- KPB & Co Research
The Coronavirus pandemic is that one in a 100-year event that puts economies on the ropes. The Canadian economy has taken so many blows that since Q1-2020 economists' ability to prognosticate has become impaired. In a break with a tradition that has been in place since 1994, fiscal authorities are not forecasting beyond the current fiscal year, and by doing so are also not relying on private sector economists for forecasts in this period. This extraordinary situation underscores the unprecedented fiscal damage that COVID-19 has done, and the unpredictability around the level of support that the government will be forced to provide over the next two years.
Expectations Getting Dimmer, and Wider
By the end of Q4-2019, about 5.5% of Canadians were unemployed - among the lowest, since data have been recorded - and GDP grew by just over 1.0%. Within 6 months, economists' Q2-2020 dashboards were looking decidedly negative, with an expected drop in Q2-2020 GDP of about 41.0%, and unemployment rates expected at 13.7%. The rest of the year covers a period in which some degree of economic activity resumes, but economists are becoming increasingly uncertain about how much activity will return, and the time it will take for economic activity to normalize. The estimates among economists have gotten so wide that fiscal authorities decided against using them beyond the current fiscal year.
With "hand clasped" Bill Morneau put forward economic "prayers" for the fiscal year end. GDP growth is expected to come back at break-neck speed in the second half of the year ( 32.2% in Q3-2020, 13.8% in Q4-2020) to end 2020 at -6.8%. This estimate is highly uncertain as it rests on a near-full re-opening of the economy in Q3-2020, which may turn out to be an aggressive assumption, given that business confidence reflects continued low expectations for the remainder of the year. Nevertheless, the government explored two other scenarios that could play out: "Uneven and Gradual Recovery" where real GDP in 2020 declines by 9.6% and "Virus Resurgence Scenario" where GDP declines by 11.2% in 2020.
By the middle of the current fiscal year, all fiscal projections have been thrown out and new ones provided, owing to the unforeseen negative effects of the shut-down in economic activity. As COVID-19 spread through the world, the combined effects of lower tax revenues and more spending will lead to a much bigger deficit this year than that of prior years. The Government of Canada is expected to fund this deficit through mostly long term debt, which comes with its own costs - albeit lower interest rates will soften the blow. According to the finance ministry's numbers, the budgetary balance will expand from C$14Bn in 2018-2019 to C$343.2Bn by 2020-2021 (0.6% of GDP to 15.9% of GDP), a remarkable deterioration in fiscal fortunes. The level of federal debt is expected to rise from 30.8% of GDP to 49.1% over the same period of time.
Fiscal Conditions may get even worse
With many companies still laying off workers and municipal representatives calling for universal benefits, it is quite likely that the government will have to come up with another round/type of government support. The government has already extended the "Emergency Response Benefit" by an additional 3 months, but a more elongated economic recovery will require support going pass the end of the fiscal year. Any such support will come at a huge cost to the government, which partly explains why the government did not provide projections going beyond the current fiscal year.
The global economy is in truly uncharted waters, and as a result, the traditional tools monetary and fiscal analysis does not work as expected. The level of government involvement in the financial markets and household budgets is larger than ever before, but there have not been many times in the past that such a large segment of the population has been put out of work. Many economists and investors argue that a similar period would be the great depression in the 1930s when unsure policy response led to an extra-long recession. As governments look to facilitate a quick recovery, their levels of commitment, unfortunately, have to be an unknown quantity with the assurance that they will do whatever it takes.