Recession question takes on new urgency amid market turmoil
The probability of North American economies entering a recession in 2020 has increased substantially over the past month, and some economists are warning a contraction may be unavoidable unless the novel coronavirus outbreak is brought under control by the third quarter.
The recession talk marks a sudden shift from early February, when most economists were still waving off the possibility because economic data did not support it for either the U.S. or in Canada.
But with the number of worldwide coronavirus cases surging and with the U.S. and parts of Europe both struggling to contain the virus, much has changed. The outbreak and a global oil price war launched by Saudi Arabia have sparked a deep sell-off in stocks not seen since the global financial crisis.
“I think a recession at this point is more likely than not,” said Moody’s Analytics’ chief economist Mark Zandi of the U.S. “If I had to put a number on it, I’d say there’s about a 60-per-cent probability of recession at this point.”
The U.S. economy was vulnerable coming off the trade war with China, Zandi said, and some sectors were already contracting. Worse is that with global markets on shaky ground, central banks don’t have much ammunition.
The two things Zandi will watch in the interim are the unemployment rate and U.S. consumer confidence.
He describes the latter as the “firewall” that separates expansion from recession worldwide. Should the virus outbreak worsen, it could cause that confidence to falter and all-but shut down the U.S. economy for a month or two — more than enough, he said, to bring forth a recession.
“An economy is a complex web of relationships, transactions and activity and if you shut it all down, reconnecting that web is going to take time,” he said.
Morgan Stanley chief economist Chetan Ahya is less certain of that outcome. In a note to clients, he wrote that his base case has the virus acting as a “sizable shock” to markets and economies but that he expects a peak to occur in April or May. If the virus has not been contained by third quarter, however, the U.S., Europe and Japan will all enter recession, he wrote.
Although he doesn’t think it will happen, Capital Economics senior Canada economist Stephen Brown said Canada faces the same risk, but at a heightened level. The Canadian economy is set to contract by a percentage point in the second quarter, but regain some ground in the third and therefore avoid a recession. That thesis, Brown said, relies on a rebound that would occur if the coronavirus outbreak peaks.
The chances of a 2020 recession have increased to about 40 per cent from 15 only a few months ago, Brown said. Canada is at more risk than the U.S. due to its dependence on oil and plunging western Canadian Select prices will almost immediately begin to weigh on the economy here. Canada’s debt situation is also more problematic, Brown said. The last time there was a global oil price shock, households and businesses, particularly in Alberta, were able to circumvent it by taking on more debt, but that may not be a solution this time.
“They haven’t made progress in repaying that debt so they won’t be able to use that same shock absorber this time,” Brown said.
“We’ve got this great unknown because we don’t know to what extent this debt can actually act to make the situation worse.”