Will the economy head out of the frying pan into the fire?

Economists are split on the shape of the recession, but there may be tightening credit and further job losses to come

Will the economy head out of the frying pan into the fire?
Steve Randall

Every day there seems to be a new way that individuals and businesses are being supported through the current crisis; a new program here, payments holidays there.

But once the schemes come to an end, there are likely to be multiple challenges for households, businesses, and governments.

Among the latest support to be announced, is a new Desjardins strategy to support Quebec as it starts to reopen for business.

This includes a $150 million “GoodSpark Fund” to support social and economic recovery through to 2024; and a $10 million “Momentum Fund” for businesses.

The organization, Quebec’s largest private employer, is also firming up plans to get its own business back up to speed.

But while the world focuses on how to get through the coronavirus pandemic, there are some worrying conditions lining up for the future.

Tightening credit?
A report from Reuters said Thursday that Canadian banks may tighten access to credit once the government-backed programs end in the coming months.

This is likely to include restricted access to HELOCs – home equity lines of credit that may be considered a lifeline for many of those who have lost income during the pandemic.

“HELOCs, in some ways, have the potential to magnify risk on banks’ balance sheets, because in times of stress, people want to draw on them,” Ben Rabidoux, president of research firm North Cove Advisors told Reuters.

Rabidoux said that Scotiabank has already stopped allowing investors to tap HELOCs for down payments on investment properties; the bank did not comment on the report.

South of the border, some major banks including JPMorgan Chase have suspended new HELOC applications.

Banks are fearful that, with the potential for home prices to drop and defaults to rise, they will see an increase in bad loans.

Market recovery
On the plus side, Nigel Green, CEO of global wealth advisory deVere Group, is optimistic of recovery, with markets showing some positive signs.

“They are shrugging off the entirely expected current poor economic data – this has largely been priced in already,” he said. “Instead, investor optimism is being reinforced by reports of major progress in the effort to develop coronavirus treatments. Also, as central banks continue to roll out and further enhance their stimulus packages, and as crippling lockdown restrictions around the world begin to ease to revive economies.”

Green believes that fear of missing out will drive recovery for the markets and says a V-shaped recovery is being priced in.

“Investor exuberance is contagious. As the markets move steadily higher - unfazed by the recent poor economic data from the peak of the pandemic – it can be expected that the uptick will further sharpen due to that powerful investor sentiment: FOMO,” he said.