Canada is on the path to a slow and fragile recovery, even as the pandemic is ongoing. Stimulus measures will be needed to accelerate that recovery and shield the economy.
Despite a couple of months of gradual economic reopening and positive signs of recovery, we are still navigating in unchartered territories.
As of this writing, the federal government released a post-crisis fiscal snapshot, depicting a sobering but largely expected state of the country’s finances.
The federal deficit is expected to reach $343 billion in the 2020-2021 fiscal timeframe, making it the largest deficit since World War II. The federal government overall debt topped $1 trillion. Economists project the economy will shrink by close to 7 per cent this year, and unemployment is likely to remain at levels higher than before the pandemic, for many years.
Under normal circumstances, these enormous deficits and levels of debt would be quite concerning for an economy like Canada. However, COVID-19 is a whole new ballgame.
It’s no secret that governments deployed massive fiscal and monetary stimulus measures that have mitigated the impact of the pandemic on the economy, protected key jobs, and helped businesses bridge the gap over the past couple of months.
In addition, there is a semblance of return to “normalcy” in the markets: businesses and dealerships are reopening, production is ramping back up and more importantly, consumers are spending again. Consumer spending is steadily trending upward across the country, as economic activity reboots and more Canadians return to work. The performance of the overall economy in May and June provides a solid indication that the worst is behind us.
We are at a critical juncture in our history and unprecedented times call for unprecedented measures.
That said, we are not out of the woods yet. There is a consensus among experts and economists that recovery will be slow and uneven across Canada. Uncertainty around the risk of a second wave would put some additional pressures on production and consumption. Moreover, downside risks persist in Canada, particularly given the rapid resurgence in COVID-19 cases in the United States and renewed trade tensions with the U.S. stemming from the threat of new steel and aluminum tariffs by the Trump administration. Needless to say, uncertainty clouds the horizon and Canada’s economic recovery is fragile and remains on shaky ground.
Despite the fact that Canada has succeeded in containing the virus for the most part, we cannot ignore the storm gathering around us. We are, to put it bluntly, too small and too dependent on demand from the United States — now in crisis — to be immune to the challenges they face.
The spike in new cases and the fact that the health response to this crisis have been politicized in the U.S. will create strong headwinds to recovery and growth in Canada. Therefore, it would be necessary, if the situation deteriorates further, for the federal government to step in again to support the economy.
It is equally as important for the federal government to rapidly introduce a robust stimulus package to accelerate recovery and shield our economy from the repercussions of the persisting health crisis south of the border.
The current level of government spending should not be a barrier to further government intervention. Interest rates remain historically low and the federal government has enough fiscal power to effectively affect the trajectory of our economy post-crisis.
While it is encouraging that the federal government allocated more funding and resources to support the extension and expansion of programs such as the wage subsidy program, and indicated that a stimulus package was in the works to be released this fall, time is of the essence. Stimulus measures are needed now for many key sectors of the economy, including the automotive sector.
To save jobs and inject much-needed stimulus into an industry reeling from a fundamental lack of consumer confidence, the federal government needs to complement their recovery plan with measures aimed at incentivizing vehicle purchases in Canada.
A comprehensive and targeted auto sector stimulus can include measures such as a national scrappage program, which would catalyze vehicle sales post-crisis, support dealers and auto manufacturers, as well as stimulate the economy.
We are at a critical juncture in our history and unprecedented times call for unprecedented measures. Actions taken now will shape the future. Governments’ commitment to effectively manage spending is admirable and very important for the long-term prosperity of our country. But to reach a prosperous long term, we need to be ready to take short term steps that we had not anticipated.
Weathering the current economic storm may well take more flexibility than a dogmatic approach to fiscal policy will allow.
