The government will need to do more to avoid contraction says economist
As the world markets begin another day of volatility sparked by the spread of the COVID-19 coronavirus, one of Canada’s big six banks has warned of a domestic recession.
Two interest rate cuts at the next two Bank of Canada meetings and emergency funding far above that announced by Justin Trudeau, will be necessary to avoid contraction of the economy in the next two quarters according to Scotiabank chief economist Jean-Francois Perrault.
With cases rising rapidly globally, the fiscal response announced Wednesday by the Canadian government - $1.1 billion in health related funding and support for businesses and workers – will be inadequate to avoid recession he says.
His call follows comments from RBC chief executive David McKay that the response would require more than just rate cuts.
In a report Perrault wrote that: “A reasonably mild recession appears likely unless timely and targeted fiscal measures are deployed in the very near future to deal with the economic impacts of the virus.”
He added that this would require stimulus equivalent to 1% of Canada’s GDP, around $20 billion. With stimulus, he forecasts that total GDP for 2020 will increase 0.7% but without growth will be less than half that (0.3%).
Market turmoil
Global markets were further rattled Thursday as President Trump announced significant restrictions on travel from the European Union amid the growing outbreak there.
“The European Union failed to take the same precautions and restrict travel from China and other hot spots,” Trump said. “As a result, a large number of new clusters in the United States were seeded by travelers from Europe.”
The comments prompted a drop of around 5% in the S&P and Nasdaq indexes.
Meanwhile, Denmark has announced a partial lockdown as cases there exceeded 1,700. Schools have been closed and the government is telling workers to stay at home. Norway has closed its borders to those from the worst affected areas and Sweden is expected to announce restrictions.
In the UK, the government says that it is moving from the containment phase to ‘delay’ with cases in the country expected to peak within two weeks. New restrictions could close schools and ban large gatherings.
Canadian rate cuts?
Perrault expects the Bank of Canada to cut interest rates by 50 basis points at its next two meetings but some believe they could go for a steeper reduction.
BMO economist Michael Gregory is also predicting that the BoC will slash interest rates by a total of 100 basis points at its next two meetings, taking the rate to 0.25%.
Gregory is calling for 0.5% growth in GDP this year rather than the 1% the bank was forecasting before the virus crisis.
