Has it ever been so hard to know our economic future?
Probably, yes. But in an era when economic commentators offer contradictory views, it certainly feels as if there is no one to trust on the important issue of whether the world is going to hell in a handbasket.
Perhaps it is one more reason why people are no longer satisfied with accepting the views of experts. They want to examine the evidence themselves.
That certainly seems the case with recent predictions that the world is heading for recession.
Thrown a curve
Here at CBC News, viewer attention to economic stories has been high, including attention to what has been considered a relatively obscure economic indicator: the relationship between interest rates on long-term bonds and rates over the short term.
There are many ways of interpreting the logic of why the inverted yield curve might be a gloomy indicator, as we have outlined in this explainer.
Preparations for a new office tower begin in downtown Toronto. Friday’s GDP figures showed the highest rates of construction since 2013. (Don Pittis/CBC)
There are also a number of reasons why that indicator alone may be an imperfect guide to what is around the corner. And economic sleuths, whether they are professionals or do-it-yourselfers, face the same set of difficulties.
That’s why in order to grasp what comes next, Canadian economy-watchers remain in suspense over each new economic indicator, including this coming Friday’s big one, the jobs numbers. So what have we learned lately?
And last week’s trade numbers, while showing a shrinking surplus, found that was due to an increase in both exports and imports. It’s just that imports grew a little more, often a sign of a strong domestic economy.
It’s different this time
Inverted yield curves are far from a sure or immediate sign of economic decline. One argument is that while yields inverted before the last five recessions, the weird world economy means something quite different is happening this time.
Last week that view was supported by former U.S. Fed chair Janet Yellen, who expects no recession this year, and by the head of the New York Fed John Williams, who says of the inverted curve, “There’s a lot of reasons to think that it has been a recession predictor for reasons in the past that kind of don’t apply today.”
Economic writer Javier David makes the case that in the past a cutback in government spending has been the real reason for the recessionary effect. With spendthrift Donald Trump as U.S. president and the MMT Democrats
theorizing that it is OK to keep the government wallet open so long as there is no inflation, it is possible austerity won’t happen, at least before the 2020 presidential election.
Laughing at the idea of a recession. U.S. Federal Reserve Chair Janet Yellen said last week there would be no reason for the Fed to cut rates this year, and history supports her. (Jonathan Ernst/Reuters)
So far there has been little sign of inflation, which in the past has been the first link in the chain to a recession caused by steadily rising interest rates. There has been lots of debate over why that is and if it could change.
Even for those convinced that the yield curve is a sure predictor of recession, history supports Yellen’s confidence that rate cuts will not be needed in 2019. That’s because even when recession follows inversion, the recession does not follow immediately. In fact, on average the two events are about a year and a half apart.
Also, the reason economics is so different from real science studying, say, fish behaviour, is that in our case the fish know they are being studied and can change their economic activities based on the published results. After all the innovations developed after 2008, central banks are certainly not trapped doing the things the way they did in the past.
While technical indicators such as bond yields may provide a warning when the world is trudging through economic business as usual, it does seem that right now real-world events should have a much bigger potential impact.
Resolving the trade fight between the U.S. and China would change the outlook for U.S. and Chinese companies considering future investments and borrowing. A resolution of Canada’s own trades spats with the U.S. and China could spark new investment here. A final decision that would transform Brexit from being a joke to a reality one way or the other would take one more uncertainty off the table.
Despite the fact that the Canadian economy is so closely tied to that of the U.S. it is clear that our economies are not in lockstep. The Canadian housing market has repeatedly defied foreign critics. Freer immigration has been credited with spurring the Canadian tech sector. Our trade deal with Europe should gradually begin to tell.
The fact that GDP was so strong in face of a continued decline in that old stalwart of the Canadian economy, resource extraction, shows something may be changing.
Perhaps policies such as high education spending, increased minimum wages and government investment in technology are having the salutary effects we have already seen in northern Europe.
For economy watchers, this Friday’s labour force survey will deserve special scrutiny. Since the data is collected in the weeks before the release, it is a fresh economic indicator.
It also says something real about the future, since employed people have more money to spend and contribute more in tax. A decline in job creation may be another hint recession could be in the offing. Of course, to be absolutely sure we’ll have to wait for the next statistic. And the next after that.
But to end on a happier note for April Fools’ Day, here is a guy who has turned the inverted yield curve into music.