Details and Analysis
Canada’s Parliament has adjourned until April 20, 2020 and the federal Budget, originally scheduled for March 30, 2020, will be postponed to a future date. Parliament also provided the ability for the government to spend additional dollars, which will be subject to review by the Auditor General, and passed the Canada-US-Mexico Free Trade Agreement, which received Royal Assent late today.
Prime Minister Trudeau also addressed Canadians regarding the immediate actions the government is taking to mitigate the spread of COVID-19. He did so from his home since he is in self-isolation for the next 2 weeks as a result of his wife, Sophie Gregoire-Trudeau, testing positive for COVID-19.
During the news conference, the Prime Minister stressed the need for Canadians to avoid all non-essential international travel in the short term, and that a significant financial stimulus package would be announced next week. He also noted new guidelines for containing the virus, such as urging Canadians to avoid all non-essential travel out of the country; delaying the start of cruise ship season from April 2, 2020 to July 1, 2020 for cruise ships with over 500 passengers; deferring cruise ship season in Canada’s North for the entire 2020 season; and pushing international flights to a few designated Canadian airports.
Less than two hours after the Prime Minister spoke, an extraordinary joint press conference was held with Finance Minister, Bill Morneau; Bank of Canada Governor, Stephen Poloz; and the Superintendent of Financial Institutions, Jeremy Rudin to jointly announce a package of measures to shore up the economy in the face of COVID-19 and economic uncertainty. The three men acknowledged that their appearance together was an unusual circumstance but highlighted the need for coordination of these three typically independent offices to help address this economic challenge.
Financial Measures Announced Today
In his remarks, Minister Morneau emphasized the strength of Canada’s banking system and Canada’s fiscal position to build confidence in the system. The following announcements were made:
- Minister Morneau announced the establishment of a credit facility program to stimulate the economy and support for small and medium-sized businesses with $10 billion being made available through the Business Development Bank of Canada and Export Development Canada. He stressed ongoing collaboration between the Department of Finance and the heads of all major banks in Canada, who will connect by phone twice-weekly, along with weekly calls with the provincial Ministers of Finance. Finally, Minister Morneau noted that a “significant stimulus package” would be coming next week.
- Bank of Canada Governor Poloz announced a cut to the overnight interest rate by half a percentage point to 0.75 per cent from 1.25 per cent, following a similar cut on March 4. Both Morneau and Poloz stated on more than one occasion that this move was to create extra money for Canadians in the short-term through decreased mortgage payments.
- OSFI Superintendent Rudin announced rule changes to enable an additional $300 billion in lending capacity as a domestic stability buffer for Canada’s big banks. This significant change will increase the capacity of banks to loan money.
Today’s announcements are in addition to a $1+ billion program announced earlier this week to tackle COVID-19, including funding for provinces and territories to fund critical health system needs, enhanced surveillance, increased testing, additional R&D capacity, and the waiving of the one-week EI waiting period if work is missed due to a medically ordered quarantine or self-isolation.
Finally, the federal government announced that it will be allowing public servants to work from home, if necessary, for the short term. Many federal departments and Crown Corporations have already put in place measures to enable remote working as a way of ensuring social distancing in the workplace.
What Does It All Mean?
Canadian markets appeared to respond positively to today’s announcement, with the TSX up almost 10% from yesterday, lodging its biggest gain since October 2008, after a very difficult week. Even after today’s gains, the TSX was still down 15% for the week.
The federal government has delivered stimulus packages in the past, most recently during the 2008-09 financial crisis. However, the effects of this crisis are dissimilar, and stimulus alone will not fix the short-term cash challenges resulting from COVID-19. Today’s announcement focused on the short-term fixes in the form of fiscal relief for small and medium-sized businesses, which seek to directly address cash crunches for Canadians as a result of quarantines and social-distancing, and a battered retail sector. The longer social-distancing and quarantines last, the more significant measures will need to be taken to support small businesses and their employees. This could include EI or CPP payment holidays or methods to infuse cash into hundreds of thousands of struggling businesses.
The medium-term issues that need to be addressed remain and this is what we are expecting from the stimulus package to be announced next week. The stimulus phase will seek to address the challenges faced by the broader economy – including manufacturing, airlines, rail, and energy. This is where the types of stimulus that we saw in 2008-09 will be effective. Companies and clients who have “shovel-ready” projects could be key targets for federal assistance under short timelines. As such, they should be looking at how they can quickly advance these projects.
The proof will be in how quickly government can deliver both the short and long-term support that the economy will need. Even though the House of Commons is adjourned for the next five weeks, the pressure will be on the Trudeau Government in a minority situation to ensure that support gets to where it is most needed.
This short and medium-term approach differs from the UK, which delivered an all-out fiscal assault of stimulus countermeasures in their Budget this week. The assistance announced today by the Canadian government is more targeted than the assistance announced today in the United States by President Trump. It appears that Ottawa is keeping some measures in reserve until the full impact of the economic impact of this global health crisis is better understood.
Given the gravity of the situation, the economic temperature may continue to rise and fall day-to-day, especially when markets open on Monday. StrategyCorp will continue to monitor the situation daily and provide updates as warranted.