Canada is likely to fall into a recession this year unless the government moves ahead with robust fiscal stimulus as the economy takes a double hit from the coronavirus and tanking oil prices, according to the Bank of Nova Scotia.
Scotiabank is the first of the six largest Canadian banks to predict the country could be headed into a recession, though it believes the government will move quickly enough to avert one. A rapid rise in coronavirus cases globally, the sharp fall in oil prices and volatility in financial markets make a contraction in the second and third quarters this year “likely” in the absence of fiscal measures, Jean-François Perrault, chief economist at Scotiabank, said Wednesday.
“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,” Perrault wrote in a research note.
Prime Minister Justin Trudeau released $1.1 billion in new funding earlier Wednesday in response to the virus, and said the government is ready to do more if necessary. Trudeau also said his government is prepared to use federal financing agencies to further stimulate the economy if needed, a measure that was deployed during the 2008-09 financial crisis.
But that may not be enough. Canada’s measures pale in comparison to those set out by countries such as Italy, which plans to spend as much as 25 billion euros ($28.3 billion) on stimulus measures. Perrault recommends the government roll out a fiscal package equivalent to one per cent of GDP, or just over $20 billion, in order to prevent the Canadian economy from going into recession.
The Toronto-based bank sees the country’s gross domestic product growth slowing to 0.3 per cent for the year in the absence of significant stimulus. Scotiabank’s isn’t the first bearish call to emerge this week in the aftermath of the oil price collapse but it does represent the most aggressive take yet on Canada’s future.
National Bank of Canada Financial and Royal Bank of Canada will release their forecasts later this week. Bank of Montreal was the first of the six banks to revise their forecasts lower this week, with a call for full year GDP growth at 0.5 per cent.
The latest stream of downward revisions include predictions that the Bank of Canada will cut rates to 0.25 per cent by June from its current 1.25 per cent. That’s in line with financial market expectations, according to overnight index swaps trading. The last time the Bank of Canada policy rate reached 0.25 per cent was in 2009. Earlier this month, the central bank cut interest rates by 50 basis points amid escalating coronavirus concerns, matching an emergency move by the Federal Reserve.
Here are the latest revisions from bank economists this week:
Scotiabank — Jean-François Perrault
Sees Canada’s 2020 GDP at 0.3 per cent in absence of substantial fiscal stimulus and 0.7 per cent if there is fiscal stimulus worth one per cent of GDP. Without fiscal stimulus, Q2 and Q3 GDP will contract. Expects the Bank of Canada to cut interest rates by 50 basis points at the next two meetings.
Bank of Montreal — Michael Gregory
Lowers 2020 GDP to 0.5 per cent from one per cent, and sees Q2 contracting by 3.5 per cent. Expects Bank of Canada to cut rates by 100 basis points over the next two meetings to 0.25 per cent.
JPMorgan — Silvana Dimino
Revises down 2020 forecast to one per cent or 1.1 per cent Q4/Q4 basis. Predicts no growth in Q2 and a two per cent rebound in Q3. Expects Bank of Canada to cut by 50 basis points in April with the “heightened risk” for an earlier emergency cut to zero per cent.
Goldman Sachs — Daan Struyven
Revises down 2020 GDP to 0.4 per cent or 0.2 per cent on a Q4/Q4 basis. Sees Canada on “verge of recession” with a zero per cent Q1, -0.5 per cent Q2, 0.25 per cent Q3 and one per cent Q4. Expects Bank of Canada to lower policy rate to 0.25 per cent by its June meeting.
— With assistance from Erik Hertzberg and Kait Bolongaro