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The last few weeks have brought encouraging Canadian economic data, after a series of pandemic lows earlier in the year.
Employment, consumer confidence and retail sales are all rebounding, as the Bank of Canada’s forecasted “long and uneven” road to recovery begins.
The Bank is currently projecting a 7.8% economic contraction in 2020, followed by 5.1% growth in 2021, and a return to pre-pandemic economic activity in 2022. But, as the pandemic continues to play out, the central bank has been emphasizing the uncertainty of economic forecasts in this unprecedented time.
The Role of Government Stimulus
Around the world, federal economic stimulus programs have been essential to containing economic damage. Canada has navigated the storm so far, but its reliance on the U.S. economy continues to be a cause for concern. Canadian growth expectations hinge on a stable recovery south of the border.
Meanwhile, the U.S. saw a historic 32.9% decline in GDP in the second quarter of the year, as the virus continues to spread throughout the country.
As the U.S. debates its second stimulus package, Canada is facing an estimated $342.2 billion budget deficit, or 15.9% of its GDP. This will push the total Canadian federal debt to over $1.0 trillion for the first time in the country’s history.
Debt Management during COVID-19
Debt management will come to define governments in the coming years, as they continue to deploy unprecedented levels of fiscal stimulus.
Vast amounts of long-term bonds will be issued, locking in today’s historically low interest rates. Central banks will then play a key role in buying most of the debt, which is expected to lead to US$1 trillion in global oversupply of sovereign bonds.
That excess supply could total as much as $189 billion in Canada, leading to a potential steepening of the yield curve. But there is virtually no cap on central bank spending, which can be ramped up when needed.
Coming Loan Losses
Canadian banks, credit unions and alternative lenders may face a wave of mortgage deferrals, as government support programs wind down. These groups are expected to see a rise in loan losses moving into 2021.
For real estate debt, within most asset classes, liquidity remains buoyant, but is very conservative in terms of both underwriting and valuation outlook.