Ian and Andrew start the episode by discussing Friday’s data deluge, particularly the red-hot inflation reading in the United States. Andrew talks about the implications for Canada based on the drivers of U.S. CPI strength, noting that both the near-term peak and the end-of-year resting spot have now increased. The duo spend a lot of time talking about the options for the Bank of Canada, and introduce CIBC’s new forecasts for the target rate, which is higher as a result of the data. Ian talks about why CAD rates have been underperforming of late, and why he likes being long cross-market now. Andrew finishes the episode by looking at the odd type of recession he believes could transpire if rates are risen too high.
Ian Pollick: So every time we get these one-offs where we’re wrong, which kind of tends to be every month. (laughs)
Andrew Grantham: So you’re telling me it’s not a one-off then?
Ian Pollick: Correct. I’m just trying to be nice.
Andrew Grantham: (laughs)
Ian Pollick: We’re pulling up the end of year resting point. We’re pulling up the peak rate. So I don’t know if you’ve done the math yet, but do you know what that peak rate is and what the end of the year level looks like? So we haven’t done a Curve Your Enthusiasm in a few weeks and I do apologize for that. It’s been extremely busy with travelling, but we’re here and we have a ton to talk about. Mr. Grantham, how are you?
Andrew Grantham: Good, thanks. How are you doing?
Ian Pollick: I’m doing good. You know, let’s just jump right into this and let’s look back at the data that was released last Friday. You know, we had some key data both in Canada and the US. The Canadian data was largely overshadowed by the US data. But I want to pick it apart a little bit. Obviously we got employment. When I look at the headline number, super strong unemployment rate, we saw a very decent headline build. Wages moved remarkably. But if you dig beneath the data a little bit and get to the nugget of everything, the composition actually wasn’t that great. Walk me through it.
Andrew Grantham: Yeah, the composition seemed a little weak, although we are a little bit concerned that maybe some of the composition isn’t quite what it seems because you know, yes, we did get a 40,000 increase in employment overall. As you rightly said, the unemployment rate coming down again to another record low 5.1. Compositionally we had some good and bad, so it’s all come in from kind of full time employment. That’s a good thing. But then the composition also seemed to suggest that all of the jobs created and more were created in the public sector with private sector employment actually down. Now, that’s the kind of composition that you don’t typically think is very good with the private sector not hiring or actually kind of shedding jobs. Why we’re a little bit dubious about that is that you look at the big gain in public sector employment against some of the sector breakdowns of health care, education, public admin and that break down or the big increase in the public sector employment does seem to be an outlier. So it wouldn’t surprise me at all if next month we get a drop in public sector jobs, we get an increase in private sector jobs, and the composition doesn’t look quite as skewed as it is today.
Ian Pollick: It was super weird because you lost 100,000 in private paid employment, you gained 108,000 in public employment. And this was not you know, there’s no elections that we could look to. There wasn’t a census that we could look to. So I don’t know if it was the seasonal adjustment. I don’t know what it was, but it looked very wrong.
Andrew Grantham: Yeah, we haven’t come to the bottom line, the actual conclusion, but those are things that we looked at ourselves. Was it increased hiring ahead of the Ontario elections? Probably not, because that would have come into public admin as well. And it certainly wouldn’t be as high as the numbers that we got. Could it be the seasonal adjustments? Because, you know, we’ve been through two years now where schools, for example, have been closed periodically and they were open this year. It’s a possibility. But again, the education number doesn’t suggest that that’s the be all and end all in terms of the story. So yeah, the composition looked a bit weird to us. So the one thing that did stand out and the one thing that I know we’re going to talk about this further later on about what it means for the Bank of Canada. The one thing that did stand out, though, is the wages, the wage acceleration. It was to be expected. We have some weak numbers from a year ago dropping out. But, you know, on the month, about a 1% increase on the month. We’re now 4.5 in terms of permanent wage growth. Those are pretty strong numbers. And given what we’re going to see dropping out in June, we’re going to be above 5%, very likely by the time the Bank of Canada meets again, which will be after the next employment report.
Ian Pollick: Yeah. So when I was looking at those numbers and we talked about this, that part of the game that we expected in wages was just a function of weak year ago comparables. But, you know, the month over month average hourly wage increase for permanent workers was like $0.34. And that in of itself was a very big number. So we know that for the next couple of months, we’re going to go to the shoot where I would say 5% is probably a low bar given where we are. But we see it. The bank obviously sees it. How are they thinking about this acceleration in wages vis a vis just broader inflation? Do they care what that number is? Because if, correct me if I’m wrong, they care about wage common more than they do what’s in the LFS. More than what they do in the SEF. Is that right?
Andrew Grantham: Yeah. So unlike the US, unlike most other countries, there is no one best figure for wages in Canada. And that’s why the Bank of Canada came up with this wage common that they have. They use kind of four different wage measures and come up with what they think the common theme of those wage numbers is. Now when it comes to the LFS number and you look at the weight that all of those four individual wage figures have in the wage common. The LFS has an extremely low weight.
Ian Pollick: For a good reason.
Andrew Grantham: Yes. So they know as well as we do that the LFS number is very volatile and that there can be more noise than signal in terms of the data. But I think what it does mean is that it just adds to this whole background of inflation still coming in above their forecast. Wage growth starting to accelerate even if it’s not their preferred measure of wages. And that’s the one thing that does have us leaning towards that maybe the Bank of Canada will have to hike interest rates a little bit more than we’d initially expected.
Ian Pollick: We’ll get to that later on in the podcast. But one of the things I want to talk to you about was, you know, we’ve been looking at the job vacancies numbers in Canada. Obviously, it’s very high. There’s a million jobs outstanding in Canada right now. How much of this do you believe is actually legitimately labour shortages or how much is a function of what we just talked about, which is wages, i.e., there are open jobs, but employers are not willing to pay the wages that people are asking for.
Andrew Grantham: Yeah, and we’re going to have a better answer to that in a couple of months’ time, because the vacancy numbers are very lagged compared to the labour force numbers that we get. We had a lot of questions, you know, you and me both about the big increase in vacancies within the March numbers. But you look at that report and they specifically said at the start of March, the survey period was quite early on and this was picking up a time where, you know, we were still reopening from the Omicron wave. So we haven’t really got any kind of really good data in terms of vacancies at the moment or clean data I don’t think. So I think it is there’s two things behind that vacancy number. Firstly, is timing. It’s not seasonally adjusted. It came very soon after the Omicron wave. So there was a big increase in vacancies within hospitality in particular. But also like as you rightly said then, maybe employers now are realizing that to attract people back to these jobs that they’ve left, they are going to have to entice them back with higher wages. And that’s obviously a good thing from the point of view of those people going back to those jobs. But it does add to this general kind of inflationary background.
Ian Pollick: So let’s just take that a step further. So inflationary backdrop, Friday’s numbers in the US, massive number month over month, a reacceleration as opposed to a deceleration that everyone had thought just a few months ago. And yes, the number was big and I don’t want to dwell too much about the details of the US number other than to say is what does it mean for Canada? When I looked at kind of the underlying contributions, it was very clear that food prices accelerated once again over percent on the month. Can’t compare the shelter component. Energy prices, we know what that’s going to do. But let’s just stick with the food prices for a minute, because we know that Canada has a higher weighting in our basket for food prices, particularly food bought at grocery stores. Walk me through what it means for our forecast.
Andrew Grantham: Yes. So it definitely put some upward pressure on what our forecast was before, you know, just to kind of uncover the layers and kind of take you behind the scenes to the forecast. We had originally penciled in a 0.8 for the month for food in terms of our forecast, which would be a strong month, just not anywhere near as strong as the 1.2 that you cited there for the US. So if we did see an increase in food prices that is comparable, that is equal to what we saw in the US, everything else being equal in terms of the forecast, that would take us up from our previous forecast, which was a 0.9 month over month to a 1% bordering on something actually even a little bit stronger than that.
Ian Pollick: And so walk us through, what does that do to the annual rate of inflation? Because right now in our current forecast, we have peak inflation occurring in the month of June, seven and a half percent. We finished the year at five three. So every time we get these one-offs where we’re wrong, which kind of tends to be every month. (laughs)
Andrew Grantham: So you’re telling me it’s not a one-off then?
Ian Pollick: Correct. I’m just trying to be nice.
Andrew Grantham: (laughs)
Andrew Grantham: We’re pulling up the end of year resting point. We’re pulling up the peak rate. So I don’t know if you’ve done the math yet, but do you know what that peak rate is and what the end of the year level looks like?
Andrew Grantham: Yeah. So it looks as if it’s going to be something around seven, six, seven, seven in terms of the peak in June. But as you rightly said, you know, there’s a lot of moving parts to these forecasts, a lot that has changed since the year began. And I believe if we call a peak in June in terms of what’s happening in energy prices, that would be, I think, the third time that we’ve called a peak in inflation since inflation started to shoot up. I think we did it once incorrectly, maybe in October or November last year. We did it once incorrectly in March of this year. Let’s hope it’s third time lucky and that we have actually peaked in June. It does seem that that should be the case with energy prices, some of the forward looking components for food prices, you know, the underlying commodities have levelled off a little bit. So we should start to see a peak there. But it is very uncertain because of the supply chain issues, because the war obviously in the Ukraine, which is adding to all these inflationary pressures.
Ian Pollick: For sure. So and what about where we finish off the year? Right now we have it at five three in headline. Do you know where we finishing, where we’re going to finish 2022 on your forecast?
Andrew Grantham: Yeah, I mean just add in those forecasts, five three would probably go up to something around five and a half. We haven’t done much in terms of change in the rest of the year, in terms of what we expect. We still expect to see ex food and energy coming down fairly sharply and I would say probably stronger than most others because of what we’ve talked about in this podcast before, which is, you know, how house prices or how housing in general goes into the inflation numbers and how that will peak or maybe even has already peaked and we’ll start to decelerate. But, you know, food, energy prices, we’re still by the end of the year, still well above even the top of the bound that the Bank of Canada has.
Ian Pollick: So I think it’s important for us just to stress that if you think about energy prices more broadly, even if we do continue to see gains on an incremental adjusted basis, those gains have a smaller delta in the index. So would you agree with that, that even if we see 125, $130 oil, the sensitivity of the basket to that increase is lower than it was from that 70 to 120?
Andrew Grantham: Yeah, the percentage point is different. And when we think about where the year over year peaks, we’re obviously by the second half of this year, starting to lap some of the buildup in energy prices that we had towards the end of last year. So that helps from the year over year comparison as well.
Ian Pollick: These are big numbers.
Andrew Grantham: They are very big numbers. They are very big numbers. But you know, as we’ve discussed before, the central banks have a very difficult job at the moment because food and energy are, you know, the things that people buy the most. So, you know, the most obvious to people when those prices start to rise. So that does two things. Firstly, it potentially increases their inflation expectations, which-
Ian Pollick: Oh, there’s no potentially. Let’s just be very clear.
Andrew Grantham: Okay, fine. There’s no potentially.
Ian Pollick: It is people’s expectations are unglued, period.
Andrew Grantham: Yeah. But on the other hand, if their wages aren’t keeping up with what they need to spend on food and gasoline and things they need to buy, then that has to at some point start to reduce their demand for other items. And, you know, that is disinflationary in the longer term. So, you know, at the moment, central banks will have to kind of battle against these rise in inflation expectations, make sure they don’t raise too much. But, you know, at the end of the day, if wages aren’t rising the same as a lot of these food and energy prices, then that has to be disinflationary for some other items in the future.
Ian Pollick: Yeah, I would agree with that.
Andrew Grantham: So I think we’ve talked enough about inflation at the moment. You know, we’ve talked before about housing and the negatives that could have in terms of GDP growth and in terms of inflation in the second half of the year, maybe more so than the central bank, more so than some other people, some other forecasters expect. But there was also a discussion of housing, along with other risks as well in the financial systems review that we had this last week. So I don’t know if you had any time to have a detailed look at that. It’s very strange, you know, in terms of these risks that they say have increased, but yet, you know, they’re also saying, and rightly so, that they need to increase interest rates because of what’s happening with inflation.
Ian Pollick: It’s interesting, right. And I think that’s the main point. So we don’t often spend a lot of time looking or dissecting the Financial Stability Review or the Financial System Review. But I think if we are thinking about some of the trigger points that complement what our forecast is, which is effectively that the bank does less than what the market has priced, then we need to start finding pieces of anecdotal information, whether it’s survey based or not. And one of the best ones is the FSR, because if there is going to be a vulnerability to the system and a risk triggers that vulnerability, that risk is higher interest rates. And you know, that was very loud and clear and made very apparent in the FSR released last week. In effect, the bank said that the vulnerabilities of the financial system have increased as interest rates are rising and you can see it in a whole bunch of places. You know, the average duration of revolving debt, i.e. credit cards is rising, that the strain put on home buyers is increasing. And, you know, they even said, you know, the average mortgage payments will increase almost 50% over the next five years. These are very big statements that you’re making as a central bank and on the other hand, warning that you are going to have to take interest rates above some estimated level of neutral. So for me, if I only looked at the FSR and I looked at the risks that were being telegraphed, I take it as dovish in the sense that there’s only so far you can take an economy like Canada because you are on the one hand you have these cyclical considerations which are inflation, you have pre-existing problems that are indebtedness, and the two of them, they’re mutually exclusive. They’re not complementary. So I think that, though, is when Governor Macklem was speaking that all of a sudden when we start to hear a lot of hawkish rhetoric, I think that as usual, the headlines that we saw coming across Bloomberg probably were out of context. You know, there is one point where he was talking where he said that we now see higher risks, that we have to take interest rates above 3%, which is the top end of their neutral range. And he said something along the lines of more steps, not bigger steps. But the real context was, you know, we don’t know. It’s still on the one hand on the other hand. And I think personally and I know I don’t know if you agree with this, if you get to the July meeting, given what we saw in CPI and given what we are expecting, given that what we’re seeing in employment, if the market is pricing in 70 basis points or higher, I am very confident the Bank of Canada uses that opportunity to deliver a jumbo sized, non-standard sized rate hike. What do you think about that?
Andrew Grantham: If the market is pricing in 70 by the time we get there, then I agree that they could take it. The one thing or the one reason why I would still favour 50 in terms of our forecasts at the moment is that if you go, 50 is still a non-standard rate. You still not normally hike in interest rates by 50 basis points every meeting.
Ian Pollick: 50 is the new 25.
Andrew Grantham: 50 is the new 25. It is this year, yeah.
Ian Pollick: It is.
Andrew Grantham: But if you do more than that, then you’re going to add to the market’s expectations for future interest rates. You’re going to add to five year bond yields, which the mortgage rates based off those are already extremely high. So I would be a little worried if I was them that you may spook the market into tightening even more than you want.
Ian Pollick: But take a step back for a second. And I think one of the differences between the Bank of Canada and the Fed is that the bank has taken a lot of effort to speak to the everyday Canadian. So, yes, us on the street, we see 75. We have expectations formed that either you have more larger size rate hikes delivered or just more in general. But if you’re an everyday Canadian, my question to you is, if you see a 75 basis point increase, do you actually think that that larger delivery means that they’re trying to snuff out inflation faster? Or is it the opposite, perversely, that it sounds like they’re more desperate and therefore your inflation expectations become unglued? Because that’s the question and that’s what we need to answer.
Andrew Grantham: In my view. I would argue it’s the latter. I would argue that it’s a central bank that looks a little bit desperate to be honest.
Ian Pollick: Like let’s be real, aren’t they? I mean, we are talking about, again, very large numbers. If you’re going to get to some pre destined number, why wouldn’t you get there as fast as possible?
Andrew Grantham: I mean, that’s true. But then where would you go after that? If you do a 75, then you’d be thinking 50 and then maybe pausing because, you know, remember that they’ve said the increased risk of having to go above 3% or go to the top end of their bound, they haven’t specifically said that we think we will definitely have to do that, right? So, you know, I still think fifties give them more flexibility in terms of looking at the data, being able to stop, slow down, do whatever they need to do if inflation or if domestic inflation starts to ease.
Ian Pollick: That is such a wild sentence. Think about that. We just normalized this idea that 50 gives them flexibility. That is crazy. But let’s just talk about our forecast, right, because we have upgraded our forecasts. So talk to us about, we had two and one half percent in September. Then we previously had the bank saying, okay, we’re at two and one half. We’re going to kind of chill out. We’re going to assess the damage that’s already occurred. And we saw that in a 50 basis point move in July, a 50 in September and that’s it. So how did we change it and what are we looking for now?
Andrew Grantham: So we just added another 25 to the next meeting after that September meeting. So we still have a peak in terms of our interest rate forecast is 2.75 still below the top end of that bound, still lower than the markets are currently expecting.
Ian Pollick: That’s 100 basis points lower than the market. Just to be clear.
Andrew Grantham: Is that 100 basis points?
Ian Pollick: Yeah, three seventy and one year.
Andrew Grantham: Wow. That’s probably moved about 100 basis points hasn’t it, in two weeks?
Ian Pollick: Yeah, (laughs). I mean not in two weeks. I mean it’s been you know, we were kind of hovering around that 325 level for a while and all of a sudden we just ramped up quite aggressively.
Andrew Grantham: Yeah, okay. Because I thought at one stage it had come down a little bit and then kind of ramped up.
Ian Pollick: Yeah. Then you sneezed and you missed it.
Andrew Grantham: I sneezed and I missed it. Exactly. But yeah. And I didn’t even have COVID. That’s not why I was sneezing. (laughs) So no, we still think they won’t need to deliver as much as markets expect. And also, I don’t believe as much as the Bank of Canada themselves may expect that they need to deliver at the moment, because when we look at how the economy is responding, we know we have the data already. We know that the housing market in terms of retail activity, is responding very quickly to the interest rate hikes that have already been delivered. We have the data for one month at least, and then we get next week some additional data. We already have some of the regional reports out. So we know that that is going to be quite a bit negative in terms of growth. But then after that, it’s how consumer spending more generally reacts. And because of some of the things that you mentioned earlier in terms of, you know, financial stability review, people taking on that higher debt, the inflation itself eating into people’s disposable incomes. We do think that housing weakens first in Q2. By Q3, you get a slowdown in wider consumer spending, retail sales, etc. as well. And by the time we get to more towards the end of the year, certainly after the October meeting, the bank is looking at growth rates which are much weaker than it is expecting at the moment. And hopefully by that time, inflation has already peaked. But as we’ve already discussed, we’ve called the peak in inflation more than once already.
Well, look, I agree with that view. And I think by the time you get to October, I like this idea of having a pause after October, because I think if you were to look at what the bank is talking about in terms of prior business outlook surveys, they are talking about this kind of reorientation of where growth is coming from, less residential investment contribution, more CapEx or business investment. But I think this is somewhat of the supply trap, right? Because businesses see this strong demand. They’re borrowing, they’re increasing their capacity to invest in this demand. But then the bank at the same time as they’re raising rates so aggressively, is effectively killing this demand. And I think you’ll start to see subsequent business outlook surveys talk about business investment not being as strong because that demand profile isn’t there. And I think that is something that’s really interesting and you probably won’t know enough by September, but I believe it. I think you could by October. I very much believe in this pause.
Andrew Grantham: Yeah, it makes sense in terms of the growth numbers. The one unknown, I guess, I think is still the inflationary pressures globally, the supply chain issues. You know, the Bank of Canada has been, I think, very good in relation to two other banks at talking about domestic demand growth versus supply growth. You know, we can’t just look at the Bank of Canada’s overall GDP numbers and say, oh, GDP’s coming in below what they expected. So they probably won’t have to hike as much as they expected.
Ian Pollick: Well, that’s because trade is subtracting and domestic demand is very strong.
Andrew Grantham: That’s because trade is subtracting. But also, I don’t believe inventory rebuilding has been as strong as they previously expected. You go back to the Q1 numbers that we had, it seems like a long time ago now, but it’s only a couple of weeks ago, I think. And the composition of growth was completely different to what the Bank of Canada had in their MPR, even though the headline number was the same. Very much stronger domestic demand, a bigger negative from net trade, but also I think less of a positive from inventories. So they’re seeing at the moment demand stronger than they expected, supply weaker than they expected. And coming to the conclusion that there’s clearly, as they said in their statement, this excess demand. Now you start to see some of the reductions in demand, firstly through housing and then through wider consumer spending, hopefully some resolution of supply chain issues and that excess demand probably doesn’t look as clear by September and October time as it does today.
Ian Pollick: Yeah, I agree with that.
Andrew Grantham: So let’s just talk a little bit. We’ve discussed the US a little bit, but you know, Canadian rates relative to the US have been underperforming recently. And is that simply a Bank of Canada versus Fed expectations thing or is there more to it than that?
Ian Pollick: No, no, not really. And that’s what I think makes this such an interesting period of underperformance, because if you kind of take a step back and say, well, when have we seen it, at least over the past year, to make it relevant, periods where CAD rates have been underperforming the US? You know, the first kind of instance occurred, you know, last year when the debt management strategy made it very clear that issuance is being shifted to the long end and that just added so much more duration supply to the market, at least traditionally to what we had expected, that CAD rates started to underperform. And you know, at around the same time, that’s when the Bank of Canada first started to taper its QE purchases. So you really lost that benefit of the insulation that QE provided and it kind of tethered Canada to the rest of the world and that transition process caused rates to underperform. But then we know what happened in October 2021. Again, we were flat footed or I should say, wrong footed. That was the time where the bank really started to turn very hawkish, and that was the same time the Bank of England also started to turn very hawkish too, and that really flushed a lot of people out of the market. It was a highly negative PNL event and I don’t think the market has recovered from an international investor participation level. You know, I would call that the high watermark and that’s important because that reduced liquidity. It means that from the trading books perspective, we can’t recycle risk as quickly and it takes smaller flows to create these exaggerated dislocations. But a lot of that was driven by policy. And right now we are not seeing underperformance driven by policy. I think it’s more of a by-product of some of the lingering conditions, like a lack of liquidity caused by QE and then subsequently quantitative tightening. I think there is the lingering footprint of a lack of investor participation globally. But what’s really interesting is if you were to kind of take a step back and look at the world in a PCA framework and say, well, if I’m looking at the G5 or the G7, what market is actually contributing the most to this increase in the level of rates? And what we found was that it was actually the small markets, it was the United Kingdom and it was Canada. Coming after that a close third was Europe and then a very distant fourth was the US. That’s kind of the opposite type of hierarchy that one would expect because it’s the larger bond markets that typically drive the level of global rates. And I think this is actually quite intuitive because it’s the small open economies that are suffering with the worst amount of inflation pass through, whether it’s from the currency, whether it’s from just the production base. And that means that the hawkishness that we saw that really catapulted the move in rates last October could actually start to unwind it a little bit or at least reorient where that momentum is coming from. And I like that idea because to me, you know, we’ve seen 30, 40 basis points of CAD underperformance, say, over the past two months. And I put out a piece last week, and I do think we are getting to the point where we can start to harvest some of this. And, you know, it’s also not lost on me that we’ve had some very idiosyncratic adjustments in Canada. Remember last week we were waiting last Thursday at 330 for the announcement of the 50 year auction. And instead of getting the details of the 50 year auction, we got details that actually they’re killing the entire sector. And, you know, I get it. They blamed it on faster and higher tax revenues, but there was no warning. And what that really means is that all the pressure that we had expected to come from, let’s say, the build in net supply, that now has to be questioned because if there is more money coming into the coffers, I do expect a shift away from long end issuance. So that could mean fewer 30 years, fewer ten years, and that’s really the part of the curve that’s outperformed the most. So I actually kind of like, or underperform the most. And so I kind of like actually being received Canada versus the US. I love it in five year, five year. I like ten year, ten year domestically. But I think it’s an interesting story.
Andrew Grantham: Yeah. So you think that when it comes to the cancellation of that, that that’s in itself interesting. But it suggests also that there’s going to be less supply in other kind of longer areas, longer durations as well. It’s just a signal of just how quickly the government finances, I guess, are improving with the economy.
Ian Pollick: Yeah, I mean, it does show a very healthy fiscal backdrop. But what it also shows us is that if you are really talking about reducing supply, and I do think that we’ve seen this before, to the end of last fiscal year, remember that they reduced issuance by 30 billion relative to plan. You know, the way that I interpret that is, well, if you’re not issuing as much at the same time that the bank is running down its portfolio, then the duration shouldering of the private sector is less than we thought. And that means term premium don’t have to rise as much. And that’s really important because that’s not what you’re seeing in the US, at least not yet. Now listen, we’re running a little bit long, but the one thing I want to talk about is a question that I keep getting from investors. And the question is, what is the recession going to look like? And I often talk about the types of recessions that we’ve seen in the past. You know, a business led recession, relatively quick and easy to fix. A household recession, deep, protracted. It involves leverage reduction in balance sheet repair. And then the worst of all is that you have a financial sector recession. And that’s because either the former two blew up or you had a market based accident. If you, I know it’s not our forecast, so I’m going to take you out of your comfort zone. If you had to think about a type of recession that Canada would be in, let’s say end of 23 or early 24, what type of recession is it in?
Andrew Grantham: Well, I think just going back to something we discussed earlier on the Financial Systems Review, I think that that middle one, the household sector, if we have to raise interest rates so much, you talked about how big the interest payments or the increases will be, I think that would be certainly the area that you expect to maybe kind of cause a recession in the future. I will also add, I’m going to add something which I’m not even sure is a recession or is not a recession. But what I can definitely see happening over the next year, particularly in the US, but even here in Canada, is you get a very weird recession slash non recession where you get some negatives in terms of GDP, economic activity starting to come down, but you don’t really see much of an increase in the unemployment rate and there are some reasons for that. Firstly, you know, when we talk about excess demand in Canada in particular, but also in the US, that excess demand is in areas where productivity is higher, right? You get a lot of GDP, you don’t get much employment from it. So if you start to lose activity in that area, you don’t tend to lose too many jobs in that area. And also just the fact that because companies have seen these difficulties in terms of recruiting, particularly in the US, but even here in Canada as well, you know, they will potentially hang on to staff, maybe even if they just reduced their hours, etc.. So you may not see quite the increase in unemployment. And that’s the scenario that I could see is almost a base case scenario where you get this very weird recession but not recession.
Ian Pollick: That’s a good point. So you don’t have the, you know, the areas where you get that slowdown are so high productivity that the labour impulse is much lower than we would expect traditionally. Like it’s not coming from just a decline in services or in the public sector. And that is a very strange recession to trade.
Andrew Grantham: Yeah, I would not want to hesitate a guess as to how you would trade that, but that’s something. I’ll leave that to you.
Ian Pollick: Okay. Well, that’s for a future podcast and I’m cognizant of the time. Andrew, thank you very much. Let’s make sure we get this rolling going forward. Apologies for not having one for a few weeks. Everyone, I hope you had a great weekend. We’ll talk about the Fed later on in the week. And remember, there are no bonds harmed in the making of this podcast.
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