Former Fed governor calls for coordinated rate cuts
The global spread of coronavirus is lowering expectations Canada’s economy will quickly emerge from one of its worst slowdowns in years, fueling bets the central bank will be forced to cut interest rates.
The nation’s economy stalled in the final three months of 2019 to its slowest rate of growth since 2016, Statistics Canada is expected to report on Friday. Previous hopes for a quick rebound in 2020 are fading as new coronavirus infections and death counts continue to climb with no end in sight.
Concerns around the outbreak caused financial markets to plummet this week and there are now two rate cuts fully priced in for the Bank of Canada over the next 12 months. The central bank has stood pat over the past year and bucked the global easing trend, but it may not be able to hold off for much longer if the epidemic shows real spillover effects on the domestic economy.
“If they see signs that the concerns over the virus are actually hitting activity broadly, I think that would be enough” to cut, Bank of Montreal Chief Economist Doug Porter said in an interview in Toronto. “There’s a debate now if they could go as early as next week,” he said, referring the Bank of Canada’s March 4 rate decision.
The likelihood of a move next week remains low, with indicative odds at 35 per cent, though that figure has doubled in the past week. Economists and policy makers are keeping a close eye on how coronavirus might affect Canada. Already, some of the country’s major companies are taking action in anticipation of the deteriorating outlook. Teck Resources said last week it will be temporarily reducing coal production partly due to the potential for weaker demand from the coronavirus.
Which of these is the biggest risk for Canada’s economy?
Not so temporary weakness
During the last quarter of 2019, Canada’s economy slowed to a 0.3 per cent annualized pace, according to the median forecast of economists in a Bloomberg survey. A series of temporary factors during the period hampered the economy, including a week-long rail strike, a pipeline leak, and manufacturing plant shutdowns.
The Bank of Canada had already cut its forecast for the fourth quarter to 0.3 per cent annualized. Any deviation from that figure will probably inform discussions at next week’s meeting of policy makers in Ottawa.
Most economists were expecting growth to quickly recover to a modest pace in the first quarter but now even those forecasts are being cut as the virus outbreak and another rail disruption are poised to stunt growth. The central bank estimated in January growth would jump to 1.3 per cent in the first three months of 2020 before accelerating later in the year.
A worsening virus outbreak is the biggest downside risk to Canada’s economy, Porter said, adding that BMO cut its 2020 GDP forecast for Canada a few weeks ago due to the direct impact from a slowdown in China. The bank will be watching for further disruptions as the virus outbreak impinges on supply chains globally.
“Until we have a better sense of how its going to affect the global economy, the Canadian economy, it really will continue to be the dominant story for a while,” Porter said.
For all of 2019, the economy is expected to record growth of 1.6 per cent, down from two per cent in 2018 and 3.2 per cent in 2017. For this year, economists predict growth will tick lower to about 1.5 per cent, but those forecasts were made earlier this month, before the rail blockades and coronavirus threat escalated.
--With assistance from Danielle Bochove and Erik Hertzberg.