Borrow, redistribute, spend: It’s not the solution
David Rosenberg explains why Canada’s economic recovery is a debt-driven mirage
I get asked all the time why it is that data in Canada have been looking so good.
Well, few other countries have turned on the monetary and fiscal spigots like Canada has.
It’s an embarrassment of riches — who knew so much money could grow on so many trees?
The Bank of Canada has taken its balance sheet relative to the size of the economy to 27 per cent — the average for the industrialized world is 19 per cent.
The federal government deficit in Canada is on the precipice of testing 20 per cent of GDP, which is more than double the rest of the Organization for Economic Co-operation and Development (OECD).
Who knew the Canadian government would be of the view that it oversees the world’s reserve currency, and who would have believed that the modern monetary theorists would have found such a welcome home in Canada?
Borrow, redistribute, spend. Borrow, redistribute, spend. And don’t worry, interest rates will remain at zero forever.
Anyone who was around in the late 1960s when Justin’s dad, Pierre, was in charge, knows that we have seen this movie before. And how it ends.
The data are startling.
Here we are with a first-quarter real GDP performance in Canada at a minus 8.2 per cent annual rate and followed that up with a 38.7 per cent plunge in Q2. Even with the recovery in recent months, employment is still in the hole to the tune of more than one million jobs, or an annual rate of minus eight per cent through the first eight months of the year.
This is double the worst trend we ever saw in the 2008-09 Great Recession, for some perspective on what this recovery really is about.
It is about government giveaways.
Think about it. Labour income plunged 18.5 per cent in the first half of the year and yet personal disposable income managed to expand at a whopping annual rate of 25.9 per cent because of the eye-popping 324 per cent surge in government transfers to individuals and families.
Labour income is down $116 billion, but total income rose $160 billion because of the $246-billion surge in government transfers (other forms of income fell in case you’re doing the arithmetic here).
The point is this: for the first time ever, a recession coincided with a 26-per-cent annualized increase in total personal disposable income.
In other words, to showcase how the federal government has gone way beyond what was needed, total income in the personal sector is running five times faster with the pandemic and lockdowns than if they never happened at all. This is how you can manufacture an artificial economy. And why it is very difficult to be bullish on the Canadian dollar, knowing just how inorganic this recovery has been.
That said, there is something to be said for the Canadian consumer here. It is true that the fiscal outlook is less robust than it was before from an income transfer standpoint, but the federal government seems committed to more fiscal largesse through the spending front.
We shall await the Throne Speech in Parliament, which is on Sept. 23 (expect a lot of emphasis on green-energy investment and other initiatives).
The personal savings rate in Canada is 28 per cent, or 10 times what it was pre-pandemic.
This comes to an unprecedented $416 billion of savings as of Q2 — even if half of that is used to pay down the mountain of debt or plowed into the markets, that other half would boost consumer spending by nearly 15 per cent. That does sound outlandish, but if you think Americans are sitting with a whole lot of dry powder, courtesy of debt-financed fiscal charity, it is equally acute north of the border.
Having some exposure to the Canadian consumer here may not be a bad idea, either, with zero rates for a very long time bumping against the largest stash of cash ever recorded. No wonder retail sales and housing have been on a tear.
It is not too difficult to see why the Bank of Canada remained on hold while taking a wait-and-see approach.
The pace of the rebound may have come as a surprise, but the winding down of fiscal support (most notably, the transition away from the Canada Emergency Response Benefit to a modified Employment Insurance program providing less income), the rolling off of mortgage and loan deferrals from the major banks and the resurgence of the coronavirus all pose downside risks to the economy.
Bottom line, with the federal government pulling back on some fiscal programs the emphasis will be on monetary policy to carry more of the load going forward.
For now, the amount provided by the Bank of Canada appears to be enough, but the bank has made it clear it will continue to evaluate and provide more support if needed.
All of this points to a continuation of the “lower-for-longer” interest rate environment that we are in, and, as such, does not change our subdued view on the loonie or Canadian financial assets writ large.
The personal savings rate in Canada is 28 per cent, or 10 times what it was pre-pandemic.