The Morning Brief – 04.29.20

By Bruce Carson


Economy—Canada’s Financial Situation

Seeking Advice on the Recovery

Issues to be dealt with during Recovery

In the middle of April, the International Monetary Fund released a report describing COVID-19 as “a crisis like no other.” The recession will be the worst in almost 100 years. It announced that the contraction could be longer and deeper than anticipated.

It forecast global GDP to shrink 3% this year, deepest since the great depression. While growth was pegged at 5.8% next year, there are risks on the downside depending on the length of the pandemic and its effect on activity and financial and commodity markets.

Canada was predicted to see its economy shrink by over 6% in 2020 but rebound by 4.2% in 2021. This report was anything but good news.

But yesterday Reuters made public the results of a survey of 25 economists it conducted between April 22 and 28 and its results, as they specifically relate to Canada, were no better.

The economists concluded that Canada’s economy is mired in its deepest recession on record with U shaped recovery likely. Canada’s economy was forecast to contract at an annualized rate of 9.8% in Q1 of 2020 and then shrink by 37.5 % in Q2 of 2020.

Canada’s economy was described by Oxford Economics as one of free-falling financial markets, plunging oil prices and plummeting confidence.

The good news is that the Canadian economy is predicted to come back 19% in Q3 and 17% in Q4. Despite this rebound the contraction will still be 5.7% for 2020.

If the worst case scenario occurs, which is a 50% contraction in Q2; this would amount to a 10% contraction this year. One economist said that “the longer the recession, the greater the capital destruction, making the recovery softer.”

The consensus was that that GDP would not return to pre-2020 numbers until early 2022. However inflation is expected to remain around 0.5% , well below the target of 2%. And as one reader pointed out to me last week what will the debt to GDP ratio look like and will some provinces and municipalities begin to default on debt? The saving grace in this may be federal government intervention and low interest rates; but how many times can the federal government intervene.

The ongoing worsening economic situation is not a reason to speed up the relaxation of requirements and closures put on the economy in order to combat COVID-19, but it does provide policy makers with a glimpse of the task ahead as Canada emerges from the clutches of the pandemic.

Relaxing the COVID-19 restrictions is driven by health metrics and not Canada’s financial situation. However, that doesn’t mean that planning for economic recovery should be put on the back burner until the health issues are resolved.

We are told that a cabinet committee headed by Environment and Climate Change Minister Wilkinson and Infrastructure Minister McKenna is meeting to plan the path back to normal, whatever normal may be. With respect to those involved in this exercise, it should be given over to a politically independent, non-partisan group representing all sectors of the Canadian economy, with a clear mandate reporting to the prime minister, the finance minister and perhaps the science, innovation and industry minister.

In a letter to the prime minister at the beginning of April, Independent Alberta Senator Doug Black recommended such a group calling it the Canadian Economic Recovery Council. It would consider the opportunities and challenges that need to be capitalized on post COVID-19 in order to provide for a smooth economic recovery.

Yesterday, in an opinion piece by Kevin Lynch and Paul Deegan entitled “A Roadmap for Canada after the Pandemic” and the Canadian Chamber of Commerce in a report entitled “5 Keys to Reopening the Economy” advisory groups similar to the one set out by Senator Black were recommended.

Lynch and Deegan recommended a non-partisan, focussed group, perhaps a Commission with appointees from across the political spectrum with a 12-18 month term. With respect, that is too long and at least there should be an interim report within 6 months. The problems are too severe to wait over a year for recommendations.

Lynch and Deegan would have this group focus on five areas: develop a debt plan which would also deal with government spending and taxation, deal with rebooting productivity growth, reboot the energy sector and make progress on climate change at the same time, diversify trade and consider what the workforce and workplace of the future will look like.

The Canadian Chamber of Commerce advises that this group not re-invent the wheel but learn from international best practices. It recommends that there be interprovincial alignment in re-opening policies to minimize cost and confusion for businesses operating across provincial boundaries. Policies will be needed that maximize growth and ensure sustainable public finances. “Canada needs a plan to move away from emergency subsidies to a healthy and growing economy.” Given the need for global supply chains, Canada’s businesses will need to rely on international trade in goods and services, and these global supply chains need to be up and running. Canada needs a plan for a “trade reboot.”

Black, Lynch and Deegan, along with the Canadian Chamber of Commerce all recommend that advice on Canada’s economic recovery come from an independent group composed of eminent Canadians and a broad based group of stakeholders.

The appointment of such a group by the prime minister is crucial at this time as the federal government needs to plot a coherent path forward rather than running off in all directions without a clear focus. And in keeping with the spirit of first ministers’ cooperation which has developed over the last six weeks, such a group should also meet with provincial and territorial premiers.

To Come

  • The House of Commons meets in person to deal with the government’s proposal to provide aid for students
April 29
  • U.S. Fed meeting concludes
April 30
  • GDP numbers for February to be released
May 5
  • International trade numbers for March to be released
May 8
  • Job numbers for April to be releasedUpdate