for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up

Canada's economy in deepest recession on record, U-shaped recovery likely - Reuters poll

BENGALURU (Reuters) - The Canadian economy is likely in its deepest recession on record and will only recover modestly over the coming year as it takes a direct hit from the coronavirus outbreak and a collapse in oil prices, a Reuters poll of economists showed.

FILE PHOTO: A view of Yonge and Dundas Square, as the number of the coronavirus disease (COVID-19) cases continue to grow in Toronto, Ontario, Canada April 8, 2020. REUTERS/Carlos Osorio

After the economy contracted sharply last month and lost a record 1.01 million jobs, economists have slashed back their economic forecasts due to lockdown measures and reeling oil prices which hit a record low last week as global economic activity came to a halt.[ECILT/WRAP]

In the April 23-28 Reuters poll of 25 economists Canada’s economy was predicted to have contracted at an annualised rate of 9.8% last quarter and to shrink 37.5% this quarter.

In a January poll, they predicted 1.6% and 1.7% growth, respectively, showing just how abruptly the economy has turned. If the latest forecasts are realized, it would mark the deepest recession in at least six decades.

“Canada is in the midst of an historic economic contraction. The economy has largely shut down, paralysed by measures to contain the coronavirus pandemic, free-falling financial markets, plunging oil prices and plummeting confidence,” said Tony Stillo, director of Canada economics at Oxford Economics.

The sombre outlook was despite the Bank of Canada’s buying up to C$10 billion of corporate bonds and C$50 billion of provincial bonds as part of its newly launched quantitative easing program - alongside hundreds of billions of dollars in government spending to support business and households.

(Graphic: Canada economic outlook - )

Although the economy was predicted to bounce back and expand by a median 19% and 11% in the third and fourth quarter respectively, all but one of nine economists responding to an additional question said the risk to their second-half forecasts was skewed to the downside.

Despite that rebound the economy was expected to contract 5.7% this year, the first annual contraction since the 2008-09 recession and easily the deepest since records began being kept in 1961.

The median worst-case scenario, based on a lower sample, predicted a contraction of 50% this quarter and 10% this year.

“The length of the recession is key. The longer the recession, the greater the capital destruction will be, unfortunately, making the recovery softer. We hopefully won’t get to the point where fiscal and monetary policy reach limits,” said Sebastien Lavoie, chief economist at Laurentian Bank.

Asked about the shape of Canada’s economic recovery, over 55% of nine respondents said it would be a U-shaped recovery and one-third said it would be tick-shaped. Only one chose V-shaped.

That was in line with BoC Governor Stephen Poloz’s recent statement that the economy would take “a couple of years” to make up lost ground once the pandemic is over.

“Overall, due to the lasting damage of the disruption, we think GDP will remain below its late-2019 level until early 2022. We do not see GDP returning to its pre-2020 trend path within the next few years,” said Stephen Brown, senior Canada economist at Capital Economics.

The BoC has already cut its key interest rate by a cumulative 150 basis points to 0.25% in the past month and launched an asset purchase program, quantitative easing.

Canada’s central bank is expected to come up with additional easing measures, according to 70% of economists who answered a separate question, likely in the form of broadening its bond buying. It is forecast to leave rates near zero until 2022.

Inflation was expected to remain around 0.5% in the coming quarters, well below the central bank’s target of about 2%.

“We assume it will be a long, slow recovery with many businesses closing and structural changes likely with businesses changing the way they operate: reduced travel having knock-on effects for airlines, hotels, restaurants, etc.,” said James Knightley, chief international economist at ING.

“Will people want to return to busy restaurants or shops? This uncertainty means we doubt the recovery will be swift.”

Reporting and polling by Mumal Rathore; editing by Jonathan Oatis

for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up