As COVID-19 spreads and oil prices plumb record lows, the dreaded “R” word — recession — is starting to resurface in Canada.
A rising number of COVID-19 cases in the U.S. raises the risk of dwindling demand and major supply chain disruptions for Canadian businesses, some analysts say. At the same time, the oil price war between Russia and Saudi Arabia, both of whom have pledged to flood the market with ramped-up supply, bodes ill for Canada’s oil-producing companies.
So is Canada about to hit a recession?
Right now, that’s “almost a coin toss,” said RBC chief economist Craig Wright.
Given the recent oil-price shock and how important the energy sector is for Canada, that risk seems to be rising nearly “by the day,” he added.
Still, for now, Wright puts the odds slightly in favour of Canada being able to avoid an economic downturn.
For now, Wright sees Canada headed for flat growth in 2020. RBC’s current forecast is for a 1-per cent contraction in the second quarter — from April to June — with the economy crawling back into positive territory in the second half of the year, eventually ending 2020 with a meagre but still positive 0.6-per cent annual growth.
Other economists share a similar assessment. CIBC currently projects a minor contraction of 0.3 per cent in the second quarter, followed by “a small negative” in the June-to-September period with annual GDP growth at 1 per cent for 2020.
That forecast dates to before Monday’s oil price drop, said CIBC chief economist Avery Shenfeld, who added the bank wants to see how recent developments evolve before updating its projections.
If oil prices stay at the current low levels, the bank may have to shave off half a percentage point of GDP growth from its outlook.
Brent crude, the benchmark for global oil prices, was at US $37 a barrel on Tuesday, after dipping as low as $32 a barrel on Monday. West Texas Intermediate, the benchmark for North America, rose to nearly $34 after dropping to $31.
Saudi Arabia and Russia have both pledged to scale up oil production even amid weak global energy demand after the OPEC+ group of oil-producing countries failed to reach an agreement to do exactly the opposite: cut back output in order to support prices amid the coronavirus outbreak.
The news from the energy markets further rattled investors already worried about the economic impact of COVID-19, triggering a historic stock sell-off. In Canada, the S&P/TSX composite index dropped 10 per cent on Monday, the biggest one-day plunge since 1987.
On Wall Street, the S&P 500 tumbled 7 per cent to its lowest since June 2019, while the Dow Jones Industrials crashed by a record 2,000 points, its biggest decline since 2008.
That prompted BMO to revise down its already negative forecast for the second quarter of the year. The bank now expects a slump of -3.5 per cent in the April-to-June period with a weaker-than-expected rebound in the latter part of the year, according to economist Benjamin Reitzes.
But like RBC and CIBC, BMO still sees Canada ekeing out a modest 0.5-per cent growth for the year as a whole.
Government stimulus could make a big difference, both Wright and Shenfeld said.
With the Bank of Canada cutting interest rates and extra government spending likely in the works, RBC sees Canada bouncing back with two per cent growth in the last three months of the year, Wright said.
Ottawa should step in to cushion the blow for businesses struggling with the oil price crash and supply disruptions caused by coronavirus, Wright said. It should also think about temporarily boosting Employment Insurance benefits for individual Canadians.
Shenfeld said the government’s first order of business when planning stimulus measures should be to think about measures to help businesses affected by coronavirus-related factory shutdowns and other operational disruptions.
Ottawa should also accelerate unemployment benefits for those who are forced into quarantine, he added.
“Not everyone has an employer who’s going to pay them, and they have to make their rent check at the end of the month.”
On Monday, Finance Minister Bill Morneau said Ottawa would announce targeted measures to shore up the economy, including funding for health care, by the end of the week.
With debt-to-GDP around 30 per cent and the cost of borrowing at near-zero, the federal government has lots of room to run a large deficit in order to support the economy, both Wright and Shenfeld said.
Provincial coffers, on the other hand, aren’t in as good shape as they were heading into the financial crisis of 2008-2009, Shenfeld said.
Alberta, where the government of Jason Kenney recently chartered a path to rebalancing the books, will likely see its fiscal numbers pushed “massively off track,” Wright said.
Kenney’s 2020-21 budget, released last month, projects a shrinking $6.8 billion deficit, but the target is based on oil prices of $58 per barrel.
Still, “there’s a time and a place for balancing the budget and during an economic downturn, that’s not the time,” he added.
Alberta has been running large deficits in recent years, but its net debt to GDP stands at around 10 per cent, the lowest in Canada and much lower than Ontario’s 40 per cent.
The potential impact of COVID-19 and the oil market woes on Canada’s job market remains difficult to predict, both Wright and Shenfled said.
If the economic hit is temporary, the main effect on employment may be simply shortened hours for some employees. However, if downturn turns deeper and longer-lasting those reduced work scheduled could turn into layoffs, Wright said.
The good news is there’s space for “the federal government to step in and avoid some of the bigger downside shocks to the job market.”
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