There were no surprises this morning from Governor Macklem’s virtual presentation to the Canadian Clubs of Canada. His opening written statement was quite brief and it was followed up with a Q and A. Here are the key points that he emphasized.

• 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”.

None of us has any experience in dealing with a medical emergency that has become an economic crisis, and none of us knows how long this will last or how the end game will play out. I think we all can agree that this is a dilemma like no other, freighted with profound uncertainty.

Economic theory and econometric modelling do not provide a specific roadmap. Unlike previous postwar recessions, today’s is not an endogenous shock triggered by huge imbalances.

To be sure, medical considerations should outweigh economic ones. The job of policymakers is to mitigate the financial burdens caused by doing the right things on the medical side.

How do we navigate the coming months? In my opinion, this is a question to be answered first by medical experts. To assess the next steps from an economic policy perspective, the government should explain its view on the likelihood of a vaccine and antivirals over a six-month, one-year and three-year time frame.

A sober assessment of the outlook for Canadian growth suggests that while the second quarter might be the bottom of the cycle, the economy will only crawl back to full employment. Those hardest hit will be those that can least afford unemployment. Small businesses, which account for more than 40% of private-sector jobs, are by now hard hit, and in many cases, might have already received a death blow. Undeniably, some of these lost jobs are gone for good.

The hope is the waves of stimulus doled out by the government, and the Bank of Canada will eventually bolster the economy and spark a revival in hiring.

The risk, though, is that the pandemic is inflicting a “reallocation shock”[1] in which some firms and even entire sectors suffer lasting damage. Lost jobs in these sectors don’t come back, and unemployment remains elevated. Traditional fiscal stimulus does not address this kind of shock.

An estimated 30% of job losses from February to May could be the result of this permanent reallocation shock. The labour market will initially recover swiftly, as we saw in the May data, but then level off with too many people still unemployed.

Workers in the hospitality industry—accommodation and food—are among the most at risk, alongside inessential retail, leisure, travel and education. Most of these people cannot work from home.

In many cases, the pandemic has increased the challenge of bricks and mortar companies facing off against e-commerce platforms such as Amazon, accelerating a pre-crisis trend in which Canadian companies have woefully underperformed.

The unique shock of the virus means governments may need to do more to support businesses and protect workers than they would in a typical recession. This puts the government under pressure to craft policies that help viable cash-strapped firms to survive and displaced workers to navigate to different jobs, but which ideally do not prop up companies that are no longer sustainable.  We have already seen evidence[2] that shows that high COVID-unemployment benefits can encourage layoffs, discourage work and delay productive reallocation.

We need to know the proportion of  Canada’s job losses that come from lockdown and weak demand. Those will diminish quickly in response to stimulus and reopening. The part generated by high unemployment benefits encouraging workers to stay home requires a gradual reduction in income support. The most intractable group of unemployed suffer the permanent fallout of the reallocation shock.

For them, the government should provide the training that gets workers ready for the next phase of the technology revolution.

The pandemic has accelerated structural shifts that will remain. The efficient response to these shifts requires–among other things–widespread enhanced broadband and computer access for all households, reduced government land-use restrictions and occupational licensing restraints, the removal of regulatory barriers to business formation and interprovincial trade restrictions.

These fault lines were there before the virus, but they are now exposed and need a new social contract between government and its citizens.

[1] Working Paper No. 2020-59, “COVID-19 Is Also a Reallocation Shock, Jose Maria Barrero, Nick Bloom, and Steven J. Davis (May 5, 2020), https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202059.pdf “…the potential for customer (and employee) concerns about infectious disease transmission to alter retail formats, restaurant designs, and the delivery of many medical, professional, personal and business services suggest that the reallocative consequences of the COVID-19 pandemic will continue to play out for many months and years to come.” p. 18.

[2] Ibid, p. 20 “When Equinox had to start furloughing some employees at its chain of upscale fitness clubs, Executive Chairman Harvey Spevak had a surprising message to stakeholders. ‘We believe most will be better off receiving government assistance during our closure’.” This passage is from Thomas and Cutter (2020), who also write: “Equinox joins a number of companies, including Macy’s … and [furniture maker] Steelcase …that are citing the federal government’s beefed-up unemployment benefits as they furlough or lay off staff amid the coronavirus pandemic. The stimulus package is changing the calculus for some employers, which can now cut payroll costs without feeling they are abandoning their employees.”

Canadians of all stripes were blindsided on June 4, when the Canadian Mortgage and Housing Corporation suddenly revised certain key underwriting guidelines. The story got a little more interesting on Monday, when CMHC’s competitors in the mortgage insurance space, Genworth Canada and Canada Guaranty, both announced they would not be following suit.

“Genworth Canada believes that its risk management framework, its dynamic underwriting policies and processes and its ongoing monitoring of conditions and market developments allow it to prudently adjudicate and manage its mortgage insurance exposure, including its exposure to this segment of borrowers with lower credit scores or higher debt service ratios,” said Stuart Levings, Genworth Canada’s president and CEO.

In an online statement, Canada Guaranty said “[O]ur underwriting policies are consistently updated to reflect evolving economic environments and emerging mortgage default patterns. This philosophy has resulted in the lowest loss ratio in the industry.” The statement went on to question the logic of CMHC’s lowering of debt servicing ratios, arguing they are not a “significant predictor of mortgage defaults.”

There tends to be a lot of static whenever CMHC makes an announcement; this time will be no different, especially among Canadians who may not be familiar with the intricacies of the mortgage insurance space. That would be almost all of them.

“First-time homebuyers don’t really know who Genworth is, or who Canada Guaranty is,” says Centum FairTrust’s Jimmy Hansra. “The majority of them only know CMHC.”

Many of these buyers, once the only mortgage insurance company they’ve ever heard of tells them they’re ineligible, are going to think they’ve been shut out of the market completely. They’ve never been taught that most lenders work with all three companies, or that credit unions and even behemoths like Scotiabank regularly work with Genworth or Canada Guaranty.

Hansra says CMHC’s tighter lending guidelines may simply drive more business toward its competitors, particularly if they are able to reach first-time buyers with the message that their homebuying window of opportunity hasn’t been nailed shut.

While there may be some short-term confusion among headline-gobblers following the divergence of policies at CMHC, Genworth and Canada Guaranty, one thing is clear: The added competition should benefit everyone.

“It’s great for borrowers. It’s great for brokers, too. CMHC has programs that Genworth doesn’t have, and Genworth has specific mortgage programs that CMHC doesn’t have. Canada Guarantee is a nice little niche mix in there, too,” Hansra says.

“When you have good people like that out in the market, it definitely helps the consumer, and it helps the broker because there’s more choice. You always want your clients and your lenders to have more choice.”

Some still baffled by CMHC’s underwriting changes

CMHC’s underwriting changes haven’t drawn much support, a less than shocking development considering they are expected to decrease spending power by 11 or 12 percent. CMHC’s decision to slow homebuying seems in direct opposition to federal, provincial and central bank policies meant to increase liquidity as a means of nurturing Canada’s economic rebound from COVID-19.

“How else does [CMHC CEO Evan Siddall] expect the economy to get humming along again?” wonders Hansra. “You’re going to handcuff the real estate market, which tends to account for a large percentage of your GDP.”

Leor Margulies of Robins Appleby Barristers and Solicitors, who deals with a range of Schedule 1 banks, private and alternative lenders, was slightly more incensed.

“Why now?” Margulies asks. “People are suffering now, so let’s make it even more difficult? Are people buying houses like crazy right now?”

For Margulies, blame for the potential damage CMHC’s recent moves will inflict on first-time buyers belongs to Siddall himself, who Margulies sees as being overly paranoid of a Canadian housing crash.

“It’s this view that real estate is bad,” he says. “‘If we don’t put a lid on it – and squeeze the lid down – there’s going to be an explosion. People will take on too much debt and it’s going to be 2007 in the U.S.’ It’s ridiculous. It’s never happened before. It didn’t happen in 2008 here. It didn’t happen here 1990 to 1995.”

“[Siddall’s] said some terrible things,” Margulies goes on. “And he continues to say terrible things. He wants to ratchet this industry down. He sees it as a real threat to the economy.”

In Hansra’s eyes, Siddall may have tipped his hand on May 19, when he first told Canadians that CMHC is expecting a decline in average home prices of up to 18 percent, an estimate few have echoed.

“CMHC needed to justify why they came out of the blue, without any actual facts or hard figures, and said home prices are going to drop by nine to eighteen percent,” he says. “In my opinion, they needed some validation. ‘Let’s go out in the market and say this is going to happen, and then this gives us an excuse to change our mortgage underwriting guidelines.’ That’s my take on it.”

The controversial new guidelines – and their arrival in the midst of a global pandemic – were enough to break a long-standing habit of Genworth and Canada Guaranty following CMHC’s underwriting path. The break is largely one of philosophy: Do you try to administer a tailored underwriting process that attempts to take into consideration each borrower’s unique circumstances, or do you make those borrowers, as diverse as they and their circumstances are, follow a single standard that will inevitably cause many of them to suffer through no fault of their own?

“It’s really taking away the common sense of lending,” Hansra says of CMHC’s sledgehammer approach. “And it’s going out the door because CMHC has a fear that the real estate market is going to go down by nine to eighteen percent.”

The doomsayers have been proven wrong by this employment report and by the high-frequency data that have been pointing to the start of a rebound in Canada’s economic activity. We have been signalling green shoots in the economy for several weeks, and while these are early days, those green shoots are surely growing. We are optimistic but mindful that just under 5 million Canadians remain without work or with substantially reduced hours.

Job Market Has Improved From Mid-April to Mid-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 Work

Even 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).

Green Shoots

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.

On the heels of a devastating decline in the Canadian economy, the Bank of Canada suggested today that the worst of the pandemic’s negative impact on the global economy is behind us, conceding, however, that uncertainty remains high. The Bank today maintained its target overnight rate at 0.25%. No additional rate cut was expected as the Bank has described the 0.25% level as the effective lower bound of the policy rate. Governor Poloz has all but ruled out negative interest rates unless the economy deteriorates dramatically further.

Today’s Governing Council meeting is Stephen Poloz’s swan song, as the new Governor, Tiff Macklem, takes the helm today. Macklem took part as an observer in the Governing Council’s deliberations and endorsed today’s rate decision and measures announced in the press release, thereby assuring continuity in monetary policy.

The Bank has taken very aggressive action to support liquidity and the full functioning of financial markets by buying short- and long-term securities. The central bank’s balance sheet holdings of securities have grown to about 20% of Canada’s GDP, up from 5% pre-crisis. That’s still well below the levels seen at the US Federal Reserve, the Bank of Japan, and the European Central Bank, which have conducted these quantitative easing operations since the financial crisis more than a decade ago. However, the Bank of Canada’s securities purchases have been extraordinary in relation to the size of our economy.

“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery.” According to the central bank, the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR).

The level of real GDP in Q1 was 2.1% below the level in the fourth quarter of 2019. The Bank of Canada is now predicting that real GDP in Q2 will likely post a further decline of 10%-to-20%, as continued shutdowns and sharply lower investment in the energy sector take an additional toll on output. That suggests a peak-to-trough decline of 12% to 22%, instead of the 15% to 30% scenario the central bank had previously been estimating. “The Canadian economy appears to have avoided the most severe scenario,” the Bank of Canada said.

Bottom Line: While the degree of uncertainty remains high, there is evidence that the worst of the economic downturn is behind us. Preliminary data for May suggests that home sales picked up on a month-over-month basis in May in the GTA and GVA, although home sales continued to be down significantly from levels one year ago.

Some people are concerned that the extraordinary stimulus in monetary and fiscal measures in recent months might, in time, be inflationary. Governor Poloz has made it clear that the dire results of the economic shutdown would have been highly deflationary had these actions not been taken. Deflation, coupled with high debt levels, would have triggered a depression. Economic models are ill-equipped to deal with the fallout of the pandemic. Policymakers need to be nimble in responding, and when the economy has recovered sufficiently, they will begin the unwinding of all of this stimulus, which will require an equally deft response on both the fiscal and monetary side.

Near-Record Decline in Q1 GDP Better Than Flash Estimate

The hand-wringing about the Q1 GDP data released today misses the point that the data were actually better than expected. The Canadian economy declined at an 8.2% annualized rate in the first quarter, less harsh than the earlier estimate by StatsCan of -10%. Of course, every sector of the economy was hit by the enforced shutdown, but not by nearly as much as most economists anticipated. For the month of March, the decline was 7.2%, less dire than the -9% earlier estimate.

In light of the current unprecedented national and global economic environment, StatsCan is providing leading indicators of economic activity. Their preliminary flash estimate for April is an 11% decline in real GDP. This estimate will be revised as more info becomes available, but the March and April decreases are likely to be the largest consecutive monthly declines on record.

The Economy Has Bottomed

It looks increasingly likely that we are already past the bottom of the latest economic downturn, with GDP potentially getting back on a positive growth trajectory as early as May.

That won’t be enough to prevent a historically large drop in Q2 output– likely multiples of the decline in Q1–but it would leave the data tracking along the more “optimistic” end of the -15% to -30% growth range estimated by the Bank of Canada in their last Monetary Policy Report. Government support programs for those losing work have been unprecedented–household disposable income actually edged up slightly in Q1 despite the large drop in overall economic activity, boosted by government transfers. With the decline in spending in March and April and the rise in disposable income, the savings rate is soaring. All of us are saving money by doing our own cooking and cleaning. We aren’t travelling and shopping is certainly limited, not to mention the savings on gasoline, entertainment, hairstyling and gym memberships. Hopefully, this could provide a cushion to support spending and the economy will turn sharply higher in Q3.

Still, the three million jobs lost over March and April will not be recouped quickly. The lockdown is easing only gradually, and any activities requiring large gatherings–think tourism, conferences, concerts, movies and sports–will remain closed until there is a vaccine or effective treatment. We expect things will begin to get better from this point, but still look for the unemployment rate to remain elevated at 8.5% in Q4 of this year. It is currently 13%.

The Housing Outlook

Much has been made of the recent CMHC Housing Market Outlook report released this week. The gloomy outlook of up to an 18% drop in home prices, a delayed recovery not until 2022, and a 20% arrears rate garnered headlines. First-time homebuyers were warned that housing was no longer a good investment, at least not over a three-year horizon. But the CMHC’s own data shows that home prices have risen an average of 5% annually over the past twenty-five years. And though no one’s retirement nest egg should consist solely of their residential real estate, a home is one of the few investments that you can actually use. People buy homes for many reasons well beyond wealth accumulation. The pride of ownership and lifestyle choice dominates the decision to buy for many.

Also this week, the Governor of the Bank of Canada suggested that the doomsters were overly pessimistic and asserted his view that the economy would recover from its medically induced coma much faster than the pessimists were suggesting. Clearly, none of us have a crystal ball, nor have we ever before experienced a pandemic recession. While we rise from the abyss, the pain may well be far from over. People are still losing jobs and many businesses continue to sink. Any recovery is dependent on whether the virus cases keep slowing and whether there is a second wave of infections.

But oil prices have risen sharply, a major boon for Alberta and some high-frequency data have improved. The stock market is well off its lows, interest rates have fallen sharply and the qualifying rate for mortgage stress tests has fallen to 4.94%. Actual mortgage rates are near record lows and are likely to remain low for the foreseeable future.

In time, immigration to Canada will restart, and foreign students will return. New businesses are blossoming even now and many sectors will continue to advance. To name a few, we are seeing burgeoning growth in telemedicine, artificial intelligence, big data analysis, cloud services, cybersecurity, 5G, home entertainment, virtual everything, home fitness, DYI renovations, indeed, DIY anything.