Scotiabank Forecast Update: Recession Likely Unless Robust Fiscal Actions Taken Very Soon
Lack of coordinated and effective policy actions may contribute to a recession in some countries. With continued turmoil in markets, exacerbated by developments in oil markets, we now expect global growth of 2.5% in 2020.
Urgent and effective action to deal with the health dimension COVID-19 are of course critical, but so are urgent measures to deal with the economic fallout from the virus. These are not the same things.
The fall in oil prices, in conjunction with continued declines in equity prices as well as the impact of virus-related fears, should lead to back-to -back declines in economic activity in Canada unless a timely fiscal package is deployed in the country.
We think a recession will be avoided in Canada as we assume the Federal government deploys fiscal stimulus to counter the negative effect of recent developments. A package of about 1% of GDP should lift growth above zero in Q3 and provide a modest buffer to downside risks. Measures aimed at providing just-in-time stimulus should be prioritized, such as transfers through the GST rebate program, or payroll tax holidays. These should be enacted as soon as April. The outlook also requires the Bank of Canada to cut aggressively, bringing its policy rate to 0.25%, its lowest level on record, by the June 3rd meeting.
Canadian growth is forecast to average just 0.7% in 2020 if the Bank of Canada and Federal Governments roll out the stimulus we expect. Without the stimulus, the country would likely be in recession, and growth would come it at 0.3% for the year. If the stimulus is delayed relative to our assumptions, growth would be significantly lower, and the chance of a recession would rise commensurately.