per cent as recently as November. And the 10-year break-even rate, a measure of expected inflation derived from the difference between interest rates on benchmark bonds and inflation-linked debt, spiked to its highest level since 2014, at 2.2 per cent. In September, it languished below 1.7 per cent.
After such an enormous market move, “the nagging doubts begin”, says Robert Tipp, chief investment strategist at PGIM Fixed Income.
It is clear the list of credible risks is long. “It is hard not to be pretty optimistic looking out,” says David Riley, chief investment strategist at BlueBay Asset Management. But “it sounds horribly complacent, which makes me worried”.
New, more easily transmissible Covid-19 variants pose the most obvious potential threat to the recovery. Preliminary reports that show the suite of coronavirus vaccines so far approved are not as effective against the South African strain are particularly worrisome, investors say.
“The spread of the variant really is competing with the rollout of the vaccine, and that is where the risk is,” says Alicia Levine, chief strategist at BNY Mellon Investment Management.
The second issue centres around the consumer. Olumide Owolabi, a fixed-income portfolio manager at Neuberger Berman, has hinged his call for outsized growth in large part on expectations that once Americans can venture out, they will rush to spend the stockpile of savings many accumulated since the start of the pandemic. This pent-up demand will also feed into higher inflation, he says.
But what if consumers are more circumspect or the opportunities to spend are more limited than prior to the pandemic?
“We don’t really know how people are going to respond,” Riley says. “We could have a situation where we have a significant relaxation of restrictions within countries, but a tightening of travel between countries. For some [places] with big tourist sectors, that will have quite a big impact.”
If people are not spending freely by summer, Owolabi warns, the expansionary cycle he expects will be upended. “Timing is key,” he says.
The US Federal Reserve is highly sensitive to these risks, according to Tipp, who cites the central bank’s “heavy handed” reminders about the enormous ground to be made up before it will consider adjusting its policy stance.
Powell doubled down on this message on Wednesday, warning that America was “very far from a strong labour market” and that any temporary burst in inflation this year would be “neither large nor sustained”. Richmond Fed president Thomas Barkin, meanwhile, told the Financial Times this week that he sees deflationary pressures ahead.
Tipp reckons 10-year Treasury yields will slip back to 1 per cent by year end, a far cry from the 1.6 per cent or higher level some strategists have pencilled in.
“You are getting to a point where [the market] is already pricing in an unrealistic pace of Fed hikes,” he says, referencing the 2023 timeline endorsed by many investors. “The [reflation] trade is over. We are just in the overshoot, and the question is, how far is it going to go?”
Given the extraordinary support being provided by both the Biden administration and the US central bank, it could be quite a long time until reality catches up.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
