The outbreak of a Coronavirus (officially named COVID-19) is currently a significant concern for the global economy, owing to its threat to human life and its potential to severely disrupt the supply chains and capital flows on which many industries depend.
While not as deadly as SARS or MERS, the prognosis of the outbreak has evolved rapidly in just the last month. Around the end of January, a couple hundred cases had occurred in China and there was a sense of optimism that a worldwide pandemic could be avoided. However, as of March 16, over 168,000 cases have been identified across 148 countries. Countries as far away as Australia, South Africa, Italy, Iran, and South Korea have experienced fast growth in the number of infections and our neighbor and strongest trading partner, the United States, reports more than 3,400 cases and almost 70 deaths across the country.
While it is still unclear what the ultimate impact of the virus will be, where the global economy ends up will depend, in large part, on the policy response of major economies to this exogenous shock.
A coordinated policy response to COVID-19 should cover three main fronts: public health, monetary easing, and targeted fiscal stimulus.
Public health policy
On March 11, just hours before WHO declared COVID-19 a global pandemic, the Prime Minister announced the creation of a COVID-19 Response Fund of over $1 billion. The fund includes investments to the tune of $50 million for communication and public education, $500 million to support critical health systems in the provinces and territories, $50 million for the purchase of personal protective equipment, $275 million for research in vaccinations and antivirals, and $100 million for increased federal public health measures including funding for Indigenous Services Canada.
There has since also been a widespread effort across the country to flatten the epidemic curve with calls for social distancing and self-quarantining. Several employers, especially in the services sector, are promoting remote working arrangements. Libraries, gyms, and other public places that facilitate congregation are voluntarily shutting doors for a few weeks following public health directives. There is a travel advisory in effect to avoid all non-essential travel outside of Canada, and conferences, concerts, and large sporting events have been suspended for the next few weeks. On March 13, Parliament was suspended until April 20, and no firm date has been announced for the tabling of the federal budget. In an address to the nation on March 16, Prime Minister Justin Trudeau announced new temporary restrictions on air travel into Canada including barring entry to foreign nationals (apart from US citizens), redirecting international flights to one of four airports, and strengthening screening measures at airports.
As the testing efforts intensify, The Public Health Agency of Canada is also looking to hire a reserve of on-call inventory nurses and quarantine officers to in case health centers require additional staff to support efforts to respond to COVID-19.
The Bank of Canada earlier this month joined the Fed, the Reserve Bank of Australia, and other Asian central banks by cutting its benchmark interest rate by 50 basis points to 1.25%. The accompanying statement focused on COVID-19 related risks, noted that the Bank expects Canada’s growth for Q1 to be below expectations owing also in part to temporary disruptions like the rail blockade and teachers’ strikes. The bank reiterated its readiness to cut rates further if needed. Bond markets have already priced in expectations of further rate cuts by the Fed and the Bank of Canada in March and April, respectively. While there are valid concerns about Canada’s household debt burden levels, the commodity price outlook, and other financial stability risks driven by the housing market, this current monetary easing is focused on the more immediate threats to consumer and business confidence.
Following the record drops in stock market indices on Thursday, March 12, the Bank announced plans for a $7 billion liquidity injection to the Canadian banking system, and an expansion of its bond buyback program, reiterating its commitment to support the healthy functioning of the Canadian financial system in times of stress. The Bank has since also dropped interest rates by another 50 basis points in an unscheduled announcement as a “proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices”. This announcement came on the tail of plans to launch a Bankers’ Acceptance Purchase Facility, further providing short-term credit assistance, especially to small and medium business which typically tend to use these funding instruments. This has been supplemented by OSFI reducing its Domestic Stability Buffer requirement for domestic systematically important banks from 2.25% to 1% of risk weighted assets. This loosening should free up about $300 billion in lending capacity at these banks which the regulator expects will be used to help businesses and households mitigate the disruption caused by COVID-19 as well as the recent oil price collapse, and to prevent a large spike in insolvencies.
Although the monetary easing can reduce debt servicing costs of companies and SMEs facing a cash crunch in the face of a shock to demand and disruptions to their supply chains, it will not provide targeted relief to the sectors most hit by these shocks. Ideally, and especially if things get worse, sectors like tourism, airlines, transportation, and manufacturing, will receive some relief through targeted fiscal policy. Temporary measures such as adjustments to capital expenditure write-offs, increases in sick leave benefits and child care allowances, could help offset some of the costs that lost productivity and output will bring, while also being reversible and so relatively easier to justify from the point of view of the government’s already wide budget deficit. Such fiscal policy moves would also give the Bank of Canada more leeway for monetary stimulus in case the outbreak further increases the risk of a wider recession.
This prong of the policy response has been the least incisive thus far, but it is also the one that benefits the most from up to date information to best target policies to the most affected sectors.
While the Prime Minister’s COVID-19 Response Fund did outline some laudable provisions-waiving the mandatory one-week waiting period for sickness benefits claims made by quarantined workers, and enhancing the Work-Sharing program by doubling the eligibility period from 38 to 76 weeks-there is a need for much more substantial intervention. On March 13, the Department of Finance announced the establishment of the Business Credit Availability Program (BCAP) to provide an additional $10 billion of credit and insurance support to Canadian businesses, especially small and medium enterprises, through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). In his speech, the Finance Minister also suggested that the CRA might consider extending the tax deadline past April 30, and that a “significant fiscal package” will be announced this coming week. A large number of Canadian households and businesses eagerly await the details.
UPDATE (March 19, 2020): Underscoring the fast-moving nature of this crisis and the policy response, in the 48 hours since this post was published lawmakers in the US and Canada have proposed fiscal stimulus plans to the tune of 3% of GDP. The proposed plans include direct fiscal transfers to households, mortgage payment holidays, temporary tax deferrals, and credit extension to businesses. This was complemented, on the monetary side, by the Fed announcing emergency liquidity support to the markets for commercial paper and money market funds, and the ECB announcing a further expansion of its asset repurchase program. The US and Canada have also mutually agreed on a temporary shutdown of their border to non-essential traffic.