May 13, 2020

Q1 Market update: The first phase of the global recession

By Dec Mullarkey

A forecast of a recession comes as no surprise right now. But what happens when infection rates start to flatten? And what are governments doing now to help boost economic recovery?

In its quarterly update, the International Monetary Fund (IMF) predicted a global recession this year due to the COVID-19 pandemic.

Most economists already expected a recession. But what happens now? Global gross domestic product or GDP* growth is expected to decrease by 3% this year. That’s one of its worst showings since the 1930s. This is a stunning reversal from the IMF’s January report, which projected a 3% expansion.

(*GDP can help track the health of a nation's economy. It represents the total dollar value of all goods and services produced over a certain time period.)

What’s the impact of COVID-19 on GDP?

The IMF expects global growth of close to 6% next year. But it warned that later waves of COVID-19 infections could stall a 2021 pickup.

Most countries have responded to the pandemic by imposing social (or physical) distancing measures and closing non-essential businesses. But the drag on consumer spending is dramatic.

Bustling global cities are at a standstill as governments and companies urge employees to work from home. But telecommuting isn’t an option for most of the service economy, and that’s in freefall.

Across North America the effects of the lockdown are equally as dire. Canada expects to see its GDP contract 6% this year, but pickup by 4% next year. The U.S. projection is similar.

China pushes to restart economy, but global demand remains low

China is closely monitoring signs of economic bounce back. But the data so far has been disappointing. February’s manufacturing Purchasing Managers Index or PMI* data was the worst on record. And while March showed some minor improvements, there was little to celebrate. In particular, the import and export outlook was weak.

(*The PMI measures the direction of economic trends in manufacturing. It’s based on a monthly survey of supply chain managers across several industries.)

Currently, China’s pushing to get its economy back on line and restore global supply chains. But demand from the rest of the world is down.

For now, economic growth is taking a backseat to controlling the health crisis. Few countries can get back to full capacity until the collective activity of most improves. That means, the effects of social distancing will also severely impact second quarter growth.

What are central banks and governments doing?

Global central banks have rushed to slash rates and fire up bond buying programs to keep the financial system and credit markets functioning. Luckily, global policy makers have learned from the Great Financial Crisis and are moving with urgency.

Over the last month, The Bank of Canada (BOC) and the Federal Reserve System (Fed) cut rates to zero and expect to be on hold until the end of 2021.

The Fed restarted its quantitative easing (QE) program. They originally planned to buy $700 billion of government and mortgage debt. But they’ve now quickly expanded to an unlimited buying program.

The Fed is also infusing liquidity* into critical funding markets such as:

  • Repurchase agreement (repo),
  • commercial paper,
  • money markets,
  • municipal and corporate bonds.

(*Liquidity means having the ability to convert any asset into cash quickly.)

The BOC is also:

  • buying government bonds,
  • supporting the commercial paper market and
  • have recently announced a provincial and corporate bond buying program.

While central banks can help protect the financial system and keep credit flowing, they’re quickly reaching their limits. The challenge with this pandemic is that it’s hitting with such intensity. It may hollow out vulnerable pieces of the economy in as little as a few months without government support.

Fortunately, governments are stepping up. Both the U.S. and Canada have quickly rolled out federal relief programs and at 11 to 12% of GDP, are the largest in the world. The primary goal of this relief is to help households and businesses survive a cash crunch until the economy reopens.

How do plummeting oil prices impact Canada?

Compared to its effects on the U.S., plummeting oil prices are a more serious blow to Canada. In particular Alberta, Saskatchewan and Newfoundland & Labrador will be hit hardest. That’s because weak oil and gas demand can lead to job losses and cancelled investments.

British Columbia is expected to weather this crisis more successfully. That’s due to a number of ongoing capital infrastructure projects underway in the province. Lumber exports will also get a boost, as U.S. tariffs were scaled back in August.

Some of the most concerning data emerging across North America over the last several weeks has been jobless claims. As workers on the front lines of the service economy, in particular, file for unemployment, the rate is spiking. The quick delivery of targeted fiscal support will make a big difference in limiting the damage from this unemployment surge.

What happens when COVID-19 infection rates flatten?

Currently, there’s a lot of bad news priced into markets, with equity and bond prices reflecting a severe recession. And that’s likely to continue until there are early signs of global infection rates flattening. That coupled with positive news on China’s economic recovery, will start to ignite confidence.

While market drops are often shocking due to their downside force, recoveries also tend to happen quickly. Historically, the market has recovered from downturns and produced gains. And, those who stay invested have realized these gains over the long term.

  • It’s emotional to see the markets drop amid the COVID-19 pandemic. But depending on your personal situation, you may want to stay invested. Here’s why.

With global interest rates likely to stay low well into next year, homeowners and businesses will have opportunities to borrow or refinance once they feel confident that activity is picking up.

Additionally, the sizeable global monetary and fiscal stimuli* should sow the seeds for a strong recovery.

(*Fiscal stimulus or stimuli refers to when a government tries to cut taxes or increase its spending in an effort to revive the economy.)

Dec Mullarkey is Managing Director, Investment Strategy at SLC Management. He is also an adjunct professor at Boston College.  

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. and offers products and services to institutional investors only.

This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, SLC Management can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of SLC Management. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.

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