With a growing number of cases and deaths due to the COVID-19, global recession has gone from being a far-off possibility to a near certainty, and some are even raising the spectre of a worse fate. While not all are willing to entertain the possibility of an economic depression, the question of just how bad is this going to get is very much in play.

Canada’s economy is careening toward recession as COVID-19 weighs on business activity and consumer spending, raising the threat of layoffs and bankruptcies in the coming months. The unfolding downturn is shaping up to be swift and sharp, as Canada and other countries take increasingly drastic steps to slow the spread of COVID-19.

Exports are bound to weaken – not only because of a big drop in oil prices, but softening demand from key trading partners. Household spending is tightening as consumers restrict their purchases to the essentials. And debt-laden businesses are finding themselves under financial pressure as their revenues take a hit. Leaders and health professionals encourage Canadians to avoid travel, gatherings and other aspects of daily life, many companies suddenly can no longer count on routine business to keep cash flows intact.

CIBC said both Canada and the United States will likely join “a growing list” of nations that experience an economic contraction. “Stretching out the period in which the disease spreads, while essential in preventing an overrun medical system, lengthens the period in which the economy feels a bite,” CIBC economists said in a report.

Financial leaders are taking action to blunt the hit to the economy and ensure the financial system continues to function smoothly. The Bank of Canada has already made two rate cuts to protect the economy against “negative shocks” from the outbreak and lower oil prices. The Government of Canada has also released details of their stimulus package.

Still, such stimulus measures are unlikely to keep Canada from falling into a recession, RBC said, noting the eventual recovery could be tepid because of “the blow to household confidence.” 

The national household debt burden – more formally known as the ratio of credit market debt to disposable income – stands at 176.3%,  Statistics Canada said on March 13. This remains near a record high, and it could come under pressure this year given looser interest rates and the prospect of lower income due to job losses or fewer work hours. CIBC said that Canada’s jobless rate could rise to 7% from its current 5.6%. Job losses could have disastrous consequences for part-time or gig workers who aren’t covered by Employment Insurance benefits. As such, spooked consumers are poised to deliver a shock to Corporate Canada.

“It’s a valley, and it’s going to be a painful valley,” said Craig Alexander, chief economist at audit firm Deloitte Canada. “It’s going to take us time to get to the other side. We don’t want businesses and individuals to lose track of the fact that ultimately we will get to the other side of this pandemic.”

A light at the end of the tunnel can be a welcome sight. However, it still involves going through darkness, and some of the biggest names in capitalism are warning of a gloomy future. Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, estimated on CNBC that global corporate losses could add up to US$12 trillion. Billionaire investor Bill Ackman has warned of a “Depression-era period” in the U.S. unless a vaccine is manufactured and distributed widely. A new JPMorgan Chase and Co. note predicts that the coronavirus outbreak will result in the worst quarterly GDP growth contractions in the past 50 years and that the U.S. economy will shrink by a stunning 14% in the second quarter of 2020.

The longer the crisis persists the more strain the economy is likely to come under. The Canadian Federation of Independent Business said 50% of small firms had already reported a drop in sales as of March 15, with one in four warning they would not be able to survive a significant drop in income for more than a month. Having entire countries under lockdown or with their populations trying to stay as far away from each other as possible could produce cash crunches for firms.

A drawn out downturn, especially one accompanied by an economic shutdown, could also cause problems for the companies that have, in the background of a bull market, loaded up on debt and gone through multiple rounds of share buyback programs, according to economist and former deputy Bank of Canada governor William White.

“The worst case would be that there’d be a shakeup on that side,” said White, who is now a senior fellow at the C.D. Howe Institute. “That would have big repercussions and could feed back into the financial system and then you’ve got the kinds of problems we’ve seen before in 2008.”

Source: Financial Post
Source: Financial Post
Source: Globe and Mail