Navigating economic uncertainty with Bank of Canada guidance
Over the next several weeks, FCC Economics will help you understand the rapidly evolving business environment due to COVID-19.
Today’s Bank of Canada (BoC) Monetary Policy Report was eagerly awaited. In a span of a few weeks, business sales in some sectors have collapsed, and more than 6 million Canadians have applied for employment insurance or emergency aid benefits. That’s more than enough to completely overturn the January BoC assessment of the economy.
It’s hard to grasp the magnitude of the economic downturn in Canadian and U.S. economies
- It’s been quite a reversal in economic projections: BoC initially projected a 1.6% increase for 2020 GDP in January. It chose not to report detailed forecasts at this time given the high level of uncertainty. Yet, it now estimates that the second quarter GDP could fall by a shocking 15 to 30% relative to economic activity in the last quarter of 2019.
- The decline in household income is strong and has an impact on food consumption patterns, especially when mixed with new living conditions: online food shopping, at-home cooking, stocking-up are all trending upward. But restaurant closures imply a significant decline in consumption of various food products.
- The length of the economic crisis is unknown, but there will be a rebound. Recent IMF projections call for 2021 GDP growth in Canada to be 4.2% after a 2020 contraction of 6.2%.
- A similar inference applies to the U.S: the IMF projects 2020 growth to be down 5.9% with a 2021 rebound of 4.7%.
Interest rates to remain low for an extended period
- BoC took the unprecedented steps of cutting its policy rate by 150 basis points in less than one month. Further cuts are ruled out for the time being as the Bank is not keen on bringing short-term interest rates into negative territory.
- Rates on long-term government bonds initially declined following the extraordinary monetary measures introduced to support the Canadian economy. The yield on the Government of Canada benchmark 5-year bonds recorded a low in Mid-March, rebounded slightly, but has been declining again over the last 4 weeks. While the average effective business interest rate may not fall to its lowest level recorded in the Spring of 2017, interest rates will remain near historic lows.
No rebound in the oil market until demand strengthens
- The Canadian oil industry continues to face price pressures as a result of weak oil demand, even when considering the agreement between oil exporting nations to cut production.
- Lower oil prices and the resulting lower loonie are supportive of farm operations’ margins.
IMF projects global GDP to contract 3% in 2020
- This contraction would be the most significant since the Great Depression – noticeably larger than the 2008-09 Great Recession.
- China’s economy was hit hard in the first quarter of this year. Its economy is projected to grow 1.2% in 2020, significantly slower than the 5.9% pace projected in January. Confinement measures in China have been gradually lifted, leading to a modest improvement in China’s economic activity.
- Slower income growth in emerging markets causes the food demand to weaken, leading to a softer demand for agricultural commodities.
The usual tools to understand economic relationships are bound to be imprecise at best. New information and data come in daily, sometimes amplifying price swings in markets. Scenario planning is often more useful than forecasting under these circumstances.
Learn about economic trends and build a limited number of representative scenarios. This will help you draft a sound risk management plan and guide your business strategy amid the uncertainty.
J.P. is the Vice-President and Chief Agricultural Economist at Farm Credit Canada. Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval. J.P. is Past-President of the Canadian Agricultural Economics Society. He obtained his PhD in economics from Iowa State University in 1999.