By Michael O’Neill
“Happy hour, Happy hour, a buck and a half for a beer.”
If the Tragically Hip updated their 1991 hit, “Little Bones,” they may be referring to how many Canadian dollars it takes to buy a US greenback.
The outlook for the Canadian dollar is grim. The coronavirus pandemic exacted such a toll on the domestic economy; it makes policymakers yearn for the good times of the 2008 Financial crisis. The Finance department expects the economy to shrink a record 6.8% in 2020, and the unemployment rate to be 9.8%.
The Canadian government dispensed with even rudimentary fiscal prudence when Prime Minister Justine Trudeau began his daily COVID 19 briefing ritual. Almost every day, until June 24, he strode to a podium to announce a new government spending program, targeted at a specific group, or industry. By the time he was done, the federal budget deficit had ballooned to over $343.0 billion, from a mere $25 billion.
Canada’s debt to GDP ratio is an eye-popping 115.0% of GDP, but when compared with other G-10 nations, it is the epitome of fiscal prudence. The United States debt to GDP ratio is the same as its Northern neighbour, Australia is at 126.0%, and the United Kingdom tops the charts at 313%. ( Source: World Population Review)
The issue is which country can manage it better.
The outlook for the Canadian dollar is grim.
Canada would be at the bottom of the list. Rolling rail blockades and the oil industry collapse were weighing on economic growth before the pandemic, and the outbreak worsened the outlook. Opec is expected to announce an end to the “emergency” 2.2 million barrel/day production cuts imposed in April. However, renewed COVID-19 outbreaks, and the lingering impact on coronavirus containment measures on crude demand, suggests prices do not have a lot of upside in the short term. The Canadian oil industry suffered from lockdown measures and was already suffering from a lack of pipeline capacity, price discounts to West Texas Intermediate oil, and a lack of federal government support for the industry.
The Canadian dollar is not getting much benefit from oil prices, especially if they stay contained in a $35.00/b-$45.00/b range.
The Bank of Canada outlook for the domestic economy is vague and uncertain. They said so themselves. According to the opening statement in the July 15, Monetary Policy Report (MPR), the uncertainty surrounding the coronavirus means “we cannot forecast with the usual degree of accuracy in our economic projections.” Instead, they presented what they called a “Central Scenario” which tries to balance the likelihood of better and worse outcomes, but it is highly conditional on our assumptions about the virus.”
Mostly, they are guessing.
They guess that the economy will shrink, with real GDP falling 8.0%. A week ago, the Finance Minister predicted a drop of only 6.3% in 2020.
The IMF guess is that Canada’s GDP falls 8.4%.
There is also a lot of guesswork going into inflation forecast for the rest of the year. The BoC is sticking to its mantra that inflation is weak, but it will gradually return to its 2.0% target. Is inflation weak? Anecdotally, businesses that reopened, in the Greater Toronto Area (GTA), aren’t shying away from price increases. How many people have noticed a lack of sales and promotions in supermarkets? How about the price of a hair cut? Gasoline prices have surged 64% since their low in March. It may not be considered inflationary, but you still pay more.
The monthly inflation numbers are questionable at best, and probably too low. However, it is in the governments best interest to keep Consumer Price Index (CPI) low. It helps cap interest rates .
That may be why, Statistics Canada, and the BoC, partnered to develop what they call an “Analytical Price Index” (API). They describe it as an “alternative estimate of consumer price inflation during the first few months of the pandemic.” The data is supposed to reflect new consumption patterns that evolved during the pandemic as “Canadians quickly began spending less and spending differently as they adapted to staying home, travelling less and buying more of certain items, like cleaning products and non-perishable foods.” They concluded that overall, the API showed a smaller month-over month declines in March and April compared with the official CPI.
George Orwell, noted English novelist would characterize the API results thusly: “And if all others accepted the lie which the Party imposed — if all records told the same tale — then the lie passed into history and became truth.”
Ballooning budget deficits and questionable data may lead to Canadians spending “a buck and half for a beer” if that beer costs one greenback.