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Taking the Pulse of Canada’s Economy: Good News Amongst the Gloom
May 21, 2020 3 Minute Read
With unemployment on the rise many are asking what COVID-19 has in store for the Canadian economy. According to CIBC Capital Markets Deputy Chief Economist Benjamin Tal, the outlook depends on timing.
“Over the next few months things will improve. But we also must remember this virus comes in waves,” he said during CBRE’s latest Virtual Market Outlook webinar.
According to Tal, there is a “reasonable chance” that Canada will experience a second wave of COVID-19 in the fall or early winter.
That would create what he calls a “zig-zag economy,” with starts and stops as the economy partially reopens only to temporarily close again.
While it’s hardly ideal, he sees it as an improvement from the current “frozen economy.” It would be followed by recession conditions, and eventually a full recovery once a vaccine is available and widely distributed.
Of course, there are no guaranteed timelines and the scale of the crisis can be overwhelming.
For those feeling concerned, Tal has some good news. He believes Canada is uniquely positioned to weather COVID-19 and the economic damage that will come with it.
Fantastic Fundamentals
First, let’s consider our starting point. Canada began the year with an excellent debt-to-GDP ratio of 30.6%, well below the Organization for Economic Cooperation and Development (OECD)’s average.
According to Tal, even with significant government spending, the rate will likely remain well below other Western nations. “Our starting point is fantastic in this sense, and that’s a good thing,” he said.
He also points to interest rates, which are historically low. While the government is borrowing significant sums of money to address the crisis, rates remain extremely low.
“When we recover, our GDP will be rising four to five times faster than interest rate payments,” he said. “So that also puts us in a good position.”
Shift to Reshoring
As we move through the crisis, Tal believes it is likely that many Canadian companies will reconsider their supply chains and the benefits of manufacturing inside the country.
“What we are going to see is many companies focusing on resiliency and flexibility,” he said. “More essential goods will come closer to home.”
Of course, some things will continue to be produced outside the country, especially when it comes to the U.S. But Tal believes that Canada, along with many countries around the world, will be rethinking the benefits of a global supply chain.
“You will see a significant amount of globalization still intact, but I think essential services will come closer to home,” he said. “It comes from the realization that you cannot fully rely on a [global] supply chain.”
Stock Market Optimism
While economic reports continue to be bleak, the stock market managed to rally in April. Why? According to Tal, it’s thanks to monetary policy.
“The [stock market] has been conditioned for years and years to rely on monetary policy,” he said. “The market is looking at the response of the [governments and central banks] and realizing it’s not over. You can basically monetize government spending.”
But Tal cautions it’s too soon to say how the market will react in the coming months. “If we have another wave, that can derail some of the confidence, and this market is a bit vulnerable,” he said.
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