First Formal Remarks By Tiff Macklem, Bank of Canada Governor

• Negative interest rates are off the table as they “lead to distortions in the behaviour of financial markets.”
• Therefore, no additional Bank of Canada rate cuts is coming.
• The BoC will continue its securities purchase program to provide liquidity to financial markets.
• In response to questions, he said he expects lasting damage to demand and supply in the economy. He said the recovery will be “long and bumpy” and “slow and gradual”.
• The inflation target of 2% will remain the beacon for BoC policy. Currently, inflation is below target.
• “This recession is a deep one. Women have been particularly hard hit because they work disproportionately in the hard-hit service sector and women are disproportionately caring for children and the elderly”.
• Fiscal support programs lay the foundation for the recovery of particular groups.
• Oil-producing regions are hard hit by the oil price shock. The price of oil has moved up recently to WTI $40, but the pandemic clearly “weakens oil demand”.
• Household debt levels are a concern. Fiscal transfers help and households have reduced their spending. The role of the BoC is to provide the required stimulus to encourage households to spend. The macroprudential measures already in place will discourage highly indebted households from taking on more debt.
• He expects “pretty good growth in jobs and GDP in Q3”. Beyond that is more uncertain as we will need to repair the economy.
• All institutions must speed up actions to deal with climate change, including the BoC. We will need to get a handle on the implications of this for the economy.
• Chartered banks are more conservative in their lending practices since the pandemic hit. The securities-purchase programs are intended to keep credit flowing from the banks. The banks are an important shock absorber during this recession. Conditions in financial markets are much improved since the beginning of the crisis. “Markets have normalized and credit is flowing more freely”.
• Both the government and the BoC have introduced extraordinary programs to deal with this crisis. He said, however, that we could use “additional international assistance and cooperation”.
• Real estate question–How much risk does this sector represent? The Governor commented that different sectors will behave differently Warehouse and fulfillment centre demand is quite strong. Commercial real estate outlook is uncertain– particularly office space and shopping malls. Housing–he commented that “sharp drops in housing activity” has led to “little change in prices” thus far. This will vary by region and type of housing in the future.  
• “The pace of change is accelerating. Societies around the world are having trouble keeping up. The central bank must get ahead of this” and be prepared for the unknowns, be agile and resolute.
• Asked about the potential for a second wave of a pandemic, he said, “The outlook is fraught with uncertainty. The biggest uncertainty is the course of the virus. There will be increases in the number of cases. We need testing and tracing with quick responses locally. We need to determine how to open up safely.”
• When asked for his last word, he said, “We are going to get through this. Canadians are resourceful, business ingenuity is strong, this will be a long slow recovery and there will be setbacks. We have avoided the worst scenario. Not all jobs will come back. The Bank is laser-focused on supporting this recovery and getting Canadians back to work”.

More Green Shoots–Employment Rebounds 10.6% in May 

Canada’s  Labour Force Survey (LFS) results for May, released this morning by StatsCanada, reflect jobs market conditions as of the week of May 10 to May 16. By then, some provinces had begun to gradually ease the pandemic lockdown that has thrown our economy into recession. Already, as of mid-May, the jobs market had shown a marked improvement, and no doubt, it has subsequently continued to revive.

From February to April, 5.5 million Canadian workers were affected by the pandemic shutdown. This included a drop in employment of 3.0 million and a COVID-related rise in absences from work of 2.5 million. Economists were expecting another 500,000 job losses last month. They were wrong.

In May, employment rose by 289,600 (1.8%), while the number of people who worked less than half their usual hours dropped by 292,00 (-8.6%). Combined, these changes represented a recovery of 10.6% of the pandemic-related employment losses and absences recorded in the previous two months. Three-quarters of the employment gains from April to May were in full-time work. The growth was across most industries and provinces, though largely driven by higher employment in Quebec, the province hardest hit by the pandemic. 

Compared to February–prior to the lockdown–however, full-time employment was down 11.1% in May, while part-time work was down 27.6%.

Unemployment Rate Rises As More Canadians Look For WorkEven though we posted employment gains from mid-April to mid-May, the jobless rate rose to 13.7%–up from 13.0%–as easing restrictions caused more discouraged workers to actively look for employment (see chart below). The 13.7% figure is the highest jobless rate recorded since comparable data became available in 1976. In February, prior to the economic shutdown, the unemployment rate was a mere 5.6%. It shot up to 7.8% in March and to 13% in April.

Unlike previous economic downturns. the bulk of the job losses were felt first in the services sector. The pandemic impact subsequently spread to the goods-producing and construction industries in April. Last month, employment rebounded more sharply in the goods-producing sector ( +5.0% or 165,000) than in services (+1.0% or 125,000). The construction industry enjoyed the largest gains in hours worked from April to May with 19.0% growth.

Quebec Accounts For Nearly 80% Of Overall Employment Gains in May

The Quebec provincial government eased restrictions on business activity before the jobs report reference week of May 10 to May 16, notably in construction from mid-April, and in retail trade and manufacturing outside Montréal from May 4. The proportion of workers labourers from a location other than home increased from 60% in April to 65% in May.

The largest employment increases in Quebec were in construction (+58,000), manufacturing (+56,000) and wholesale and retail trade (+54,000), three industries with a relatively high proportion of jobs that are difficult to do from home.

Employment increased by 97,000 (+5.3%) within the Montréal census metropolitan area.

Employment Declines Continued in Ontario But At A Slower Pace

Ontario was the only province where employment continued to fall in May. This is consistent with the fact that most restrictions on economic activity remained in place in Ontario during the week of May 10 to May 16.

While employment declined in Ontario in May (-65,000), it did so at a much slower pace than in March (-403,000) and April (-689,000). All of the employment decline in the province in May was in the services-producing sector (-80,000). At the same time, employment rose by 15,000 in the goods-producing sector, driven by manufacturing (+14,000).

The proportion of employed people in Ontario who worked less than half their usual hours dropped from 22.1% in April to 21.2% in May.

In Ontario, 55% of workers worked from a location other than home in May, the lowest proportion of all provinces and little changed from April.

As most restrictions on economic activity remained in place in Ontario, the number of people who were not in the labour force but wanted to work and did not look for a job was little changed. The unemployment rate continued its upward trend, rising from 11.3% in April to 13.6% in May (see the table below).

Employment Picture Mixed In Western Provinces

Employment in British Columbia increased by 43,000 in May and the unemployment rate rose 1.9 percentage points to 13.4%, as more people looked for work. Almost all of the employment increase in the province was in the services-producing sector (+41,000), led by accommodation and food services (+12,000), educational services (+12,000), and wholesale and retail trade (+12,000).

British Columbia announced a first phase of reopening on May 6, with a plan to lift restrictions on non-essential medical services and parts of the retail trade industry starting May 19, after the reference week.

The number of employed people in Alberta grew by 28,000 in May, following a cumulative decline of 361,000 from February to April. The employment increase in the province was entirely driven by the services-producing sector (+33,000). The unemployment rate increased by 2.1 percentage points to 15.5%.

Alberta allowed some businesses such as restaurants and non-essential shops to start operating from May 14.

In Manitoba, employment increased by 13,000 in May. At the same time, the proportion of employed Manitobans who worked less than half their usual hours fell by 1.7 percentage points to 12.9%. In May, most of the employment increase in Manitoba was in the services-producing sector (+12,000), the majority of which was in wholesale and retail trade (+7,000).

On May 4, Manitoba allowed a number of services businesses to resume their activities, with limited occupancy and physical distancing requirements.

There was little change in overall employment in Saskatchewan. Increases in wholesale and retail trade, manufacturing and accommodation and food services were offset by declines in many sectors, led by information, culture and recreation as well as in construction.

Employment increases in all Atlantic provinces

With the exception of Nova Scotia, provincial governments in the Atlantic provinces started to ease restrictions in early May, with New Brunswick reopening most of its economy from May 8. The number of employed people increased in New Brunswick (+17,000), Newfoundland and Labrador (+10,000), Nova Scotia (+8,600) and Prince Edward Island (+2,600).

There is increasing evidence that the economy has bottomed and is gradually improving. Business shutdowns are easing, and while it will be some time before we see a complete reopening, early signs of improvement are evident.

A Bloomberg News poll taken at the end of May found that 30% of respondents who had lost their job or seen hours decline because of the coronavirus pandemic said they were re-employed or working more. The survey, conducted by Nanos Research, is consistent with other high-frequency data from Indeed Canada and Google that suggest stabilization in labour conditions and economic activity over the past few weeks.

The rebound story is also reinforced by Canadians’ movement patterns. Mobility data from Apple and Google smartphones during the latter half of May suggest more people present in retail stores and parks — coinciding with re-openings across Canada. While transit usage remains down, driving and walking have picked up, a positive sign for commerce.

In addition, the Office of the Superintendent of Bankruptcy Canada reported that the total number of insolvencies (bankruptcies and proposals) decreased by 38.7% in April compared to the previous month. Bankruptcies decreased by 41.5% and proposals decreased by 37.2%. The total number of insolvencies in April 2020 was 43.5% lower than the total number of insolvencies in April 2019. Consumer insolvencies decreased by 43.1%, while business insolvencies decreased by 54.8%.

On another positive note, commodity prices have rebounded. Most notably for Canada, oil prices have risen sharply–great news for Alberta and Saskatchewan. As well, the Canadian stock market has rebounded significantly and the Canadian dollar is up. The Bank of Canada noted this week that the worst of the pandemic decline is behind us.

The Royal Bank economists survey of consumer spending in May shows continued recovery as discretionary spending is returning.

• “As Canadian provinces take steps to reopen their economies, consumers have begun spending more on the discretionary items they shunned during the early phase of the pandemic.
• Entertainment and art spending has benefited most from easing restrictions.
• Spending on dining out continues to recover from lows, as restaurants adapt to take-out and other delivery models.
• Formerly slow spending at merchants selling apparel, gifts & jewelry picked up steam in early May; Canadians spent more at clothing stores in particular.
• Spending at merchants selling household goods remains strong, reflecting spending at DIY construction stores, and on appliances and furniture.
• Canadians began to drive more through early May, and card spending on auto expenses continued to pick up.
• In mid-May, spending at entertainment and art merchants was down 37% from a year earlier, compared with a 58% drop in late April.
• Golfers dusted off their putters as golf courses opened up around the country. Those who prefer playing inside continued to spend on online and console gaming.”

Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in the fall.

Real estate boards report a pick-up in home sales in May in the GTA and GVA.

Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.

The posted mortgage rate finally fell to 4.94% last week, but it remains well above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in coming months and the regulators will change the qualifying rate to a contract rate plus 200 basis points, as planned to happen in April before the pandemic hit.

The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.

One piece of bad news for housing was yesterday’s CMHC announcement of a tightening in mortgage qualification rules for mortgage borrowers with less than a 20% down payment. As I wrote yesterday, I believe this action flies in the face of measures taken by the Bank of Canada, OSFI, and the Department of Finance to cushion the blow of the pandemic and prevent unnecessary insolvencies. CMHC’s tightening measures reduce housing affordability, especially for first-time home buyers, by more than 10% and are totally unwarranted from a prudential perspective. For more on that, see yesterday’s report. As well, Bloomberg News also suggested the same in their article, Canadian Housing Agency Draws Fire For Tightening Mortgage Rules.