Peter G. Hall – Vice-President and Chief Economist, Export Development Canada
Unprecedented events are hard to map out. Until they’re over, that is. If it weren’t so serious, it’d be funny how expert we can all be in retrospect. Sort of like those head-scratching high school math problems—once you see the solution, well, duh! It’s obvious. Before that? Not so much. Same goes for the economy. There’s a lot of confusion about our future direction, and even more opinions. To cut through some of the opacity, EDC Economics has created the Canadian Economic Recovery Tracker (CERT). What is it, and how can it help?
Lots of economic trackers already exist. Extensive work has been done over the years on leading, lagging and contemporaneous indicators. The leading ones have likely received the most attention, as our curiosity is perhaps greatest for what’s next. COVID-19 has changed that up. To be clear, standard leading indicators are still functioning well, as far as we can tell. But they have been upstaged.
For the moment, economies everywhere are going where COVID-19 says they can go. It seems we have a new, and dominant leading indicator now. The logic is simple: Rising infection rates lead to economic shutdowns of varying magnitude, and more public stimulus. Flattening or declining curves are a signal to reopen, and ultimately to a roll-back of stimulus measures.
As such, our new tracker incorporates the latest COVID-19 data for Canada. Specifically, we use the aggregated, seven-day moving average of daily new cases, as reported by Johns Hopkins University, taking the weekly value as a share of the series maximum value, which for Canada was recorded on May 22.
There’s a lot more to the tracker, though. Pandemic data may be helpful, but they don’t tell the whole story. To round out the picture, we have four additional sub-indexes, covering as broad a swath of the economy as possible. First, we include financial markets. Stock market indexes are a known and trusted bellwether of the economy just about everywhere, so we have included the TSX Composite Index in our measure. To that we have added the Western Canada Select oil price, which helps to track a key Canadian sector, and also general economic direction. Both indicators are weighted equally, and are calculated as a percentage difference from their average values in January 2020.
Transportation and mobility are also critical gauges of economic activity, and likely more pronounced these days. The Google Mobility indices are an excellent real-time guide. They measure visits to six places of interest as a share of their immediate pre-pandemic levels. Of these, we use the four that are best correlated with economic activity. To this we add weekly domestic and international flights, and freight ton-miles supplied by Canadian National.
Sentiment is critical these days. We cover both business and consumer sentiment. For the former, we use the IHS Markit purchasing managers’ index, a trusted leading index of industrial intentions. For consumers, we use the Bloomberg Nanos Canadian Confidence Index.
Finally, we gauge spending and employment. This sub-index includes three measures: hours worked, taken from Statistics Canada’s monthly Labour Force Survey; job postings data, supplied by Indeed Hiring Lab Canada; and credit card purchase information from RBC. The latter come from RBC’s Consumer Spending Tracker, and while they cover a subset of total purchases (i.e., they likely don’t reflect auto sales and some large home appliances), they’re seen as a timely and good proxy for total spending.
OK, let me end the suspense—what is the CERT saying? Sum it all together, and it seems that Canada’s economy bottomed out in late April—something that current jobs and spending data seem to bear out. It also tracks a steady improvement since then. At the trough, the CERT was down by close to 45%. It’s now more than halfway back, down just 19% from the pre-COVID-19 period. Better still, the trend is still decidedly upward. Financial market and COVID-19 data are the ones lending strength. Holding things back are the transportation and mobility indicators.
The bottom line?
EDC’s CERT shows that Canada’s economy is on the mend. It has shown significant progress since hitting its late-April trough. This is no dead-cat bounce, as some like to say; to date, we have powered back consistently. Will the rebound continue? Currently, the future rests heavily on the world’s collective success at reining in the pandemic. We can all hope that second-wave infections, underway everywhere, but alarmingly large in pockets of the United States, are contained in short order, facilitating as steady a return to a pre-COVID-19 normal as possible. The alternative is unnerving.