‘By definition a temporary shock:’ Canadian economy likely set for sharp rebound, despite current panic

Due to the fast-paced nature of pandemics, an eventual containment would spur a hasty recovery as consumer spending lurches upward and businesses fill the gaps in their supply chains

Jesse Snyder, National Post

OTTAWA — The Canadian economy could be headed for a sharp rebound by the end of the year or even earlier, economists say, despite a recent crash in stock markets that have generated apocalyptic fears around the globe.

The rapid spread of COVID-19 triggered a catastrophic selloff in recent weeks that has, by some measures, cut even deeper than the 2008 financial crisis, including the worst oil price shock seen in decades.

Economists say it is highly uncertain when markets might return to normal. But due to the fast-paced nature of pandemics, an eventual containment would spur a hasty recovery as consumer spending lurches upward and businesses fill the gaps in their supply chains.

“The virus itself, and how it’s evolving, is almost by definition a temporary shock that’s going to be reversed,” said Jean-François Perrault, chief economist at Scotiabank.

The comeback could begin as early as this summer, depending on whether governments can effectively contain the outbreak, economists say, while cautioning that a timeframe is especially hard to predict given the limited understanding of COVID-19.

Such a rebound would ease the significant political pressure now facing Prime Minister Justin Trudeau, who is being called upon to act fast as virus worries become elevated. The Liberal government has for years aggressively sought to take credit for any positive economic indicators in Canada, and the recent downturn has severely restricted one of its key talking points as it prepares to table its 2020 budget.

Fiscal measures expected to be announced soon by Finance Minister Bill Morneau will also help lift the economy out of a potential short-term recession, economists say. Morneau has already announced $10-billion in credit to small businesses to make up for lost cash flows. A surprise interest rate cut by the Bank of Canada on Friday, down to 0.75 per cent, will also fuel plenty of low-cost debt spending that will quickly spread through the economy.

“Once we go back to normal, all that stimulus is going to lead to some pretty strong growth,” Perrault said.

Still, economists caution Canada is likely headed for deep recession in the near term. And a failure to quickly contain the virus could add to the current turmoil, making it increasingly difficult for the global economy to limp back to health.

The Canadian economy is widely expected to grow at an average rate between 1.6 per cent and 1.8 per cent over the next five years. In the second quarter, by comparison, Bank of Montreal analysts see that number falling to a staggering negative six per cent. By the third quarter, they forecast that number to climb back to 4.5 per cent growth, or a roughly ten per cent swing.

“We could see some pretty extreme economic numbers in the coming months,” said Doug Porter, chief economist at BMO.

Porter said market fears are entirely justified, given the sheer precipitousness of the recent market crash. But like others, he sees recent market panic subsiding within a relatively short period.

“It’s almost like we’ve taken the 2008 situation and accelerated it to within a one-month timeframe,” he said.

“But I do think there is some tendency, when there are so many waves of tough headlines in such a short period, to lose sight of what’s just over top of the hill.”

All that stimulus is going to lead to some pretty strong growth

Brian DePratto, director of economics at Toronto Dominion Bank, estimates that total fiscal spending measures by the federal government could be around one per cent of GDP, or roughly $24 billion. Such spending is likely to offer a significant bridge for small companies and taxpayers as they wait for the spread of the virus to slow.

“You’ve got a whole lot of juice waiting to bring things back up to speed,” DePratto said.

However, that sharp return is not likely to be extended to the oil patch, where recoveries tend to take much longer to materialize. Canadian oil producers have been navigating low oil prices since 2014, which have been exacerbated by a lack of new pipeline capacity that has pummelled prices for Canadian crude.

“What we’ve learned in the past is the lingering impact on the Canadian oil sector, and investment there, could be quite long lived,” he said. “We were not even really recovered from the last shock at the point where this one came.”

New spending measures would add significant new sums to the federal deficit, which was already expected to come in at $26.6 billion this year, higher than an earlier estimate of $19.8 billion. But economists say Ottawa’s net debt as a percentage of GDP, currently around 30 per cent, remains among the lowest in developed countries, and at low interest rates is of minimal risk to federal coffers.

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