Coronavirus: A Canadian Economic Crisis
As a number of businesses in Ontario are to reopen on Tuesday, May 19 in order to jump-start the economy, concerns around Canadian health and the economy have only increased. While Premier Doug Ford has stated confidently on numerous occasions that Ontario is ready to reopen businesses, Ontario health officials including the Chief Medical Officer Dr. David Williams have expressed their professional judgement. Williams has made it clear he is not convinced that Ontario is ready for the “restart phase”, and that he would have recommended it himself if the province were ready for such a shift.
Among the several businesses being allowed to reopen this week are construction and essential workplaces, as well as all retail stores being allowed to open with limited capacity. However, businesses are encouraged to only reopen if they are ready. If businesses choose to reopen they will be under strict public health measures as precaution to prevent a second wave of the virus. Public health officials are asking that businesses take measures from providing online ordering, delivery or pick-up if possible, to providing enough tools and materials on worksites so that employees do not have to share. Many store owners are in the process of adapting their services to not only create a safe environment for their employees, but also their customers.
As many precautionary measures as there are being taken, the reality of it is that there are still signs of concern in Canadian businesses’ ability to shoulder the economic crisis. Over the last two months, the Central Bank of Canada has made a number of policy decisions to help Canadian businesses and consumers. The bank has cut its target interest rates, as well as started an out-of-the-ordinary bond buying program to help credit flow. The Financial System Review — 2020 indicates these measures have been effective to some extent. Liquidity strains have eased a little, and companies and households have found easier access to short-term credit.
However, the report warns of a cash flow problem being faced by businesses seeing steep revenue declines. The bank fears that these declines during the pandemic could turn into an issue of solvency for businesses. Solvency refers to the ability of a business to actually reach its financial obligations and address its long-term debt. Solvency is often used as a measure of a business’s financial health in the long-term as it is vital for firms to remain in business. An issue of solvency would demonstrate a lack of a firm’s ability to continue its operations in the future. Businesses that are insolvent often eventually reach the point of bankruptcy.
The Bank of Canada links market prices to the fear that defaults will soon rise as well. A default, or a failure to pay back a debt (such as interest or security), occurs when the borrower is unable to make the necessary and timely payments, or avoids making payments entirely. Relating back to solvency, businesses must keep up with their debt obligations in order to protect themselves from defaults and remain solvent.
Furthermore, there is sign for concern for non-business running Canadians as well: the report also indicates that household debt levels are also highly likely to rise and become drastic for those whose incomes are not able to fully recover from the pandemic. Bank Governor Stephen Poloz reassures Canadians that “we entered this global health crisis with a strong economy and resilient financial system. This will support the recovery”, but also reinforces the idea that debt levels are going to rise so it is crucial that “right combination of economic policies” are put in place.
On top of almost $150 billion in direct federal aid, the Central Bank has also cut its target interest rate an unprecedented amount from 1.75% to 0.25%. To manage a huge spike in spending in Ottawa, the bank also cut federal bonds to provide low-cost financing. In 2008 and 2009, during the Great Recession, the bank’s balance sheet increased by 50%. During the pandemic, the bank has implemented an expansion much larger and much more rapidly in which its balance sheet has more than tripled to $392 billion.
The bank warns that the number of vulnerable households is likely to rise and fall behind on loan payments- even with over 700 000 households who have been allowed delayed mortgage payments by Canadian banks. Renters are less likely to be in debt but are also more likely to work in industries that are heavily impacted by the pandemic compared to homeowners. For those Canadians who are experiencing difficulties paying rent may also pass on their financial stress to their landlords, many of whom already have households with mortgages of their own.
What may be the most concerning is that the longer Canada faces the economic shocks from coronavirus, the more likely citizens are to fall prey to insolvencies themselves. The pandemic has led to a significant loss in household employment incomes, and the Bank of Canada predicts this will continue, but are unsure for how long. The unemployment rate in April 2020 was worse than the rates during the Great Recession, with not only those losing their jobs suffering but also those who are employed working fewer hours. Households who are affected by the pandemic continue to struggle to manage income losses, and the situation will only worsen for those who are deep in debt as it is.
