The update to the IMF global economic outlook made for somber reading—not surprising, just depressing. The IMF is forecasting that the world economy will contract by 3 percent in 2020, far worse than in 2008/09. This base projection assumes that the Great Lockdown and containment will peak in the second quarter of this year. This year will also be the first time since the Great Depression that both advanced economies and emerging markets will be in recession at the same time. The Canadian economy is expected to experience a contraction that is double in magnitude relative to the crisis of 2008. The Fund is forecasting GDP to fall by 6.2 percent in 2020, with a rebound of 4.2 percent in 2021.
Our view is that the IMF forecast is realistic, albeit more negative than our current base case forecast. It is worth noting that the IMF tends to be a conservative economic forecaster, which does not publish sensational predictions. If anything, they have tended to be either less optimistic or less pessimistic than private sector consensus in the past. So, I find it noteworthy that they are more negative than the current consensus, both in terms of global and Canadian growth.
The IMF also presented two alternative adverse scenarios. This approach aligns with our position that firms and governments should be considering scenarios of different likelihoods given the high level of uncertainty that prevails in the current environment. The alternative scenarios are a 6 percent decline in the world economy if the pandemic is more protracted. An 8 percent contraction if the pandemic extends into next year. These scenarios are broadly in line with the alternative scenarios that we have developed.
Although the IMF forecasts and scenarios are bleak, it is important to stress that this really isn’t new information. Everyone knows it is a deep contraction. The focus has now shifted to how we ease the lockdown when the health outcomes have reached a point that we can do so. The main question for policymakers is how to restart the economy. Do we take measures to ease containment gradually, such as changing the designation of what is essential business to allow more activity? Or, can we reduce containment across the board? How do we ease containment in some provinces that are farther ahead in bending the curve relative to provinces having a more difficult time? I suspect the answer to all of these questions is tied to the degree to which the virus has been diminished and the extent to which broad and rapid testing can be deployed.
Prime Minister Trudeau suggested the economy will be reopened in stages. He also said, “we’re working to enhance the Canada Emergency Business Account, as well as new supports on commercial rent for businesses that are hardest hit.” Mr. Trudeau listed tourism, aviation, and oil and gas as specific sectors the government will address. We’ve been saying for weeks that government programs for hard-hit sectors were in the works, but it is taking time for the measures to be designed.
Tomorrow will be a big day on the economic front. The Bank of Canada will be making a policy announcement and it will be releasing the Monetary Policy Report (MPR). We do not anticipate any new monetary stimulus, but rather the Bank is likely to take the opportunity to explain their recent strong actions. Moreover, the MPR will provide us with the Bank’s economic forecasts, which will be fascinating given the current range of projections by private sector forecasters. Statistics Canada may also be releasing preliminary estimates of economic growth by industry for the month of March. The statistical agency is accelerating economic releases to be timelier on economic developments.
I expect that the Bank of Canada will be forecasting a contraction in Q1 and a plunge in Q2 but an economic recovery thereafter, similar to other forecaster. If so, the focus will be on the magnitude of the contraction and the speed of recovery. The consensus of private sector forecasters is for a contraction of 4 percent in 2020. It will be interesting to see if the Bank anticipates something closer to the 6 percent predicted by the IMF. The surprising news that Stats Can is releasing real GDP for March early means that we don’t have a consensus survey on what it will show. The economy grew by 0.1 percent in January. I expect a small decline in February, but a stunning drop of near 5 percent in March as the lockdown came in effect. The industry profile will be for weakness across the board in every sector, except essential service industries. For example, hoarding at grocery stores will be masked by a huge drop in retail spending. Manufacturing and resource industries will be hammered by the global downturn. But, what makes this cycle unique is the weakness in services that have been impacted by the shutdown.
