Covid-19 and cheap oil will batter Canadian economy in 2020
The Canadian economy will be battered by Covid-19 and oil price declines in 2020, according to Deloitte’s March 2020 quarterly economic outlook. The report projects a small decline in GDP in the first quarter (-0.5%), a significant contraction in Q2 (-3.5), fading weakness in Q3 (-0.3), and then a rebound in Q4 (3.4). This will amount to a forecasted 0.2% decline in real GDP in Canada in 2020.
Canadian economic growth was already slowing in Q4 2019, with just a 0.3% annualized gain. However, Deloitte was optimistic that growth in Canada would improve in 2020, with China and the US reaching a trade agreement and Britain avoiding a hard Brexit.
However, the force majeure of Covid-19 has spread around the globe. The initial hit to China weakened the Asian country’s economy, lowering demand and depressing prices of commodities. Meanwhile, trade flows were disrupted, affecting global supply chains.
Covid-19 has since easily slipped by marginal containment efforts and spread across the world, with particularly drastic effects in Italy and Iran. The economic disruption has seen markets price in the possibility of a recession, while investors have been moving to the safety of cash, the US dollar, and gold.
Furthermore, a disagreement between Saudi Arabia and Russia saw the Gulf nation announce an increase in oil supply, leading to a plunge in oil prices.
Deloitte’s report projects a 0.2% decline in Canadian GDP in 2020, driven by weaker global demand, lower commodity prices, and restrictions on the movement of goods and people. Their base case assumption is that Covid-19 will eventually burn itself out in the summer, with a rebound of economic activity in the fourth quarter and 2021. Deloitte's economists note that it is incredibly difficult to make predictions in the midst of a pandemic, however, because there is a great deal of uncertainty as to the size and duration of the spread.
Consumer spending will be depressed by an inability to go to malls, restaurants, and other public places, while employment and personal income will be hit by reduced hiring and layoffs from containment efforts (e.g. restaurant employees, hotel workers, events industry staff). The most vulnerable sectors in the first three “tough quarters” of 2020 are energy, mining, hospitality, tourism, and transportation. Automotive and real estate are also expected to have significantly weaker sales.
Alberta and Newfoundland will be particularly vulnerable due to the compounded effect of a huge drop in oil prices. All provinces, meanwhile, will be impacted by weaker demand for exports, softer consumer spending, lower business investment, and reduced tourism, according to the report.
The government’s stimulus response is key, as the pandemic creates a supply and demand shock where fiscal policy is more impactful than monetary policy (with interest rates close to zero anyway leaving little room to maneuver). The federal government has announced $82 billion in funding to address the impact of Covid-19 and measures to help support funding for businesses.
