April 29, 2022 | 12:54
And the Calls Come Tumbling Down
The statisticians certainly have a delicious sense of timing. Just as recession chatter was beginning to take hold and dominate many client conversations, the U.S. BEA drops an estimated 1.4% contraction of Q1 GDP into the mix. Never mind that it came loaded with a bevy of caveats: that final domestic demand rose at a decent 2.6% annual rate, that total hours worked were up 3.4% a.r., and that GDP is still up a sturdy 3.6% y/y. Despite all that, it was only the second quarterly decline in the past 10 years, aside from the two-quarter plunge at the start of the pandemic. (That other quarterly decline was during the great growth scare of 2014 Q1. Don’t remember that one? Neither does anyone else. The economy rose at almost a 4% pace over the next four quarters; i.e., it was meaningless noise.) Still, a negative is a negative; while the focus had been on a coming cooldown, even the rearview mirror suggests activity was challenged.
Markets had little trouble looking beyond the quirky GDP result—we dubbed it a “false negative”—as stocks had their best session of the month the day of the release, while yields nudged up, and the big dollar continued to rip. Even so, it prompted us to shave U.S. growth expectations for all of this year and next, which we were priming to do even before the weak Q1 result. In part due to the meek Q1 outcome, and in part due to the coming dampening impact of aggressive Fed rate hikes, we have clipped this year’s GDP estimate to 2.5% (from 3.0%) and shaved next year’s to just 1.7% (from 2.3%). These revised figures encircle the economy’s 20-year average growth rate of roughly 2%, reflecting the fact that output was almost back to “normal” by late 2021.
The U.S. was certainly not the only major economy dealing with a listless start to 2022. Today’s Euro Area Q1 GDP estimate revealed modest 0.8% annualized growth, a bit below consensus and a bit below the mild 1.2% Q4 advance. After previously lopping a full percentage point from our 2022 call, in the wake of the invasion of Ukraine, we will maintain our full-year estimate of 2.5% (curiously, the same as the U.S.). However, the risks are clearly skewed lower, with inflation a piping hot 7.5% in April for the region, and amid the ongoing threat to its energy supply. Aside from the Euro Area, others reporting cool Q1 GDP this week included South Korea (2.8% a.r., versus 4.0% for all of 2021), Mexico (1.6% y/y vs. 4.8% in 2021) and Sweden (-1.6% a.r., vs. 4.6% last year).
We have also previously taken a hatchet to our GDP estimate for China, reflecting both rolling lockdowns and roaring commodity prices. Even with a somewhat better-than-expected outcome for Q1 (4.8% y/y), we have clipped our call for the full year to 4.5% (versus the official goal of 5.5%). The Politburo rolled out a series of proposals today aimed at supporting growth, but we suspect the headwinds facing China are now simply too intense to go much above our revised estimate.
Reflecting this week’s U.S. revision and earlier trims to Europe and China, we now look for global growth of 3.3% this year and next. Those figures are a classic case of glass half-full, half-empty. On the half-full side, 3.3% is remarkably close to the global economy’s long-run average growth rate (we consider anything between 3% and 3.5% to be “normal”), and is clearly a long way from recession. But on the half-empty side, the estimate is also a big slowdown from last year’s hot 6.1% bounceback, it’s a bit below the latest IMF estimates, and it’s more than 1 percentage point below our call at the start of the year (for 2022). Simply put, we looked for a more complete reopening to drive above average global growth, further filling in the hole created by the 2020 lockdowns. Alas, that is not to be, either this year or next.
Amid this dreary growth backdrop, one economy is quietly going the other way. In what may well be a first for 2022, we have revised up a GDP estimate—for none other than Canada. Growth came in even better than the initial take for February, and March’s flash read was also solid, pointing to Q1 annualized growth of 5.5%. That landed well above our prior estimate of 4.0% (and the BoC’s 3.0%), plus the solid hand-off from March points to a small upgrade to our Q2 view as well. As a result, we now see the economy growing by just over 4% this year, versus 3.5% previously, and maintaining a sturdy 3% pace next year—both well in excess of potential growth of less than 2%.
What explains this counter-move by the Canadian economy? Overall, it’s no huge surprise—the latest IMF projections noted that Canada was one of the select few which did not see a downward revision since the invasion of Ukraine. One readily obvious explanation is that Canada produces much of what Russia produces, and has seen its basket of resource prices roar. The Bank of Canada’s commodity price index, for example, is up 28% just since the start of the year. A little less obvious is the fact that, with the loonie largely treading water this year, this commodity surge has turned into a bonanza for producers. In Canadian dollar terms, the BoC’s index is off the charts, and nearly double the median level of the past 20 years.
Also a little less obvious is that Canada’s economy is still playing catch-up with the U.S. after two years of more extensive and intensive restrictions. The rollicking gains in a variety of reopening sectors in February and March speak to that catch-up effect. Think of it this way: In the first eight quarters of the pandemic (from 2020Q1 to 2021Q4), the U.S. economy managed to grind out 3.1% growth, while Canada eked out a mere 0.1% (i.e., just returning to pre-pandemic levels by the end of last year). In the 15 years before the pandemic, the two economies had an identical annualized growth rate (of 1.8%). Even if we assume the U.S. has a slightly firmer growth potential (of say 0.2-0.3 ppts per year), that still leaves Canada with plenty of possible catching up to do on the growth front over the next two years—roughly a combined 2.5 percentage points. And, it just so happens that our forecasts, of 4.1% this year and 3.0% next year, will be a combined 2.9 ppts north of our new U.S. calls. The extra little oomph could be explained by the boost from soaring commodity prices.
Given the notably cooler global growth backdrop, perhaps it’s appropriate to draw a quote from The Big Chill, on the Canada/U.S. revised growth call: “There’s a certain symmetry to that.”
Realizing that this comes a week after the fact, but I was simply in too much shock last Friday on the news of the passing of Guy Lafleur. He was arguably the NHL’s best player in the 1970s, a decade that was first dominated by Orr and Esposito, before Bobby Clarke led the Broad Street Bullies, and ended with Wayne Gretzky bursting onto the scene. But through it all, the Canadiens won no less than six Cups that decade, in large part due to Lafleur’s brilliance. And the news came just days after the passing of one of the best players in the 1980s, Mike Bossy, and due to the same terrible cause.
Today also happens to mark the last day of the NHL regular season, with the playoffs set to start Monday. Notably, only one of the four semi-finalists from last year made it this year, with the Habs and Islanders both coming up short after heroic runs in 2021. But of course the team for economy watchers to focus on is clearly the Leafs. We have previously shown how the Bank of Canada is notably much more hawkish in the (rare) years that the Leafs make progress in the playoffs—which may explain how we got to zero rates in recent years. Obviously, with the Bank now fully primed to hike aggressively, the Leafs too are on the verge of a break-out this spring… right?