Canadian Manufacturing

Canada’s economic recovery to take longer than the U.S. following COVID-19: report

RSM Canada’s Financial Conditions Index highlights the impact to Canada’s economy in the first quarter of 2020, requiring responses by monetary and fiscal authorities

April 23, 2020  by CM Staff

On April 23, accounting firm RSM Canada launched its first 2020 issue of ‘The Real Economy: Canada’ – a quarterly report that provides Canadian businesses with economic analysis and insights into factors driving growth or economic headwinds in Canada’s middle market.

As the COVID-19 pandemic continues to disrupt the global economy, the report investigates how deep the impact will be for Canada’s economy as well as its business community.

Through an analysis of in-depth data, the report also outlines recommendations on how the government and financial authorities can curtail the damage and explores what Canada’s economic recovery could look like in the months ahead.

Key findings in this quarter’s report include:

  • Canada’s economic recovery will take longer than the U.S.
    • The current financial system shock has not set off a broader financial and banking crisis thanks to activist and globally coordinated monetary policy.
    • Recovery will not be L-shaped, as the U.S. economy experienced after the Great Recession, but could take on more of a ‘U’-shaped recovery pattern due to:
      • Pre-existing signs of economic weakness prior to the onset of COVID-19.
      • The U.S.-China trade war, which disproportionately affected Canada given the degree of integration between the U.S. and Canadian economies.
      • The Saudi-Russian oil price war, which impacted oil and gas pricing, and a significant reduction in exports such as petroleum, automobiles and automobile parts.
      • Already-high levels of household debt, which have increased substantially over the past several years and remain the highest in the G-7. Debt levels may increase further due to economic uncertainty during COVID-19.
  • The COVID-related shock to Canada’s financial system has resulted in four to seven standard deviation drops in the RSM Canada Financial Conditions Index
    • The Index is a composite measure of the risk being priced into financial assets, and it would normally fluctuate within two standard deviations above or below normal levels of stress.
    • A four-standard deviation move below normal conditions suggests disturbing circumstances.
    • A seven-standard deviation shock suggests that Canada is on the verge of a financial crisis that could rival the global financial crisis of 2007-2009.
    • As of report writing, the equity market is more than 9.7 standard deviations below normal levels; the money market is 2.1 below normal; and the bond market is 4.2 below normal.
  • These shocks to the financial system are transmitted to the real economy via a loss in income, a decline in investment, with the propensity to borrow and lend collapsing.
    • Addressing system shocks requires extraordinary responses from both monetary and fiscal authorities.
    • Monetary authorities have responded by lowering short-term interest rates. These proactive efforts help to avoid the catastrophic freeze up of the global financial system that occurred in 2008.
    • The next step is solving the health care crisis, after which fiscal authorities can facilitate the means for preventing further illnesses while increasing the availability of health care and crisis care; support the ability of businesses to recover; and for employees to work online by expanding broadband to all citizens.

“Canada’s financial system has experienced a series of devastating blows in the wake of the global equity market collapse that began in the last weeks of February, and which has us on the verge of a financial crisis that could rival the global financial crisis of 2008,” said Joe Brusuelas, chief economist with RSM US LLP, in a prepared statement. “Monetary authorities have responded appropriately with measures such as easing of interest rates, but now we need to see fiscal authorities implement meaningful measures to protect and preserve the real economy.”

“Measures being taken to stem the spread of COVID-19 have ravaged Canada’s economy,” said Alex Kotsopoulos, vice-president, projects and economics with RSM Canada, also in a statement. “As we look ahead to recovery, we expect it will be more tepid than originally thought and, unfortunately, for a variety of reasons it will take longer for us to rebound in Canada than the U.S.”