Many businesses have been waiting for details of how the 75 percent wage subsidy for businesses that experience a 30 percent or more decline in revenues will be implemented. Prime Minister Trudeau and Finance Minister Morneau provided some more guidance, but the technical details are required to fully help businesses understand the program. We already knew that the 75 percent will be capped on the first $58,700 of income earned – $847 per week per employee. Trudeau emphasized that businesses will need to show they are doing “everything they can” to pay the remaining 25 per cent of their employee’s wages, or face serious penalties. Morneau said that businesses will need to reapply each month. All for-profit, non-profit and charities will be covered. Publically funded institutions will not. There is an estimated price tag of $71 billion on the wage subsidy, although use of the wage subsidy will diminish use and the price tag of the Emergency Care Benefit (CERB). This makes the fiscal calculation difficult, but I think the total package of fiscal stimulus is now around 8 percent of GDP.
For those wishing to track all of the measures and look for guidance on the programs, the Government of Canada COVID-19 Economic Response Plan website is useful.
Meanwhile, we are starting to get data on the sharp decline in the North American economy.
The HIS Markit Canada Manufacturing PMI fell to 46.1 in March from 51.8 February. This is a sharp decline and signals a significant contraction. Regrettably, this is not a surprise. It reflects the drop in global demand and disruption to trade caused by the global pandemic. Shrinking domestic demand was due to stoppages at home and the impact of the oil shock. Purchasing manager indexes (PMI) are watched closely because they provide one of the timeliest assessments of what is happening to the economy.
The US ISM Manufacturing (another PMI) fell from 50.1 in February to 49.1 in March. This was less than the 44.5 reading markets were expecting. The downturn might have been less negative than anticipated but the pain in the manufacturing system is likely to build in February.
Weakness in the real estate market is also apparent. GTA new listings fell 33% last week. Meanwhile, cancelled listings rose 27%. On an annual basis, home sales fell by 37%. There will be dramatic volatility in real estate activity this year. Overall, I think national average home prices will decline by around 5 percent in 2020, with the greatest declines in the most expensive markets.
The chief executives of two major Canadian banks (BMO and Scotia) say they expect to have ample capital to absorb shocks from the coronavirus pandemic. I have had experience doing financial stress testing at a major Canadian charted bank, and I would agree with that the Canadian financial system has adequate capital. It is worth highlighting that in the bill the federal government passed to enact the emergency policy response, there was a new section that allows the Government of Canada to nationalize any corporation whose failure would pose a threat to the stability of the financial system. I do not believe that the government expects to use this new ability, but it sends a strong signal that the federal government will act to ensure the Canadian financial system can weather the storm and can continue to support households and businesses.