TORONTO -- The fallout from COVID-19 is expected to hurt economies around the world, but the pain is not expected to last, experts say, as expectations rose among investors that the Bank of Canada will cut interest rates on Wednesday.
Global markets rebounded on Monday after plunging last week, amid investor hopes there will be co-ordinated action by major central banks and politicians around the world. G7 finance ministers are planning to hold a call Tuesday to co-ordinate a response, , while the U.S. Federal Reserve, the Bank of Japan, and the Bank of England have all said they would take steps to support the economy.
The Bank of Canada, whose benchmark interest rate stands at 1.75 per cent, has not lowered rates since July 2015 and has resisted following other central banks who have eased rates, but that could change this Wednesday.
鈥淚 think markets are getting some assurance that there鈥檚 a beginning of a floor being established to this,鈥� said Phil Cross, a senior fellow at the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada.
鈥淭he economy was in a very vulnerable spot to begin with and that鈥檚 probably why we are seeing such a strong impact on financial markets.鈥�
Global markets plummeted last week, with U.S. stocks experiencing the worst rout since the 2008 financial crisis after governments around the world began taking more drastic measures to contain the virus amid an increasing number of cases reported incountries outside of China, and as companies warned investors that sales and supply-chain disruptions would hurt finances.
鈥淲hen we look at past epidemics, these kinds of disruptions typically pass after a couple of quarters. They鈥檝e an immediate impact on growth for about half a year, and then we see a moderate and sometimes quite robust rebound,鈥� Brett House, vice president and deputy chief economist at Scotiabank, told CTV鈥檚 Your Morning.
The Organization for Economic Cooperation and Development (OECD) said Monday in a that the global economy could shrink this quarter for the first time since the 2008 financial crisis, but that it was still expected to grow overall this year and rebound in 2021.
Even with a rebound, the last year that a severe pandemic could, conservatively, 鈥渄estroy up to 1 per cent of global GDP鈥�. Experts including the OECD also note the global economy is much more integrated and dependent on China than it was during SARS 17 years ago. Chinese data showed that the country鈥檚 manufacturing plunged last month as efforts to contain the virus put more than 760 million Chinese in various levels of lockdown and halted much of the world鈥檚 second-largest economy.
DIFFERENT FROM 2008
Despite some comparisons to the financial crisis more than a decade ago, House said the current situation was 鈥減rofoundly different鈥�, noting that the 2008 crisis was triggered by problems in the U.S. financial system and the country鈥檚 mortgage market.
鈥淗ere we have disruption in supply chains, mainly coming out of China. But they鈥檙e no means broken,鈥� House said.
鈥淭here鈥檚 no question everyone鈥檚 concerned seeing the numbers from last week, but if you are a long-term, diversified investor - as we all should be - your focus should be on that long horizon, and keeping calm through this.鈥�
House advised Canadians to continue to contribute to their RRSPs ahead of Monday鈥檚 deadline and to ensure their RESPs were maxed out to take advantage of the 20 per cent match by the government.
Should the Bank of Canada cut interest rates, House said it would not be just due to COVID-19.
Economic data in recent months have shown signs of softness in the Canadian economy across a number of sectors, and a cut at the upcoming meeting would give businesses more support, he said.
Experts say the one area of uncertainty is how far COVID-19 will spread.
If the outbreak continues much longer and goes into April, for example, businesses could start having to lay people off, Cross told CTV鈥檚 News Channel.
鈥淭hen we鈥檒l see this supply shock transform to a demand shock through lower income, through lower employment. And then we鈥檙e going to see the impact on the economy through the rest of the year,鈥� he said.
Some financial experts also said that a recession is not impossible, particularly as the 10-year bond yield falls.
鈥淲atching the 10-year bond yield definitely indicates that we could be in a situation where we鈥檙e heading into a recession,鈥� said personal finance expert Rubina Ahmed-Haq.
鈥淩emember we鈥檝e been on a 10-year bull run. There has been an expectation that the economy has to slow down at some point, it just can not simply keep going up and the coronavirus could be that catalyst that starts this off.鈥�
Since officials began about a month and a half ago, there have been more than 89,000 infections spread across more than 60 countries on every continent except Antarctica, and more than 3,000 people have died. In Canada, there have been , with 10 new cases in Ontario since Saturday.
With files from The Associated Press
