Postmortem: Pandemic value(s)

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, unpacks the week in economics.

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All over but the crying

Statistics Canada reported June 30 that gross domestic product (GDP) fell 0.3 per cent in April, the first monthly drop since the COVID-19 recession bottomed a year earlier.

The decline was actually a pleasant surprise for most Bay Street forecasters, as they had predicted the third wave of the pandemic would take a bigger toll. Instead, GDP is tantalizingly close to where it was at the onset of the crisis.

Statistics Canada’s flash estimate of May GDP, based on incomplete survey data, anticipates another 0.3-per-cent decrease. But with vaccination rates climbing quickly, that could be the last negative reading for a while. To be sure, the Delta variant of COVID-19 is cause for concern; otherwise, there appears to be little standing in the way of one of the strongest periods of growth the country has ever seen this summer.

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The following chart offers a snapshot of where we’re at. It’s an index of the rate of change of GDP along with a handful of industries. The severity of the crisis very much depends on what Canadians chose to do for a living.

Pandemic values

Canada is a rich country. The past decade presented it with a glorious opportunity to leverage that wealth, as interest rates spent much of that time closer to zero than ever before. So what did we do with that never-before-seen opportunity? Buy houses, mostly.

It’s a problem. One of the reasons Canada’s productivity rate is so poor is because the country is plowing too much of its wealth into an unproductive sector. Yet policy-makers have created a system that incentivizes home ownership, stoking demand where there is plenty already. The following chart shows the change in GDP since 2009, and the share of that total represented by select industries. The lines speak for themselves. 

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Wage restraint

There were more shocking inflation numbers last week. Statistics Canada reported on June 30 that its Industrial Product Price Index surged 16.4 per cent in May from a year earlier, the biggest increase since 1980.

Commodity prices moderated in June, and the Bank of Canada remains confident that the burst of inflation this spring will be temporary, so the worst could be over. The test will be the extent to which producers are willing to absorb higher input costs, and whether workers begin demanding higher wages to compensate for an increased cost of living. 

It’s difficult to get a good read on what’s going on with wages because so many people remain unemployed. Most of the jobless occupied the lower rungs of the pay spectrum, so the current pool of workers consists of people who tend to earn relatively higher salaries. That makes year-over-year comparisons difficult.

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The following chart consists of the average weekly pay in various industries that were mostly unaffected by social distancing, so the pool of workers available to those sectors probably was little changed by the crisis. To reduce even more noise, it compares monthly changes in average weekly pay over two years instead of one, since year-over-year readings might be skewed by the broad economic collapse that immediately followed the first wave.

The chart is far from the final word on inflation, but there is little obvious wage pressure outside of construction.

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V-shaped recovery

Exports wobbled in April, as a big increase in the value of the loonie shaved the return on goods priced in U.S. dollars, Statistics Canada said on July 2. 

Still, the 1.6-per-cent drop from March didn’t change the bigger story, which is that exports are helping the recovery, not hurting it. Exports were lacklustre following the Great Recession, robbing the economy of one of its most important engines. That partly explains why business investment also was weak, as the two are tightly correlated. So it wouldn’t be surprising if executives started deploying more capital, adding to the tailwind that is pushing the economy towards a strong second half. 

“We see strength across the board,” Anthony Caputo, chief executive of Brampton, Ont.-based Can Art Aluminum Extrusion LP, a maker of specialized automotive parts, told FP Economy. “There’s going to be lots of global expansion, lots of North American expansion.”

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Gravitational pull

The United States will always be the destination for most of Canada’s exports: the gravitational pull of an economy that big and that close is simply too strong. 

But the world economy’s centre of gravity is shifting to Asia, where growing middle classes in China and elsewhere are generating growth that the advanced economies of Europe and North American simply can’t match. Asia’s relative success at controlling containing COVID-19 has accelerated that trend, so much so that even Canada’s notoriously risk-averse exporters are getting pulled into the action.

The following chart is an index of the rate of change of merchandise exports to select countries since the start of the crisis (Zero = January 2020). The U.S. and overall trade are essentially the same, since Canada generates about 70 per cent of its export income from south of the border. Americans remain great customers, but something is happening on the margins. 

Financial Post

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