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Monthly Economic Letter

March 2020
Feature article

What does the coronavirus mean for your business?

Given the fast-evolving situation, it is difficult to fully assess the economic impact of the coronavirus outbreak as well as the precautionary measures being implemented by governments. As of early March, the Public Health Agency of Canada had assessed the public health risk associated with the coronavirus as low for Canada.

Assessing the impact of the current outbreak on Canada’s economy

Although Asia and Europe are bearing the brunt of the virus’s economic impact, Canada’s economy will be affected. The following sections take a deeper look at the consequences for our economy. Note that this letter does not assume that there will be a lockdown of the economy as was the case in Hubei and is the case in Italy.

Lower oil prices—Travel restrictions, factory closures and an overall slowdown in economic activity led to a drop in the price of West Texas Intermediate (North America’s main oil benchmark) from about US$60 per barrel (the average in December  2019) to about US$45 in late February. Oil prices collapsed in early March for other reasons, which are described in detail in the oil section of this letter.

Lower oil prices have a direct impact on Canada’s oil producing provinces and trickle-down impacts in the rest of the country.

Reduced tourism—Travel bans, ongoing flight cancellations and generalized aversion to travel will have a direct impact on Canada’s tourism and travel industries.

According to Statistics Canada about 4.8 million visitors came to Canada during the first three-months of 2019 and spent an estimated $1.6 billion in the country.

Due to flight cancellations and travel advisories, we expect tourism and business travel to Canada to drop significantly during the first and second quarters. If you operate a business in the tourism and travel sector expect a tougher time over the next couple of months. The situation should ease during the summer but could pick up again in the fall when colder weather makes it easier for the virus to spread.

Supply-chain disruptions—Extended factory shutdowns in China have resulted in global supply-chain disruptions. This will have an impact on businesses in Canada, as China occupies a much larger role in global supply chains than it did during the SARS outbreak in 2003.

According to a report published by RBC about 10% of Canadian imports of intermediate goods come from China. There will also be spillover from disruptions to U.S. supply chains. A much larger share, about 50%, of Canada’s intermediate goods imports come from the U.S. We expect these disruptions will cause a drop in industrial production in Canada in the first and second quarter.

Weaker financial markets and confidence—In late February and March, financial markets suffered large losses, erasing gains over the last 18 months. The uncertainty associated with the virus doesn’t only impact stock markets, it lowers consumer confidence and spending and has a negative impact on business investment.

Interest rate cuts at the beginning of the month are aimed at helping calm equity markets and facilitate a recovery once the virus subsides.

Comparison to SARS

The SARS outbreak in 2003 is an interesting comparison point. Although SARS originated in China and Hong Kong, there was a concentrated outbreak in Toronto, resulting in 43 deaths in Ontario.

At the time, the accommodation, air transportation and tourism sectors were hard-hit, especially in Toronto. The Bank of Canada estimates SARS reduced Canada’s GDP growth by 0.6 percentage points in the second quarter of 2003.

However, the economy recovered relatively quickly in the second half of 2003, growing by 2% during the year. This shows how fast an economy can recover once an epidemic is brought under control and public health fears subside.

What will be the impact on the Canadian economy?

It is too early to conclude on COVID-19’s impact and we are evaluating the situation as it evolves. However, we know that past viral outbreaks have had a temporary effect on the economy. The graph below plots real GDP for Ontario during the SARS outbreak in 2003. Note the dip highlighted in red and the recovery starting immediately after the virus fades in the third quarter of the year.

That said, an important difference between Ontario in 2003 and the current situation, is the oil price war between the Saudis and Russia. Low oil prices will have a material economic impact on Canada’s oil producing regions and a trickle-down effect across the country. The extent of the impact will depend on the duration of the dispute between Saudi Arabia and Russia. The oil price war between Saudi Arabia and Russia is discussed in more detail in the oil tab of this letter.

What does it mean for entrepreneurs?

  1. Think about your supply chain. Contact your suppliers and ask about their exposure and contingency plans in case of supply disruptions.
  2. The impact of the virus will differ by sector. If you’re a business owner in a service sector like accommodation, food and beverages or tourism, expect a harder hit that should subside in the second half of the year.
  3. Think about contingency plans. How will you keep your workplace safe and your business running in the event the outbreak gets worse in Canada? Learn how to plan for emergency and disaster by reading this article.

Support for entrepreneurs impacted by the COVID-19 coronavirus

Canadian economy at a glance

Canadian economy severely tested for another quarter

The Canadian economy had a rocky start this year after already showing significant signs of slowing down at the end of 2019. Indeed, economic growth was only 0.3% in the fourth quarter. This poorest performance of the year, while still in line with Bank of Canada forecasts, brought GDP growth to only 1.6% in 2019.

Economic activity was penalized last year by the decline in business and residential investment, by less than 1% each. Consumer and public spending were the driving forces of the economy, although their growth also slowed.

The economic rebound that might have been expected at the start of the year will undoubtedly be delayed. The Canadian economy is not out of the woods and growth will probably continue to be held back by temporary factors, at least in the first quarter.

Growth still victim of temporary disruptions

Fears about the coronavirus (Covid-19) are growing and the global pandemic could stifle investment and slow national industrial activity. The impact of the pandemic is already being felt on stock markets, and the Chinese slowdown is hurting many commodities—including oil. Rail blockades have also weakened Canada’s economic growth.

From the coronavirus to a crude oil price war

The coronavirus crisis has affected the oil market. The slowdown in oil demand caused crude oil prices to plunge 35% between early January and early March. At the time, OPEC was expected to intervene to counter the drop in global prices.

At its latest meeting with its partners, however, OPEC did not get Russia to go along with its proposal to withdraw an additional 1.5 million barrels per day from the market in order to rebalance supply and demand and bolster crude prices. In addition, no agreement was reached on extending the current cuts, so as of April 1, 2020, producers will be able to pump as much oil as they want.

In retaliation for Russia’s refusal to cooperate, Saudi Arabia launched a full-scale price war on Monday, March 9, selling its crude for $29.05 per barrel to capture market share from its Russian competitor.

The last crude oil price war occurred in 2014 and plunged Canada into a technical recession. Given its importance to some Canadian provinces and the country terms of trade, the current collapse of crude oil prices will further limit growth this year. The question now is how long this price war can last. To learn about it, check out our article of the month on oil.

Rail blockades to derail the economy?

Canada’s rail system is at the heart of the Canadian economy. For this reason, blocking railways that carry freight from coast to coast is yet another obstacle to growth in the first quarter of 2020 at a time when the economy must already cope with disruptions caused by the coronavirus and low oil prices. (For more details, see this month’s featured article). Overseas containers piled up in ports in February, and retailers struggled to get adequate supplies.

Besides the transportation sector, this rail blockage will have an impact on a number of industries. Manufacturing, energy, chemicals, raw materials and agriculture are all affected by the rail shutdown.

The layoffs announced by companies directly affected by the blockades are proof of their impact on the economy. Canadian National temporarily laid off 450 workers. VIA Rail followed suit with temporary layoffs of nearly 1,000 employees. Despite these economic setbacks, the Canadian economy created more than 30,000 jobs in February.

This is the second rail shutdown in just a few months. Last November, when a CN strike partially suspended rail transportation in the country, the GDP generated by the transportation industry fell by 0.6%. This slowdown also coincided with a decline in international trade. The stoppage affected rail shipments and, as a result, both exports and imports.

However, the November drop in GDP from the transportation industry was more than offset by a 1.5% increase in December. The impact of rail was also moderated by increased use of other means of transportation, such as air transport.

This time around, these alternatives could further mitigate the economic impact of the blockades. A number of companies have resorted to trucking for their supplies, and the passenger air transportation network has partially compensated for the closure of a few key routes. Indeed, Porter Airlines reported that demand for its Montreal-Ottawa-Toronto flights rose strongly. However, these two options remain significantly more expensive than rail transportation for both businesses and travellers.

What does this mean for entrepreneurs?

  1. Canadian economic growth will probably be more modest at the start of this year, but should recover subsequently. Learn how to prepare your business for a slowing economy here.
  2. February's disruptions in rail transportation will have caused real headaches for many businesses. Despite the conflict’s resolution, spillover effects will likely be felt for some time before the situation returns to normal. You should expect a transition period and plan your operations accordingly.
  3. Businesses that depend on the oil sector or operate in oil-producing provinces will be hit harder. Map out a contingency plan to overcome the drop in crude oil prices.

Support for entrepreneurs impacted by the COVID-19 coronavirus

U.S. economy at a glance

United States: Growth still in the hands of consumers

U.S. economic growth will this year again rest on the shoulders of consumers, it seems. However, improved financial conditions and the favourable reception to the signed “phase one” trade agreement with China pointed to a recovery in investment and the industrial sector taking over in 2020. But the outbreak of Covid-19 has muddied the waters.

Impact of the virus on U.S. growth

The United States has been relatively spared by the pandemic, so far at least. Nevertheless, the negative effects of the virus on the Chinese economy will surely have an impact on the U.S. economy, even if its magnitude remains uncertain. The Federal Reserve lowered its policy rate by 0.5 percentage points in response to this growing risk. This is the first time since 2008 that the Fed has revised its rate outside the planned schedule.

In addition to the obvious impact on tourism and exports, China is a key player in U.S. supply chains. The shutdown of Chinese factories could lead to difficulties purchasing intermediate goods needed for U.S. production. A factory closing in China could force a company in the United States to suspend operations due to a shortage of inputs required to produce its goods. The virus could therefore have harmful consequences for the industrial sector, which was already struggling to recover from the 2019 trade war. On the other hand, the U.S.-China trade dispute may have already led U.S. companies to turn to different suppliers, reducing the risk of an industrial slowdown in the United States.

The emergence of the coronavirus in additional countries and the pace at which it continues to propagate has led U.S. health authorities to finally expect further spreading of this new virus in the United States. U.S. and foreign financial markets have fallen sharply since that announcement. Investors are increasingly concerned about a significant negative impact on the economy. The risk of further contagion in the United States and the confirmation that the epidemic had in fact turned into a pandemic are also worsening the outlook for investment growth.

Healthy household finances and consumer spending will therefore be the main supports of the U.S. economy again this year. In fact, recent confidence indexes continue to indicate positive sentiment among U.S. consumers. In addition, disposable income of U.S. households increased in January. A total of 273,000 jobs were created and wages rose by 3% in February.

What this means for Canada

The importance of U.S. economic growth to Canada is undeniable. While U.S. forecasts remain slightly below 2%, which is positive for the Canadian economic outlook, investment- and industrial sector-driven growth benefits Canada more than consumer-supported growth.

A total of 65% of Canadian goods exported to the United States enter the U.S. production chain. U.S. growth is therefore more favourable to Canadian companies when it is based on industrial production or investment rather than consumption. Of course, not all machinery, equipment or intermediate goods are linked to manufacturing and production chains. For example, the market for lumber or other semi-finished materials used in construction will continue to benefit from U.S. household-supported growth.

What this means for entrepreneurs

  1. Although consumer spending is slowing, a strong labour market and low interest rates should continue to support household spending and residential investment.
  2. Companies dependent on U.S. industrial production could experience a more difficult quarter than expected despite the easing of trade disputes.
  3. A more marked slowdown in manufacturing and business investment in the United States could affect Canadian exports and limit the country’s growth at the beginning of the year, even though the loonie favours Canadian exporters.

Support for entrepreneurs impacted by the COVID-19 coronavirus

Oil market update

Oil prices: After Covid-19, a price war

Fears of a global economic slowdown and the decline in China’s economy caused by the coronavirus were quick to hit oil markets. World crude prices fell by more than $10 a barrel in a single month. The price of Brent even dropped below $54 a barrel in February—its lowest level in more than a year. The recent and significant drop in oil prices is discussed at the end of this article.

Of course, all eyes are now on China, as are those of the major stakeholders in oil markets, since Chinese demand is one of the biggest determinant of oil prices today.

The importance of Chinese demand

China is a key player in several commodity markets, including oil. In fact, it is the largest oil importer in the world, so any change in Chinese demand has a major impact on the crude market. The International Energy Agency forecasts a decline in oil demand of 1.1 Mb/d in the first quarter of 2020 and 345 Kb/d in the second.

The steep drop in Chinese demand is the result of the problems faced by two oil-intensive sectors—factories have shut down and air transportation is limited. This is considered to be the biggest shock to oil markets since the 2008-2009 global financial crisis.

Markets react strongly to virus developments

Investors are proving highly responsive to news about the virus. When the situation somewhat stabilized in China around mid-February, crude oil prices began to regain some of their lost ground. A few days later, however, it was reported that the coronavirus had spread further around the world. The worsening of the situation in many countries such as Italy, South Korea and Iran has fuelled concerns of a more severe global slowdown than initially anticipated. As a result, financial markets reacted strongly and the price of a barrel of oil fell again.

Can OPEC remedy the situation?

Before the decline in global oil demand and coronavirus-fuelled volatility, the market was already worrying about oversupply in December  2019. New players such as Guyana, Brazil and Norway, along with rising U.S. crude production, did not bode well for world prices as demand was already expected to grow more modestly. This situation prompted OPEC and its partners to increase their first-quarter production cuts. The decision was made before the virus outbreak.

Differences of opinion, particularly between Russia and Saudi Arabia, have plagued the Organization for some time. Russia, reluctant to agree to previously imposed cuts, has not complied with its commitments to OPEC+, while Saudi Arabia voluntarily adopted more stringent production limits than those agreed upon by the organization.

The organization and its key partners met again on March 6 to discuss how to address the virus. At that meeting, OPEC tried to convince its partners to cut production by 1.5 million barrels per day, but failed to rally a key player, Russia.

Saudi Arabia then launched a crude oil price war to increase pressure on Russia, cutting its price by 10%. In fact, both oil-exporting countries are preparing to flood the market. They are also targeting U.S. shale. Despite the OPEC+ effort to reduce supply in support of prices, U.S. production has steadily increased.

The big question is, how long can this price war last? According to the Russian finance minister, the country can sustain its production for six to ten years at a price of $25 to $30 a barrel. Most analysts believe it’s more a matter of months.

U.S. and Canadian oil producers are not controlled by the state and must therefore yield to the market and accept the financial conditions that the banks are prepared to grant them in a risky environment of low prices. Several North American companies will be in trouble if oil continues to trade at levels as low as those seen in recent days.

With a significant slowdown in demand and a new threat of increased supply, crude oil prices will remain low for most of the year. Such low prices allow importing countries to fill their crude inventories. The effects of a price war will therefore be felt in the markets even if a settlement is reached, because the build-up of stocks will keep prices low afterward.


The oil market has not been spared by the coronavirus pandemic. Chinese demand for crude oil has fallen dramatically since the virus emerged, and fear of its spread is gripping the markets. Unable to reach an agreement, OPEC and Russia launched a crude price war, fuelling investor fears. In response, world prices have plummeted and producers will probably have to cope with a low-price environment for much of the year.

Support for entrepreneurs impacted by the COVID-19 coronavirus

Other economic indicators

Bank of Canada slashes rates

The Bank of Canada decided to reduce its key policy rate by 0.5 point on March 4th, to 1.25%. The Bank was taking its cue from the Federal Reserve, its U.S. counterpart, which announced a 0.5-point decrease the day before. The reason for these rate cuts is similar: The risks posed by the Covid-19 pandemic, even though both countries have been relatively spared (so far at least). U.S. economic fundamentals remain strong as temporary factors and the oil price war further erode Canada’s economic outlook.

The increasingly weak dollar

One of the main factors determining the dollar’s direction is the price of oil. The price war started by OPEC and slowing Chinese demand for crude resulting from the pandemic sent global prices down. The uncertainty created by the virus is also driving investors to safe-haven assets such as the U.S. dollar. Under pressure from these two factors, the loonie took a hit, trading at US$0.73 at the beginning of March.

SME confidence has improved

While the majority of SMEs remain somewhat pessimistic about the economic outlook for the coming year, our most recent survey of investment intentions shows that SME confidence is improving. The balance of opinion among entrepreneurs regarding the global and U.S. economies is still negative, meaning that a greater proportion of businesses expect an unfavourable global and U.S. economic environment over the next 12 months. However, the proportion of more optimistic businesses increased by 15 percentage points between the last quarter of 2019 and the first quarter of 2020. Entrepreneurs are also more optimistic about the Canadian economy as a whole and their own provincial economy. The survey was conducted among 1,000 entrepreneurs between January 15 and February 7, 2020, when Covid-19 was restricted to China and there were few rail blockades. Since the fear of the pandemic has intensified in recent weeks, chances are that business confidence will erode next month unless the situation improves.

Credit conditions increasingly favour investment

Effective interest rates for households and businesses continued to drop in February. While they have declined somewhat marginally, they still foretell an easing of credit conditions in Canada. As expected, fears over the Covid-19 pandemic gripped bond markets. Demand for government bonds rose and pushed yields down, which explains why Canadians now enjoy more favourable rates than they did a month ago. The Bank of Canada’s decrease of its key interest rate will also drive down the borrowing rates of Canadians over the next few months. If the impact of the pandemic continues to increase, chances are that interest rates will continue to fall.

Key indicators—Canada

Support for entrepreneurs impacted by the COVID-19 coronavirus