Oumayma B Tanfous/The Globe and Mail
Around Valentine’s Day, the chief economist for Manulife Investment Management used her Twitter account to share a poem she’d penned: “Roses are red/Violets are blue/Central banks will say they are “reducing demand”/When really they are trying to unemploy you.” That tweet goes a long way to explain both the popularity of Frances Donald’s Twitter feed and how she views her role in the national economic conversation. Canada’s youngest chief economist when she was appointed by Manulife in 2019 at age 33, Donald is a demystifier. She wants to punch holes in the intimidating walls that separate regular people from the financial systems and decisions that affect them. To that end, she keeps up a steady back-and-forth on social media and makes regular appearances on all the financial TV networks that matter, both in Canada and the United States. In her everyday job, she promotes the value of diverse perspectives in economic decision making, and she’s ready and eager to question the status quo. That includes the role of Canada’s central bank, where she began her career as a research assistant 15 years ago. Amid her regular travels between Boston, Toronto, New York and London, we caught up with Donald at her Montreal base.
You’ve been on maternity leave for five months. How happy are you to be back in the world of liquidity traps and lagging indicators?
We are in the middle, I think, of one of the most exciting periods in economic history. And what a privilege and highlight of my life to be at the centre of it, when we get to question what history can teach us, but also which playbooks we need to throw out.
It’s a confusing time. Recently a senior economist at the Center for Economic and Policy Research in the U.S. said, “Everyone’s scratching their head to some extent… We’re really kind of shooting in the dark.” How can central banks come up with coherent policy in an environment like this?
The biggest challenge for central banks is their mandate. There’s often a misconception that the Bank of Canada is a government entity. It’s not; it’s a Crown corporation. But the government has given it a job: to control inflation between the 1%-to-3% band. The problem is that, in the postwar period, we’ve leaned on central banks to control and define our business cycles. We’ve asked central banks to cure us of what ails us, to help us when we needed help, and to cool things when we’ve needed things cooled. But as we progress into this new economy, particularly the post-COVID-19 economy, we’re asking central banks to solve problems they cannot solve. In the next several years, all Canadian policy makers will have to reassess both how much we rely on central banks and what we ask central banks to do. Or else we’re potentially going to create more harm than good.
You tweeted recently that you fear markets are too complacent about growth and inflation. What makes you fearful?
Every leading indicator we have tells us that we are likely to face a recession in 2023, potentially later in the year, or into 2024. Now lately, a lot of experts look at strong job growth and strong consumer spending and say, “How could we possibly be in a recession?” The challenge is that some data points lead and tell us where we’re going to be in six to 12 months, and some data points lag, or are coincident, and explain only where we are now. Indicators that lead tend to be things like the housing market, yield curves or how much credit banks are willing to provide. Indicators that lag include things like consumer spending and jobs. If I’m going to make the case that Canada will evade a recession, I have to make the case that every leading indicator that told us in the past that a recession was coming is no longer valid. There are certainly a lot of things about the current environment that are different than they have been in the past. But to ignore these warning signs completely, I think, is ill-fated.
What’s your best guess for where inflation will be by the end of this year?
We’re probably going to continue to see prices rise by 3% to 4%. But importantly, we need to move away from this idea of, “How much inflation do you see?” and start asking, “Where are we going to see inflation?” A lot of the inflation we believe will still remain in the next few years is going to be driven by themes like deglobalization, climate change, ESG concerns, the search for alternative fuel. These are global trends that raise prices everywhere, and they are not interest-rate sensitive. The Bank of Canada can hike interest rates all it wants. It’s not going to suddenly give us access to the bread basket in Eastern Europe. It’s not going to cure the avian flu that has decimated chicken flocks and led to egg prices rising. We’re in a situation where we’re asking monetary policy to solve problems it cannot solve, and putting the weight of curing us of higher prices on one entity. And if we ask the central banks to do that, their only method to achieve this mystical 2% is to decimate prices in the areas that they are capable of controlling, and leaving the prices they can’t control floating high. So, 2% inflation is a general guidepost, but it’s more and more irrelevant.
Could rate hikes actually exacerbate inflation?
Some elements of inflation are higher. Mortgage interest costs are up 21% right now on average, and higher for Canadians with variable-rate mortgages. So we’re actually seeing inflation in the CPI basket rising because of those interest-rate increases.
You’re calling for a delayed and deeper recession in 2024. But the CEO of Bank of America, and many others, disagree. So, who’s right?
Well, I like to think I’m right, but there’s certainly a lot of opinions on this topic. There is always pressure in this field, Trevor, to have a bold, exciting call. It gets you interviews like this one, and people pay attention to what you say when you’re saying something that’s different. My biggest fear in the next one to two years—on a global basis, U.S. economy in particular—is that we may or may not hit a so-called technical recession, often described as two quarters of negative growth. We may be in for something more challenging, which is a prolonged period of low growth. We may see an environment with very low growth, but still unemployment rates that are not particularly worrisome. We may see a recession in which labour hoarding is the defining feature, and companies try to cut costs in other ways. Probably we are going to have to re-evaluate how we think about this word “recession.” Frankly, I think we’re going to be discussing whether or not the next 12 months will be a recession for the next 10 years.
When construction engineers look at their numbers, they can usually agree on whether the bridge will stay up. Why can’t economists look at numbers and agree?
Well, there is a lot of science in economics, but there’s also an element of art. We are in the business of predictions, and we have to make assumptions in order to develop these forecasts. You may have heard the joke: 20 people were lost at sea, and only one survived—an economist. Someone asks: “How did they survive?” Answer: “They assumed a boat.” So, as an economist, you begin with a rich history of models and correlations. But we also need to constantly question whether our correlations and our models are fit for today’s economy.
We’re living with a global pandemic and war in Ukraine. How can we apply old economic rules to these new conditions?
This is exactly the point. A good economist is going to start at the beginning—what would be true if this were a normal situation—and then try to extrapolate what isn’t normal. What is different today that breaks the economic models? We’ve seen major early retirements in Canada and the U.S., which are creating a labour scarcity that many of us have never seen in our lifetimes. We’ve also seen, in Canada, some of the largest government intervention post-COVID that we have seen since World War II. How you choose to incorporate these can have pretty significant changes on your output. It’s also why we need economists with more varied backgrounds. We need more diversity. The job of questioning what might be wrong with the way we think about things requires different perspectives we just don’t have.
You’re the global chief economist for Manulife, so when you look at the globe, what are the economic trouble spots?
The inability to predict what is ahead is, for me, the real troublemaker. There’s two in particular that weigh on me. One is geopolitics. It has a human element to it, and humans are much more difficult to predict than widgets on a conveyor belt. The second is the long-term implications of COVID, both the public health components of it, but also, did it produce one-off changes in behaviour, like work-from-home? Or did it produce sustained changes to the way we function as a society?
China has been a great driver of economic prosperity for a number of years. How much can we count on China, into the future?
Earlier in my career, I was advised to devote myself to Chinese economics, because if you could nail the China credit cycle, you could get a lot of things right. That is still partially true. China’s the second-largest economy in the world, so what happens there will impact the global economy, but that relationship is lessening over time. Some of that is due to China’s growing service sector and its focus more on its domestic economy. As we think about China’s reopening, the sectors that have to do the most catching up are largely domestically focused, as opposed to global in nature.
As an economist and as a mom, what worries you most about Canada’s economy, beyond inflation or recession?
Housing affordability is huge. We have to come at it through a variety of approaches. One of the biggest is going to be shifting the Canadian psychology. We’re on several decades now of this concept that home prices always rise. I remember when I was younger my father telling me, “Frances, buy a house you can’t afford, because home prices always rise, and your income always goes up.” He’s not with us anymore, but I wish I could tell him how faulty that advice was. The U.S. is still recovering from the psychological impact of 2008—that prices can decline. Canada did not experience that reset. In Canada, there are some areas where the market’s already reheating, because now it’s “a good time to buy.” So, this concerns me.
Some economists predict Canada will have the lowest GDP growth in the G7 in the next year or so. Do you agree?
It’s entirely plausible, and that’s largely because our economy is very interest-rate sensitive, largely because of the share of housing in our economy. The Bank of Canada spent the last year being very hawkish, hiking rates quickly. So, just the pure math of it suggests Canada could have the lowest GDP growth in 2023. However, does it have the lowest GDP growth in 2024 and onward? There, I think we may come out looking a bit stronger. Canada has one of the most educated populations in the OECD. We have what economists like to call high human capital, which is just a good way of saying we’re all pretty smart. We have several functioning industries. We have a growing tech industry. There’s a lot of upside for our economy. This is, no doubt, going to be a rough patch, and it’s going to hurt a lot of Canadians who are already feeling the brunt of it. But I am more optimistic when I think about where Canada can be in five to 10 years.
Let’s talk about you for a minute. What drew you to the field of economics?
I worked very hard as a child and young adult to be a violinist. Then I broke my hand. Economics was a backup degree for me. When I was 17 or 18, someone gave me the book Freakonomics. It put together all of the social sciences—history, psychology, sociology, geography and political science—and basically said, you can develop a system of thought that helps you understand this incredibly complicated world. Later, I began to realize just how many interesting things you could do with an economics degree, from policy to finance to academia. When I had my first job working in finance in New York, I became exhilarated by the idea that financial markets were like watching our economy’s heart monitor. You were seeing the economy live and breathe in real time. Then I began to realize that, generally, people felt alienated and disconnected from economics and finance. I thought we needed to start inviting people into the economics conversation, so they could contribute and understand what was going on around them. I decided, if I can help make the field more accessible, while maintaining my connection to financial markets and policy, this is what I want to do with my life.
So, part of your job description at Manulife is “thought leader.” What goes into that role?
Often economists in the private sector are viewed as thought leaders. And the title of chief economist tends to come with this unspoken responsibility to contribute to the conversation. I would say it’s my side gig to strive to be a thought leader who expands beyond that and contributes to policy discussion. I’ve felt very strongly for many years that Canada needed accessible and affordable childcare. When I started talking about that, I would get vicious personal attacks on social media. Fast forward, and Canada has passed game-changing policies that integrate accessible and affordable childcare across the country. And those who had been opposed to the concept were suddenly saying, “Yeah, that makes good economic sense.” When you start to see yourself have very tiny drops of influence in some of these bigger discussions, you realize just how powerful this otherwise somewhat lame term “thought leader” really is.
When the time comes, and your two boys tell you they want to be economists, what advice will you give them?
I will tell them, what a wonderful degree. And then for Christmas and birthdays, I will buy them history books, psychology books, political science books, physical science books, and I will remind them that we are better thinkers and thought leaders when we take a holistic approach to the world.
Oumayma B Tanfous/The Globe and Mail
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