BRIDGE CLOSING AT MIDNIGHT
Transport trucks entering Windsor from the U.S. are shown on the Ambassador Bridge on Thursday. The Canada-u.s. border will close to all but essential traffic at 12:01 a.m. Saturday.
More than a century ago, with the world in the throes of the Spanish flu pandemic, business in Little Rock, Ark., was not exactly booming.
Companies in the state capital were losing more than US$130,000 a day on average, a report by the Federal Reserve Bank of St. Louis found. Perhaps the only exceptions were the drug stores — and mattress sellers.
“Bed rest is emphasized in the treatment of influenza,” reported The Arkansas Gazette, according to the Fed’s summary. “As a result, there has been an increase in demand for beds, mattresses and springs.”
It was a difficult time, and one in which there are echoes today, as a global health crisis threatens to unleash an economic downturn of unknown depth.
So far, more than 200,000 cases of the novel coronavirus have been reported to the World Health Organization, and more than 8,000 deaths.
Global recession has gone from being a far-off possibility to a near certainty, and some are even raising the spectre of a worse fate.
“We are facing a period of profound adversity unlike any we have since the 1930s,” Alberta Premier Jason Kenney said Thursday.
While not all are willing to entertain the possibility of an economic depression, the question of just how bad is this going to get is very much in play.
From a health point of view, we have not reached the dark days of the 1918 pandemic, which killed millions. In a city like Philadelphia, “bodies lay along the streets and in morgues for days, similar to medieval Europe during the Black Death,” according to Fed report.
The same flu outbreak “paralyzed” the Canadian economy, according to the federal government, which was so harshly criticized at the time it was prompted to create a national health department.
But health care has modernized, governments are preparing to unleash billions of dollars in stimulus spending, and there may be a lot of pent-up demand to boost the economy when the pandemic finally subsidies.
“It’s a valley, and it’s going to be a painful valley,” said Craig Alexander, chief economist at audit firm Deloitte. “It’s going to take us time to get to the other side. We don’t want businesses and individuals to lose track of the fact that ultimately we will get to the other side of this pandemic.”
A light at the end of the tunnel can be a welcome sight. However, it still involves going through darkness, and some of the biggest names in capitalism are warning of a gloomy future.
Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, estimated on CNBC that global corporate losses could add up to US$12 trillion. Billionaire investor Bill Ackman has warned of a “Depression-era period” in the U.S. unless a vaccine is manufactured and distributed widely. A Jpmorgan Chase and Co. note predicted the U.S. economy will shrink in the second quarter by 14 per cent.
“For all intents and purposes we are in global recession territory,” Fitch Ratings declared in its latest forecast.
A recession is typically viewed as six months of economic decline while a depression is seen as a downturn lasting years. Current predictions are leaning more toward the former than the latter, but that can make it no less grim.
Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal didn’t mince his words: Things will get much worse for Canada’s economy before they get better.
Week-to-week, Tal’s call for a recession has now evolved into one forecasting a deep recession where GDP contracts by six per cent in the second quarter of 2020 and another three per cent in the third quarter before starting a slow rebound. The unemployment rate will rise as high as 7.5 to eight per cent and translate to a loss of about 400,000 jobs while bankruptcy rates rise by 40 per cent.
“We will not get a green light until we have a vaccine which is a year or a year and a half away,” Tal said.
That timeline is what’s stopping Tal from invoking the possibility of a depression. The term, Tal said, is only used appropriately when there appears to be no end in sight to an economic downturn. While Tal admits that a vaccine could be delayed beyond the current 18-month horizon, the end of this cycle would still be tied directly to its creation.
Projections being given now are assuming the health crisis clears up at some point. However,
Tal’s “nightmare scenario” could come to light should health officials have to face the possibility of reinfection. Should that occur, the economy would undoubtedly be grounded for a longer period of time, meaning that it may very well take an equal amount of time to get it rolling again.
The longer the crisis persists the more strain the economy is likely to come under. The Canadian Federation of Independent Business said 50 per cent of small firms had already reported a drop in sales as of last weekend, with one in four warning they would not be able to survive a significant drop in income for more than a month. Having entire countries under lockdown or with their populations trying to stay as far away from each other as possible could produce cash crunches for firms.
A drawn out downturn, especially one accompanied by an economic shutdown, could also cause problems for the companies that have, in the background of a bull market, loaded up on debt and gone through multiple rounds of share buyback programs, according to economist and former deputy Bank of Canada governor William White.
“The worst case would be that there’d be a shakeup on that side,” said White, who is now a senior fellow at the C.D. Howe Institute. “That would have big repercussions and could feed back into the financial system and then you’ve got the kinds of problems we’ve seen before in 2008.”
The worst-case scenario here could be even more grim than the shock that threatened the global banking industry in 2008, White said, because financial imbalances have been allowed to build up for an additional 12 years. The markets and ratings agencies would begin to lose faith in these overlevered firms as they see credit spreads widen, he said, and these debtors could soon find themselves incapable of paying back what they owe.
One hard-hit sector has been oil and gas, as there is a war being waged at the moment over crude prices, which were already being watered down because of a Covid-19-related drop in demand. A Desjardins Capital Markets report released Thursday called the coronavirus-oil price war “the one-two punch no one needed,” adding that, at US$30 per barrel, “there are few companies that have free cash flow, implying that further cuts to capex and dividends are likely if the current environment persists.”
In other words, investors have already had to stomach a lot so far, and may still have more to digest. Citigroup Inc. analysts this week said they see global earnings per share falling by at least 20 per cent this year.
What happens in the stock markets may not always reflect what is going on in the economy. But Deloitte noted in its latest Canadian outlook that “negative wealth effects from the correction in equity markets could also dampen spending,” as people may not be so willing to make a big purchase if they’re not feeling quite so rich anymore.
The silver lining was the suddenness of the coronavirus crisis and the annihilation of share prices has prompted markets to price in the profit recession much faster than in previous downturns. Stocks even rose on Thursday, a rare occurrence of late.
“It has been very painful, but the rapid downward adjustment in equity prices may make this one of the shorter bear markets in stock market history,” the Citi analysts wrote.
While they noted “economists are not epidemiologists,” Deloitte and Alexander see the virus eventually burning itself out. Their call is for the Canadian economy temporarily contracting in 2020, but then returning to growth full-time in 2021.
White also said the responses from global governments and central banks so far have convinced him that they’d be willing to continue to act should the downturn worsen. Among other things, Ottawa has announced a credit program that could provide more than $10 billion of support to businesses through Crown lending agencies.
“Nothing can be ruled out, but I think if we remember the lessons learned from the Great Depression, it’s that there’s a lot that can be done to fend off the worst outcomes,” White said. “The governments have got to step up and be prepared to use fiscal policy in a way that perhaps will seem adventurous to some.”