The chief executives of two of Canada’s largest banks are warning that it will take longer for the economy to recover from the new coronavirus than they expected even a few weeks ago, and that businesses will still be feeling the effects in 2021.
The sharp rebound many have hoped for is looking increasingly unlikely, according to Royal Bank of Canada CEO Dave McKay. He predicts many businesses will emerge from the crisis with a more cautious mindset, supply chains will be redrawn, and sectors such as transportation and travel could take more time to bounce back.
As a result, the economy that emerges on the other side of the crisis may look markedly different from the one before COVID-19. Despite massive stimulus measures launched by governments, Canada’s GDP growth could turn negative in some quarters, according to Canadian Imperial Bank of Commerce CEO Victor Dodig.
Many businesses hit hard by stringent physical distancing measures may only partly recover, Mr. McKay said, and scores of Canadians will change their habits, at work and at leisure.
“We’re going to need to support businesses and consumers a little bit longer than we might have planned even a month ago," Mr. McKay said, speaking to reporters after the bank’s annual meeting on Wednesday. Whereas some experts have predicted that the economy could enter a sudden, V-shaped rebound once the strictest physical distancing measures are lifted, “I don’t think you can expect that."
“If we can get back to 80 per cent or 90 per cent of where we were early in 2021, I think that is pretty good,” he added.
Mr. Dodig echoed Mr. McKay’s concerns in an interview ahead of CIBC’s annual meeting of shareholders, which was also held virtually on Wednesday.
“Things will be different. We won’t necessarily have the gangbuster economy that we did have in the past,” Mr. Dodig said. "People will get bet back on their feet, but they’ll be a little bit more sheepish. They’ll manage more cautiously.”
Both banks’ CEOs said governments and central banks around the world, including Canada’s, have reacted swiftly to the crisis. Mr. McKay cited massive stimulus packages: $100-billion earmarked “to start” in Canada, and US$2-trillion in the United States, while many governments around the world are crafting their own responses with price tags equal to 10 per cent or more of their GDP.
“We’ve never seen that kind of support outside of a war time," Mr. McKay said. “We know it’s going to be a huge mitigant to risks we would have normally modelled in our economic scenarios."
After banks deferred payments on hundreds of thousands of mortgages and other loans, and cut interest rates on credit cards for some customers, the biggest challenge they face in the short-term is helping business clients manage a cash crunch brought on by a drop in revenues, Mr. Dodig said.
“What worries me most is making sure our clients are able to bridge to a period of normalcy," he said. “It’s impacted everybody’s income, because it’s just stalled, and the income replacement hasn’t fully funded what they’ve lost.”
The federal government has already started paying $500 a week in direct benefits to Canadians who have lost income, and will launch a no-interest loan program for small businesses on Thursday. Yet it is still working to deploy wage subsidies for companies of all sizes to help them retain or rehire workers. “There is a lot of policy that’s been announced. We’ve got to get it implemented. It’s complex,” Mr. McKay said.
Companies are also already having to rethink their supply chains to deal with reduced cross-border movement of people and goods. Mergers and acquisitions activity across most industries has come largely come to a halt as companies look to conserve cash. And some sectors are being hit especially hard, including oil and gas, amid a plunge in energy prices.
Mr. McKay said RBC’s leaders have turned some of their attention to drawing up plans for managing the transition to a new kind of normal life after the most severe lockdown measures are lifted, and government stimulus starts to run out.
“We may need to save some stimulus for the exit strategy, to encourage consumers to have confidence to spend," he said. "I think there will be somewhat of a fear of congregating, there will be a fear of travelling. There will be changes in behaviours.”
That wariness will dampen economic activity, but could also be vital to keeping the risk of a second outbreak of the novel coronavirus low. “Certainly any kind of fallback where there’s contagion and we have to isolate again would be quite damaging," Mr. McKay said. “We’re facing an economic shock and contagion like we’ve never seen. This is completely new.”
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