The financial markets are bracing for the coronavirus outbreak to seriously infect the Canadian economy. The reality is more likely to be a case of the sniffles.
As global bond and equity markets have been busily repositioning for what they perceive as a growing threat that a coronavirus pandemic poses to the global economy, traders in Canadian interest-rate derivatives have joined the pessimism party. Traders were already pricing in one quarter-percentage-point rate cut in the coming months after last week’s Bank of Canada outlook update; in the past few days, they have tacked on a 40-per-cent chance of a second cut before the year is out.
Their knee-jerk reaction is baseless. Realistically, there’s more evidence that this will be a tempest in a teapot than a meaningful threat to Canada’s economic outlook and, by extension, to the Bank of Canada’s rate position.
Sure, when you look at some of the estimates from credible sources for what a genuine global pandemic could inflict on the world economy, the nervousness isn’t surprising. The World Bank has estimated that a “moderately virulent” global influenza pandemic would cost more than 2 per cent of global gross domestic product (GDP). That’s about double last year’s estimated impact of the U.S.-China trade war.
A much bigger crisis, on the scale of the devastating 1918 flu pandemic, the World Bank says, would put a dent of almost 5 per cent in the world economy. That would plunge us into a global recession – and a fairly deep one at that.
But that scenario is based on not only one of the worst pandemics in human history (at least 50 million dead), but one that took place more than 100 years ago. To see a similar relative degree of devastation today, we’d need to suffer more than 200 million deaths worldwide – and to forget the dramatic medical and epidemiological advances of the past century.
When dealing with more realistic scenarios, the World Bank’s models identify Canada as among the economies least exposed to the effects of a global pandemic, thanks largely to the country’s highly advanced health-care system. Simulations predict that Canada would lose something less than 0.5 per cent of GDP in a moderate pandemic.
Many economists are turning to the last global outbreak that reached Canadian shores in a significant way – the SARS (severe acute respiratory syndrome) crisis of 2003 – as a useful guide. At the height of SARS, Canada’s economy contracted for two consecutive months, in March and April; the Bank of Canada estimated that SARS effects subtracted about 0.6 percentage points from the annualized pace of GDP growth in the second quarter of 2003.
But in that case, Canada’s biggest city and financial centre, Toronto, was one of the most seriously infected cities in the world – prompting the World Health Organization to issue an advisory against travelling to Toronto in April, 2003. Although the WHO lifted the advisory a week later, the scare put a longer-lasting chill on Toronto’s and Canada’s tourism industry, which suffered the bulk of the economic fallout from SARS. A Conference Board of Canada study attributed about 70 per cent of Canada’s SARS-related economic losses to travel and tourism, more than half of that in Toronto alone. It estimated that the SARS outbreak reduced Toronto’s travel and tourism spending by 22 per cent in the second quarter of 2003, and nearly 9 per cent for the year as a whole.
Even then, the damage inflicted on the overall economy proved temporary and fairly small. The SARS effects largely reversed in subsequent quarters. Bank of Canada estimates put the overall SARS cost at about 0.1 per cent of GDP for 2003 as a whole; the Conference Board study pegged the damage at 0.15 per cent.
That’s pretty much a rounding error as far as economic forecasting goes – not nearly enough to sway the Bank of Canada’s interest-rate policy. And even to get that rounding error, we’d have to see fairly substantial Canadian exposure to the outbreak. If Toronto hadn’t been hit with the highest incidence of SARS outside of China and, especially, the WHO travel warning, the disease would have been essentially a non-event for Canada’s overall economy.
Nevertheless, the SARS experience suggests that to the extent that there is an impact, it will be concentrated in a relatively short time frame. That short-term shock could influence timing of a Bank of Canada rate cut, even if it doesn’t imply deeper cuts.
Bank of Nova Scotia economist Derek Holt argued this week that with the Canadian economy already in a weakened state heading into the coronavirus scare, the central bank may want to step in with a rate cut sooner rather than later. An early cut – rather than an additional cut – would be the more sensible route to cushioning what is more likely than not to be a glancing economic blow.
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