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Sobering outlook, but COVID-19 has ‘end game’: Tal

“The next few weeks, months and quarters will test the economic IQ of every government and every...

IMAGE: Benjamin Tal, the deputy chief economist at CIBC. (Courtesy CIBC)

Benjamin Tal, the deputy chief economist at CIBC. (Courtesy CIBC)

“The next few weeks, months and quarters will test the economic IQ of every government and every central banker in the universe, because they are the first to admit that they have no clue what’s happening.”

That doesn’t sound optimistic, and CIBC World Markets managing director and deputy chief economist Benjamin Tal acknowledged “it’s going to get worse before it gets better.” However, he believes Canada can slowly crawl out of the COVID-19 crisis.

Tal conducted a webinar April 7 presented by Informa Canada. He said looking at history and how other countries have handled their own COVID-19 crises can help create working assumptions which will benefit businesses and the economy.

Tal said Canada is where hard-hit Italy was three or four weeks ago with regards to COVID-19, but Canada has a younger population and can learn from mistakes in other countries. While the infection curve is still trending upward in Canada, it’s expected to flatten over the next three to four weeks.

“A flattening curve is not a green light to start celebrating,” said Tal, who believes China and Singapore have reduced physical distancing and other restrictions too quickly. They may now be getting a second wave that — aside from the potential human and economic toll — could also adversely affect North American financial markets.

On the upside, Tal said the real estate, computer software, health and food sectors have led the economic recovery in China to this point.

Summer economic forecast

Assuming Canada doesn’t move too quickly once the infection curve flattens, Tal pictures this scenario unfolding in three to four months:

* People in their 60s and older will be told to remain at home.

* Essential workers will remain essential, more will be hired, and their bargaining power and wages will rise.

* Many office workers will remain at home. The previous 1-in-5 ratio of employees working remotely will remain substantially higher as large companies will be told to maximize employees working from home.

* For those who return to offices, work stations will be rearranged to minimize interaction and maximize distance between people.

* Public transit will operate at a reduced level and fewer people will use it.

* Airports will operate at a higher level than now, but will still have reduced capacity and fewer passengers.

* No large gatherings of people will be permitted.

* More stores will open, but under strict guidelines and restrictions.

* Manufacturers will go to flex hours with multiple shifts per day to minimize interaction between people, which will significantly decrease productivity.

Something similar to what will happen with manufacturing is also expected to occur at construction sites.

“Governments may allow developers to build more than they’re allowed to build now, but the productivity will go down dramatically because only a limited number of workers will be allowed in a certain environment,” said Tal.

He anticipates the speed of building completion will drop by about 50 per cent through the summer.

GDP, investment and housing starts

Tal forecasts Canada’s overall gross domestic product (GDP) growth will be approximately negative 27 per cent this quarter and will rise by about 15 per cent in the third quarter.

Investment is anticipated to decline 40 per cent this quarter and to improve slightly in the third quarter.

Housing starts are expected to drop from 200,000 in 2019 to 70,000 this year and completions will be even lower.

“It’s not a V-shaped recovery by any stretch of the imagination,” said Tal, noting part of the slow recovery will be by design to avoid a second wave of COVID-19 spread.

Tal warned against comparing the pandemic to the economic depression that crippled North America in 1929. The circumstances now aren’t set up for a freefall as they were at that time.

“This crisis has an end game. This end game is a vaccine,” Tal stated. “The moment we have a vaccine this crisis will be basically over and things can go back to semi-normal.

“We’re not there yet, but we have two layers of defence between this point and the vaccine, which is maybe a year to 18 months away.”

The defence mechanisms are maintaining physical distancing and the possibility of finding an anti-viral medication to assist those stricken with COVID-19 before a vaccine is found.

Government and Bank of Canada policies

Tal praised the federal and provincial governments for their willingness to spend money to: assist individuals and businesses through the crisis so far; introduce enough demand into the economy to avoid deflation; and achieve enough liquidity in the financial sector so banks can function and provide credit.

The Bank of Canada learned lessons from the 2008 financial crisis, when it was criticized for moving too slowly to curtail damage. Tal said it has moved “extremely quickly and aggressively” in response to the pandemic.

Interest rates were lowered, but the Bank of Canada has given notice it won’t introduce negative interest rates.

Tal said negative interest rates are like a black hole you can’t get out of and they reduce consumption – the opposite of what they’re supposed to achieve.

Canada’s debt-to-GDP ratio is much lower than most countries, which will help its recovery even as the federal government commits more funds to aid programs.

Deglobalization has been pushed by the American government since Donald Trump’s 2016 election victory and is being accelerated and expanded by the pandemic, Tal said.

He believes countries are waking up to how dependent they are on supply chains in other countries. That will put a focus on producing more at home and reducing reliance on China and other nations where products are manufactured more inexpensively.

Immigration, interest rates and inflation

Informa Canada real estate vice-president George Przybylowski moderated the webinar. He posed viewer questions to Tal to close it off.

Tal said 450,000 immigrants won’t be coming to Canada over the next six months to a year because of COVID-19 movement restrictions.

This will hurt economic activity and reduce demand in the rental housing market. He anticipates purpose-built rental construction dropping over the next six months, but rebounding strongly in one to two years.

Interest rates shouldn’t rise and inflation isn’t expected to increase much, according to Tal. He thinks low interest rates will enable the real estate sector to help lead the economic recovery.

Tal also noted building valuations won’t change, but transaction activity will temporarily slow down.

“It’s not that prices are falling or rising. In a recession you have too much supply and not enough demand and prices are going down. Here, we have nothing and we are frozen.”

Double-digit unemployment

Canada’s unemployment rate is expected to be in the low double digits through the second and third quarters, before starting to drop in the fourth quarter and early 2021.

Tal said large companies will attempt to keep people in the labour force through job-sharing and reduced incomes. Many smaller companies, however, won’t be able to do so.

Tal estimates 10 to 12 per cent of the labour force is “extremely vulnerable,” and singled out restaurants as a sector that will likely have casualties.

Things will be more difficult in Alberta. Even though the price of oil could go back up to $30 or $40 per barrel from the current $25 range, Tal doesn’t see the provincial economy improving significantly any time soon.

“I really cannot be optimistic about the situation in Alberta over the next year or so, especially when it comes to the office market.

“Commercial real estate will be hit hard because there are too many things happening at the same time.

“That’s a very unfortunate situation and that’s why they need help from the federal government.”

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