What to Expect From The Recovery's Second Wave? - Andrew Grantham, Executive Director & Senior Economist
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What to Expect From The Recovery’s Second Wave? Andrew Grantham, Executive Director & Senior Economist January 2021
Steve Kuwahara
Market Vice-President, Public Sector and Not-for-Profit
Group, CIBC
1
Andrew Grantham
Executive Director & Senior Economist
2Executive Summary 3
• Short Term – Bad
• Medium Term – Better2020: Autumn “Lockdowns” Not As Strict… 4
(Deaths per 1m Represented by Size of Dots)
Ita 95
Oxford Stringency Index
85
UK UK
Cda US 75
US
Cda 65
= First Wave
= Second Wave
55
-100 -80 -60 -40 -20 0
Google Mobility (Retail & Recreation)
Source: University of Oxford, Google, CIBC…And Not as Effective, Yet 5
4000 Weekly New Cases Per 1 Million of Population
At Time of Initial Tightening of Restrictions
Peak
3000 Latest
2000
1000
0
Alb BC Man Ont Que Sask
Source: Health Canada, CIBCMobility Data Suggests Stricter Lockdowns 6
Since Start of the Year Are Having an Impact in Ont/Que
Google Mobility Deviation From Baseline
(Avg of Retail & Recreation, Transit and Workplaces)
0
-20
-40
-60 First Wave (Mid-Mar to Mid-May)
Second Wave (Nov/Dec)
-80 Latest
Alb BC Man Ont Que Sask
Source: Google, CIBCVaccination Goals Would Put Canada in Middle of the Pack… 7
Timeline Goal to Deliver at Least First Vaccination Shot to the Majority of the
Population (based on stated target date or stated target of vaccinations per month)
Spain
Australia
Cda
US
UK
Source: Our World in Data, Local News Sources…But Canada Further Behind in Meeting That Goal 8
100 Latest Trend in Daily Doses Administered (to Jan 11) as a Proportion of
Those Necessary to Meet Goal
80
60
40
20
0
UK (5 months) US (8 months) Cda (9 months) Spain (15 months)
Source: Our World in Data, CIBCGovernment Spending Per 1% Decline in GDP 9
4.0
% of GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
CAN USA IDN JPN KOR BRA RUS DEU GBR AUS ITA ZAF ESP FRA IND MEX TUR
Source: IMF, CIBCLess Domestic Content in Retail Sales See Greater Leakage 10
of Stimulus Abroad, Need For Bigger Overall Boost
Domestic Value Added Content in Retail & Wholesale Trade (%)
60 70 80 90 100
Chg. in Deficit in 2020 (%pts)
0
-5
-10
US
-15
-20
Canada
-25
Source: OECD, IMF, CIBCCanadian Federal Deficit Largely Due to Covid Hit 11
450 $ bn
400
350
300
250
200
150
100
50
0
Budget Deficit Projection 2020/21 Underlying Deficit (2024/25
Projection)
*based on federal fiscal updateProvincial Budget Projections Using Fairly Conservative 12
Economic Forecasts
Forecasted Level of Nominal GDP in 2021 vs 2019 (% Change)
4
2 Prov. Gov CIBC
0
-2
-4
-6
-8
BC Alb Sask Man Ont Que NSHousehold Incomes Well Supported by Government Stimulus 13
Household Income
(Bn of $, YoY Chg. Apr-Sep 2020 vs 2019)
120
100
80 Total Household
60 Disposable Income
40 +$82.5bn
20
0
-20
-40
Wages Employment Other All Other Net
(incl. CEWS & Insurance Government Income
Temp. Wage (incl. CERB from Transfers
Subs.*) Service Canada) (incl. CERB from
CRA)
*Government wage support programs represented 10.4% and 5.5% of wages in the second and third quarter, respectively
Source: Statistics Canada, CIBCHouseholds in Canada Have Had Greater 14
Degree of Excess Savings
16 %-pt Chg in Household Savings Rate
(First 3Qr's of 2020 vs 2019)
12
8
4
0
Germany France China US Australia UK Canada
Source: National Statistics Agencies, Bloomberg, CIBCCanadians are Sitting On a Boatload of Cash (L) 15
Set to Flood into Services in Q2-Q4 (R)
Canada Personal Deposits ($Mn.) Changes in Spending:
1,250,000 Total Personal Fcst. Q2 to Q4 2021 Relative
Deposits 50 to Q1 2021
1,200,000 Trend Growth $90Bn (Bn of $, SA)
excess
1,150,000 cash
1,100,000
1,050,000
1,000,000 -50
Services Goods
950,000 Gradual Normalization
Indulging in Discretionary Services
Deferred Essential Services
Source: OSFI, CIBCLast Recession Did Lasting Damage to US Growth Path: 16
20 US Real GDP (Chained $ SAAR, Trillions)
19
Pre-Financial Crisis Trend
18
17
16
15
14
13
Q1-04
Q3-04
Q1-05
Q3-05
Q3-06
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
Q1-12
Q3-12
Q1-13
Q3-13
Q1-14
Q3-14
Q1-15
Q3-15
Q1-06
Source: BEA, CIBCNot a “Normal” Recession – Job Losses More Concentrated 17
So a Vaccine Could Cure Most of the Economic Illness
% Decline in Private Sector Payrolls
Contribution of Worst Performing 15 Sectors vs Others
0
-1
-2
-3 Other
-4
-5 Worst 15
-6
-7
-8
Financial Crisis (Peak to trough) Current vs Feb'20
Source: BLS, CIBCExcluding Oil, Biggest Demand Hits in Sectors That Don’t 18
Require Much Cap-Ex
(Labour Compensation / Value Added)
100
Accommodation
& Food Serv
80
Arts & Entertainment Transportation
Labour Share
60
40
Mining, Oil & Gas
20
0
-50 -40 -30 -20 -10 0 10
Activity Volume (From GDP by Industry % Yr/Yr)
Source: Statistics Canada, CIBCInvestment is Bouncing Back Faster Than Prior Recession (L), 19
But Has Left a Hole in the Oil Sector (R)
Business Investment in Machinery & Oil Production Forecasts (Mb/d)
Equipment (Index, Recession Start = 6.0
105 100)
5.5 Approx -0.15%-pts to
100 annual GDP
95 5.0
90 4.5
85
4.0
80
75 3.5 2019 Baseline Projection
Latest
70 Financial Crisis 2020 Baseline Projection
3.0
65 Early 90's
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
r-1 r r+1 r+2 r+3 r+4 r+5Employment Growth Seen Outside of Hardest-Hit Sectors in Atlantic
20
Canada, More “Scarring” Seen in Alberta, Sask and Ontario
Contribution to Change in Hours Worked
2 (Oct-Dec 2020 vs Oct-Dec 2019, %-pts)
0
-2
-4
All Other Industries
-6
Info/culture/rec, Food/Accom
-8 and Other Serv
N&L PEI NS NB Que Ont Man Sask Alb BCProvincial Forecasts: Let’s Get Ready to Rebound! 21
Real GDP Nominal GDP Unemploymen
Y/Y % Chg Y/Y % Chg %
2019A 2020F 2021F 2022F 2019A 2020F 2021F 2022F
BC 2.7 -5.6 4.4 4.6 4.4 -3.7 6.6 6.6
Alta 0.1 -7.1 4.5 6.0 2.7 -11.1 10.1 8.8
Sask -0.7 -5.2 4.1 4.6 0.1 -8.2 8.1 6.9
Man 0.6 -3.9 3.5 4.0 1.0 -2.0 5.5 6.0
Ont 2.1 -5.5 3.9 5.2 3.8 -3.6 6.1 7.2
Qué 2.7 -5.2 4.0 5.0 4.3 -3.3 6.2 7.0
NB 1.2 -3.5 3.2 3.9 3.0 -1.6 5.2 5.9
NS 2.4 -3.8 3.3 4.1 3.8 -1.9 5.3 6.1
PEI 5.1 -4.5 3.5 4.6 7.0 -2.6 5.5 6.6
N&L 4.0 -7.0 4.5 5.7 4.1 -10.5 8.5 8.0
Canada 1.9 -5.5 4.0 5.1 3.6 -4.8 6.8 7.2
Sources: CIBC, Statistics Canada, CMHCCanadian Output Gap (L) Closing Later Than US (R) 22
Output Gap and Forecast Output Gap
(% GDP) (% of Potential GDP)
3 2%
0 0%
-3 -2%
-6 -4%
Forecast
-9 -6%
-12 -8%
-15 -10%
Sep-21
Jul-22
Jan-20
Feb-22
Dec-22
Aug-19
Apr-21
Jun-20
Mar-19
Nov-20
-12%
2019 2020 2021 2022
Source: Statistics Canada, BEA, CIBCCanadian Dollar Strength a Headwind to Export Recovery 23
Contribution of Exports to GDP Growth since 1975
2.0
(%pts)
1.5
1.0
0.5
0.0
USDCAD Below 1.30 USDCAD 1.30 & Above
Source: Statistics Canada, CIBCInflation: Already Pockets Where Demand Remains 24
But Operating Costs Are Higher
Personal Services CPI (% Yr/Yr) 7.0 Food Service CPI (% Yr/Yr)
6.0
6.0
5.0 Full Service
5.0
4.0 Limited service (takeout)
4.0
3.0
3.0
2.0 2.0
1.0 1.0
0.0 0.0
Jan-10
May-12
Jul-13
Jan-17
May-19
Jul-20
Sep-14
Mar-11
Mar-18
Nov-15
Jul-13
Jul-20
Sep-14
Jan-10
May-12
Jan-17
May-19
Mar-18
Nov-15
Mar-11
Source: BLS, CIBCBiden Stimulus Talk and The “Reflation” Trade 25
What to Expect From the Recovery’s Second Wave? 26
• Near term hit to economy should give way to strong growth in second half
of this year, particularly if vaccination process speeds up.
• Households on aggregate have the spare cash to spend on services when
certain sectors can fully reopen
• Those sectors worst hit by the crisis generally require less capital
investment, therefore should be quicker to rebound when allowed to
reopen – a positive for employment growth
• Strong growth and inflation in late 2021/2022 will see long-term interest
rates rise, but central banks will be able to prevent a “tantrum”.
• Federal Reserve to hike in 2023, BoC to follow keeping C$ appreciation in
check.
• Low interest rates reduce need for fiscal restraint to reduce debt levels in
the future. Little change in underlying deficits (yet)Gradual Climb in Long Rates In H2 2021 and 2022 27
2021 2021 2022
END OF PERIOD: 18-Jan Mar Jun Sep Dec Mar Jun Sep Dec
CDA Overnight target rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
98-Day Treasury Bills 0.06 0.10 0.15 0.15 0.20 0.25 0.30 0.30 0.40
2-Year Gov't Bond 0.17 0.20 0.20 0.25 0.30 0.40 0.45 0.50 0.60
10-Year Gov't Bond 0.83 0.70 0.85 0.85 1.25 1.25 1.30 1.45 1.60
30-Year Gov't Bond 1.45 1.30 1.45 1.50 1.80 1.80 1.80 1.90 1.95
U.S. Federal Funds Rate 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125
91-Day Treasury Bills 0.08 0.10 0.20 0.15 0.25 0.30 0.35 0.40 0.50
2-Year Gov't Note 0.15 0.15 0.15 0.20 0.30 0.35 0.40 0.55 0.55
10-Year Gov't Note 1.10 1.00 1.20 1.20 1.45 1.40 1.45 1.50 1.75
30-Year Gov't Bond 1.84 1.75 1.90 1.90 2.00 2.00 2.20 2.25 2.25
Canada Yield Curve (10-Year — 2-Year) 0.66 0.50 0.65 0.60 0.95 0.85 0.85 0.95 1.00
US Yield Curve (10-Year — 2-Year) 0.95 0.85 1.05 1.00 1.15 1.05 1.05 0.95 1.20
EXCHANGE RATES CADUSD 0.79 0.77 0.76 0.75 0.75 0.75 0.74 0.74 0.75
USDCAD 1.27 1.30 1.32 1.33 1.33 1.34 1.35 1.35 1.34
USDJPY 104 102 100 100 99 99 99 99 99
EURUSD 1.22 1.23 1.25 1.26 1.26 1.25 1.25 1.25 1.24
GBPUSD 1.37 1.35 1.37 1.39 1.40 1.39 1.40 1.40 1.40
AUDUSD 0.77 0.79 0.80 0.82 0.83 0.84 0.85 0.86 0.87
USDCNY 6.47 6.40 6.32 6.25 6.15 6.05 5.95 5.85 5.8028 CIBC World Markets Inc., CIBC World Markets Corp., CIBC World Markets Plc., CIBC Australia Limited and certain other corporate banking and capital markets activities of Canadian Imperial Bank of Commerce operate under the brand name CIBC Capital Markets. This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority, and (c) in Australia, CIBC Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, “CIBC”) and (d) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors (“MII”) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority. U.S. MIIs receiving this report from CIBC World Markets Inc. (the Canadian broker-dealer) are required to effect transactions (other than negotiating their terms) in securities discussed in the report through CIBC World Markets Corp. (the U.S. broker-dealer). This report is provided, for informational purposes only, to institutional investor and retail clients of CIBC World Markets Inc. in Canada, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This document and any of the products and information contained herein are not intended for the use of private investors in the United Kingdom. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of wholesale clients of CIBC Australia Limited. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC. Before making an investment decision on the basis of any information contained in this report, the recipient should consider whether such information is appropriate given the recipient’s particular investment needs, objectives and financial circumstances. CIBC suggests that, prior to acting on any information contained herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. The information and any statistical data contained herein were obtained from sources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient’s convenience and information, and the content of linked third-party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. © 2021 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets Inc. is prohibited by law and may result in prosecution.
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