TD Economics: Quarterly Economic Forecast - The Dirty Dozen

On Thursday, TD Economics published its Quarterly Economic Forecast, entitled 'The Dirty Dozen: Your Questions Answered.' This edition of the Forecast is written in a Q&A format to address top issues related to the economic backdrop, and touches on international and policy context for the United States and Canada, as well as potential upside and financial risks. Below is a selection of questions from the report. The full report can be found here.

By Beata Caranci
Senior Vice President and Chief Economist
TD Bank Group

With economic data now available for the first half of 2020, how bad was it? 

For most major advanced economies (AEs), the pullback in the second quarter was the largest in the post-war history of available data. Table 1 (below) shows the change in GDP relative to a year ago. 

The United States outperformed much of the rest of the world (albeit slightly). Europe, where lockdowns were the most stringent, suffered the biggest setbacks. Canada’s performance was roughly in the middle of the major-economy pack with real GDP 13% below its year-ago level.  

Emerging markets (EMs) were also hard hit by the health crisis, which was worsened by capital outflows and dollar shortages. The crisis has amplified idiosyncratic weaknesses within some EMs, particularly Argentina, India and Turkey. India and Brazil – two of the biggest EM economies after China – saw their output contract by 24% and 11% year-on-year, respectively. 

In contrast, China was first-in-first-out of the health crisis with Q2 GDP rising by 3.2% relative to the same period last year. However, this came after a near 7% (y/y) contraction in the first quarter, which marked China’s first contraction since 1976 (the end of the Cultural Revolution). Notwithstanding these improved data, the recovery has been uneven, with investment recovering faster than consumption, and supply recovering faster than demand. 

Can the housing market remain divorced from the broader economy? 

North American housing markets have become disconnected from other economic headlines, as sales and prices have advanced at double-digit rates even as the unemployment rate hit historical highs. 

Falling interest rates have boosted affordability, but even with this impact, housing activity is stronger relative to what is suggested by most standard forecasting models. Delving into the details, the reasons for this outperformance are attributed to: 

  • Very different job market outcomes by income level. In Canada, there was a near-13% employment gap for the lowest-wage workers in August; for all other employees, it was just 0.9%. Home ownership is strongly correlated with income. The same phenomenon is evident in the U.S. 
  • Relying on the unemployment rate suggests that housing activity should have remained weak, whereas the income statistics are more consistent with the rise in activity observed this summer (Chart 10). 

  • The lack of the typical spring market led to a large degree of pent-up demand. Strong sales gains in June, July and August have just brought the cumulative total back in line with historic norms;
    • U.S. demand may be receiving additional support from millennials. Unlike Canada, home ownership rates within this cohort are lower than past generations at the same ages (see report). 
  • The durability of housing remains an open question. On the price side, there is little-to-no evidence of forced selling, which is keeping markets tight and price growth high. However, deferrals will begin to expire this fall, potentially leaving some households forced to sell. 
    • The roll-off of forbearance programs also creates a risk to fourth quarter consumption in Canada as funds saved during the payment holiday period are re-directed into mortgage payments. 

Thus, near-term strength in housing should eventually give way to a more “normal” pace of both sales and price growth to reflect lingering pandemic impacts and, importantly, less organic demand thanks to below-trend population growth. 

The same risks exist in the United States against a backdrop that exhibits even lower housing supply. With years of relatively muted construction, the inventory of homes for sale is at historical lows relative to the size of the population. 

What is the risk of temporary job losses becoming permanent? 

In the initial sudden stoppage in the economy, most unemployed people were on temporary layoff, but as people have been called back to work, unemployment has taken a more permanent shift. 

  • In the United States, the number of unemployed people who do not expect to remain “temporary” has risen since April (Chart 11). It stands at 14.4 million people (or about 8.6% of the adjusted labor force) when we add in those who are not counted as part of the labor force but would like a job (many people are likely not searching for work given shutdowns in their industry or perhaps even health-insecurity relative to the virus.) 
  • In addition, it’s reasonable to assume that some portion of the 6.2 million American workers currently being cited as “temporary layoff" will become permanent. Some evidence already resides within sectors like travel and entertainment, where permanent job cuts are taking hold. 
  • Canada also shows evidence that temporary losses are giving way to permanent ones. Temporary unemployment was 54% of total unemployment in April. That share has since fallen to below 20%. Many of those who could be quickly recalled have already benefited, consistent with TD Economics’ view that the pace of job gains is set to moderate as we enter autumn. 

How would the outlook change if a vaccine goes into production by the end of this year or early next? 

A full economic recovery is not possible without a vaccine or an effective and widely available treatment that materially reduces the risk factors. Until then, flareups in new cases – as seen around the world – will be the status quo. 

Our baseline forecast assumes vaccines become available by the summer of 2021, with a wider distribution in the second half of the year. This is consistent with WHO’s recent assertion that vaccines won’t be available for widespread usage until mid-2021. Should a vaccine go into production by early next year, it will raise our growth forecast for 2021 and mitigate labor market scaring. The U.S. Centre for Disease Control has already asked states to prepare for vaccine distribution by November, however, widespread distribution is more likely to take place next year. 

The immediate impact of the vaccine will be seen in certain consumer-facing services sectors like restaurants, malls and travel. The vaccine will also offer relief to business uncertainty and promote stronger investment as companies pull-forward future plans as policymakers are able to relax restrictions. 

The good news is that there are currently more than 170 vaccine candidates under investigation, with six already in the final stage of trials. Russia has already claimed a win in the vaccine race, although it is unlikely to be adopted by most AEs. However, Russia is in talks on exporting the vaccine or licensing production with 20 countries including Brazil, India and Turkey. The Philippines, Saudi Arabia and the United Arab Emirates (UAE) have also agreed to conduct clinical trials. More transparent data on the formulation, testing and efficacy of the Russian vaccine may make more EMs open to its usage. 

While the vaccine is likely to expedite the economic recovery, we caution in overestimating its immediate impact next year: 

  • Despite promising reports on vaccine development, the timing of mass distribution remains uncertain. For example, the UK Chief medical officer recently stated that a vaccine for mass use is unlikely to be ready before end-2021. The pandemic has demonstrated that countries become inward-focused when hit with a major shock, especially when it comes to critical drugs and medical supplies. 
  • Whenever a vaccine does come on the market, its scarcity would force countries – at least initially – to be more protectionist with it. This “vaccine nationalism” would place some countries (primarily AEs) at the top of the list for access and a faster economic recovery. For example, the U.S. and UK have production capability, while others – such as Canada and Japan – have secured orders that would cover a sufficient portion of their populations. 
  • However, even with vaccine production, the outstanding question remains whether it will have public confidence and who would be prioritized for distribution. Surveys across the world already indicate a significant share of individuals may be reluctant to receive a vaccine. In addition, it remains to be seen if vaccines will be partially protective for a short period (like the flu vaccine) or highly protective for a life-time (like a measles vaccine). 

Contributing authors: Beata Caranci, Derek Burleton, James Marple, Sohaib Shahid, Leslie Preston, Sri Thanabalasingam.

To read the rest of the Quarterly Economic Forecast, please visit TD Economics. 

Beata Caranci

Senior Vice President and Chief Economist

TD Bank Group