A substantial economic stimulus package is required to address the short-term liquidity crunch and longer-term considerations.
There is no question COVID-19 will significantly wound the Canadian economy. The big question governments and policymakers have to grapple with is whether the downturn will be short term or longer term in nature. Indeed, the answer to this question will help to guide the appropriate fiscal policy response.
While most headlines of late have focused on the impact of COVID-19, it is important to note that prior to the onset of the novel coronavirus the global and Canadian economies were already facing significant headwinds that suggest a lingering, longer-term negative impact.
According to the International Monetary Fund, global economic growth in 2019 was a meager 2.9% – the lowest it has been since 2009. Global growth diminished, in part due to the U.S.-China trade war, which helped cause a global manufacturing recession and declining oil prices. In Canada, business investment levels declined markedly in 2019, while at the same time delinquency rates increased as well.
The Federal Reserve responded by cutting rates last October. The Bank of Canada, however, did not cut rates at this time, taking a “wait and see” approach.
Since then, the Canadian economy has been adversely affected by rail blockades beginning in early February, a further decline in commodity prices (at the time of this article Western Canada Select fell below US$20), declining business confidence and the coronavirus. Following other major central banks, the Bank of Canada cut the overnight rate by 50 basis points on March 4 and is increasing the frequency of direct purchases in the debt market to add needed liquidity. While an important step, economists from some of the major banks believe Canada will still fall into a technical recession. Given the headwinds the Canadian economy has faced over the past couple of years, we believe that the downturn could last longer than many anticipate.
A substantial economic stimulus package is required to address the short-term liquidity crunch and longer-term considerations. The federal government will be announcing a major economic stimulus package in the coming days.
Here is what we will be looking for:
Significant increase in public health and health care expenditures
Ultimately, the best way to limit the economic impact of COVID-19 is to decrease the rate of transmission. The federal government already announced a billion dollars in increased public health expenditures. Additional funding for healthcare and in coordination with provinces will also be required to help the system deal with a surge in utilization. Recent estimates suggest that anywhere from one-third to two-thirds of Canadians will be impacted by COVID-19.
If you have the fiscal room, use it
Canada is in the enviable position of having a healthy balance sheet with net government debt levels the lowest in the G7 by a large margin. Canada’s net government debt as a percent of GDP was 26% in 2019, almost four times lower than the United States and nearly five time lower than Italy. Finance Minister Bill Morneau has claimed a number of times over the past week that there is ample fiscal room to respond to the COVID-19 crisis. We will see if the federal government is prepared to use it. In response to the global financial crisis, the government of former PM Stephen Harper announced $47 billion in new spending over two years. We believe that a similar level of new spending is required to address the short-term impact of COVID-19, but also to address other headwinds the Canadian economy is facing. Now is not time for prudence.
Aid for small and medium-size businesses
In a press conference last week, the finance minister (accompanied by the governor of the Bank of Canada highlighting the degree of coordination with the central bank) announced a new credit facility targeted at small and medium-size businesses. The Business Credit Availability Program is intended to provide these concerns with viable business-models financing to address short-term liquidity challenges required to maintain operations and employment levels. The program is similar to one created in the wake of the global financial crisis; the $10 billion of funding announced will be administered via the Export Development Bank of Canada and the Business Development Bank of Canada. Small and medium-size businesses with liquidity concerns should immediately reach out to their banks to discuss options. Additional funding may be required, however, given corporate debt levels in Canada and the increased proportion of debt classified as being at risk. Delaying remittances of payroll taxes is another measure that could provide additional liquidity to small and medium-size businesses.
Support for lower-income households
Many lower- to middle-income households could also face a liquidity crunch in the short term. Social distancing may disproportionately impact lower-income households. Some economists have called for “supersizing” existing rebate programs such as Canada Child Benefit and/or the GST/HST Rebate as an effective way to provide lower-income Canadians support to address lost wages in the short term. These measures and others like them leverage existing programs, target lower-income households and are therefore more likely to be spent in the economy. These measure could also benefit Canadians working in the growing gig economy.
Targeted support for Alberta and other provinces dependent on oil exports
Oil prices have collapsed not just because of COVID-19, but also because of the recent price war between Saudi Arabia and Russia. Alberta is facing an unemployment rate that is nearly two percentage points above the national average. COVID-19 and the Saudi-Russian dispute could not have come at a worse time for the Alberta economy and there is no question that additional levels of support will be required to help stabilize Alberta’s economy in the short term and likely on a longer-term basis.
New infrastructure stimulus program
We acknowledge that infrastructure spending takes time to work its way through out the economy, but prior to the outbreak of COVID-19 Canada was already facing lower growth prospects, decreasing investment and a large and growing infrastructure deficit, which is harming productivity levels. Remitting a higher proportion of the gas tax to municipalities could help various municipal infrastructure projects to progress and increase demand. If managed appropriately, increased infrastructure spending could also address some of our longer-term challenges. Indeed, one approach that should be considered is whether existing infrastructure projects could be accelerated through an increase in funding. It will important to invest in projects that are not just “shovel ready” but those that are “shovel worthy” to improve Canada’s lagging productivity.