Scotiabank believes Canada is heading towards recession

Two interest rate cuts at the next two Bank of Canada meetings and emergency funding far above that announced by Justin Trudeau, will be necessary to avoid recession.

That’s how Scotiabank chief economist Jean-Francois Perrault reads the current trajectory of the Canadian economy amid the impact of the COVID-19 coronavirus outbreak.

With cases rising rapidly globally, the fiscal response announced Wednesday by the Canadian government - $1.1 billion in health related funding and support for businesses and workers – will be inadequate to avoid recession says Perrault.

His call follows comments from RBC chief executive David McKay that the response would require more than just rate cuts.

In a report he wrote that: “A reasonably mild recession appears likely unless timely and targeted fiscal measures are deployed in the very near future to deal with the economic impacts of the virus.”

He added that this would require stimulus equivalent to 1% of Canada’s GDP, around $20 billion. With stimulus, he forecasts that total GDP for 2020 will increase 0.7% but without growth will be less than half that (0.3%).

Perrault expects the Bank of Canada to cut interest rates by 50 basis points at its next two meetings but some believe they could go for a steeper reduction.

Interest rates at 0.25%
BMO economist Michael Gregory is also predicting that the BoC will slash interest rates by a total of 100 basis points at its next two meetings, taking the rate to 0.25%.

Gregory is calling for 0.5% growth in GDP this year rather than the 1% the bank was forecasting before the virus crisis.