Expect a Canadian recession in 2020: RBC


Royal Bank of Canada expects a recession this year and another rate cut by the central bank to support an economy bruised by the one-two punch of the COVID-19 pandemic and plummeting crude prices.

The Bank of Canada delivered on expectations for a cut on Friday, lowering its benchmark overnight interest rate by 50 basis points to 0.75 per cent. Central bank Governor Stephen Poloz, Finance Minister Bill Morneau, and Office of the Superintendent of Financial Institutions (OSFI) superintendent Jeremy Rudin jointly announced a range of stimulus measures aimed at countering the effects COVID-19 and falling oil prices.

RBC issued “significant downward revisions” to its economic forecasts on Friday, calling for annualized GDP growth of 0.8 per cent in the first quarter, followed by declines of 2.5 per cent and 0.8 per cent in Q2 and Q3, respectively. RBC expects the economy will pick up again in the fourth quarter.

“It is increasingly likely that countries around the world will fall into recession this year. This is particularly true in Canada, where the combination of falling oil prices and virus-related stoppages are likely to overwhelm any lift that lower interest rates and government spending provide,” the bank wrote in a report titled “The world has changed.”

The Bank of Canada said last week when it cut its overnight rate for the first time in more than four years that it is “ready to adjust monetary policy further if required to support economic growth.”

In addition to its March 4 rate cut, the central bank has revived its financial crisis-era playbook by extending its bond buy-back program and injecting cash into the financial system. RBC expects the Bank of Canada to lower its key policy rate by an additional 100 basis points, matching the record low of 0.25 per cent. 

RBC calls Canada’s economic exposure to the historic volatility in the global oil market caused by the Saudi-Russian price war a “powerful force” behind its pessimist outlook.

The price of North American benchmark West Texas Intermediate (WTI) (CL=F) has been cut in half since its recent peak on Jan. 6. The price of Western Canadian Select, the chief grade produced in Canada’s energy patch, is closing in on break-even prices for some producers as it falls to the US$20 level.

With supply impacted by threats of increased Middle Eastern production, and demand dampened by COVID-19, analysts are struggling to predict the path forward for oil prices.

“There aren’t many parallels in the modern oil market,” Price Street managing director and market economist Rory Johnston recently told Yahoo Finance Canada. “We are flying in relatively unprecedented territory.”

The April 20 WTI contract fell 0.7 per cent to US$31.28 in late morning trading on Friday. Earlier this week, Goldman Sachs predicted prices will stay near US$30 for the next six months

RBC said the “double whammy” of lower oil prices and virus-related economic slowdowns will have an outsized impact on Alberta and Saskatchewan compared to slowdowns felt in the rest of Canada.

“We expect that the biggest negative impact from the coronavirus to show up in Q2, with the weight from lower oil prices weighing on the economy in the third quarter,” the bank wrote. 

Other economists weigh in

CIBC’s view is that Canada is “likely on the brink of recession,” and the economy will contract in the second and third quarters, with the worst impacts in the latter. 

“We’re bracing ourselves for annualized declines in the three per cent range for Canada in each of the next two quarters. Output for the year as a whole will show no growth in 2020, even with a Q4 rebound,” economists Avery Shenfeld and Benjamin Tal wrote on Friday.

They expect the falling price of oil will reduce Canada’s GDP by a half percent over the coming four quarters, which they note is less severe than during the major price decline in 2014-15. 

“As of 2014, energy sector capital spending was more than 3.5 per cent of GDP. We’re starting from less than half of that now, so a similar percentage pull back in capital spending won’t hit the national economy as hard,” Shenfeld and Tal wrote. “Still, in the oil producing provinces, it’s a major setback for output, employment and government revenues.”

Stephen Brown of Capital Economics is also calling for a recession in 2020, and for the Bank of Canada to slash its key rate to 0.25 per cent. 

“The closure of public schools in Ontario shows that containment measures are coming to Canada. So the economy will be hit harder than we previously thought,” he wrote on Friday. 

“During the earlier oil price slump a couple of years ago, debt acted as a shock absorber as households increased borrowing to maintain consumption. This time, households and firms may feel that they are already too heavily indebted . . . This raises the risk that what should be a temporary shock to the economy morphs into something far worse.”