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Weekly Talking Points

July 31, 2020
Slower, Lower, Weaker Wins Gold
Douglas Porter, CFA, Chief Economist,,
In the absence of the Tokyo Summer Olympics, which would have been in full gear at this point, the global economy performed its own 2020 version of the Games’ motto this week. Records fell like proverbial dominoes as the official GDP tallies rolled in for the brutal second quarter. Markets mostly looked past these long-expected heavy hits, as they are backward-looking, and more current data sent a mixed picture—the message there was mostly that the recovery is still on, but it’s fading in some places. Against that, bond yields fell further (including some record lows in Treasuries and GoCs), gold thrived (including some record highs near $2000) and oil’s recent rally faltered. Even the FOMC made few waves, with no new measures and Chair Powell delivering few quotable quotes. In fact, the meeting was pre-empted by the prior day's extension of a variety of the Fed’s facilities until at least year-end. Stocks were flattish, with the notable exception of the Nasdaq; it snapped back with purpose on the week and was again eying record highs by Friday. The tech titans readily hurdled mid-week Congressional testimony and then pole-vaulted earnings expectations the very next day, seemingly immune to the harsh economic realities in the quarter.

On that alternative economic reality, even though it’s “old news”, we must dig a bit into the Q2 GDP figures, which were truly historic. While no doubt staggering, a key point off the top is that quite a few economies saw lighter hits than generally expected in Q2, including the U.S. (-32.9% annualized), Germany (-34.7%) and Italy (-41.0%). On the flip side, France (-44.8%) and Mexico (-53.2%) suffered even mightier blows than anticipated. The Euro Area landed close to expectations with a 40.3% annualized setback. On balance, we expect some of the more dire estimates on the global economy to be dialled back in the weeks ahead (looking at you IMF and OECD), and that’s even with the upturn in virus cases in many nations. Still, with expected drops of 5% in the U.S., 7% in the Euro Area, and deeper declines in harder-hit emerging markets, the global economy could decline by nearly 4% this year.

Specifically on the U.S. economy, Q2's 32.9% plunge (or -9.5% before annualizing) was a bit less bad than most expected (at one stage in the quarter, many were looking for a drop of over 40%). We would hasten to add that this is a preliminary estimate and it would have included some placeholder stats. Thus, it may easily be revised lower… potentially much lower. Even so, the lighter hit prompted a small revision in our estimate for 2020 “growth” to -5.0% (from -5.5%), and that’s even with a much more subdued assumption for the second half of this year, due to economic rollbacks in some states. That less robust rebound does, however, dim next year’s assumed growth (to +4.0% from +5.0%).

The more subdued U.S. outlook for the second half was reflected in a sag in consumer confidence for July, after a hearty bounce in June. Similarly, the improvement in initial jobless claims has stalled at dishearteningly lofty levels, with some metrics even beginning to deteriorate. Other timely measures clearly reveal the U.S. recovery has lost serious steam in recent weeks due to the flare-up in virus cases, a point Jay Powell directly pointed to in his press conference. Meanwhile, at press time, Congress continues to fiddle as the fiscal cliff looms large, although at least a temporary extension of augmented UI payments is widely expected.

Meantime, the Canadian economy is actually unfolding mostly as expected. While only a preliminary estimate, StatsCan estimates that GDP fell 12% in Q2; that works out to precisely a 40% annualized drop, right in line with our working assumption. In turn, the back-to-back record gains for monthly GDP of 4.5% in May and 5% in June set the economy on the path for a big-time surge in Q3, even as the monthly pace inevitably cools through the quarter. Suffice it to say that we remain entirely comfortable with our call of a roughly 40% annualized rebound in Q3. Alas, after the heavy hit through the early spring, that would still leave the economy on track for roughly a 6% drop for all of this year (as we have long expected), albeit with our call of a symmetric 6% recovery next year still a very realistic possibility.

One wrinkle in our respective calls for North America is that, after a much deeper drop through the lockdown stage and as oil was plunging, Canada is now primed for a much bigger bounce on the way back up. That’s reflected in both our estimates for Q3 growth as well as for 2021. We made this very point a few weeks ago, that the risks on the downside have shifted meaningfully in the past six weeks or so away from Canada and towards the U.S. economy. The combination of a less-awful experience with the virus, a partial recovery in oil prices, a full recovery in some other commodity prices (e.g., lumber), a steady flow of fiscal support, and a darn-the-torpedoes housing market, suggests that Canada will outperform in the recovery stage. To some limited extent, this modestly better outlook is also being reflected in the Canadian dollar, which has also been pulled along for the ride in the much broader move out of the U.S. dollar in the past month.

Next week will bring some crucial tests for the strength and durability of the recovery as a flood of July data will wash ashore. Beyond the all-important employment reports for both the U.S. and Canada, we’ll also get reads on July auto sales, U.S. ISMs, Euro PMIs, and preliminary home sales for major Canadian cities. On U.S. jobs, we are expecting to see a clear deceleration in the recovery for July, which is very much in sync with the flattening of the initial jobless claims curve in recent weeks. Even here, we expect a relatively heartier snap-back in Canada, where jobs are guesstimated to have risen by 350,000, versus a 2 million increase stateside. We also look for Canada’s jobless rate to fall further to 11%, and the U.S. unemployment rate to step down to just below 10.5%.

Of course, as we have seen so very many times in recent months, expect the unexpected even on something so closely followed and tracked as the jobs data. The surprises have landed consistently on the strong side of expectations in the past few months for employment, in both the U.S. and Canada, and it wouldn’t be a shock if that’s the case again for July. But we will end with this cautionary tale on the data. Canada’s Labour Force Survey (the equivalent of the U.S. household survey) estimated that 290,000 jobs were created in May. Yet, just this week, the equivalent of the payroll report was (finally) released and it suggested employment fell by 585,000 that month. Now perhaps you can forgive forecasters for struggling mightily to pin these forecasts down correctly when StatsCan itself has such a divergence between its two major employment reports on the historical data. Oh, and by the way, our initial estimate on Canadian jobs in May was—you guessed it—for a decline of about 500,000. But we’re not bitter… much.

You know it’s a bad year when they’re even naming hurricanes after you. Yes, digging ever deeper into the barrel for increasingly obscure names, this year has brought hurricanes dubbed Bertha, Cristobal, Isaias, and Douglas. True, Douglas was a Pacific Hurricane (following a Boris earlier on), but it almost lived up to its name by building to a Category 4 at one stage before losing steam. It brushed Hawaii early this week at a Cat 1 level, but apparently did no serious damage to the islands. Unfortunately, the same can’t be said for the local economy. Hawaii continues to grapple with a Cat 5 recession; the islands have been spared the worst of the direct hit from COVID, but the resulting global tourism plunge has been devastating.
Douglas J. Porter, CFA | Chief Economist | Managing Director, Economic Research