How would you characterize the general state of Canada's finances going into this snapshot?
The lockdown measures imposed by the government during the pandemic heavily disrupted economic activity in Canada. As a result, the government spent billions of dollars on emergency programs to support the economy and workers in Canada. The Federal government is heading for a massive deficit of $250-300 billion, about ten times larger than the deficit forecasted in December 2019. With a deficit of around 12% of GDP, even with no lockdowns in the second half of the year, there is little room for the government to implement any further stimulus measures. This rapid deterioration in the public finances will force the government to make some hard choices to tackle the mountain of debt and reign in the deficit to get back on a path of balanced-budgets. The good news is that interest rates are currently very low and are expected to stay that way for a long-time, making debt-servicing cheap and more sustainable.
What markers are you looking for in today's data that would show Canada is able to recover without sliding into a depression?
Consumer spending, particularly discretionary spending, and business investment remain significantly lower than their pre-COVID levels. According to recent surveys from the Bank of Canada, even as lockdowns and social distancing measures ease across the country, households and businesses remain cautious about their spending and investment, suggesting that Canada's economic recovery will be weak. In the months ahead, I will be watching how consumer and business confidence recover, and the data on consumption and investment, two key economic indicators of economic growth. Moreover, as a significant exporter of commodities, the Canadian economy is very dependent on demand from the U.S. economy and the global economy. I will be closely watching how the economies of the U.S. and Canada's other main trading partners recover from the pandemic. Finally, I will also have an eye on inflation, which has been falling recently, and whether deflationary trends are gaining momentum in Canada.
What information today would cause you concern?
It is very troubling that the U.S, the largest economy in the world, and the most important trading partner for Canada has failed to get the pandemic under control, and other countries such as Australia who successfully suppressed the virus are seeing a resurgence in cases. If repeated shutdowns are required to stop the pandemic, it is clear that this will cause intolerable harm to the global and Canadian economies.
Many businesses are emerging from the first lockdown with strained balance-sheets, and millions of workers have lost their jobs. A second lockdown will cause even greater suffering. The fiscal costs of the first lockdown have already put the Canadian government on a dangerous fiscal path and has forced the Bank of Canada to deploy most of its unconventional monetary policy tools. It is not clear if the Canadian government and the Bank of Canada will be able to hand out billions of dollars to rescue businesses and workers a second time.
The University of Waterloo has a number of experts available for comment on various aspects of the COVID-19 pandemic, click here to see the up-to-date list.
