Ahead of this week’s Bank of Canada decision on interest rates, I read lots of notes advising me that a cut was needed because economic growth had stalled in the fourth quarter, meaning there was no momentum with which to confront the headwinds coming from COVID-19.
They made sense, and the central bank clearly agreed, since it decided to slash its benchmark rate by a half-point.
But indicators of resiliency aren’t always treated the same way. On March 6, I read notes that advised readers to ignore the labour market’s latest show of strength because the data are based on a survey from early February, before the coronavirus became a present danger to the North American outlook.
There isn’t a big market for evidence of potential resilience right now. The narrative is a negative one, and positive indicators are easily discounted. In this environment, stagnant gross domestic product three months ago is more meaningful to some people than evidence of brisk hiring about three weeks ago.
“Canada ended the last of the pre-virus jobs reports with a flourish, as a strong month for employment and a healthy wage gain showed that everything was fine in the labour market … then,” Avery Shenfeld, chief economist at CIBC World Markets Inc., said after Statistics Canada reported the economy added about 30,000 jobs in February.
There is every reason to think that hiring will slow, and probably even decline in the months ahead as the coronavirus spreads in Canada.
Web Summit Intelligence Ltd., which organizes the annual Collision technology conference, on March 6 said this year’s event, scheduled for Toronto in June, will instead be held online. Hosting a massive gathering in the cloud is creative, but it requires fewer support workers. The cancellation will rob the city’s hotels and restaurants of thousands of visitors, and kill the sort of networking that leads to promotions and higher salaries.
There will be more announcements like that one, maybe many more. But at least they will pare Canadian employment from a high level. The employment rate of Canadians aged 25 to 54 first cleared 83 per cent in October 2018 and it hasn’t fallen below that mark since. The youth participation rate — workers aged 15 to 24 — is hovering around 65 per cent, the highest since 2011. The monthly Labour Force Survey’s measure of average hourly wages increased about four per cent from the previous year for the ninth consecutive time in February. That’s roughly twice the rate of inflation and the strongest in more than a decade.
“Canada’s labour market seems to be holding up well despite lingering headwinds and growing concerns about the coronavirus,” said Arlene Kish, director of Canadian economics at IHS Markit, a data and research firm.
Bank of Canada Governor Stephen Poloz also made that point this week when he spoke at an event in Toronto. His thoughts on the coronavirus got most of the attention, but the bulk of his speech was about the surprising strength of the labour market given all that has afflicted the Canadian economy in recent years. There are weak spots, particularly Alberta, which is still struggling to recover from the collapse of oil prices at the end of 2014. But “when you look at all the indicators, you can see that the labour market has been, and continues to be, a source of resilience for the Canadian economy,” Poloz said. “A solid, secure job is the primary bases for consumer confidence and household spending, which is the primary engine of the growth of any economy.”
Other indicators are less robust. GDP grew at an annual rate of only 0.3 per cent in the fourth quarter. The central bank predicted that outcome, but mixed up the reasons for it. Policy-makers assumed household debt would slow domestic spending, while exports and business investment would improve with the calming of the trade wars. Instead, trade remains a drag on growth.
Statistics Canada on March 6 also reported that non-energy merchandise exports dropped 2.1 per cent in January from December, the fourth decline in five months. Imports of industrial machinery and equipment, a proxy for business investment, increased one per cent, only the third monthly gain since January 2019. “Business investment does not appear to be recovering as was expected following positive trade policy developments,” the Bank of Canada said when it cut interest rates this week.
Fortunately, consumer spending rebounded from a sluggish third quarter, as wages and employment powered through the trade headwinds. The latest hiring numbers suggest momentum continued into the new year. Technology companies are rapidly expanding, driving strong local economies in the biggest cities. Quebec’s jobless rate in February plunged to 4.5 per cent, by far the lowest on records that date to the mid-1970s.
Finance Minister Bill Morneau on March 6 told an audience in Toronto that he was prepared to do what it takes to prop up the economy through the COVID-19 crisis. There’s nothing he can do to spur demand for exports, and business investment will remain limp until the horizon clears. But fiscal policy can easily and quickly replace lost income or backstop smaller companies that might otherwise be forced to fire people for lack of business. Domestic demand powered Canada’s economy through much of last year, and it probably could continue to do so if backed by fiscal stimulus and lower interest rates.
Yes, pre-virus hiring is “old news,” but very good news all the same.
Financial Post
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