Canada needs a formal mechanism to determine which companies will take priority as the economy reopens, says the chief executive of the country’s largest bank, who warns the country can’t afford to repeat the nationwide lockdown put in place to contain the new coronavirus.
Royal Bank of Canada CEO Dave McKay is pitching a plan that would combine increased testing with widespread tracking of the disease, a detailed methodology to gradually reopen businesses, and further government stimulus to support non-essential businesses that could struggle to survive even after they return to work.
The key challenge in any recovery plan will be striking the right balance between the prospect of a resurgence in COVID-19 infections and the need to jump start the economy and limit long-term damage. But those high-level goals need to be anchored by specific criteria to decide when and where to lift restrictions in controlled stages, Mr. McKay said. There needs to be co-ordination between business and government, Mr. McKay said in an interview on Friday. It could include crafting a “scoring grid" to weigh the order and speed at which workers can come back.
“We can’t screw this up because we don’t have enough fiscal firepower" to offset a second economic shutdown, he said. “It’s why a co-ordinated plan between business and government is so important here. We can’t fail the re-entry. We don’t have enough money for a massive step back.”
He is discussing the idea of a co-ordinated approach directly with the senior ranks of government, and suggests bringing together federal, provincial and city officials with representatives from labour groups, small and large businesses, as well as pension funds and asset managers to draw up the criteria. “It could get unwieldy, and how you find the right mix is important," Mr. McKay said, "but I think those are the key players.”
Canada’s fiscal response has been of “the right magnitude,” Mr. McKay said. At $262-billion, Canada’s relief spending equals 11 per cent to 12 per cent of gross domestic product, and Mr. McKay said spending up to 15 per cent of GDP should be “manageable," as further stimulus will still be needed to support an economic restart.
Mr. McKay has been speaking to fellow CEOs in Canada and in Europe, finding a need for more grants or forgivable debt, because of high levels of indebtedness among businesses and consumers. “We’re not sure there’s huge demand by businesses to take on more debt. And there’s certainly not a lot of room for consumers to take on more debt."
When Canada’s government launched no-interest loans of up to $40,000 for small businesses through banks last week, with 25 per cent of each loan forgivable, business owners snapped up more than $5-billion in loans in a matter of days. Government earmarked $25-billion to fund the loans, but demand for them has begun to taper off, even as the federal government loosened eligibility criteria this week. Many struggling businesses say they still don’t qualify.
By contrast, a US$350-billion program offered by the United States Small Business Administration that allows loans to be fully forgiven if the funds are primarily used to rehire and maintain payrolls has already been fully tapped out.
“While the 25-per-cent forgivable factor [in Canada’s loan program] is good, I think it needs to be higher," Mr. McKay said. “As far as the re-entry stimulus, I just don’t think enough businesses are going to make it, small and medium-sized, without a 50 or 75-per-cent forgivable [component].”
Some of those funds might flow through banks, but it would be up to government to provide the funding. Banks already face sharp increases in loan losses and are working to pump liquidity into the economy, but are not considering forgiving loans at this point.
Governments are already running up a large tab with wage subsidies and the direct payments to individuals who have lost income. Mr. McKay estimates the impact on businesses from lower consumer spending adds up to $5-billion to $6-billion in lost wages per month. For non-essential businesses that are major employers such as restaurants, barber shops, nail salons, jewellers and gyms, as well as chain stores and malls of all sizes, revenue could be down by 75 per cent, he said.
Those businesses may see an increase in traffic when they restart, as consumers crave contact with each other and a return to more normal routines. But some businesses like restaurants will only partly recover previous volumes, and may need extra support to help sustain them. “Some pent-up demand will help, but pent-up demand won’t be enough," Mr. McKay said.
As restaurants reopen, “it helps reinforce your food supply chain all the way down to farmers," Mr. McKay said, if it can be done safely. Getting employees of non-essential businesses back on the job and restoring their wages will be important to bring down the cost of relief programs. But other reopenings can likely wait. As RBC clients’ use of online and mobile banking has surged by 25 per cent, reopening branches that the bank has shuttered might be less of a priority.
There will also need to be “preconditions" in place to test for COVID-19 and track its spread, he said. That could mean adding technology on smartphones to monitor contact with confirmed cases – a prospect that raises concerns about privacy and civil liberties. “I think as a society we have to accept tracking, the way the South Koreans did it with a lot of privacy,” Mr. McKay said, to find and contain outbreaks before they spread to the wider economy.
“The fall-backs have to be minor blips, not major blips," he said. "Something bad will happen: A city, a town, a company, a supply chain … is going to have re-contagion. You can find it fast, you can test for it, you can track recovery and you can let the rest of the economy operate without fear.”
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