Recession may be inevitable, but for how long?

The forecast predicts people will be heading back to work around September. But, as with all other forecasts in this unprecedented situation, that’s a shot in the dark, says Jean-François Perrault, senior vice-president and chief economist at Scotiabank, noting once things begin to recover, growth will spike as pent up demand is finally released, but it’s impossible to tell how long economies will have to wait.

“If you think that things pick up sooner, so say for instance, [the] shut downs last a couple months and then basically everybody is back to work, then you have a significantly different outlook. . . . Any indication that they’re going to relax a lot of this stuff later this quarter or next quarter has a material impact on how quickly the rebound occurs.”

Some firms are predicting the world will be back to business as usual as early as June. Yet, the problem there is if the workforce returns to normal operations too early, it could put the world right back into the dangerous situation it’s in today in early autumn, Perrault says.

“Six months for us is a middle scenario where we’re probably assuming a little bit too much containment . . . but maybe that’s the right amount of containment to do to prevent negatives later in the fourth quarter or the first quarter of next year as the virus comes back around because there still isn’t a vaccine for it.”

Multiple factors are also impacting the stability of consumers’ financial health, he says. Consumers won’t be doing nearly as much discretionary spending as they focus on necessary expenses to keep their households afloat, such as credit card payments, rent, mortgages and insurance.

At the same time, unemployment is skyrocketing as many firms, depending on their sector, must simply shut down to fight the virus. Even though stimulus measures are already coming through to ensure households don’t face massive cash flow problems, they’ll have less to spend overall. “Even though we’ll see significantly increased unemployment, I suspect we’ll see enough government support to minimize what that increased unemployment would have historically meant for the state of household finances,” he adds.

Looking to capital markets, the ‘whatever it takes’ approach adopted by the U.S. Federal Reserve and other monetary institutions will mean a massive increase in the amount of sovereign debt available. And in the short term, there isn’t much risk implied as most governments are starting from reasonably strong fiscal positions, Canada being among them.

“I’d say the risk is maybe over the longer term, once all is said and done,” Perrault says. “You’ve had likely trillions [of dollars] of government debt out there. Does that become a problem in a year or two or three to manage? Does inflation pick up? Do risk premiums rise? Does the cost of carrying that debt become a problem or could people not want it anymore because there’s so much out there? . . . I think anything related to government debt is a longer-term consideration and for the time being everybody wants governments to step in a do something . . . that’s why it doesn’t really matter to markets.”