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Canada’s economy posts tepid growth as virus uncertainty casts doubt over outlook

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Real gross domestic product inched up by an annualized 0.3 per cent, Statistics Canada said Friday, matching what the Bank of Canada and private-sector economists had expected.

Adrian Wyld/The Canadian Press

The Canadian economy nearly ground to a halt in the final quarter of 2019, but showed flickers of momentum that could be short-lived as the world contends with the coronavirus outbreak.

Real gross domestic product inched up by an annualized 0.3 per cent, Statistics Canada said Friday, matching what the Bank of Canada and private-sector economists had expected. For the year, real GDP rose by 1.6 per cent, marking a slowdown from 2018’s 2-per-cent pace.

A weak quarter was hardly surprising given a slew of temporary disruptions, including the Canadian National Railway Co. strike, poor weather in parts of the country and pipeline shutdowns. In particular, business investment and exports were notable drags, while household spending was strong enough to keep the quarter in positive territory.

December, however, brought some relief, with GDP climbing 0.3 per cent from the previous month and delivering a stronger end to 2019 than many had expected.

“Normally, we would see that as a good hand-off for [the first quarter], but that goes out the window given the new issues with global growth and yet more rail disruptions in February,” said Royce Mendes, senior economist at Canadian Imperial Bank of Commerce, in a client note.

On top of that, the COVID-19 outbreak has spread to more than 50 countries, forcing some companies to cut back on operations and leading to considerable losses on equity markets.

As such, an increasing number is betting the Bank of Canada will be forced to cut its policy rate, perhaps as soon as next week.

“The key questions facing the Bank of Canada ahead of next week’s rate decision are likely the same ones facing all analysts right now: how long will the coronavirus disruption last, and how deep will that disruption be?” said Brian DePratto, senior economist at Toronto-Dominion Bank, in a research note.

“It is too early to expect the Bank to have these answers, so a rate cut on Wednesday seems unlikely (though not impossible). Instead, given the list of risks facing the Canadian economy, expect Governor [Stephen] Poloz to open the door even wider to monetary easing this spring.”

Friday’s report highlighted some persistent issues for the economy. For the quarter, exports dropped by an annualized 5.1 per cent, with weakness in both goods and services, while business investment continues to flip-flop between gains and losses. Consumer spending, however, expanded at a 2-per-cent annualized rate, bucking recent data that pointed to a beleaguered consumer.

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How bad is it? The state of the coronavirus-hit Canadian economy in numbers – Financial Post

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Coronavirus has rocked the Canadian economy. As the death toll keeps climbing across the country, economists are grappling with the toll on the economy. Here are the numbers you need to know.

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The economy's on life support and Canadians need help now. What's the holdup? – CBC.ca

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As the COVID-19 caseload shows every sign of surging in Canada, the delivery of promised financial relief for people who’ve lost their jobs or closed their businesses remains maddeningly slow.

The federal government’s emergency wage subsidy is at least three weeks away from being available. It could take even longer. The emergency response benefit for those who already have lost their jobs begins phased-in registration for the program on Monday.

Small businesses, which still have to pay rent and other bills, continue to wait for promised $40,000 interest-free loans as the Department of Finance continues to negotiate its delivery with the country’s banks.

Waiting for the banks to step up

Finance Minister Bill Morneau said this week that his department has been working every day with the banks. He told members of the Commons finance committee that the “intense negotiations” are going well and that banks are “close to offering” the interest-free loans, perhaps as early as next week.

“We are going as fast as humanly possible,” he told opposition MPs on the committee.

Watch: Finance Minister Bill Morneau on rapid development of economic program:

Finance Minister Bill Morneau says government programs that would normally take about 2 years to develop are being built in short order due to the COVID-19 crisis. 1:29

But the pace remains too slow for many, even as political leaders grapple with a bewildering array of new challenges on a daily basis.

Today alone, the prime minister was forced to respond to U.S. President Donald Trump’s directive to Minnesota-based 3M to stop shipping N95 masks to Canada. Ontario released projections saying there could be 80,000 cases of COVID-19 in the province by the end of the month, and that the pandemic’s effects could last as long as two years.

‘Extreme sacrifices’

“These numbers are stark and they are sobering,” said Premier Doug Ford as he announced more mandatory closures of workplaces, including construction projects.

“We have to make difficult choices and extreme sacrifices.”

The sheer scale of the pandemic — the possibility that tens of thousands of Canadians could die, the prospect of self-isolation and business closures lasting for many months — simply adds to the stress felt by Canadians worried about their immediate future.

Pedestrians walk past a closed store on Ste. Catherine St., Monday, March 30, 2020 in Montreal. For a lot of Canadian businesses, temporary closures could become permanent. (Ryan Remiorz/The Canadian Press)

The Canadian Federation of Independent Business released a survey this week suggesting that up to a third of small businesses that have closed because of COVID-19 will never re-open. Another 23 per cent of the 9,000 members who responded to the CFIB survey indicated they would not make their April rent payments.

It’s led many to question why Canadian banks aren’t doing more to help.

‘Business as usual’

Former Conservative leadership candidate Rick Peterson wrote an op-ed piece this week criticizing the banks for failing to be proactive and for continuing to charge high fees and credit card interest rates.

“It’s basically business as usual,” he wrote in The Edmonton Journal. “Sure, the banks have deferred payments for up to six months on mortgages and some loans — but the interest charges continue to accrue. Credit card payments have been deferred as well, but interest charges and transaction fees stay the same.”

New Democrat MP Peter Julian issued his own public appeal to the banks earlier this week.

“All Canadians are making sacrifices to get our country through this crisis,” he wrote in an open letter. “Financial institutions, particularly Canada’s six big banks, can play their part by waiving interest fees and charges on bank loans, line of credits and mortgages for the next two payment cycles.”

Government balks at using the Bank Act

New Democrats urged the Trudeau government to use its authority under the Bank Act to reduce interest rates, and to work with the provinces to freeze any rent increases and utility payments.

Government officials, who spoke on background, said banks are cooperating and using the hammer of the Bank Act would be counterproductive.

“We get that people want relief,” said one official. “To be fair here, the banks are very aware that they are a critical piece of keeping the economy healthy.”

The Canadian Bankers Association says it is working with both governments and customers to help them weather the pandemic.

Spokesman Mathieu Labrèche replied to written questions from CBC News on Friday to say nearly a half a million requests for mortgage deferrals were either completed or were in the process of being completed over the past two weeks — about 10 per cent off the mortgages held by the country’s six largest banks.

Watch: Trudeau asked about Canada’s talks with OPEC on reducing oil production:

Prime Minister Justin Trudeau spoke to reporters on Friday 2:43

Over that same period, the banks have dealt with about 100,000 credit card deferral requests.

“Canada’s banks assembled quickly and made a commitment to work with their customers to provide flexible solutions to help them manage through financial hardship,” Labrèche wrote. “Many banks have programs in place to help … make debt more manageable and structure the right solution, for example rolling in credit card debt into term products with lower interest rates.”

Short-term relief, long-term burdens

But that relief is temporary. And for many people, the cost of servicing those debts will actually increase in the long run.

CIBC announced Friday that any clients with personal credit cards who want to skip a payment will receive a temporary lower rate of 10.99 per cent retroactive to March 15. But the accrued interest over the deferral period is going to be added to the cardholder’s outstanding balance. “Once your payments resume,” the bank acknowledges, “your minimum payment may be higher as a result of a higher outstanding balance.”

A letter from TD Bank to one of its mortgage customers outlines the consequences of deferrals:

“It’s important that by deferring mortgage payments you’re not paying the mortgage principal, and interest will be capitalized, (that is, it will be added to the outstanding mortgage balance so your balance will increase),” the letter said. “We want to ensure you understand the impact.”

It’s a fair bet that Canadians do understand the impact. They also understand why it’s up to the government to ensure the banks’ interests don’t run counter to those of their customers — the ones obeying the government directives to stay at home at great personal cost.

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Pandemic debt: Countries are spending trillions to save the economy from the coronavirus crisis. Can the world afford it? – The Globe and Mail

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The nightmare scenario is one where the virus continues to suffocate the global economy for a year or more.

ISABEL INFANTES/AFP/Getty Images

Over the past three weeks, governments around the world have embarked on one of the greatest peacetime borrowing binges in history.

In many countries – including Canada, the United States, Germany and Britain – policy makers have launched massive stimulus programs to help sustain economies under attack from the novel coronavirus. To fund more than US$5-trillion in relief packages, governments are issuing epic amounts of debt.

Most big economies will see government borrowing leap higher as a result of the virus, says Gavyn Davies, chairman of Fulcrum Asset Management in London. He expects ratios of public debt to gross domestic product to jump by 10 to 20 percentage points. In Canada, a move of that magnitude would propel general government debt, including both federal and provincial borrowing, to around 100 per cent of GDP, while in the United States it would boost the ratio above 120 per cent.

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Can the world afford this avalanche of new borrowing? For now, the answer is yes. So long as interest rates remain low and economies return to something approaching normality within a few months, developed countries should find the additional burden to be tolerable. Most will remain considerably less indebted than Japan, which for years has sustained stratospheric levels of public borrowing, with government debt well in excess of 200 per cent of GDP.

One big uncertainty hovers over these calculations, however: What happens if the world does not return to normalcy within, say, six months? If so, governments will find themselves writing enormous cheques every month to sustain comatose economies. If that happens, all bets are off.

For now, though, worrying about such possibilities misses the point. Confronted by an overwhelming emergency, governments have little choice but to engage in deficit spending on a giant scale.

In fact, the urgent question isn’t whether these countries can afford to take on more debt. It’s whether they’re taking on enough debt to fund the stimulus programs necessary to avert an even deeper downturn.

Analysts at Bank of America describe the massive US$2-trillion stimulus package passed by U.S. Congress in March as the “bare minimum.” Scott Minerd, chief investment officer at Guggenheim Partners, told Reuters he expects more support will be needed for the U.S. economy. If so, Canada is likely to be caught short as well.

Lockdowns and quarantines needed to fight the virus have already sent unemployment soaring. In Canada, more than two million Canadians filed for unemployment benefits in the last half of March. Meanwhile, in the United States, almost 10 million people have filed for benefits over the past two weeks.

The pain is not going to let up. If private-sector forecasters are right, economic output in the second quarter will shrivel at a 15-per-cent to 35-per-cent annualized rate in Canada and the United States. This would be a far deeper downturn than anything that occurred during the financial crisis.

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General government debt to GDP ratio   

In select OECD countries

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: imf

General government debt to GDP ratio   

In select OECD countries

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: imf

General government debt to GDP ratio   

In select OECD countries

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: imf

Capital Economics is warning clients that the global slowdown is shaping up as the sharpest and deepest global slowdown since the Second World War. Harvard University economist Kenneth Rogoff goes even further: He told Barron’s that the depth of the global downturn could be as bad as anything in the past century and a half.

Without relief, many households will go bust. Their incomes will shrink or vanish, and they will default on mortgages, rent payments and car bills. Meanwhile, many restaurants, retail stores, travel operators, malls, hotels and airlines will tumble into bankruptcy. With all those employers gone, many workers will not have jobs to go back to when the virus does come under control. The slump could stretch on for years and turn into a full-on depression.

Generous government support can help prevent this ugly scenario by ensuring we still have a functioning economy whenever life does return to normal. For most economists, the logic is inarguable: No matter how expensive an outpouring of government aid may seem right now, it is cheaper than dealing with a depression down the road.

Still, the size of the necessary relief programs is staggering. In the United States, for instance, the federal deficit will hit 13 per cent of GDP this year, according to credit rater Fitch. That would blow away the previous record of 9.8 per cent, which occurred during the darkest days of the financial crisis, in 2009.

In Canada, the fiscal programs already unveiled by federal and provincial governments amount to 13 per cent of GDP, Capital Economics calculates. But even that enormous flood of government cash may not be enough to save everyone.

Stephen Brown, senior Canada economist at Capital Economics, points out that 10 per cent of the 13,330 Canadian restaurants that replied to a recent survey indicated they were closing their doors permanently in March. A further 18 per cent said they were likely to go out of business this month. If the imploding restaurant business is any gauge, Canada’s economy may be in need of even more support, and all the government debt that implies.

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Should we worry about the long-term effects of this new borrowing? Without question, the new debt will leave taxpayers with a significantly larger burden to carry in years to come.

But so long as financial conditions remain similar to today’s, the burden should not be overwhelming. “The Canadian government has the space to deliver stimulus on this scale,” DBRS researchers assured investors in a report this week. “The federal government is entering the crisis with a modest fiscal deficit, relatively low levels of debt, and funding costs that are negative in real terms.”

The biggest ally of deficit spenders everywhere is today’s shockingly low interest rates. When Canada and other major industrialized economies can borrow money for 10 years at considerably less than 1 per cent a year, the real burden of carrying additional debt becomes exceedingly small – or even negative, as DBRS notes. At these rates, lenders are essentially begging Canada and other advanced countries to borrow more.

The low rates set up some favourable math. Once the world gets past the worst of the pandemic, and growth returns to more normal levels, the economies in most industrialized countries should expand substantially faster than the interest rate on their debt. This means the size of their government debt should shrink steadily as a portion of GDP. In Canada, for instance, it makes perfect sense to borrow at 0.7 per cent (the current yield on 10-year Canada bonds) to support an economy capable of growing at 3 per cent or more.

How many coronavirus cases are there in Canada, by province, and worldwide? The latest maps and charts

Coronavirus guide: Updates and essential resources about the COVID-19 pandemic

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‘Can I take my kids to the park?’ And more coronavirus questions answered by André Picard

Remember, too, that today’s emergency measures are temporary. Unlike proposals for spending on new social programs, the need for most of the new stimulus programs will melt away as soon as the threat from the virus eases.

To be sure, there are risks, particularly in poorer parts of the world. In some emerging economies, a rapid run-up in debt could result in a crisis if investors begin to worry about possible defaults, or if bondholders start to fear that hard-pressed governments will inflate their way out of the problem.

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In more advanced economies, though, one has to squint hard to see any immediate problem. Judging from today’s ultralow yields on Canadian, U.S., German and British government bonds, investors are desperate for safe assets. They are clamouring to buy government bonds from big industrialized economies and that demand is not likely to dry up any time soon.

All this argues strongly that the current borrowing binge should turn out well – so long as things get back to normal in relatively short order.


The nightmare scenario is one where the virus continues to suffocate the global economy for a year or more.

“What would be the effect of the Treasury continuing to add trillions of dollars each quarter to the deficit (which was already running at $1-trillion even before the virus hit) and of the Fed continuing to pump trillions more into the monetary system?” asked Howard Marks, the widely followed co-chairman of Oaktree Capital Management, in a commentary this week.

Mr. Marks puts forward a couple of tentative possibilities: Maybe a burst of inflation because of all that money printing. Maybe a shift away from the U.S. dollar as the world’s reserve currency because of worries over the U.S. economy’s rapidly expanding debt load.

At the very least, he suggests, the next few months will stoke debate around Modern Monetary Theory, the heterodox school of economics that argues government debt and deficits don’t matter. While highly contentious, MMT has helped to focus attention on central banks’ increasingly aggressive interventions in debt markets.

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The largest example of those interventions are the massive bond-buying operations launched by the European Central Bank and the U.S. Federal Reserve since the financial crisis. By hoovering up domestic bonds, these central banks are creating artificial demand for bonds and thereby driving down interest rates (which move in the opposite direction to bond prices).

bond yields

10-year government bond yields,

as of noon Eastern, Friday

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: marketwatch

bond yields

10-year government bond yields, as of noon Eastern, Friday

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: marketwatch

bond yields

10-year government bond yields, as of noon Eastern, Friday

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: marketwatch

To some eyes, bond buying by central banks – or quantitative easing, as it’s known in the jargon – commits the unpardonable sin of blurring the distinction between fiscal and monetary policy. After all, it consists of one arm of government creating money in order to buy debt issued by another arm of government. That looks perilously close to a shell game in which central banks monetize government debt and distort markets.

Defenders of central bankers argue that is not entirely accurate. They say the bank interventions stop short of rigging the game. Rather than holding all the cards, central banks still own only a fraction of government bonds. (In March, for instance, the Fed held about 12 per cent of all U.S. Treasury securities, considerably less than foreign investors and also less than the U.S. Social Security system.) In addition, central banks typically vow the interventions are temporary. They promise to eventually reverse most, if not all, of their bond buying.

Maybe so. But those reversals show no signs of happening in the foreseeable future. Central banks’ balance sheets are expanding furiously as they gobble up government bonds and other forms of debt. The Federal Reserve’s balance sheet has already swelled to US$5.7-trillion from just less than US$4-trillion before the pandemic hit. It could swell to as much as US$10-trillion – roughly half the size of the U.S. economy – over the next few months, according to Capital Economics.

Some commentators believe debt-challenged governments may eventually be forced to go even further and turn to “helicopter money,” a manoeuvre in which central banks would simply create money, without issuing any corresponding debt, and government would funnel the new cash to people and businesses. It is an attractive idea in theory. However, doing so would mark a new level of desperation. It would be a sign that governments are out of alternatives.

Fortunately, we’re not at that point yet. Governments still have the capacity to borrow and will make full use of that power in the weeks and months ahead. But until we win the battle against COVID-19, and revive our battered economies, we are in uncharted territory. Best to not rule anything out.

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