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Post mortem: Pandemic value (s) | Financial position

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, discusses the week in economics

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, looks at the week in economics.

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Everything but crying

Statistics Canada reported on June 30 that gross domestic product (GDP) fell 0.3 percent in April, the first monthly decline since the COVID-19 recession bottomed out a year earlier.

The decline was actually a pleasant surprise to most of the Bay Street forecasters, as they had predicted that the third wave of the pandemic would come at a higher cost. Instead, GDP is tantalizingly close to where it was at the start of the crisis.

Statistics Canada’s preliminary estimate of GDP for May, based on incomplete survey data, anticipates another 0.3% decline. But with vaccination rates rising rapidly, that could be the last negative reading for a while. Clearly, the Delta variant of COVID-19 is cause for concern; otherwise, there appear to be few obstacles in the way of one of the strongest periods of growth the country has seen this summer.

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The graphic below provides a snapshot of where we are. It is an index of the rate of change of GDP along with a handful of industries. The severity of the crisis depends largely on what Canadians choose to do for a living.

Pandemic values

Canada is a rich country. The past decade presented you with a glorious opportunity to tap into that wealth, as interest rates spent much of that time closer to zero than ever. So what did we do with that never-before-seen opportunity? Buy houses, mostly.

It’s a problem. One of the reasons Canada’s productivity rate is so low is because the country is investing too much wealth in an unproductive sector. However, policy makers have created a system that incentivizes home ownership, fueling demand where there is already plenty. The graph below shows the change in GDP since 2009 and the share of that total represented by selected industries. The lines speak for themselves.

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Dare to moderation

There were more shocking inflation figures last week. Statistics Canada reported on June 30 that its industrial products price index increased 16.4 percent in May from a year earlier, the largest increase since 1980.

Commodity prices moderated in June and the Bank of Canada remains confident that this spring’s burst of inflation will be temporary, so the worst could be over. The test will be to what extent producers are willing to absorb higher input costs.and if workers start demanding higher wages to offset the increased cost of living.

It’s hard to get a good read on what’s going on with wages because so many people remain unemployed. Most of the unemployed were in the lower echelons of the wage spectrum, so the current group of workers is made up of people who tend to earn relatively higher wages. That makes year-to-year comparisons difficult.

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The graph below consists of the average weekly wage in various industries that were mostly unaffected by social distancing, so the pool of workers available for those sectors likely changed little from the crisis. To further reduce the noise, compare monthly changes in average weekly wage over two years instead of one, as year-over-year readings could be skewed by the general economic collapse that immediately followed the first wave.

The graph is far from the last word on inflation, but there is little obvious wage pressure outside of construction.

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V-shaped recovery

Exports He staggered in April, as a large increase in the value of the Canadian dollar reduced the performance of goods priced in US dollars, Statistics Canada said on July 2.

Still, the 1.6 percent drop since March didn’t change the bigger story, which is that exports are helping the recovery, not hurting. Exports were mediocre after the Great Recession, stripping the economy of one of its most important engines. That partly explains why business investment was also weak, as the two are closely correlated. So it wouldn’t be surprising if executives started deploying more capital, adding to the tailwind that is pushing the economy into a strong second half.

“We see strength across the board,” Anthony Caputo, CEO of Brampton, Ontario-based Can Art Aluminum Extrusion LP, a specialty automotive parts manufacturer, told FP Economy. “There will be a lot of global expansion, a lot of expansion in North America.”

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Gravitational attraction

The United States will always be the destination for most of Canada’s exports – the gravitational pull of such a large and closed economy is simply too strong.

But the center of gravity of the world economy is shifting to Asia, where the growing middle classes in China and elsewhere are generating growth that the advanced economies of Europe and North America simply cannot match. Asia’s relative success in controlling COVID-19 has accelerated that trend, so much so that even notoriously risk-averse Canadian exporters are being pushed into action.

The following graph is an index of the rate of change in merchandise exports to selected countries since the beginning of the crisis (zero = January 2020). The United States and trade in general are essentially the same, with Canada generating about 70 percent of its export earnings from south of the border. Americans are still big customers, but something is happening on the margins.

Financial position

• Email: [email protected] | Twitter: carmichaelkevin

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