There was more good news today on the housing front. Home sales rebounded by a further 63% in June, returning them to normal levels for the month–150% above where they were in April when the pandemic-induced lockdown paralyzed the economy (see chart below). Data released this morning from the Canadian Real Estate Association (CREA) showed that for Canada’s largest housing markets, activity was strong. Sales rose 83.8% (month-over-month) in the Greater Toronto Area (GTA), 75.1% in Montreal, 60.3% in Greater Vancouver, 99.7% in the Fraser Valley, 54.9% in Calgary, 59% in Edmonton, 22.5% in Winnipeg, 34.8% in Hamilton-Burlington, 67.9% in London and St. Thomas, 55.6% in Ottawa and 43.6% in Quebec City. These m-o-m gains reflect the pent-up demand from what would have been a stellar spring housing season.

On a year-over-year basis, national home sales were up 15.2% in June.

Anecdotal evidence suggests that home sales continued to be robust in the first weeks of July. Daily tracking thus far this month indicates that activity has strengthened further in July.  According to Costa Poulopoulos, Chair of CREA, “realtors across Canada are increasingly seeing business pick back up”.

New Listings

The number of newly listed homes shot up by another 49.5% in June compared to the prior month with gains recorded across the country.

The national sales-to-new listings ratio tightened to 63.7% in June compared to 58.5% posted in May. There were only 3.6 months of inventory on a national basis at the end of June 2020 – a 16-year low for this measure.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) climbed 0.5% in June 2020 compared to May (see Table below). Of the 20 markets currently tracked by the index, 17 posted m-o-m gains.

Generally speaking, prices are re-accelerating east of Manitoba, except Toronto for now. B.C. prices are also picking up except for Vancouver. Home prices are declining in Calgary, while elsewhere on the Prairies, prices are either flat or rising.

As usual, the price movements announced by the local real estate associations (for example, TREB in Toronto) were misleading because they are greatly affected by the types and sizes of housing sold during any month. The MLS® HPI provides a more accurate way to gauge price trends because it corrects for the changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average price for homes sold in June 2020 was almost $539,000, up 6.5% from the same month the previous year.

The national average price is heavily influenced by sales in the Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations cuts more than $107,000 from the national average price. In the months ahead, the extent to which sales fluctuate in these two markets relative to others could have significant compositional effects on the national average price, both up and down.

Bottom Line

CMHC has recently forecast that national average sales prices will fall 9%-to-18% in 2020 and not return to yearend-2019 levels until as late as 2022. I continue to believe that this forecast is overly pessimistic. Here we are in the second half of 2020, and the national average sales price has risen 6.5% year-over-year.

The good news is that the housing market is contributing to the recovery in economic activity. While the course of the virus is uncertain, Canada’s government has handled the COVID-19 situation very well from both a public health and a fiscal and monetary perspective. You only need to look at the debacle south of the border to see how well we have done. The future course of the economy here will depend on the virus. While no one knows what that will be, suffice it to say that Canada’s economy is en route to a full recovery, but it may well be a long and bumpy one.

The Bank of Canada had its first meeting today with Tiff Macklem at the helm. The Bank of Canada said full recovery from the virus would take two years (more on that in the next email).

–DR. SHERRY COOPER

The Bank of Canada under the new governor, Tiff Macklem, wants to be “unusually clear” that interest rates will remain low for a very long time. To do that, they are using “forward guidance”–indicating that they will not raise rates until capacity is absorbed and inflation hits its 2% target on a sustainable basis, which they estimate will take at least two years. As well, they indicate that the risks to their “central” outlook are to the downside, which would extend the period over which interest rates will remain extremely low. The Bank also made it clear that they are not considering negative interest rates. The benchmark interest rate remains at 0.25%, which is deemed to be its the lower bound.

The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

With the benchmark rate at its effective lower bound, the Bank’s quantitative easing is the way it is lowering mid- to longer-term interest rates, reducing the borrowing costs for Canadian households and businesses. The Bank assumes that the virus will be with us for the entire forecast range, which is two years.

The Bank released its new economic forecast in today’s July Monetary Policy Report (MPR). The MPR presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus in Canada or globally.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the most profound decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.

Mincing no words, the MPR acknowledged that the COVID-19 pandemic has caused a “worldwide health-care emergency as well as an economic calamity.” The course of the pandemic is inherently unknowable, and its evolution over time and across regions remains highly uncertain.

In Canada, the number of new COVID-19 cases has fallen sharply from its April high, and the economic recovery has begun in all provinces and territories and across many sectors. Consequently, economic activity is picking up notably as measures to contain the virus are relaxed. The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors (Figure 1 below). As a result, Canada’s economic output will likely take some time to return to its pre-COVID-19 level. Many workers and businesses can expect to face an extended period of difficulty.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

Bottom Line

Governor Macklem said in the press conference that what he wants Canadians to take away from today’s Bank of Canada’s actions is “Canadian interest rates are very low and will remain very low for a very long period”. The reopening of the Canadian economy is well underway. Economic activity hit bottom in April and began expanding in May and accelerated in June. About 1.25 million of the 3.0 million jobs that were lost in March-April, were added in May and June.

Some activities, including motor vehicle sales, have already seen a strong pickup since April. Likewise, housing activity fell sharply during the lockdown but is beginning to recover quickly. In contrast, some of the hardest-hit businesses, such as restaurants, travel and personal care services, have only just started to see improvements in recent weeks and are expected to continue to face significant challenges.

The chart below, from July’s MPR, shows that household spending patterns have shifted since the onset of the pandemic. Some of these shifts might last. In the central scenario, the effects of the downturn and lower immigration hold down housing activity over the next few years. After a near-term boost from pent-up demand, residential investment slowly increases as income and confidence recover.

–DR. SHERRY COOPER

The June Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions as of the week of June 14 to June 20. By that time, public health restrictions had been eased in most parts of the country. Tighter restrictions remained, however, in much of southwestern Ontario, including Toronto. Even though businesses reopened, physical distancing and other requirements reduced the employment impact of the easing lockdown provisions.

From February to April, 5.5 million Canadian workers–30% of the workforce– either lost their jobs or saw their hours significantly scaled back. Yet, nearly 8.2 million Canadians receive the $2,000 per month Canadian Emergency Response Benefit (CERB) payments. Is this a disincentive for some workers to return to work?

The benefits have been recently extended by eight weeks to roughly the end of August, and the NDP is urging Ottawa to continue them until early October. If you earn more than $1,000 per month, you lose the full $2,000 monthly payment, so clearly, this might preclude some from seeking new work or returning to their original employers.

CERB has cushioned the blow of the pandemic on households and helped to boost consumer confidence. Nevertheless, keep it in mind in assessing the speed at which the jobless are returning to work.

Blowout Jobs Report in June

By the week of June 14 to June 20, the number of workers affected by the COVID-19 economic shutdown was 3.1 million, down 43% since April.

Building on an initial recovery of 290,000 in May, employment rose by nearly one million in June (+953,000; +5.8%), with gains split between full-time work (+488,000 or +3.5%) and part-time work (+465,000 or +17.9%). With these two consecutive monthly increases, the total level of employment in June was 1.8 million (-9.2%) lower than in February.

The speed of job recovery has been much faster than in previous recessions, just as the pandemic-induced decline in jobs was more sudden. Men are closer to pre-shutdown employment levels than women in all age groups. The hardest-hit sectors, accommodation, food services, retail trade and personal services are heavily dominated by female employees. The burden of daycare with schools closed likely fell more heavily on women as evidenced by the higher unemployment rate for women with young children.

UNEMPLOYMENT RATE DROPS IN JUNE AFTER REACHING A RECORD HIGH IN MAY

The unemployment rate was 12.3% in June, a drop of 1.4 percentage points from a record-high of 13.7% in May. While this was the most significant monthly decline on record, the unemployment rate remains much higher than in February, when it was 5.6%.

Employment Increases in All Provinces

In Ontario, where the easing of COVID-19 restrictions began in late May and expanded on June 12, employment rose by 378,000 (+5.9%) in June, the first increase since the COVID-19 economic shutdown. The proportion of employed people who worked less than half of their usual hours declined by 6.5 percentage points to 14.1% in Ontario. The unemployment rate declined 1.4 percentage points to 12.2% as the number of people on temporary layoff declined (see table below).

In Toronto, where the easing of some COVID-19 restrictions was delayed until June 24, the recovery rate was slightly below that of Ontario in June. The employment level in Toronto was 89.6% of the February level, compared with 94.5% for the rest of the province (not adjusted for seasonality).

Quebec recorded employment gains of 248,000 (+6.5%) in June, adding to similar gains (+231,000) in May and bringing employment to 92.2% of its February level. At the same time, the number of unemployed people in the province declined for the second consecutive month in June (-119,000), pushing the unemployment rate down 3.0 percentage points to 10.7%. The decline in unemployment in Quebec was entirely driven by fewer people on temporary layoff.

The number of people employed in British Columbia rose by 118,000 (+5.4%) in June, following an increase of 43,000 in May. The proportion of employed people who worked less than half of their usual hours declined by 2.9 percentage points to 14.6%. The number of unemployed in the province was little changed in June, and the unemployment rate edged down 0.4 percentage points to 13.0%.

In the Western provinces, employment increased in Saskatchewan (+30,000) for the first time since the COVID-19 economic shutdown and rose for the second consecutive month in both Alberta (+92,000) and Manitoba (+29,000).

In New Brunswick, the first province to begin easing COVID-19 restrictions, employment increased by 22,000 in June. Combined with May gains, this brought employment in the province to 97.1% of its pre-COVID February level, the most complete employment recovery of all provinces to date.

Employment increased for the second consecutive month in Nova Scotia (+29,000), Newfoundland and Labrador (+6,000) and Prince Edward Island (+1,700).

Sectoral Variation in Job Growth

Those sectors that require proximity of workers to customers (accommodation and food services and retail trade other than online) remained hardest hit by the medically-induced job losses. As well, a high proportion of jobs in both the health care and social assistance and educational services industries involve proximity to others. Employment increased in all of these sectors, but remain well below pre-COVID levels.

Also hard hit was employment in businesses that rely on the gathering of large groups (information, culture and recreation industry). This sector was subject to some of the earliest public health restrictions in the form of the size of gatherings as all provinces continue to limit the number of people allowed to gather in public.

In several services-producing industries—such as wholesale trade, public administration, and finance, insurance, real estate and rental and leasing—fewer than 40% of jobs involve proximity with others. In many of these industries, employment in June was at or near pre-COVID-shutdown levels.

Monthly employment gains were recorded in wholesale trade (+38,000) and finance, insurance, real estate and rental and leasing (+17,000). Employment returned to pre-COVID-19 levels in wholesale trade, while it was 1.0% lower than pre-COVID-19 levels in finance, insurance, real estate and rental and leasing.

In most industries where few jobs require close physical proximity with others, workers have shifted to working from home on a large scale. In finance, insurance, real estate and rental and leasing, 6 in 10 (61.2%) were working from home during the week of June 14, more than double the proportion (28.5%) who usually do so. A larger-than-usual percentage of workers also continued to work from home in professional, scientific and technical services (73.2%) and public administration (53.8%).

After avoiding significant job losses in the first month of the COVID-19 economic shutdown, both the construction and manufacturing industries experienced heavy losses in April, followed by an initial recovery in May.

In June, employment in construction was 157,000 higher than in April, reaching 89.3% of its February level. In the manufacturing sector, employment gains in May and June totalled 160,000, bringing employment to 91.9% of its February level.

In each of the construction and manufacturing industries, both the proportion of people working less than 50% of their usual work hours and the number of people on temporary layoff fell markedly in June. Construction recorded a 53.8% decrease in the number of people on temporary layoff (not adjusted for seasonality).

Bottom Line 

This was an unambiguously strong jobs report, and we will likely see a continued rebound in employment as long as the economy can open further. Undoubtedly, however, Canada’s economy is still digging itself out of a deep hole, and some jobs are gone for good. But new sectors are growing rapidly as the pandemic accelerated the technological forces that were already in train. I expect to see strong job growth in the following new and burgeoning areas: telemedicine, big data, artificial intelligence, cloud services, cybersecurity, 5G, driverless transportation and clean energy. Online shopping will also continue to proliferate as Canadians have learned to use delivery services and online retail.

These new jobs require training and a high degree of expertise. Those who have suffered permanent job losses will need to adapt. What we do not want to see is government programs that slow the rate of adaptation or support businesses that are no longer viable. Support for those most in need with little likelihood of adaptation will remain necessary.

–DR. SHERRY COOPER

Finance Minister Bill Morneau presented his fiscal snapshot this afternoon. Most economists were expecting a budget deficit of roughly $260 billion. Instead, the government announced a deficit for the fiscal year 2020-21 of $343.2 billion–close to 16% of GDP. That compares to the $34.4 billion deficit projected before the pandemic.
A big chunk of that additional deficit can be attributed to the $212 billion in direct support measures the federal government is providing to individuals and businesses. The deficit was initially estimated at C$256.2 billion by the Parliamentary Budget Officer, the country’s budget watchdog. The discrepancy reflects lower tax revenue, an eight-week extension of CERB and the wage subsidy increase.

Aside from the pandemic program spending, the economic slowdown is estimated to have added another $81.3 billion to the deficit in 2020-21, driving spending levels to their highest since 1945. The recession has also taken a toll on revenue, which will drop as a share of the economy to the lowest since 1929.

The prime minister argued the economy would be in much worse shape were it not for the government’s response, in part to thwart the need for households to take on more debt. “We made a very specific and deliberate choice throughout this pandemic to help Canadians, to recognize that overnight people had lost their jobs,” Trudeau told reporters in Ottawa. “We decided to take on that debt to prevent Canadians from having to do it.”

To be sure, the government can finance the debt at a much lower cost than households. Long-term interest rates for the government of Canada are at record lows–below the rate of inflation. The ten-year GOC yield is 0.56% and the 30-year bond yield is just a tad over 1.0%. In consequence, the interest cost to the government of the rising debt burden is very modest.

In addition, the vast majority of the temporary surge in Ottawa’s new debt is being absorbed by the Bank of Canada in its bond purchases. While the BoC’s holdings of federal government debt as a share of its total securities holdings has risen abruptly from less than 14% at the start of the year to around 27% now, that’s still below the share of domestic government debt held by central banks in Japan, Germany and Sweden, for example. Canada’s overall public sector net debt remains moderate among major economies, and especially when compared to the U.S., Britain, or the Euro Area.

GDP DECLINE

The Canadian economy is projected in the report to shrink by 6.8% this year before bouncing back by 5.5% next year, making this crisis the worst economic contraction since the Great Depression. The economy is expected to decline in FY2020-21 more than twice as much as it did in FY2009-10 in response to the global financial crisis.

Between February and April, 5.5 million Canadians either lost their jobs or saw their work hours significantly reduced. Those losses pushed the unemployment rate to 13.7% in May — the highest rise on record — from a pre-crisis low of 5.5% in January.

Finance Minister Bill Morneau said that without government pandemic programs, the GDP would have contracted by more than 10% and unemployment would have risen by another 2 percentage points.

DEBT STRATEGY

The government now projects debt will rise to 49.1% of GDP in the fiscal year that started April 1, up from 31.1% last year. In his speech, Morneau didn’t provide any forecasts beyond 2020 or provide any indication of future fiscal plans other than to say Canada will continue to hold its low-debt advantage relative to other major economies. That status is facilitated by historically low interest rates, with public debt charges actually declining as borrowing costs fell.

“We, the collective we, will have to face up to our borrowing and ensure it is sustainable for future generations. Canada’s debt structure is prudent, it’s spread out over the long term, and it compares well to our G-7 peers,” the finance minister said. “And we will continue to make sure this is the case in the months and years to come.”

Federal government spending, along with the deficit, is poised to hit all-time highs as a share of GDP outside of World War II. Program expenses will surge 69% to C$592.6 billion, or 27.5% of GDP. That figure has averaged about 15% in the past half-century.

That includes a cost of C$80 billion for the main income support program — the Canada Emergency Response Benefit, or CERB. One change in Wednesday’s documents is a top-up of almost C$40 billion in the government’s wage subsidy program to C$82.3 billion. The numbers suggest the government anticipates transition Canadians from the C$2,000-per-month cash support beginning in September.

BOTTOM LINE

The government has asserted bragging rights as having the most comprehensive fiscal response to the pandemic in the G20 (see chart below).

The fiscal snapshot states, “Canada’s strong fiscal position going into the pandemic has allowed the government to implement an ambitious economic response plan by international standards. Direct fiscal support measures alone represented over 10% of Canada’s GDP, relative to 6.7% on average for G7 countries, with the bulk of support directed at individuals and households. In comparison, the U.S. plan also devotes a large share of direct support to individuals and households but to a lesser extent than Canada. Beyond its total size, which is among the most significant in the G7 and the G20, Canada’s plan is also among the most comprehensive, covering a broader range of measures than most plans announced in peer countries. Canada is notably one of the few countries that has announced both a national program to provide commercial rent assistance for small businesses and forgivable credit to SMEs.”

Let us hope that the government does not consider restraint measures until it is certain that the pandemic has been contained and the economic recovery is on firm ground. The last thing we need right now is tax increases, which many people fear will be the outcome of all of this red ink. Much of the one-time fiscal costs will roll off as the economy recovers. it is essential, however, that we avoid supporting businesses that are no longer viable in a post-pandemic world. We also want to assure that the CERB and other income supports do not discourage people from returning to work that is available.

The government did not forecast beyond the current fiscal year. Given the uncertainty surrounding a possible second wave of the virus and the timing of a vaccine, that forecast would be highly unreliable. Morneau will get back to us with an update in the fall.

–DR. SHERRY COOPER