For economic prognosticators, it’s been an eventful few weeks.
The new year began with a modicum of optimism that the world economy would gain some traction after a sluggish 2019. A similar view was expressed by most forecasters who focus on Canada. But from today’s vantage point, it looks to be ending in tears.
Globally, confidence has been shattered by the novel coronavirus that first appeared in China last December and has since spread to more than 100 countries, including the U.S., Canada, Japan and much of Europe. This dangerous worldwide disease outbreak has led to frozen cross-border supply chains, sharp declines in both commodity prices and international travel, and plunging equity markets.
Closer to home, the early months of 2020 have seen Canada rocked by protests and transport disruptions linked to opposition to B.C.’s Coastal GasLink pipeline by some Indigenous groups and their environmental sympathizers. While other countries grapple with a frightening new pandemic, the Canadian government has been preoccupied with getting the trains running again, keeping the country’s ports operating and trying to look as virtuous as possible. Meanwhile, Teck recently shelved its huge Frontier oilsands mine and Warren Buffett has decided not to invest in a proposed natural gas project in Quebec. Rarely has the picture that Canada presents to the world been less inspiring.
With economic growth projections being slashed across the board, the budget unveiled by B.C. Finance Minister Carole James on February 18 was out of date before she rose to present it in the legislature. That is not to criticize the minister – our own assessment of B.C.’s near-term economic prospects has shifted markedly in the span of two months. In January, the Business Council of British Columbia predicted that B.C.’s economy would grow by a modest 2% this year, up marginally from 1.8% in 2019. By early March, we had trimmed our 2020 forecast to 1.4% – with further downgrades likely as overall economic conditions continue to deteriorate.
The 50-basis-point interest rate cuts announced in early March by the U.S. Federal Reserve and the Bank of Canada have done nothing to calm the roiling economic waters. Indeed, these actions have further unsettled markets. In truth, monetary policy can do little to ameliorate the economic dislocations that occur when millions of people decide – or are instructed – to avoid work and public spaces, manufacturing supply chains stop functioning and travel plans and conferences are cancelled. The latest rate reductions also underscore how little ammunition central bankers have left after more than a decade of exceptionally low interest rates. Unlike the situation in 2008-09, central banks will have few tools to respond to the next recession.
And when might that arrive? Incoming data from fixed-income and equity markets suggest a downturn is imminent, assuming it hasn’t already started. U.S. President Donald Trump’s frantic and frequently incoherent tweets aren’t helping to move sentiment in a positive direction. On our side of the border, the government of Prime Minister Justin Trudeau looks like the proverbial deer in the headlights as the economic and financial storms gather force.
For government and business decision-makers in Canada, it’s time to prepare for the hard times that may now lie ahead. Companies should review and perhaps recalibrate their capital budgets and business plans and explore ways to build greater resilience into their supply chains. The federal and provincial governments need to think about options to support the economy as more businesses pare their capital spending and hiring plans and consumers retrench. Short-term stimulus measures, including stepped-up efforts to bolster the stressed health-care system, make the most sense. If private-sector economic activity does contract significantly, a determined government response will be warranted – even if it results in (temporarily) larger fiscal deficits. In this regard, it’s unfortunate that the Trudeau government failed to bring the federal budget back into balance when the Canadian economy was performing well over 2016-18. That mistake means Ottawa may have less room to respond to a full-scale economic slump, should one occur.
It’s also critical that the supply of credit to the economy is not interrupted in the event of a pandemic-induced recession.
Sectors of our economy that are expected to be hit hard by the coronavirus and the rapidly weakening global economy include tourism, hospitality, transportation and commodity-producing industries generally (outside of agriculture). Policy-makers in Victoria and Ottawa should keep on top of developments in these industries and stand ready to lend a hand if necessary. •
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.