Coronavirus: Canada’s economic recovery will be stronger in short term, poll suggests

Click to play video: '$343-billion deficit projected for 2020-2021 fiscal year'
$343-billion deficit projected for 2020-2021 fiscal year
The federal government has released its fiscal snapshot amid the coronavirus pandemic, projecting a deficit of an astonishing $343 billion. David Akin looks at what could make the economy shrink even more, and what Ottawa's announcement left out – Jul 8, 2020

The economic recovery underway in Canada will be stronger in the near-term than expected a few months ago, according to a Reuters poll of economists who said a resurgence in coronavirus infections and high unemployment were the two biggest risks.

Like many other countries, the Canadian government imposed strict lockdowns to quell the spread of the novel coronavirus, forcing businesses to close and citizens to stay home, bringing swathes of the economy to a standstill.

Canada, with a population of around 38 million, has recorded over 100,000 cases. Infections are still rising, but at a much slower pace than its closest neighbour and largest trading partner, the United States.

The July 6-9 Reuters poll of 32 economists showed the economy rebounding by an annualized 30% in the current July-September quarter, a sharp upgrade from the 19% forecast in the last Reuters poll taken in April.

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Still, the quarter through June was predicted to look a bit worse, shrinking 40% compared with 37.5% predicted in a poll taken two months back. If realized, that would be the deepest contraction since comparable records began six decades ago.

Click to play video: 'Canada’s $343 billion-dollar economic dilemma'
Canada’s $343 billion-dollar economic dilemma

That follows an 8.2% contraction in the first quarter, the worst-three month period since early 2009, the Great Recession.

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The latest poll forecast the rebound will slow in the final three months of this year, growing 10% compared with 11% predicted in April.

“In the very near-term, economic activity has not been as bad as we were expecting, but still there are a lot of concerns going forward around how much the economy can recover without prompting another resurgence in the virus spread,” said Nathan Janzen, senior economist at RBC.

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“Absorbing the remaining amount of economic slack leftover at the end of this year will be a much slower and gradual process than the initial bounce-back we are probably going to see in the third quarter as containment measures ease.”

Indeed, Canada’s economy was expected to contract 6.8% this year as a whole, worse than the 5.7% contraction predicted in April. The rebound expected in 2021 was only slightly higher, 5.2% from 4.5% previously.

Nearly two-thirds of economists, or 11 of 17, who replied to a separate question said the recovery outlook has either remained the same or worsened over the past month.

Click to play video: 'Canada’s fiscal snapshot: One-on-one with Finance Minister Bill Morneau'
Canada’s fiscal snapshot: One-on-one with Finance Minister Bill Morneau

“Overall, while the economy is on the mend, it’s still early days and both businesses and consumers will continue to grapple with uncertainty over the foreseeable future,” said Ksenia Bushmeneva, an economist at TD Economics.

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Asked what were the top downside risks to the economy this year, nearly all economists chose a resurgence of coronavirus cases and about half said high unemployment.

One-third said limited or slow reopening of the economy and one-quarter said lower oil prices. Crude oil is one of Canada’s top exports.

The Bank of Canada has slashed its key interest rate by 150 basis points to 0.25% this year and made its first foray into bond buying on the open market. But borrowing costs were expected to be left unchanged through to end-2022 at least.

In the meantime, Finance Minister Bill Morneau said this week the federal government has spent more than C$212 billion in direct COVID-19 support.

Inflation forecasts were cut, with the rate now expected to hover around 0.5% until Q2 2021, well below the central bank’s target range of 1-3%.

(Reporting by Mumal Rathore and Indradip Ghosh; Polling by Nagamani Lingappa; Editing by Ross Finley and Bernadette Baum)

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