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Today was very quiet on the economic data front. There were no major economic releases in Canada and US. In the financial markets, the Canadian dollar rose to a 3-month high around 74 US cents, partly reflecting the gradual recovery in oil prices that lifted the price of West Texas Intermediate crude oil to $36 a barrel.
The troubling social unrest in America continues. Typically, economists do not comment on such developments, but there are some important economic implications Firstly, the non-peaceful protests will disrupt some businesses that are trying to reopen or recover from the pandemic fallout. Secondly, there is the potential negative impact to consumer confidence. It was already a bleak economic environment in the USA, but the terrible events and escalating tension can damper consumer sentiment. Remember that personal expenditure is roughly 70 percent of the US economy. Third, protestors and public officials may be unable to practice the physical distancing health officials are stressing as a means to contain COVID-19. This runs the risk of increasing the number of COVID-19 cases, which then adds to the risk of a second wave of infection. Increased health risks do create negative economic risks. To be clear, it is completely understandable why protests, particularly peaceful ones are happening. However, they can create conditions that can dampen economic recovery.
Tomorrow, the Bank of Canada will deliver its first rate announcement under the new Governor, Tiff Macklem. No change in the overnight rate is anticipated. The accompanying communique and press conference will receive considerable attention as they will signal any potential future changes in policy direction under the new leadership. Governor Macklem is well known to economists and investors in Canada. Although the communication may be less colourful than under Governor Poloz, who was known for creative analogies and metaphors, a significant change in policy in the coming months is unlikely. The Bank of Canada is likely to resist the adoption of negative interest rates. If further stimulus is needed, it could expand the current debt purchase program. Alternatively, the Bank could adopt forward guidance about the future path of interest rates. Thinking back to the 2008/09 crisis, the Bank signaled that it would remain on the hold for many months in order to shape financial market expectations and lead to lower bond yields. However, the time for such actions is not now. The provinces are gradually reopening, and I suspect that Governor Macklem will want to assess how that is going before deciding to change the current policy stance.
Craig Alexander is the first Chief Economist at Deloitte Canada. He has over twenty years of experience in the private sector as a senior executive and leading economist in applied economics and forecasting. He performed macroeconomic research, regional and sector analysis, and fiscal market forecasting and modelling. Craig is a passionate public speaker and holds a graduate degree in Economics from the University of Toronto.