Central bankers are waking up to dramatically overhauled expectations about interest rates, as the coronavirus that started in China and is now creeping around the world rewrites their plans as quickly as the virus spreads.
Investors are betting that there’s better than a two in three chance of a rate cut from the Bank of Canada as soon as next Wednesday, when Canada’s central bank is poised to reveal its next decision on interest rates. Not everyone believes it’s a sure thing, but the probability goes up as the illness spreads.
At the start of the year, the odds of Canada cutting its rate at the March meeting were barely one in 20. Even a week ago, the odds of a cut were barely one in six. But that was before the virus that causes COVID-19 started its spread around the world, infecting markets everywhere with something almost as dangerous as the pathogen itself: fear.
Both Canadian and U.S. stock markets are in correction territory, meaning declines of more than 10 per cent. Supply chains at technology companies like Apple have been disrupted as Chinese factories shut down, making it impossible for manufacturers to get finished products to market.
Airlines have seen their ticket sales plunge as consumers decide to stay home. Businesses around the world are cancelling conferences and other events that require people to meet face to face. And if coronavirus becomes widespread here, many businesses will struggle with shortages of workers and supplies.
All things being equal, central banks raise interest rates when they want to cool down overheated economies. They cut when they want to stimulate an economy that needs a little warming up.
Faced with the potential of a sickly economy because of coronavirus, central banks around the world are expected to try to flood the system with cheap money in the hope that it’s the shot the arm the economy needs to get better.
China, Brazil, Russia, the EU, Indonesia, India and Mexico have all cut in recent months.
U.S. Fed could lower rates
Typically in times of uncertainty, investors flock to the relative safety of the U.S. economy. But the world’s largest economy also is going to be dealing with the spread of coronavirus. And despite lowering rates three times in the past year, it’s not immune to the trend toward lower rates.
Traders are pricing in effectively a 100 per cent chance of a U.S rate cut next month, and there’s a 50/50 chance of up to two more cuts after that.
Those odds are three times as high as they were as recently as Wednesday, before U.S. President Donald Trump appointed vice-president Mike Pence to head public health efforts to contain the virus’ spread.
The U.S. central bank, the Federal Reserve, has been signalling for months that it thinks the underlying numbers in the U.S. economy are strong, and telling investors not to expect any more rate cuts unless something drastic happens.
Reaction to the coronavirus suggests something certainly has. Even if the Fed is inclined to sit tight, it is under pressure to do something for the sake of looking like it is doing something.
“The Fed’s desire to be data-dependent may capitulate to market sentiment,” as Jon Hill, an interest rates strategist at BMO Capital Markets put it.
That goes for Canada, too. While most economists who study trends at the Bank of Canada expect the bank to stand pat next week, almost half of them think the bank should cut, according to a survey by rate comparison site Finder.com.
Canadian GDP another reason to cut
Brett House at Scotiabank is among them. “Our call for is for two cuts in 2020, which we’ve been saying since August of last year,” he said in an interview. That call was based on underlying weaknesses in the economy, something that was borne out by Friday’s GDP release that showed economic growth slowed to its slowest annual pace in almost four years at the end of 2019.
“And that was all before the coronavirus,” he said.
Since that call, more than 40 major central banks around the world have moved to cut rates, he notes. “If anything Canada has been one of the tardiest to the [rate cut] party.”
Others aren’t sure the coronavirus will be enough to compel the bank to take action — yet. “Although we think a certain degree of easing is warranted, two cuts priced by the end of 2020 seems somewhat unrealistic,” CIBC’s economics team said in a note this week.
The bank thinks a cut is coming, but possibly not until the next meeting in April.
“We are reluctant to pencil-in an additional cut as we don’t know how long the associated uncertainty will last,” CIBC said.
Sherry Cooper, chief economist with Dominion Lending Centres, says the panic in the stock market right now shows the central bank is under pressure to do something, even if it’s just for the sake of doing something.
“None of this is good for psychology or the economy,” she said.
“The Bank of Canada meets next Wednesday, and clearly, their press release will address these issues. It’s unlikely the bank will cut rates in response on March 4, but if the economic disruption continues, rate cuts could be coming by mid-year.”
Australia central bank sees glimmer of hope as economy restarts after pandemic shutdown – The Guardian
By Swati Pandey
SYDNEY (Reuters) – Australia’s central bank held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually re-opens during what is likely to be the worst quarter since the Great Depression.
The Reserve Bank of Australia (RBA) left rates at 0.25% at its monthly policy meeting in a widely expected decision, and said the “accommodative approach will be maintained as long as it is required.”
In a short post-meeting statement Governor Philip Lowe said the RBA was prepared to scale up government bond purchases if needed to ensure three-year yields held around 25 basis points.
Australia’s A$2 trillion ($1.4 trillion) economy is experiencing its biggest contraction since the 1930s in the current quarter but “it is possible that the depth of the downturn will be less than earlier expected,” Lowe added.
A significant decline in new infections, earlier-than-expected easing of restrictions and signs that hours worked stabilised in early May auger well for a recovery.
“There has also been a pick-up in some forms of consumer spending,” Lowe added.
States and territories across Australia have been easing social distancing regulations at differing paces in recent weeks, slowly ending a partial lockdown ordered in March, having largely contained the COVID-19 pandemic.
Australia, which has about 7,200 coronavirus cases, has not reported a death from the disease for more than a week.
The country’s success in containing the virus has sent the Aussie dollar soaring to five-month highs. Yet, that is leaning against monetary stimulus and won’t be welcome by the RBA.
The central bank made no mention of the exchange rate in the statement.
Highlighting the depth of the pandemic-driven global economic downturn and the fallout on Australia, many economists expect interest rates to remain at record lows for at least two more years.
Some are even predicting negative interest rates, though Lowe has ruled it out.
“While we have also become more optimistic about the outlook for the economy in recent weeks, we still expect the unemployment rate to jump to nearly 9% by Q3,” said Capital Economics analyst Marcel Thieliant.
He expects the central bank to announce an expansion of its government bond buying programme at its August policy meeting.
“And we only expect the unemployment rate to fall below 7% by 2022. That would leave it far above the RBA’s estimate of the natural rate of 4.5%, underlining that the RBA will miss its full employment mandate for years to come.”
Q1 GDP MAY DODGE CONTRACTION
Official data out earlier showed Australia boasted a record current account surplus last quarter as firm export prices and a fall in imports provided a timely boost to growth.
Other data out on Tuesday showed government spending also added to growth in the March quarter, while companies reported better sales and profits than many expected.
The figures led analysts to upgrade their forecast for first-quarter gross domestic product due Wednesday with some saying the economy might not have shrunk in the quarter as previously feared.
GDP had been forecast to show output contracted 0.3%, the first fall since early 2011.
“A small positive print cannot be ruled out,” said Su-Lin Ong, chief economist at RBC Capital Markets.
“But the likely collapse in activity in the current quarter and accompanying impact on the labour market…is a sharp and deep shock through the whole economy with likely lasting ramifications.”
(Reporting by Swati Pandey; Editing by Shri Navaratnam)
Saskatchewan's economy was already shrinking before COVID – Regina Leader-Post
New data from Statistics Canada suggests Saskatchewan was already in a “mild recession” last year, even before COVID-19 and the latest oil shock began pummelling the province.
Saskatchewan’s gross domestic product (GDP), a measure of total economic output, shrunk from $82.2 billion in 2018 to $81.5 billion 2019 after factoring in inflation. That’s a decrease of 0.8 per cent, the worst number of all the provinces. The only other province to see its economy shrink last year was Alberta, which faced a contraction of 0.6 per cent.
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Joel Bruneau, head of the economics department at the University of Saskatchewan, said the new data shows the province wasn’t even managing to tread water before COVID hit.
“We’ve averaged negative growth over four quarters, so I would call it a mild recession,” he said.
The data shows that most of the hit to Saskatchewan in 2019 came from goods-producing industries, rather than the service sector. Industrial production was down, as was mining and quarrying, while the energy sector was basically flat.
Lockdown or no lockdown, study shows COVID-19's economic destruction followed a similar path either way – National Post
A group of economists studying how South Korea fought the COVID-19 outbreak without stay-at-home orders found that the country still experienced significant job losses in a pattern similar to that of countries that imposed lockdowns.
The study, from economists at Seoul’s Myongji University, Queen Mary University of London and St. Louis’s Washington University, also suggests that Canada’s slowly reopening economy may not go back entirely to normal as long as the virus is still prevalent.
“At most, half the job losses in the United States and the United Kingdom can be attributed to lockdowns,” the economists argue. Most job losses came from reduced hiring by businesses and a significant amount of non-participation in the labour market, rather than unemployment.
The same types of workers are feeling the effects, whether their country implemented a lockdown or not, the study claims. Less-educated workers, young people, workers in low-wage occupations and the self-employed lost were hardest hit, even when researchers controlled for industry effects that might over-represent these people.
“Lifting of lockdowns may lead to only modest recoveries in employment absent larger reductions in COVID-19 rates,” the paper warns.
The economists looked at labour-market effects in South Korea, where no lockdown was imposed, and compared the economic impact across different areas. One particularly bad local outbreak allowed the researchers to estimate that one additional infection for every thousand people causes a two to three per cent drop in local employment.
“The best way to revive the labour market is to eradicate the virus,” reads the paper by economists Sangmin Aum from the Myongji University in Seoul, Sang Yon Lee from Queen Mary University of London and Yongseok Shin from Washington University in St. Louis.
The study manages to untangle the many different factors in unemployment by concentrating on a localized outbreak in South Korea caused by a notorious event that spiked the transmission rate in the country.
In mid-February, the country had only 30 infections, but “Patient 31” attended a religious gathering in the city of Daegu. Ten days later, the country had more than 3,000 infections almost entirely clustered around Daegu. More than 60 per cent of them were traced back to that single gathering.
South Korea managed to quash the outbreak and maintains one of the lowest death rates in the world, mainly due to widespread testing, a robust contact-tracing regime and comparatively intrusive tracking measures, including monitoring quarantine-breakers with electronic wristbands.
The study is a working paper released for discussion by the National Bureau of Economic Research in the United States before peer review. Although working papers haven’t gone through the rigorous publication process, they are a timely way to compare the results of the COVID-19 outbreak around the world.
Countries that didn’t implement a lockdown have also suffered economic damage from the pandemic due to the disruptions in global travel and trade.
Sweden, which kept most schools, businesses and restaurants open after experiencing its own COVID-19 outbreak, is still expecting its economy to contract by seven per cent this year. Sweden’s exports depend heavily on demand from other countries, many of which went into full lockdowns.
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