PBO warns economy could see largest annual decline since 1962

Real GDP in the second quarter set to slump 25% year-over-year report estimates

PBO warns economy could see largest annual decline since 1962
Steve Randall

The Canadian economy is set for its weakest year on record since 1962 as global economies enter recession.

The Parliamentary Budget Officer (PBO) says that the impact of the COVID-19 pandemic will see real GDP in the first quarter of 2020 decline by 2.5% year-over-year. But the big hit will be in the second quarter with a 25% decline year-over-year.

That would mean Canada’s economy would contract by 5.1% for the whole year, a drop of 6.5 percentage points compared to the PBO’s projection published in November 2019.

Although no projection can be entirely accurate with so many unknowns about the coronavirus crisis, the PBO’s latest analysis assumes that social distancing remains in place until August, making 6 months in total.

It also assumes that OPEC+ will not cut oil production.

“The subdued rebound reflects our judgment that, similar to the global financial crisis and previous oil price shocks, the Canadian economy recovers gradually in the presence of large shocks,” the report states.

Budget deficit
The PBO report concludes that the Canadian budget deficit would rise to $26.7 billion in 2019-20 and then to $112.7 billion in 2020-21.

That’s equivalent to 1.2% of GDP in 2019-20 and 5.2% of GDP in 2020-21.

The last time the budgetary deficit was near 5.2% of GDP was in 1993-94. Compared to our November projection, the deficit is $5.5 billion higher in 2019-20 and $89.5 billion higher in 2020‑21.

The report notes that prior to the outbreak, the Canadian balance sheet was healthy.

However, it is now likely that further stimulus will be required to get the economy back to “lift-off speed” especially if consumers and businesses are slow to get back to normal once the virus threat is lifted.