After initial economic rebound, brace for a 'stall-out' phase that could last six to 18 months
Professional economists are getting pretty good at tracking the COVID-19 crisis in real time.
Last week, Peter Hall’s team at the Export Development Canada released the Canadian Economic Recovery Tracker, which aggregates COVID-19 cases, Canadian National Railway traffic and nine other high-frequency indicators to create a weekly index it thinks will foreshadow gross domestic product, which is typically published with a considerable lag.
The initial release brought some positive news — provided you adjust the result for COVID-19. As of July 10, GDP was about 19 per cent below its level at the end of February, suggesting we are half way out of the hole created by the lockdowns and trepidation associated with the pandemic.
GDP was about 45 per cent below its pre-pandemic level in late April, and has been recovering fairly smartly ever since, as governments ease social distancing restrictions and consumers and businesses adjust to the altered reality. “For the moment, economies everywhere are going where COVID-19 says they can go,” Hall said in a commentary last week. “It seems we have a new, and dominant leading indicator now.”
The earliest economic forecasts were shots in the dark.
Frances Donald, global chief economist and head of macro strategy at Manulife Invest Management, said on a conference call with a group of reporters on Monday that the divergence between her profession’s outlooks and actual outcomes has never been bigger.
For example, in April, Toronto-Dominion Bank had Canada’s economy collapsing 7.5 per cent this year. In June, it raised that outlook to a decline of about six per cent, as hiring rebounded faster than many anticipated.
That’s a big change in such a short time. Most of the Bay Street shops had equally large misses. But give them credit for trying. The Bank of Canada and the U.S. Federal Reserve didn’t even bother to publish forecasts, arguing that the uncertainty was too great.
Manulife’s Donald reckons those early predictions failed to recognize adequately that an epic destruction of economic output was matched with unprecedented monetary and fiscal stimulus. Central banks did in a few weeks what took them months to achieve during the financial crisis a decade ago, while the U.S. and Canadian fiscal rescues were so generous that some households ended up with bigger paycheques than they were getting from their employers before the pandemic.
The Great Recession dragged on because policy-makers hesitated in the beginning. They didn’t make that mistake this time. The economy crashed into a cushion of hundreds of billions of dollars rather than hard ground.
“In our view, many economists are underestimating the ferocity of this initial V-shaped rebound because the existing macro narrative underappreciates the impact of the fiscal policies that have been implemented, while simultaneously places too much emphasis on challenges that’ll only arrive later in the year,” Donald, who advises portfolio managers who oversee $1.2 trillion in assets, said in a mid-year economic update set for release this week.
Other than a dose of humility, it’s unclear what lessons forecasters should take from the past few months as they project toward the end of the year and into 2021 and 2022. The federal wage subsidy is scheduled to stop in December, and the $2,000-per-month payments to unemployed Canadians are set to end in October. The bet is that the economy will have recovered enough by then that private spending will take over as the main driver of growth.
That should happen, but it seems likely that we will have to accept a slower expansion than we would like.
Donald is advising her clients to brace for a “stall-out” phase starting in late summer that could last six to 18 months, depending on how quickly fiscal support is withdrawn, and assuming an effective treatment for COVID-19 doesn’t arrive sooner than expected.
Canada’s central bank foresees a similar trajectory, predicting earlier this month that the bounce from stimulus and the easing of lockdowns will give way to a more subdued and bumpy “recuperation” period.
Corporate bankruptcies will pick up pace as owners run out of ways to keep their businesses open amid capacity constraints forced by social distancing. That will weigh on hiring. So will weaker exports and lower commodity prices. The global recovery will become fitful, as new outbreaks of COVID-19 force new restraints, as is happening now in the United States.
Stock markets likely will become more volatile, which could test confidence. Canada’s high levels of household debt will operate as an anchor on the recovery by limiting the amount of disposable income that can be used to create new demand.
“We do see a very real prospect of another soft patch of economic activity through August, September, October as reclosures work their way through the U.S.,” Michael While, a portfolio manager at Toronto-based Picton Mahoney Asset Management, said in an interview earlier this month. “During the financial crisis, ‘less bad’ was seen as good. I think that’s going to be the reality now for many, many months to come.”
We were too pessimistic in the early days of this crisis. Let’s not correct for that by becoming overly optimistic. The climb back is manageable, but it won’t be easy.
•Email: kcarmichael@postmedia.com | CarmichaelKevin