Executive Summary

The COVID-19 pandemic has triggered the most severe economic shock since the Great Depression. Despite massive intervention by central banks and governments, real output in the advanced economies likely fell in mere weeks by more than 10% from its level at the end of 2019. 

A number of factors complicate a recovery from this unprecedented crisis: unknowns about the evolution of the pandemic; lack of global policy coordination; the uncertain behaviour of consumers as lockdowns are eased; the high debt levels of households, businesses and governments going into the crisis; the risk of permanent loss of capacity as the crisis endures; and the impact on investor confidence of uncertainty about the post-COVID-19 world.

Against this backdrop, this outlook aims to present reasonable planning assumptions for Canadian businesses to the end of 2021. We offer two scenarios which we think represent possible outcomes.

  • In our baseline scenario, an effective vaccine becomes widely administered in the second half of 2021, and the easing of mandated lockdowns continues prudently, without severe outbreaks requiring their widespread reimposition.

The result is that by the end of 2021, the recovery to pre-COVID-19 levels of output in the advanced economies is achieved. Interest rates and inflation stay low through the period. Oil and commodity prices firm up modestly.

Under this scenario, output in Canada by the end of 2021 returns roughly to its level at the end of 2019, although still almost 4% below where it would have been on the pre-crisis trend. The federal deficit reaches nearly $300 billion in 2020-21, even with a rapid tapering of the exceptional fiscal measures introduced through the crisis. The deficit in 2021-22 is still high, at $105 billion.

The Bank of Canada is expected to absorb a substantial portion of federal government borrowings. The capacity for Canada to attract capital inflows is maintained, and the Canadian dollar is broadly stable.

  • In our alternative and more pessimistic scenario, an effective vaccine is not readily available until 2022. The relaxation of lockdowns in the summer of 2020 leads to a large second wave of disease later, prompting a reimposition of widespread restrictive measures.

By the end of 2021, real GDP in advanced economies is then about 6% below the fourth quarter of 2019. There is deflationary pressure—for example oil prices remain depressed with still large supply-demand gaps—but some prices are pushed up where supply is constrained. Governments have no choice but to prolong and enhance their support programs, and central banks to expand their balance sheets to absorb an increasing portion of new public debt.

Under this dire scenario, policy risks for Canada would be more acute. To maintain the confidence of markets, and financial stability, the federal budget for 2021-22 would have to lay out plans to raise additional revenues and reduce spending, starting in 2022.

At this time, we think that a Plan A for businesses is best made on the basis of our baseline scenario. However, developments need to be monitored closely through the summer and early fall to see whether businesses should shift to a Plan B, based on our more pessimistic scenario. There would remain some upside risk that could crystallize with the faster availability of a vaccine.

Pulling through such a crisis is not just a matter of arithmetic, but of plans and strategy by governments and businesses to respond to new circumstances and to act in a cohesive fashion.

Global demand, and international trade, are unlikely alone to propel our growth. The multilateral trading system is weakened. The United States is not exerting global leadership; heightened political unrest amid the pandemic, and a Presidential election only months away, further erode the prospect of a constructive U.S. role over the next months. Geo-strategic conflict between the United States and China is threatening a decoupling of global supply chains. Recent developments have also elevated potential risks to Canada's relationship with China.

Thus, Canada, while continuing to engage constructively with global partners and to pursue every opportunity to expand and diversify its trade, must chart its own path to re-open, recover, and then re-build the economy for the medium to long term.

Reopening is a gradual exercise of learning to live with COVID-19—creating and adapting to a modified state of the economy that will prevail for months, perhaps years. A prudent and successful reopening requires a greater capacity for testing and for tracing the spread of the virus, as well as widespread availability of personal protective equipment (PPE) for workers.

As the economy reopens, the flow of direct support from government will need to be tapered: it is fiscally unsustainable, and it creates distortions that may slow down a return to more normal conditions for employers and workers. This will be an exceptionally delicate policy exercise.

Recovery is what will be required over the next 18–24 months to get output back to its pre-crisis level. Recognizing that the crisis started from an induced supply shock, a recovery must be founded on conditions and incentives for the re-emergence of supply. Large demand stimulus will be of limited utility and, if supply is held back, it could put upward pressure on some prices.

Governments can identify targeted measures to support and accelerate the recovery. This may include low-cost measures that can assist in restoring markets for businesses, for example, buy local or travel in Canada campaigns, as well as training for displaced workers. There are gaps to close in the public health system and in care for the elderly. Steps can be taken to accelerate investment in economic infrastructure, including by mobilizing private capital instead of public debt where there can be a stream of revenue. Access to broadband should be made universal.

Rebuilding is the enterprise for the medium to long term of growing productivity to maintain and then to raise the standard of living of Canadians, doing so in a way that is sustainable, resilient, and inclusive. This was a critical challenge even before COVID-19. It is now even more daunting.

In undertaking the rebuilding, governments and businesses must grasp the ramifications of the crisis and the risks and opportunities that will emerge in its aftermath. While there remain many questions, some trends and signals are evident.

  • First, the geopolitical environment will continue to be messy and a high level of dependence on any one client, supplier, or region of the world, in either a global or decoupled marketplace, will entail material risks.
  • Second, the crisis has rendered obvious, if not already clear, that all large organizations today are, or must be, digital and that intangible assets are a critical vehicle for realization of value.
  • Third, with intense pressure coming out of the crisis to restore growth while pursuing environmental and climate change goals, Canada must make the energy sector a driving force of an integrated strategy.

With structural change accelerating through the crisis, and with the risk of further disruptions, governments need to review their instruments to facilitate adjustment. The income security system for working-age Canadians was not up to the task in this crisis, and it deserves review.

Fiscal management will require a medium-term plan with a solid anchor and a significant reserve for contingency in an uncertain world. To contain the growth of the debt and debt-service costs, there will be no way around raising some taxes, and cutting some spending. This will entail tough choices.

Governments will have to weigh carefully the distributional impacts of economic developments and policy. Intergovernmental fiscal arrangements will also attract attention. Indeed, when the bills from the crisis have to be paid, the pursuit of economic and fiscal stability, social cohesion, and national unity will require strong leadership.

Thus, governments will need to set out a finite set of priorities for the country, a fiscal track, principles to guide policy development, and processes for engagement with Canadians. While issues are urgent, the right solutions will not be developed overnight. There will need to be parallel exercises to develop the evidence base and solicit advice from experts and leaders in the private sector and in communities, with an imperative to follow through with timely decisions.

In Canada's history, exercises such as the Macdonald Commission made important contributions to the national debate at critical times. Governments again may find that for a specific set of issues, there would be merit in a national Commission on the economic prospects for Canada, with wise persons, expert resources, and a capacity to propose a direction for the country.

Bennett Jones Spring 2020 Economic Outlook

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