The Great Reopening - BMO Harris
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North American Outlook | A look ahead at the Canadian and American economies June 9, 2020
The Great Reopening
A Publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist, BMO Financial Group
• The NBER has officially declared that the longest economic expansion in history ECONOMIC RESEARCH
ended in February, with the downturn beginning in March and, we suspect, +1 (416) 359-6372
ending in April. A return to positive job growth in May signals the recovery economics.bmo.com
is underway after two months of lockdowns to control the outbreak of the Sal Guatieri, Senior Economist
sal.guatieri@bmo.com
coronavirus. Attention now turns to the speed and breadth of the rebound
under the threat of a flare-up. Our critical assumption that the restrictions
would ease around mid-May was met, with all states and provinces loosening Key Messages
restrictions on non-essential business. We expect a robust recovery to unfold The lockdowns have
in the second half of the year. However, it could take two years before supressed the rate of new
employment returns to pre-virus levels. Barring a vaccine, the virus' legacy will infections of COVID-19,
linger much longer than the pandemic itself. though at the cost of an epic
downturn in the economy and
• The lockdowns and social-distancing measures have slowed the growth rate
rise in joblessness
in daily infections to about 1% in the U.S. and Canada from more than 30%
in mid-March. However, we are monitoring an upturn in infections in several
A return to positive job
states, reflecting increased testing and relaxed social distancing rules. More
growth in May signals that
encouraging is that the death rate continues to trend down, and the nation's the recovery has begun,
hot-spot, New York, is seeing a steady decline in hospitalizatons. though one that is likely
• The lockdowns took a crushing toll on the economy, unrivaled in the to prove uneven across
post-war era. Canada's real GDP contracted 8.2% annualized in Q1, only industries
modestly better than StatCan's initial estimate. An 11% decline in April GDP
A faster-than-expected
could anchor an epic 40% annualized contraction in Q2. The U.S. economy
recovery in oil prices brings
fared only moderately better than Canada, contracting 5.0% in Q1, with weaker
some much-needed relief
imports and firm government spending cushioning the blow. Spending on to Alberta and other oil-
autos, clothing, restaurants and accommodation was notably weak. For all producing regions, as well as
of 2020, the Canadian and U.S. economies are expected to shrink by 6% and to the loonie
5.5%, respectively.
• The shutdowns led to job losses unseen in modern times. More than than
21 million Americans and 3 million Canadians were laid off in March and April.
However, the easing of restrictions, coupled with incentives from government
wage-assistance programs, resulted in a 2.5 million increase in U.S. payrolls
and a 290,000 rise in Canadian jobs in May. The former pulled the U.S. jobless
rate down to 13.3%, while Canada's rate hit a record-high of 13.7%. Still, the
pace of rehiring retraced only one-tenth of the earlier losses, a small step on
the long road to recovery for labour markets.
• The massive policy response is one reason we are on the less pessimistic end of
consensus forecasts. The U.S. government's pandemic response is near $3 trillion, or
over 13% of GDP, with more than half in the form of direct payment support. Most
of the $650 billion in loans allocated under the Paycheck Protection Program (PPP)
for U.S. small businesses is forgivable if workers are retained for eight weeks. TheNorth American Outlook | The Great Reopening
program should minimize insolvencies while assuring that furloughed workers are
called back soon. As a result of the PPP, as well as the $1,200 one-time payments
to individuals, personal income rose sharply in April, despite more than 20 million
layoffs that month. Although the PPP expires on July 31, it stands a reasonable
chance of being extended, though some senators question the need for additional
support. Canada's federal government pledges direct payments to the tune of $153
billion, or 7% of GDP. This includes income support for individuals that should fully
compensate for lost wages in the current quarter. Over 8 million Canadians have
applied for the $2,000 monthly payment under the Canada Emergency Response
Benefit, eclipsing the 3 million laid off workers in March and April.
• Besides employment, most other data, including real-time indicators on consumer
spending, business activity and driver mobility, suggest the downturn ended in
April and that the recovery began in May. The housing market has made decent
headway, with U.S. mortgage applications for purchases fully retracing an earlier
plunge. In Canada, May existing home sales in several major cities and housing
starts bounced higher, though they remain well below pre-virus levels. It was a
similar story for auto sales in both countries.
• June data will better capture the speed of the economy's reboot. We still expect
a forceful recovery in the second half of the year, paving the way for real GDP
to expand 6% in Canada and 5% in the U.S in 2021. A spirited rally in equity
markets (with the S&P 500 all but erasing this year's losses) and a sharp narrowing
in corporate credit spreads suggest investors anticipate a robust recovery.
• Along with the improvement in employment and financial conditions, another
welcome development is the reversal in oil prices. After turning negative on April
20, WTI prices have bounced to around $38 a barrel as OPEC+ nations agreed to
extend output cuts. While that's still down more than 30% from the 2019 average
level and not high enough to spur new investment in the sector, the rebound should
support the recovery in oil-producing regions.
• The oil rally and diminished safe-haven demand for greenbacks have allowed
the Canadian dollar to return to pre-lockdown levels, at around C$1.34/US$.
However, even if oil prices average $45 next year, as we expect, the currency will be
challenged to make further headway given the highly uncertain economic climate.
• Despite the expected strong upturn in growth, it could take until early 2022
before the economy fully climbs out of a deep hole. Even a year from now,
industries such as airlines, hotels, restaurants and entertainment venues, which
account for almost 5% of GDP, could be operating substantially below pre-virus
levels. Large cities relying on public transportation could face a daunting challenge
getting people back to work or to live in dense areas.
• After unleashing asset purchases and new credit facilities to backstop the economy,
the Fed and Bank of Canada are expected to hold policy rates near zero until at
least 2022. To return inflation to the 2% target, Fed officials will likely consider
capping bond yields through a combination of targeted asset purchases (such as
committing to buy Treasuries in unlimited amounts to keep yields at low levels)
June 9, 2020 | Page 2 of 8North American Outlook | The Great Reopening
and forward guidance (such as committing to hold policy rates low for a specified
period or until a certain economic goal is reached). The Fed has all but ruled out a
shift toward negative interest rates.
• Economic risks will remain skewed to the downside until a vaccine or treatment
is found. Despite the income-support and forbearance measures in place, many
companies won't survive the crisis. While insolvencies among Canadian firms and
consumers fell sharply in April, this was due to support measures rather than an
underlying improvement in financial health. The greater the number of business
failures, the larger the number of permanent job losses, which will undercut
spending and slow the expansion.
• Longer-term risks to the economy stem from eventual fiscal restraint to rein in
massive budget deficits. Canada's budget gap could widen from over 1% of GDP to
10%, the largest since at least the mid-1980s. The U.S. federal deficit is expected to
balloon from $1 trillion to almost $4 trillion this year, or an eye-popping 18% of GDP.
It's of only limited comfort that record-low interest rates will ease the debt-service
burden on governments.
• The outcome of the November 3 presidential and congressional elections
will have a bearing on the policy response to tackling the deficit. Presumptive
Democratic nominee Biden will lean toward tax increases for corporations and
upper-income households, while a re-elected President Trump would likely rely on
cuts to program spending.
June 9, 2020 | Page 3 of 8North American Outlook | The Great Reopening
Forecasts
2019 2020 Annual
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021
CANADA
Real GDP (q/q % chng : a.r.) 1.2 3.2 1.1 0.6 -8.2 -40.0 42.0 10.0 1.7 -6.0 6.0
Consumer Spending 2.4 0.4 2.2 1.8 -9.0 -42.9 41.5 13.8 1.6 -6.7 6.1
Business Investment (non-res.) 21.5 -7.8 3.1 -4.8 -2.7 -60.0 68.0 10.0 0.4 -10.9 5.9
Consumer Price Index (y/y % chng) 1.6 2.1 1.9 2.1 1.8 -0.2 0.1 0.2 1.9 0.4 1.5
Unemployment Rate (percent) 5.8 5.6 5.6 5.7 6.3 12.9 9.7 9.2 5.7 9.5 8.0
Housing Starts (000s : a.r.) 187 224 223 201 208 177 187 201 209 193 215
Current Account Balance ($blns : a.r.) -69.3 -35.7 -45.9 -37.2 -44.4 -72.8 -71.4 -67.5 -47.0 -64.0 -61.5
Interest Rates (average for the quarter : %)
Overnight Rate 1.75 1.75 1.75 1.75 1.25 0.25 0.25 0.25 1.75 0.50 0.25
3-month Treasury Bill 1.65 1.67 1.64 1.66 1.29 0.25 0.25 0.25 1.65 0.50 0.25
10-year Bond 1.86 1.62 1.36 1.52 1.20 0.65 0.85 1.00 1.59 0.90 1.15
Canada-U.S. Interest Rate Spreads (average for the quarter : bps)
90-day -79 -68 -38 5 16 10 11 11 -45 12 11
10-year -80 -72 -43 -28 -18 -10 -16 -15 -56 -15 -12
UNITED STATES
Real GDP (q/q % chng : a.r.) 3.1 2.0 2.1 2.1 -5.0 -40.0 36.0 7.0 2.3 -5.5 5.0
Consumer Spending 1.1 4.6 3.1 1.8 -6.8 -47.7 46.7 7.8 2.6 -7.2 5.4
Business Investment (non-res.) 4.4 -1.0 -2.3 -2.5 -7.9 -32.5 18.1 7.0 2.1 -7.4 3.6
Consumer Price Index (y/y % chng) 1.6 1.8 1.8 2.0 2.1 0.5 0.8 0.6 1.8 1.0 1.5
Unemployment Rate (percent) 3.9 3.6 3.6 3.5 3.8 13.0 9.8 9.0 3.7 8.9 7.0
Housing Starts (mlns : a.r.) 1.20 1.26 1.29 1.43 1.49 0.73 1.10 1.36 1.30 1.17 1.29
Current Account Balance ($blns : a.r.) -548 -505 -502 -439 -387 -355 -392 -406 -498 -385 -425
Interest Rates (average for the quarter : %)
Fed Funds Target Rate 2.38 2.38 2.13 1.63 1.13 0.13 0.13 0.13 2.13 0.38 0.13
3-month Treasury Bill 2.44 2.35 2.02 1.61 1.13 0.15 0.15 0.15 2.10 0.40 0.15
10-year Note 2.65 2.33 1.79 1.79 1.38 0.75 1.00 1.15 2.14 1.05 1.25
EXCHANGE RATES (average for the quarter)
US¢/C$ 75.2 74.8 75.7 75.8 74.4 72.1 73.7 74.0 75.4 73.6 74.7
C$/US$ 1.33 1.34 1.32 1.32 1.34 1.39 1.36 1.35 1.33 1.36 1.34
¥/US$ 110 110 107 109 109 108 108 110 109 109 113
US$/Euro 1.14 1.12 1.11 1.11 1.10 1.10 1.13 1.12 1.12 1.11 1.12
US$/£ 1.30 1.29 1.23 1.29 1.28 1.24 1.25 1.23 1.28 1.25 1.26
Blocked areas mark BMO Capital Markets forecasts
.
June 9, 2020 | Page 4 of 8North American Outlook | The Great Reopening
Chart 1 Chart 2
Risk Aversion Abates Credit Spreads Retreat
United States (as of June 8, 2020) United States (ppts : as of June 8, 2020)
Ted Spread¹ VIX² Corporate Bond Spreads¹
150 100 3.5
80 3.0
100
60 2.5
40 2.0
50
20 1.5
0 0 1.0
14 16 18 20 14 16 18 20 14 15 16 17 18 19 20
¹ 3-mnth Eurodollar minus 3-mnth T-bills (bps); ² CBOE market volatility index ¹ 15-year BoA Merrill Lynch AA Corporate Yield less 10-year Treasury Yield
. Chart 1 BMO Economics, Haver Analytics
Sources: . Chart 2 BMO Economics, Haver Analytics
Sources:
Chart 3 Chart 4
Equities Recover Most Losses Loonie Shows a Spark
(indices : as of June 8, 2020) (US¢ : as of June 8, 2020)
Equities Canadian Dollar
3500 35000 110
S&P 500 forecast
(lhs)
Parity
3000 30000 100
2500 25000 90
2000 TSX 20000 80
(rhs) l
1500 15000 70 74.71¢
1000 10000 60
14 15 16 17 18 19 20 03 05 07 09 11 13 15 17 19 21
. Chart 3 BMO Economics, Haver Analytics
Sources: . Chart 4 BMO Economics, Haver Analytics
Sources:
Chart 5 Chart 6
Commodities Off Lows Oil Rebounds
Commodity price range since start of 2020 (US$/bbl : as of June 8, 2020)
Materials & Foodstuffs Metals & Energy WTI Crude Oil Price
(as of June 8, 2020) (as of June 8, 2020) 120
Lumber 370.80 Gold 1683.45 100
(US$/ 259.80 463.00 (US$/oz) 1474.25 1748.30
1000 sq ft) 80
Soybeans 8.52 Oil 38.26
(US$/bbl) -37.63 60
(US$/bu) 8.09 9.38 63.27
40
Wheat 4.78 Nat. Gas 1.78
(US$/bu) 4.29 5.07 (US$/ 1.55 2.20 20
mmbtu)
Corn 3.18 Copper 2.57 0
(US$/bu) 2.87 (US$/lb) 2.09
3.91 2.86 14 15 16 17 18 19 20
. Chart 5 BMO Economics, Haver Analytics
Sources: Line indicates current value . Chart 6 BMO Economics, Haver Analytics
Sources:
June 9, 2020 | Page 5 of 8North American Outlook | The Great Reopening
Chart 7 Chart 8
Epic Economic Collapse Consumers Stayed Home
(y/y % chng) (y/y % chng)
Real GDP Real Personal Consumption Expenditures
forecast forecast
20 30
20
10
Canada
10 Canada
0
U.S. 18 19 20 21
0
-10 Canada 2.0 1.7 -6.0 6.0 U.S.
-10
U.S. 2.9 2.3 -5.5 5.0
-20 -20
00 02 04 06 08 10 12 14 16 18 20 00 02 04 06 08 10 12 14 16 18 20
. Chart 7 BMO Economics, Haver Analytics
Sources: . Chart 8 BMO Economics, Haver Analytics
Sources:
Chart 9 Chart 10
Investment Plunges Home Sales Plummet, Prices Holding Firm
(y/y % chng) Existing Homes (y/y % chng : 3-mnth m.a.)
Real Non-Residential Business Investment Sales Prices
forecast
30 20 20
Canada Canada¹
20 Canada 15
10
10
10
0 0
5
-10 U.S.²
U.S. -10 U.S.
-20 0
-30 -20 -5
00 02 04 06 08 10 12 14 16 18 20 14 16 18 20 14 16 18 20
. Chart 9 BMO Economics, Haver Analytics
Sources: . Chart 10BMO Economics, Haver Analytics
Sources: ¹ MLS HPI; ² NAR Median Sales Price
Chart 11 Chart 12
Jobless Rate Soars Disinflation on Tap
(percent) Consumer Price Index (y/y % chng)
Unemployment Rate Canada United States
15 Canada 6 6
forecast forecast
Headline Headline
1.2% 1.4%
10 3 3
l l
0.3%
0 0
l
l
5 -0.2%
U.S. Core¹ Core²
forecast -3 -3
0 07 12 17 07 12 17
70 75 80 85 90 95 00 05 10 15 20 ¹ core = ex 8 most volatile components & indirect taxes; ² core = ex food & energy
. Chart 11BMO Economics, Haver Analytics
Sources: Chart 12BMO Economics, Haver Analytics
. Sources:
June 9, 2020 | Page 6 of 8North American Outlook | The Great Reopening
Chart 13 Chart 14
Monetary Medicine Lower for Even Longer
(% : as of : June 9, 2020) (% : as of June 8, 2020)
Overnight Rate 10-Year Bonds Current Year-End
2020 2021
6 6 U.S. 0.88% 1.15% 1.40%
forecast Canada 0.68% 1.00% 1.30% forecast
Canada-U.S. Spread -20 bps
4 4
Canada 0.25% U.S.
0.00%–0.25%
2 2
U.S. l
l
l
l l
l
Canada l
0 l
0
07 09 11 13 15 17 19 21 07 09 11 13 15 17 19 21
. Chart 13BMO Economics, Haver Analytics
Sources: . Chart 14BMO Economics, Haver Analytics
Sources:
June 9, 2020 | Page 7 of 8North American Outlook | The Great Reopening
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