Economic Forecasting in Turbulent Times

(The following article was first published by RBC Economics on March 12, 2020.)

In the days during which we were trying to pin down our economic projections, the coronavirus ricocheted through global markets; oil prices cratered; the Bank of Canada, the Federal Reserve and the Bank of England all slashed their key interest rates by 50 basis points; and Ottawa joined other governments in announcing support to offset the economic shock of the outbreak.

The unfolding crisis upended our typical process of projecting the near-term course for the economy, which draws on economic data, theories and judgement. This time it was an iterative process, with each gap in financial markets or report of another country waging battle against the virus causing us to review our assumptions as we tried to paint the clearest economic picture we could in rapidly changing circumstances.

It will be some months before we get a solid picture of the damage that COVID-19 inflicted on Canada and other economies. We believe the damage will be considerable, in the short term—pulling Canada and possibly other countries into the first recession since the financial crisis, even if governments take aggressive action to instill business confidence and assist affected workers. But like all difficult times, this too shall pass. We currently expect the second half of 2020 to look better than the first, as the worst of the coronavirus fades and coordinated policy actions restore confidence.

Highlights of our forecast:

• Canada will experience a technical recession in 2020, as economic activity contracts in the second and third quarters of the year. The slowdown will limit growth for all of 2020 to 0.2%, a sharp decline from growth of 1.6% last year. Forecasts for the U.S., Europe and the U.K. are also weaker.
• Central banks will take further aggressive action to support financial conditions. Government action is a sure thing too, though the magnitude and timing are as yet unclear.
• Job losses in Canada, particularly in highly exposed sectors, will occur but will prove temporary. Falling oil prices will hit the energy sector harder.
• We expect the impact of the coronavirus to fade after the end of the first half, though low oil prices will constrain Canada's recovery for the rest of the year.

As Deputy Chief Economist, Dawn Desjardins contributes to the macroeconomic and interest rate forecasts for Canada and the U.S.