The best way of avoiding the economic fallout from a novel coronavirus pandemic is to not have a novel coronavirus pandemic. Okay, so too late for that.
Once in a pandemic, the best way to minimize its economic impact is to contain the spread. Canada is working on it, so far with some success, although this country is still in the early stages, as is much of the world.
COVID-19’s long-term damage to the economy will depend, in part, on how many people become ill and how many become seriously ill. But the big, immediate impact is coming not from the virus itself, but rather from attempts to limit it.
The world is basically causing itself short-term economic pain, with the goal of staving off a bigger wave of health and economic damage. It’s a prudent move, but it isn’t coming cheap.
There are excellent public health reasons for suspending sports events and business conferences, but these necessary social distancing measures are an economic minus sign. COVID-19, and the efforts to stop it, threaten to push the world and Canada into a recession.
The good news is that central bankers and finance ministers have a medicine cabinet full of tried-and-tested recession remedies. In the short term, they have the means to support those who lose jobs, or who are quarantined. In the long run, they have the tools to return the economy to growth and full employment.
That’s why what we are living through is not Episode 1 of The Walking Dead. This illness, and the measures to fight it, will put a temporary damper on economic growth. However, they need not cause a permanent economic decline. COVID-19 may bump the Canadian economy off course, but there’s no reason it has to alter the country’s long-term trajectory, which is a steady upward curve.
But getting back on track will depend on what the world’s central bankers, and, even more so, finance ministers and heads of government do – from Ottawa and the provinces, to Washington and Europe.
A classic recession involves people and businesses pulling back on spending, thereby slowing economic activity. Companies unable to sell their products respond by laying off workers, which leads to less consumer spending, which can spark a vicious cycle of more layoffs and more pullbacks in spending. That cycle can be short-circuited by monetary policy – lower interest rates – or fiscal policy, namely more government spending.
The Great Recession and the financial crisis of a decade ago were dealt with through a combination of both, with the accent on monetary policy. The Bank of Canada and other leading central banks took extraordinary steps to prevent financial markets from freezing up, while stimulating demand by lowering interest rates and keeping them there for years.
This time around, more of the response is going to have to come from fiscal policy. Central bankers still have an essential role to play, including by making sure the economic plumbing – the banking system – doesn’t seize up. On Thursday, the United States Federal Reserve said it would make US$1.5-trillion available “to address highly unusual disruptions” in the market for U.S. government Treasury bills, a building block of the global financial system.
If there’s to be heavy lifting beyond that, however, it’s going to have to come from fiscal policy, via deficit spending. Central banks are not out of ammunition, but with interest rates already so low, there aren’t many bullets left in the chamber.
Canada’s fiscal arsenal, in contrast, is enormous. The federal government has a relatively low debt-to-GDP ratio, and long-term borrowing costs are cheaper now than at any time in history.
There’s the immediate cost of supporting people who may become unemployed or be put into quarantine – costs Ottawa has committed some funding to, with more needed. Beyond that, if the country needs to be stimulated out of a recession, Ottawa has the ability to add tens billions of dollars, or even hundreds of billions of dollars, to its deficit. Between 2008-09 and 2009-10, the Harper government increased its annual deficit tenfold, from $5.6-billion to $55.6-billion.
It was the right move. Depending on the course of the virus and the economy over the coming weeks, a sequel could be in order.