- Canada is experiencing an unprecedented health and economic crisis.
- Deloitte Economics is tracking economic and policy developments, and updating the macroeconomic forecast as new information comes in. It now appears that the Canadian economy experienced a significant contraction in Q1, perhaps around -1.5 percent annualized. The economy is likely to record a severe economic contraction in the second quarter, perhaps in the ballpark of -15% annualized – this is around three times greater than the quarterly declines experienced in 2008/09. We look for the weakness to diminish in the third quarter of this year as containment is relaxed, but anticipate a rebound in fourth quarter of 2020 or early 2021. As a result, the economy experience a significant contraction in 2020.
- Unemployment will soar. Indeed, the Globe & Mail reported on March 24 that its sources suggested that 1 million Canadians applied for Employment Insurance in March. This is 5% of the labour force and that could mean the unemployment rate doubled in just one month. More job losses will come in the months ahead, but as will be discussed below this could be tempered by more employers choosing to put workers on furlough.
- Today, the federal government announced that it has adjusted the plan to address the income shock of workers whose income drops to zero. The new benefit will be for all unemployed and furloughed workers – the latter being an employee that is still on a payroll but they are not getting paid. The government will provide financial support for 16 weeks and the value is expected to be up to $2,000 a month. Finance Minister Morneau says the new approach should be simpler to administer and get to workers with a target delivery date of April 6.
- This is effectively a minimum income program for workers and does address how individuals will still be able to pay the bills while not being able to work. It could also reduce the coming spike in the unemployment rate, as furloughed workers will report on Statistics Canada surveys that they are still employed despite not being paid. It could also reduce the negative cash flow on businesses as it gives them scope to furlough workers knowing that the affected workers will be supported. It should accelerate the ability for businesses to ramp up when the crisis has passed since they won’t need to rehire furloughed employees.
- Having said that, the income replacement will fall short of prior wages for many workers, meaning that there will still be a negative income shock. Moreover, it does not appear that businesses can top-up income of workers on the program, since the condition for access is an income of zero, but this needs to be confirmed.
- Beyond the negative shock to personal income, the other major concern remains business cash flows and balance sheet stresses. There have been many announcements around maintaining and expanding access to credit. However, it is likely that many businesses will need more support than what is currently available. Comments from government officials suggest that we will see future announcements from the federal and provincial governments to address this vulnerability. Time will tell if the policy response is fast enough and significant enough.
- Finally, the House of Commons ratified the Federal governments’ $82 billion fiscal stimulus program. Moreover, the additions to the package lift the total value to $107 billion.
