Talking Points

January 22, 2021 | 13:25

Here Comes the Sum

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

It’s only appropriate that, in a week of historic import, financial markets were mostly a sideshow, with little net movement overall. True, global equities took a peek at all-time highs before receding Friday, but record stock prices have become almost de rigueur in recent months. Treasury yields were roughly flat after the early-year fireworks, although Canadian 10s backed up on less-dovish comments by the BoC than were widely anticipated. Oil prices rinsed and repeated last week’s movement by rising mid-week above $53, but fading late. That, and perhaps the cancellation of the Keystone XL permit by President Biden, kept the Canadian dollar in check even as other currencies mostly firmed and the BoC sounded somewhat optimistic.

With the new President sitting behind the desk, and the new Senate in their seats, market attention has now swung fully to the prospects for further fiscal moves. Last week’s opening bid of a $1.9 trillion stimulus package (a cool 9% of U.S. GDP) has already been questioned by a variety of (relatively moderate) Republican Senators, with most concerns surrounding the enormity of the proposal and its debt implications. Even former Treasury Secretary Larry Summers—typically a big fan of stimulus—suggested that such a massive package may be a bit more than required, given that the economy is operating roughly 3%-to-4% below trend. And, recall, this proposal comes immediately after a hefty $900 billion package (more than 4% of GDP) was approved at the end of 2020. It may not be unreasonable to allow some of that wave of spending to flow through the economy before immediately determining a second dose is required. Still, incoming Treasury Secretary Janet Yellen urged Congress to “act big” at this week’s testimony.

Regardless of any doubts around the wisdom of another blast of spending, the likelihood of some further support has prompted us to nudge up our U.S. forecast yet again for this year. As detailed in Focus, we are lifting the estimate for GDP growth by half a point for both 2021 (to 5.0%) and 2022 (to 4.0%). To be clear, the near-term growth backdrop remains squishy soft, and the entire upgrade falls into later quarters. We continue to believe that the U.S. will struggle to post any growth in the current quarter amid various restrictions and cooler spending. The late-year slide in retail sales and the more recent back-up in jobless claims point directly to a stalling of momentum at the turn of the year. Still, there are just enough signs of resiliency, notably in manufacturing and housing, to keep growth on the positive side of the ledger in Q1. And the combination of some loosening of restrictions and rising stimulus is likely to fuel a pop in activity in the spring.

In studied contrast to the upgrade of our U.S. call, the Canadian forecast is grinding lower. While there has been a mildly encouraging pullback in new virus cases recently across much of the country, tighter restrictions are still biting. There is also the cold reality that the vaccine rollout has been languid, and a hiccup in new supplies suggests the pace will remain sluggish. This week’s Monetary Policy Report from the BoC called for an outright drop in Q1 GDP, and we can’t disagree owing to the above factors—we now look for a 3% annualized pullback. While we continue to maintain that activity will rebound with purpose as restrictions are lightened—and remain stubbornly at the high end of consensus—our estimate of full-year growth has been shaved two ticks to 4.8% (the BoC says 4.0%). But what is taken away from this year is giveth to 2022, and we have upgraded next year’s call to a matching 4.8% pace (same as the BoC, as it turns out).

One curiosity of these forecast revisions is that we now have the U.S. growing a touch faster than Canada this year (5.0% vs 4.8%). True, that spread is not at all notable on its own. But, it follows a year in which Canadian GDP “growth” ran a full 2 percentage points behind the U.S. (-5.5% vs -3.5%), and at least some catch-up may have been a reasonable expectation. After all, there has only been one other year in the past two decades when there was such a wide gap between the relative growth rates (during the 2015 oil shock, when Canada lagged by 2.4 ppts). And there have been only five such gaps in the past 60 years. But it’s notable that there was persistence in each and every one of those five cases—that is, if the U.S. outpaced Canada by more than 2 points in year one, it continued to grow somewhat faster in year two.

What explains this groaning and ongoing growth gap in North America? We have tilled this ground before, but, as a quick recap, part was due to the industrial structure of the economies (Canada’s overweight in hard-hit oil, the U.S. overweight in thriving tech). Yet there’s also the fact that U.S. restrictions on activity (or at least the adherence to such) have been consistently lighter, acting as less of a drag on activity. The counterpoint is that the U.S. health outcomes have also been consistently more negative. Ultimately, if a big part of the growth gap is in fact due to tougher restraints in Canada, then it follows directly that when such restraints loosen there will be a period of sustained catch-up by the Canadian economy. Not to put too fine a point on it, but the domestic economy will fly… eventually.

There were few top-tier economic releases this week, and the major ones on hand in North America offered a mixed snapshot. The overall message from the slate of Canadian figures was that activity was solid when and where things were open, but was dented elsewhere. A prime example was the offsetting message from a very robust November retail sales result (up 1.3% m/m and 7.5% y/y), but a big step back in the flash estimate for December wholesale trade (-1.7% m/m). New restrictions really only began to bite in late November and through December; much as the earlier employment figures suggested, we are thus likely to see a series of surprisingly upbeat figures give way to a slate of downbeat stats.

Make no mistake, any weakness in forthcoming data is a direct result of the new imposition of restraint measures, and not some sign of an unwillingness to spend. It is staggeringly obvious from the furious rebound in housing and the V-shaped recovery in retail sales that consumers are only too willing to spend where they are able. Just as one takeaway factoid, Canadian retail sales outside of autos and gasoline were up a towering 13.5% y/y; prior to 2020, the previous high on this metric in the past 25 years was a gain of just over 8%. Put us squarely in the camp that believes growth will recover rapidly and forcefully when the health crisis recedes.