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Today’s economic data docket was quite sparse with policy announcements being front and centre. As part of the COVID-19 support effort, the Government of Canada today announced plans to re-direct up to one-tenth of the $33.5B funds allocated to the Investing in Canada program for the retrofit of public buildings and spaces to aid physical distancing and improve hygiene. The money will be distributed through arrangements with the provinces and territories to ensure quick delivery, flexibility, and efficiency. Hospitals, schools, parks, and bike lanes are among the eligible projects so long as they are completed by the end of the 2021 construction season. The program will be funded by the federal government up to 80 percent and will be fiscally-neutral since the money was already allocated, according to Infrastructure Minister McKenna who announced the program after extensive consultations with provincial and territorial leaders. Given the high share of the federal financial contribution, we expect that many provinces will take advantage of this opportunity to push forward on relevant infrastructure projects.
The only notable release south of the border was the US Labor Department’s consumer price index. Consumer prices tumbled 0.8 percent in April, marking the largest drop since December 2008, pushing inflation (defined as the change in prices from the year prior) down to just 0.3 percent. The April drop, comes atop of a 0.4 percent decline in the month prior, was related to a plunge in gasoline and airline ticket prices as people remained confined to their homes during the crisis. Core CPI, which excludes energy and food prices, fell 0.4 percent in April and is up just 1.4 percent from a year earlier. The weaker than expected inflation figures will do little to assuage fears of deflation at the Federal Reserve, and could motivate further accommodative action if they persist. Our base case forecast anticipates low inflation, not a deflationary environment, but this risk we are monitoring closely.
Despite the unprecedented monetary and fiscal stimulus, the US economy will shrink by over 5 percent this year according to Philadelphia Federal Reserve President Harker who spoke in Delaware today. The decline is consistent with views of Richmond Fed President Barkin, who expects the jobless rate to reach high double-digits in the coming months. Barkin believes the US economy is currently near the trough, but still expects both the second and third quarter to be rough with the recovery likely to be gradual.
We agree with the notion that the recovery will be far more gradual than the “V-shaped” typically presented in economic textbooks. On the other hand, we believe that the immense stimulus implemented domestically and abroad should prevent the economy from falling into a protracted “U-shaped” or “W-shaped” double-dip. Rather, our current base case forecasts a recovery that looks more like a check mark, or a “swoosh” reminiscent of a Nike logo.