Macroeconomic Lessons from the Pandemic
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Stéfane Marion, Chief Economist and Strategist at National Bank of Canada, provided a thought-provoking presentation and Q&A on macroeconomic lessons from the pandemic.
Stéfane began by highlighting that the world is experiencing the highest geopolitical uncertainty since the Iraq invasion that is fundamentally impacting economic policies and financial asset evaluations.
Current economic data show selected stagflation similarities to the 1970s: CPI has increased above the unemployment rate, accompanied by rising wages and highly simulative monetary policy. However, the Canadian stock market is on an even stronger footing in 2022 than during the 1970s as energy, other commodities and real estate tend to do well under a stagnation scenario and these sectors are well represented in the S&P/TSX index.
Both the Federal Reserve (Fed) and Bank of Canada (BoC) have tightening options beyond increasing policy rates as they are using their balance sheets for quantitative tightening (QT), so they do not need to hike as aggressively. Stéfane thinks the BoC should be flexible in its rate hike approach given the Fed’s plan to reduce its balance sheet and forward guidance on rates that has already significantly increased medium and long-term global and Canadian bond yields.
In contrast to the United States and especially Europe, Canada has several advantages in its growth outlook: record high commodity prices providing a boost for trade, surging business profits and revenues in the resource sector creating strong job growth, and favourable demographics from immigration bringing in more working-age skilled workers than any other major advanced economy. Yet, the picture is not all rosy. Non-residential investment is far below its pace of growth prior to the pandemic, and this trend has worsened recently given the first contraction in Canada’s capital stock adjusted for depreciation since the 1960s. Inadequate business capital spending also explains Canada’s underperformance in productivity. Rebuilding capital stock will be essential to boost Canada’s economic growth sustainably.
Stéfane views that the BoC’s tightening will likely lead inflation back to the upper part of its target range at 2.5-3.0 percent. He recommends that the federal government move from short-term, aggressive fiscal stimulus during the pandemic to a supply-side focus in its budgets. This would “deploy more capital from both the private and public sectors, and attract more foreign direct investment,” with capital spending being supported by more business-friendly policies.
Chief Economist and Strategist, National Bank of Canada