Never have economists seen our country’s economic outlook shaken so drastically, so quickly. With whole segments of the economy abruptly shuttered by COVID-19 and more than a million Canadians laid off in a matter of days, we’ve plunged into a sudden recession.

At first glance, the situation looks dire. Canada’s economy is among those most exposed to coronavirus-related shocks because of its dependence on imports from the U.S., according to analysts at ING Group. Canadian banks project Canada’s GDP to shrink by a whopping 20% this quarter alone. Layoffs could reach nearly three million.

“What we’ve seen in the last few weeks is an unprecedented level of shutdown, but also unprecedented speed of shutdown,” said Robyn Gibbard, senior economist at the Conference Board of Canada. “I’m not sure what you can compare it to aside from a work of fiction. Certainly within recorded economic history there hasn’t been anything like this.” But there is, even at this early stage in the crisis, a gleam of light at the end of the tunnel: Canadian economists are cautiously optimistic about the country’s ability to make a quick recovery once the worst of the pandemic is over.

All five of Canada’s major banks predict economic growth will resume this summer following a historically steep downturn. The banks project Canada’s GDP to shrink by between 10% and 28% this quarter, but they expect those losses will be mostly made up in the second half of the year. (Although not quite: They all project an overall contraction of the GDP this year, with forecasts ranging from -1% to -4.2%.)

However, this assumes the virus will be under control by the summer and the economic restrictions will have lifted, which remains uncertain. As TD states in its latest forecast: “The wild card is not depth, but duration.”The longer the economy is disrupted, the less likely it will be able to quickly recover. 

The National Post, citing government documents, reported late March 31 that the federal government is looking at a “best case scenario” of maintaining social distancing measures until at least July. This announcement has economists and analysts at some of the country’s biggest financial institutions reworking their projections for the economic fallout as the hope had been that businesses would be reopening in May.

Meny Grauman, a bank analyst at Cormark Securities Inc., said any forecast of a “V-shaped” recovery that includes a short trough and quick rebound is “wishful thinking” at this point. “Even after we leave our houses there is a high probability that we will be walking into a prolonged recession,” Grauman said. “We are still in the very early innings here.”

The Impact on the Loonie
The Canadian dollar is set to remain at depressed levels over the coming months, with analysts in a Reuters poll slashing their forecasts for the currency as the coronavirus pandemic potentially pushes Canada’s economy into a deep recession.The loonie has plunged more than 8% since the start of the year, with much of that decline coming over the past month, as the coronavirus outbreak interrupted global economic activity and major oil producers began a price war. Canada’s economy could be hit particularly hard because it is a major exporter of commodities, including oil, and Canadians carry record debt loads.

“Forecasting is fraught with perils right now as no one really knows how long the virus-related lockdown will last,” said George Davis, chief technical strategist at RBC Capital Markets. “We believe that the Canadian economy will enter a recession in the first half of this year.”

But the loonie is then expected to rebound, with strategists forecasting 1.37 in one year. “We are more optimistic over the longer term for the loonie,” said Hendrix Vachon, a senior economist at Desjardins. By the summer “the recovery should be strong enough to reduce significantly the level of uncertainty and to fuel demand for currencies such as the Canadian dollar,” Vachon said.

Should oil prices recover, that could also support the loonie. “Our energy analyst is expecting a decent pick-up when we look towards year-end, with a target of 50 bucks,” said Christian Lawrence, a senior market strategist at Rabobank. “That is CAD positive longer term.” Oil has recovered some ground since March 30, when it hit an 18-year low at $19.27 a barrel, on hopes that Russia and Saudi Arabia will announce a major oil production cut.

Source: The Star
Source: Financial Post
Source: Financial Post