Corona and oil prices hit the Canadian economy hard

The Canadian economy has to face several setbacks these days. The adverse effects of the Coronavirus with its strict containment measures in combination with the slump in oil prices (caused by the unwillingness of Russia to agree on OPEC-production levels) and falling exports are causing problems for the second-largest country in the world. 

Business investments are declining due to weaker demands and waning consumer confidence as well as the current distress in the financial markets. Although consumer spending might be temporarily higher due to hoarding, buying activities and consumer confidence will probably resume only slowly. Reduced recruitment and work interruptions will have an impact on lower incomes, and perceived asset losses suffered from the correction in equity markets could also reduce the buying behavior.

In general, this will weaken the Canadian economy. Policymakers replied to this situation and are likely to do even more in the upcoming months. While the Bank of Canada injected massive amounts of liquidity into the markets (alongside with other major central banks) as stimulus measures, it also cut its interest rates to an all-time low. 

While this primarily supports economic growth, the ability of monetary policy to address the economic weakness is limited due to the nature of the current health crisis. With a supply and demand shock, a targeted fiscal policy should be much more effective. A weaker Canadian dollar will improve export competitiveness but will not meet weak global demand. It is difficult to predict what the upcoming months will bring, but it is becoming increasingly clear that a recovery could follow the sharp drops in Q1 and Q2 in the second half of the year. The most vulnerable sectors are energy, mining, tourism and transport. Weaker sales are expected for automobiles and real estate. The provinces of Alberta, Newfoundland, and Labrador will be particularly affected by the decline in oil prices in an already difficult budgetary situation. More than other provinces, BC is affected by the economic disturbances in Asia due to lower export demands, lower consumer spending, smaller business investments, and reduced tourism. It is also a fundamental question of how much the US economy will be weakened by the north-south rather than east-west direction of trade of Canadian provinces. In short, Canada’s economic weakness will be felt from coast-to-coast.

We will closely monitor developments for our clients, but still believe that this crisis is only temporary, can and will be overcome, and also offers opportunities.