Operational changes announced by the Bank of Canada this week mean the pace of expansion of its balance sheet is set to slow. The Bank’s assets have surged by $420bn, or 350%, since February, a rise equivalent to 18% of GDP. The pace of expansion picked up last week, but the big picture remains that it has been on a downward trend since early April. In the past four weeks, the Bank has purchased an average of $12bn of government debt securities per week, through both its Government Bond Purchase Program (GBPP) and because it has been taking a higher-than-normal 40% of the bonds and bills offered by the government at primary auction. The Bank announced this week that it will henceforth only take 20% of the bonds and bills offered and, in any case, as the worst of the crisis is behind us the government’s debt issuance will decline as well. The Bank also announced this week that it is reducing the share of provincial bills that it buys at primary auction from 40% to 20%, and we would not be surprised if it soon trims some of its other programs. While these changes mean the pace of balance sheet expansion will slow further, our expectation that the Bank will continue its main asset purchase program for at least the next 12 months suggest its asset holdings will nevertheless continue to increase.
- Operational changes announced by the Bank of Canada this week mean the pace of expansion of its balance sheet is set to slow. The Bank’s assets have surged by $420bn, or 350%, since February, a rise equivalent to 18% of GDP. The pace of expansion picked up last week, but the big picture remains that it has been on a downward trend since early April. (See Chart 1.) In the past four weeks, the Bank has purchased an average of $12bn of government debt securities per week, through both its Government Bond Purchase Program (GBPP) and because it has been taking a higher-than-normal 40% of the bonds and bills offered by the government at primary auction. The Bank announced this week that it will henceforth only take 20% of the bonds and bills offered and, in any case, as the worst of the crisis is behind us the government’s debt issuance will decline as well. The Bank also announced this week that it is reducing the share of provincial bills that it buys at primary auction from 40% to 20%, and we would not be surprised if it soon trims some of its other programs. While these changes mean the pace of balance sheet expansion will slow further, our expectation that the Bank will continue its main asset purchase program for at least the next 12 months suggest its asset holdings will nevertheless continue to increase.
- Output and activity indicators imply that GDP rose by 4% to 5% in May.
- Consumption indicators imply that retail sales returned to pre-virus levels in June.
- Business indicators show that small business confidence continues to rebound.
- External indicators suggest that trade volumes are recovering only slowly.
- Labour market indicators revealed that employment rebounded by near one million in June.
- Inflation indicators showed a big rise in inflation in June.
- Financial market indicators show the Bank of Canada continues to expand its balance sheet.
Chart 1: Weekly Change in Bank of Canada Balance Sheet ($bn)
Source: Bank of Canada
- GDP plunged by 11.6% m/m in April, taking the total fall since February to 18% (2). Stats Can also said that its preliminary data point to a 3% m/m rebound in May. We would not be surprised to see a stronger gain of 4% to 5%, given the large rebounds in the activity indicators that have since been released (3).
- Restaurant visits across the four most populous provinces increased in June as restrictions were further lifted, but have since showed signs of plateauing in July (4). The number of domestic aircraft movements has risen by 185% since early April, suggesting that, while international travel restrictions remain in place, Canadians are increasingly on the move again within the country (5).
- The Ivey all-economy PMI jumped to 62.9 in June, confirming the evidence from the other data and surveys that the rebound in activity has started strongly (6). The potential for a second wave of the coronavirus remains a risk to the outlook. Although the number of new daily cases of Covid-19 per million people remains far lower in the US, it has been increasing so far this month (7).
Chart 2: GDP ($bn, 2015 prices)
Chart 3: May Activity Indicators (% m/m)
Chart 4: OpenTable Restaurant Visits
Chart 5: Aircraft Movements
Chart 6: Ivey PMI* & GDP
Chart 7: Covid-19 New Daily Cases Per Million
Sources: Refinitiv, Capital Economics
- Retail sales jumped by 18.7% m/m in May, although that still left them 20% below their pre-virus level. As gasoline prices rose strongly in May, sales volumes increased by a lesser but still substantial 17.8% (8). There has been a sharp divergence in the performance of different retail sectors since February. Clothing sales remain 68% below their February level, while food and beverage sales are now 8% higher (9).
- Consumer confidence has risen further since June. While it still seems consistent with annual retail sales growth of -6% (10), Stats Can said alongside the release of the May retail sales data that its preliminary data point to a rise in sales of 24.5% m/m in June. That would take annual retail sales growth to +1.8%.
- As 75% more Canadians normally travel abroad than foreigners come to Canada each month (11), travel restrictions may be contributing to higher retail sales at home. Higher retail sales also come at the expense of lower spending elsewhere, with spending at food and drinking places 50% below its pre-virus level in May (12). The resilient housing market is probably also helping to support spending. In June, home sales rebounded by 65% m/m, to return to within 5% of their February level (13).
Chart 8: Retail Sales ($bn)
Chart 9: Retail Sales (February to May, %)
Chart 10: Consumer Confidence & Retail Sales
Chart 11: Travel into Canada (Million People)
Chart 12: Food Service and Drinking Place Sales & Retail Sales (January = 100)
Chart 13: Home Sales & New Listings (000s)
Source: Refinitiv, Bloomberg, DesRosiers
- The summer Business Outlook Survey unsurprisingly showed a plunge in investment intentions, which reached the low levels seen during the Global Financial Crisis (14). As credit is flowing more easily than it was back then, investment intentions may recover faster. Indeed, the further rebound in CFIB business confidence in June paints a less gloomy picture, although remains consistent with lower investment (15).
- The CFIB survey shows transportation confidence is higher than in February (16), which is probably due to higher demand for logistics services. Confidence in the construction sector is much lower than in February, although the latest data are not as gloomy as we feared. Admittedly, residential investment remained far below pre-virus levels in May (17). But the strong rebound in housing starts, which rose above 200,000 annualised in June (18), suggests investment will recover further.
- Oil prices have recovered strongly since their April nadir, but their still low-level means new drilling remains largely uneconomical. Drilling in Canada is highly seasonable, with drilling dropping in the spring and picking up sharply in the summer. This summer, however, there has been no pick-up at all. Last week just six rigs were active, compared to 83 this time last year (19).
Chart 14: Business Outlook Survey Investment Intentions & Investment
Chart 15: CFIB Business Confidence & Investment
Chart 16: CFIB Confidence by Sector (June vs February)
Chart 17: Investment in Building Construction ($bn)
Chart 18: Residential Building Permits &
Chart 19: Active Oil Rigs
Source: Baker Hughes, CFIB, Refinitiv
- After falling by 35% from February to April, goods exports rose by 6.7% m/m in May. By contrast, imports declined by a further 3.9% (20). The rise in exports was primarily due to a 76% surge in auto exports from their very depressed level in April, while a rise in prices helped to push energy exports higher. Imports fell further in most sectors, with the exception of food and consumer goods imports (21).
- Despite the rise in May, auto exports remained 75% below their pre-virus level, while auto imports were 84% lower. Consumer goods, food, and forestry & building material trade have been comparatively less affected (22). With travel restrictions keeping the services trade balance in a rare surplus again in May, the rebound in goods exports caused the overall trade deficit to narrow sharply, to below $1bn (23).
- Rail freight car loadings were down by 9% y/y last week, but are at least now moving in the right direction (24). The rise in the US manufacturing PMI to 49.8 in June also bodes well for non-energy exports, although the survey will need to strengthen further before it looks consistent with exports growing again (25).
Chart 20: Goods Export & Import Values ($bn)
Chart 21: Goods Exports & Imports (%, May)
Chart 22: Goods Exports & Imports
Chart 23: Trade Balance ($bn)
Chart 24: Rail Freight Car Loadings (000s)
Chart 25: US Manufacturing PMI & Non-Energy Exports
Sources: Refinitiv, Statistics Canada, Capital Economics
- The 950,000 rise in employment in June took the total rebound since April to over 1.2 mn, although employment remained 1.8 mn below its level in February (26). Concentrating on the number of inactive potential workers – that is, those either working zero hours, not in the labour force, or unemployed – showed a larger improvement with the total declining by 1.3 mn. That said, the number of inactive potential workers remains more than double what it was in February (27).
- Those sectors that had been most negatively affected by the lockdown saw the strongest gains in June, with wholesale and retail employment rising by 220,000 and accommodation & food services employment increasing by 164,000 (28).
- The unemployment rate fell only modestly to 12.3%, from 13.7%, which left it far higher than the latest unemployment rates recorded across most other advanced economies (29). That is partly because a much smaller share of workers have been covered by wage subsidy schemes than elsewhere (30). We have assumed a further 800,000 increase in employment in July and August, with the bulk of those gains likely to be driven by the 645,000 unemployed people that remain on temporary lay-off (31).
Chart 26: Monthly Change in LFS Employment (000s)
Chart 27: Inactive Potential Workers (000)
Chart 28: Change in Employment in June (000)
Chart 29: Unemployment Rate (%)
Chart 30: Workers Covered by ST Work Schemes in Europe/CEWS in Canada (% of Q4 Labour Force)
Chart 31: Job Losers Since February (000)
- The largest month-on-month seasonally-adjusted rise in consumer prices on record, of 1.0%, pushed inflation up from -0.4% in May to 0.7% in June (32). Inflation rose across several categories, including an increase in clothing inflation from -5.4% to -2.6%, recreation, education and reading inflation from -2.6% to -1.4%, transportation inflation from -3.0% to 0%, and shelter inflation from 1.0% to 1.7% (33).
- The increases in transportation inflation and shelter inflation were partly a result of higher energy inflation, reflecting higher gasoline and electricity prices. Gasoline prices have risen further this month, which implies that the contribution of energy to headline inflation should rise by another 0.2%-points (34).
- Inflation for travel tours seemingly surged in June, but that was because Stats Can was still unable to collect travel tour prices and so instead applied the 1.0% m/m rise in the overall index to the travel tours index. Inflation for other travel-related items genuinely rose, with airfares inflation picking up to 8.1% and travel services inflation rising to -5.9% (35). The across-the-board rises in inflation caused two of the core inflation measures to pick up (36), taking an average of the three back up to 1.7% (36). The recent rise in firms’ selling price expectations suggests core inflation will remain near 1.7% in the coming months (37).
Chart 32: Consumer Prices
Chart 33: Inflation (%)
Chart 34: Gasoline Inflation & Contribution of Energy Prices to Headline Inflation (%)
Chart 35: Inflation (%)
Chart 36: Core Inflation (%)
Chart 37: CFIB Selling Price Exp. & Core Inflation (%)
Sources: Refinitiv, Capital Economics, Bank of Canada
- The Bank of Canada has continued to expand its balance sheet, with its assets now at $540bn. The pace of expansion picked up last week despite the Bank reducing its purchases of government debt securities from $12.5bn to $10.6bn. That was because commercial banks’ use of repo facilities was broadly unchanged, in contrast to the declines in use seen in the preceding three weeks (39).
- The Bank purchased just $1mn of corporate bonds last week, taking its total purchases since early June to $141mn. Despite its limited purchases, investment-grade corporate bond yields are now below their pre-virus levels. Provincial bond yields have continued to edge down as well, amid the Bank’s more substantial provincial bond purchases of $5.5bn since June (40). In contrast to investment-grade yields, high-yield corporate borrowing costs remain about 1.2%-points higher than their pre-virus lows (41).
- The S&P TSX has lost some ground versus the S&P 500 in the past month. While the S&P 500 is now 3.8% below its February peak, the TSX is 9.8% lower (42). That partly reflects the lower share of technology firms on the TSX and the larger representation of commodity firms. Despite oil prices being broadly unchanged in the past few days, improving market sentiment as well as the stronger-than-expected rise in inflation in June have driven the loonie back above $0.74 (43).
Chart 38: Bank of Canada Assets ($bn)
Chart 39: Weekly Change in Assets ($bn)
Chart 40: 5-year Provincial and Investment-grade Corporate Bond Yields (%)
Chart 41: Corporate Bond Yields (%)
Chart 42: S&P 500 & TSX 300 (19th Feb = 100)
Chart 43: Oil Prices & Exchange Rate
Sources: Refinitiv, Bloomberg, Capital Economics
Stephen Brown, Senior Canada Economist, firstname.lastname@example.org