MORNEAU LOOKS TO AVOID ‘MADE-IN-CANADA’ RECESSION

Narratives don’t go away even when reality contradicts them, says Kevin Carmichael.

On the weekend before Christmas, Bill Morneau accused the Official Opposition of talking us into a recession.

“I think it’s a little bit irresponsible of the Conservatives to be making people more anxious,” the finance minister said on Question Period, CTV’S Sunday political talk show.

Morneau probably was thinking of one Conservative in particular. Pierre Poilievre, the Opposition finance critic, spent much of December talking about a “made-in-canada” recession, even though almost no professional forecaster had predicted one.

“I’m aware of your textbook definition,” Poilievre said in Ottawa on Dec. 17 after a reporter described a recession as two consecutive quarters of economic contraction and asked him to produce evidence that such a scenario was likely.

“But I will say as Reagan said: A recession is when your neighbour loses his job. A depression is when you lose your job. And a recovery is when Justin Trudeau loses his job. Thank you very much.”

Then Poilievre walked away. If he’d had a mic, he would have dropped it.

Morneau, a former Bay Street executive backed by the Finance Department, might be a more reliable narrator on economic matters than Poilievre, a 40-year-old career politician with a penchant for hyperbole.

But that doesn’t matter if you don’t have a convincing story to tell. Poilievre is winning because he has adapted a narrative that has been resonating with people since short-term interest rates climbed higher than longer-term bond yields earlier this year. Narratives get lodged in our heads and they don’t go away, even when contradicted by reality.

“It makes me nervous,” Simon De Baene, co-founder and chief executive of Montreal-based software developer Gsoft, said earlier this month when I asked him about the possibility of a recession. De Baene had just taken me on a tour of Gsoft’s newly renovated and expanded work space and he said there was no sign of a slowdown in his order books. Still, “we plan for the worst,” he said.

Economists are beginning to produce compelling evidence of the media’s ability to generate what Nobel laureate Robert Shiller calls “sentiment shocks.”

Both The Economist and The Financial Times ranked Shiller’s new book, Narrative Economics, as one of the best of 2019.

The Yale economics professor compiled years of analysis and research to assert that investment is just as likely to be driven by the zeitgeist as dispassionate analysis.

Narratives “are the dominant explanation for the strength of a recession,” Shiller told the Wall Street Journal earlier this month. “The Great Depression was great because of the narrative. Franklin Roosevelt said all we had to fear was fear itself. That phrase is remembered by many people. And it isn’t just fear. Other emotions, like anger, might change the economy and markets.”

The stories behind sentiment shocks needn’t be true or plausible.

Jerome Powell, chair of the U.S. Federal Reserve, insists that pressure from President Donald Trump has no effect on policy and the Fed’s track record suggests that’s true.

And yet Trump’s harassment of Powell on Twitter causes traders to reassess the path for interest rates.

Earlier this month, the Bank of Canada published research by Antoine Camous, an economist at the University of Manheim, and Dmitry Matveev, a staff economist at the Canadian central bank, that shows that when Trump tweets about the Fed, the price of contracts linked to the U.S. benchmark shifts to reflect a higher probability of an interest-rate cut. Last year, the International Monetary Fund released a working paper by a team of economists that had used more than 4.5 million Reuters articles published between 1991 and 2015 to create a news-based sentiment index.

They found that the “tone” of news “robustly predicts” daily returns on stock markets in both advanced economies and emerging markets.

The relationship still isn’t entirely clear, but “the project already shows that monitoring news tone in real time is a very effective way to capture sudden changes in investor sentiment that would not be captured otherwise,” Damien Puy, an

IMF economist and one of the authors, wrote in a blog post that the fund published on Dec. 16.

It makes you wonder whether the news reflects sentiment or drives it?

David Rosenberg, the one prominent Bay Street economist who thinks a recession is likely, receives an outsized amount of attention, in part because multiple outlets, including the Financial Post, give him a platform for his bearish writings.

The news business craves drama, so it’s hard to resist the tragic overtones of an economic downturn.

The pursuit of tension also results in false equivalency, with outliers getting as much

(or more) ink as the consensus. So it’s easy to game coverage.

But what ultimately is hurting Morneau is that Prime Minister Justin Trudeau has handed him such a lousy script. The finance minister’s mandate letter calls on him to reduce debt as a percentage of gross domestic product, but also to “invest in people,” while at the same time “preserve fiscal firepower.” Even if all of that is technically possible, it reads like fantasy.

But an old-fashioned recession narrative? That makes sense to people. And when the audience becomes too big, the story becomes true.

The news business craves drama, so it’s hard to resist the tragic overtones of an economic downturn.