25 June 2020

The current economic crisis will go down in history as one of the fastest hitting of the last 150 years. While 85% of economies shrank during the Great Depression in 1930, it only took a few weeks for 90% of the world’s economies to feel its impacts in 2020.

In response to this crisis and the dramatic fall in oil prices, Canada deployed a comprehensive arsenal of tools provided through fiscal and monetary policy. The measures announced by the Government of Canada, amounting to close to 12% of its GDP, are the highest among all countries of the world. Additionally, the Bank of Canada’s operations have increased its balance sheet by 20%. Given its healthy financial situation before COVID-19, Canada still has some intervention capacity, but it is diminishing.

The potential impact of a second wave would delay recovery and put us back a decade in terms of per capita income, the primary indicator of the level of wealth. Government responses would be more targeted based on in-depth analysis of the cost-benefit ratio of another lockdown on the various sectors of the economy. In this context, corporate restructuring and the provisions of the Bankruptcy and Insolvency Act would certainly be simplified.

The long-term impacts of this crisis will depend on the capacity of governments to intelligently compensate for weak private investments in a way that positions the economy for eventual recovery. Studies have demonstrated that public investment in infrastructure contributes to increasing work productivity by up to 10%.

The new Governor of the Bank of Canada this week stated that its biggest challenge ahead will be preventing the Canadian economy from falling into a downward spiral in a context where demand is to remain unstable in the medium term.

The US Dollar

On the American side, some 100 eminent economists have requested that Congress enhance its fiscal response to the risk of increased marginalization among the more economically vulnerable segments. This would bring the level of the federal debt-to-GDP ratio over the forecasted 100%, in line with countries like Italy and Japan. Such an explosion in American debt could revive the debate on the legitimacy of the US dollar as “reserve currency,” especially in the tumultuous social and political context under the current administration.

Analysts are in agreement that the US dollar will remain under pressure for the next year. Highly volatile markets and the reevaluation of numerous paradigms since the start of this crisis could exacerbate certain trends negatively impacting the US dollar.

For our last webinar, we invited a foreign exchange dealer to come talk to us about foreign exchange hedging activities. If your business is exposed to a risk of losses related to fluctuating foreign currencies, the time is now to protect yourself by including currency forward contracts or options in your risk management strategy. These tools, like all credit insurance on debts, will ensure you peace of mind.

As the saying goes, “Hope for the best and prepare for the worst,” because the coming season may be eventful.

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