Survey of forecasters: April 22, 2020
COVID-19 slams Canada’s economy
Forecasters surveyed by The Conference Board of Canada in the spring have, not surprisingly, dramatically changed their near-term projections for the Canadian economy. Real GDP is expected to contract by 4.0 per cent this year, down from a gain of 1.7 per cent expected in the winter, prior to the COVID-19 outbreak. In 2021, a 4.9 per cent recovery is anticipated as the virus's aftermath fades.
Federal and provincial guidelines recommending people stay at home and practise social distancing have resulted in a dramatic drop in Canadian economic activity. Consumer spending has ground to a halt, and forecasters expect a sharp decline of close to 5 per cent this year—mostly in the second quarter. But consumers aren’t the only ones cutting back their expenses. Spending on machinery and equipment and exports and imports will all record huge drops in activity. In fact, the only sector of the economy that will continue to spend is the government sector. The federal government has injected a large amount of stimulus dollars into the economy to support struggling workers and businesses, and this is expected to expand spending by 3.1 per cent.
Oil prices have continued to languish due to plunging demand from every corner of the world economy.
The other factor affecting Canada’s outlook is the collapse in world oil prices. A combination of tumbling global demand and the decision by Saudi Arabia and Russia to gain market share by ramping up production has dragged oil prices down to the $20 per barrel range. While the major oil-producing countries recently reached an agreement on production cuts, oil prices have continued to languish because of the sharp plunge in demand from every corner of the world economy. This unwelcome development is reflected in forecasters’ expectations of a 14.3 per cent drop in investment in machinery and equipment this year.
The Bank of Canada has responded to the crisis by slashing interest rates to close to zero and engaging in massive quantitative easing. Forecasters expect the 90-day Treasury bill rate to average 0.33 per cent this year compared with the 1.5 per cent rate expected in the winter update. Rates are expected to remain at rock-bottom levels in 2021 as well.
The loonie is forecast to trade in the US$0.72 range this year.
The large monetary stimulus won’t be inflationary, however. Forecasters expect consumer prices to increase by only 1.1 per cent in 2020. The collapse in demand due to social distancing and plummeting commodity prices will restrain inflation over the near term.
The collapse in oil prices has hurt the Canadian dollar. The loonie is forecast to trade in the US$0.72 range this year, down from US$0.77 anticipated in the winter.