Why Canada's post-COVID recovery will lag the U.S.

Report cites signs of economic weakness that pose challenge to Canadian revival

Why Canada's post-COVID recovery will lag the U.S.

While the world has been officially plunged into recession thanks to the coronavirus pandemic, the hopeful question on many analysts’ minds isn’t if countries can recover, but when. And according to RSM Canada, the Great White North has a challenging road ahead.

In the first 2020 issue of its quarterly report The Real Economy: Canada, it found that activist and globally coordinated monetary policy helped prevent the present shock to the financial system from devolving into a broader financial and banking crisis.

But it noted that even with those measures, Canada is set to trudge a U-shaped path to recovery. Aside from signs of economic weakness that pre-dated the onset of COVID-19, the report cited challenges including:

  • The outsized impact of the U.S.-China trade war on the country;
  • The Saudi-Russian oil price war, which delivered a double blow of low oil and gas prices and reduced exports of products such as petroleum, automobiles, and auto parts; and
  • Already-elevated levels of household debt, which are the highest among the G-7 and may rise even further amid the current economic uncertainty.

“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, and co-author of the report.

Noted in the paper was the record-shattering 16.8 million jobless claims recorded in March and early April, which were all attributable to the coronavirus.

The coronavirus-inflicted shock on the financial system was also evidenced by steep drops in the RSM Canada Financial Conditions Index, a composite measure of risks being priced into financial assets.

Typically, the index would oscillate within two standard deviations above or below normal levels of stress. A movement of four standard deviations below normal conditions would suggest “disturbing circumstances,” while a seven-standard deviation drop would indicate a financial crisis on par with the 2008 global financial crisis.

“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,” RSM Canada said.

The report said that stress in capital markets will make itself felt in the real economy as a loss in income and a decline in investment.

“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,” said Joe Brusuelas, chief economist with RSM US.


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