Macroeconomic outlooks are shifting in light of the coronavirus pandemic, which will influence our ways of doing business for years to come. This article aims to provide a macroeconomic overview related to COVID-19, helping businesses frame their strategic decisions in a context shaped by\u00a0crisis and currency risk<\/a>\u00a0As the pandemic spreads globally, supply chains are breaking down, and lockdowns are occurring across continents. India, among others, has announced a total shutdown. Governments and central banks have responded with unprecedented aid programs.<\/p>\r\n\r\n\r\n\r\n COVID-19 is causing simultaneous disruptions in supply and demand, and worse \u2014 its duration and full impact remain unknown. While banks are functioning normally despite businesses rushing to secure short-term credit, that stability could change if a wave of defaults begins. A global recession is underway \u2014 could it lead to a depression?<\/p>\r\n\r\n\r\n\r\n Supply chains are under stress \u2014 some even halted \u2014 due to quarantines, factory closures, and transport restrictions. Goods are not being produced or shipped, revenues are not being generated, and invoices are going unpaid. Most organizations are in crisis mode. For how long? That\u2019s the question.<\/p>\r\n\r\n\r\n\r\n It is likely that post-COVID market shares will look very different. Buyers unable to receive deliveries will turn to alternative suppliers. Force majeure clauses, price or quantity adjustments, or refusal to accept delivery may protect one party in the supply chain \u2014 and hurt another. It's better to be the one holding those clauses.<\/p>\r\n\r\n\r\n\r\n Companies must forecast the impact of COVID-19 on customer demand and future delivery capabilities. Maintaining communication with partners is now essential. The focus is shifting to resilience, risk exposure, and business continuity planning.<\/p>\r\n\r\n\r\n\r\n Facing uncertainty, investors and businesses are clearly prioritizing liquidity. Investors are selling off stocks and bonds, favoring cash \u2014 particularly in US dollars. Companies are in liquidity preservation mode. The resulting surge in the US dollar's value is painful for countries and businesses holding USD-denominated debt. They now face a stronger dollar \u2014 and a severe recession.<\/p>\r\n\r\n\r\n\r\n Emerging-market corporations and sovereign entities, especially in vulnerable sectors like energy, tourism, and commodities, face falling demand, declining prices, and more expensive debt repayments. Credit rating agencies are downgrading firms, restricting their access to capital. With 2020\u20132021 being peak years for corporate refinancing, a wave of defaults may significantly reduce risk appetite.<\/p>\r\n\r\n\r\n\r\n Many governments are seeing tax revenues fall and expenses surge due to COVID-19. As the economic damage deepens, monetary policy becomes less effective.<\/p>\r\n\r\n\r\n\r\n Since 2008, we've operated in an ultra-loose monetary environment \u2014 endless quantitative easing, negative interest rates. These tools helped avoid disaster during the last crisis, but they\u2019ve also fueled asset bubbles and underestimated inherent risk.<\/p>\r\n\r\n\r\n\r\n The use of these tools over the past decade has generated an abundance of cheap money (read: debt) and ever-rising asset prices\u2014whether in real estate, stocks, or bonds\u2014along with an underestimation of the inherent risks tied to these assets.<\/p>\r\n\r\n\r\n\r\n We're now in an era of over-financialization, and collapsing demand caused by COVID-19 might not respond to central bank tools. Government fiscal measures will be essential to restarting economies.<\/p>\r\n\r\n\r\n\r\n In any case, aggressive monetary easing\u2014of uncertain effectiveness in stimulating demand\u2014risks exacerbating systemic issues related to over-financialization (excess debt and underpriced asset risk). In other words, the pandemic is causing a demand shock that won\u2019t be resolved with \u201ca flood of money.\u201d<\/p>\r\n\r\n\r\n\r\n In this environment, fiscal policy tools will be necessary to attempt to lift global economies.<\/p>\r\n\r\n\r\n\r\n Keynes is back<\/strong>\u00a0(1).<\/p>\r\n\r\n\r\n\r\n The pandemic's economic impact is still unfolding, but it will be massive. Lockdowns and social distancing could last months, not weeks.<\/p>\r\n\r\n\r\n\r\n Governments must support affected populations at unprecedented levels. Most people, and even many governments, lack the savings to handle this crisis.<\/p>\r\n\r\n\r\n\r\n The priority for everyone is to save lives. The budgetary positions of many countries suggest serious challenges in meeting these needs, even though it is clear that disposable income must be preserved to prevent collapse.<\/p>\r\n\r\n\r\n\r\n Governments from the\u00a0Eurozone<\/strong>\u00a0have attempted a coordinated response to the virus\u2014but with limited success. Differences in member states\u2019 budgetary positions are a major barrier. Germany and the Netherlands are the only countries with strong fiscal margins (debt-to-GDP ratios under 70%), whereas several major European countries already exceed 100% (France and Spain ~100%, Portugal ~120%, Italy ~130%).<\/p>\r\n\r\n\r\n\r\n The ability of many eurozone governments to respond to the COVID-19 shock is limited. GDP (the denominator) is falling while debt (the numerator) is exploding. When the time comes to rebuild devastated economies, countries with weak fiscal positions will lack one major recovery tool: they won\u2019t be able to devalue their currency to boost competitiveness. For the eurozone, weak responsiveness to monetary stimulus is a serious concern<\/p>\r\n\r\n\r\n\r\n Another risk: a massive sell-off of Italian and\/or Greek bonds could make it impossible for these countries to finance their needs based on their own credit ratings. They will still need to spend heavily on direct aid to people and businesses\u2014and will need to find the resources (via taxation or borrowing) to do so.<\/p>\r\n\r\n\r\n\r\n In short, this economic shock\u2014on top of Brexit and rising nationalism\u2014could signal the eventual collapse of the euro.<\/p>\r\n\r\n\r\n\r\n Let\u2019s recall Greece ten years ago: bankrupt, but unable to default. Trading, but unable to devalue its currency.<\/p>\r\n\r\n\r\n\r\n Remember the debate of the time\u2014should the fiscal discipline of some members be extended to support others in trouble? Should the taxes of one member finance the stabilization of another\u2019s economy? In other words, how far does the union go?<\/p>\r\n\r\n\r\n\r\n What if multiple Greece-style crises erupted at once? COVID-19 could very well take us to that breaking point. The response of fiscally strong countries will be decisive for the euro\u2019s survival.<\/p>\r\n\r\n\r\n\r\n We could imagine, for instance, Italy realizing that vague promises of support are not enough. Then comes the dilemma: is it better to default and leave the euro\u2014or accept years of debt servitude, like Greece? Hopefully, Europe will offer a better, more unified answer.<\/p>\r\n\r\n\r\n\r\n Canada entered this crisis with a solid fiscal position. The federal debt-to-GDP ratio was under 35% (pre-COVID-19), and even when adding provincial debt, the overall ratio remains well below 70%. Most provinces had stable fiscal positions\u2014except for Newfoundland and Labrador\u2014and should be able to absorb the shock.<\/p>\r\n\r\n\r\n\r\n Of course, Alberta and Saskatchewan are struggling due to the oil price crash, but their pre-COVID debt levels were reasonable.<\/p>\r\n\r\n\r\n\r\n Provincial debt-to-GDP ratios before the crisis ranged from under 20% (BC, Alberta, Saskatchewan) to 30\u201340% (Manitoba, New Brunswick, Nova Scotia, PEI) and remained below 45% for Ontario, Qu\u00e9bec, and Newfoundland. Tax burdens vary across provinces, but most still have some fiscal room.<\/p>\r\n\r\n\r\n\r\n The federal government has implemented unprecedented support programs for individuals and businesses, with some measures topped up by provincial programs.<\/p>\r\n\r\n\r\n\r\n The Bank of Canada intervened three times in March (rate cuts) to ease market tensions and improve liquidity. As the economy slows to focus on fighting COVID-19, business bankruptcies are on the rise.<\/p>\r\n\r\n\r\n\r\n In early April, the Bank of Canada launched a program to support liquidity and ensure the provinces can secure financing. Implicitly, the federal government is guaranteeing that all provinces will find the funding they need to get through the crisis.<\/p>\r\n\r\n\r\n\r\n The U.S. debt-to-GDP ratio exceeds 105%. The budget deficit stood at around 4% of GDP (pre-COVID-19). While high, tax burdens in the U.S. are not yet as heavy as in Europe (or Canada), so there remains some fiscal capacity\u2014through increased taxation.<\/p>\r\n\r\n\r\n\r\n The need for support in the U.S. is also enormous. The financial impact on short- and medium-term fiscal health (shrinking GDP and rapidly rising debt) will be significant. After the emergency stimulus programs, the U.S. debt-to-GDP ratio could easily reach 120%\u2014a level that has often been flagged as a serious warning signal and a sustainability concern.<\/p>\r\n\r\n\r\n\r\n The U.S. Federal Reserve responded swiftly and forcefully to ensure dollar liquidity worldwide and reinstated its unlimited quantitative easing (QE) program.<\/p>\r\n\r\n\r\n\r\n Regardless of country, governments must implement these aid measures. The priority remains saving lives. But the consequences will last. These programs will place growing pressure on U.S. public finances, increasing already high interest payments\u2014and we won\u2019t always be in a low-rate environment.<\/p>\r\n\r\n\r\n\r\n Like any government, the U.S. must issue debt on the open market. True, the U.S. benefits from its economic scale and the dollar\u2019s reserve-currency status\u2014but a steep increase in debt alongside a deep GDP contraction (a prolonged recession) could still trigger a sharp market reaction.<\/p>\r\n\r\n\r\n\r\n In conclusion, financial risk management becomes crucial in this context of uncertain macroeconomic outlook. Finance leaders must closely monitor economic developments and adjust their hedging strategies to protect their businesses from the potential impacts of this prolonged crisis.<\/p>\r\n\r\n\r\n\r\n While the U.S. has hesitated in its COVID-19 response, China is positioning itself as the global leader in pandemic management. However, even though plane loads of medical supplies are real, many doubt that the virus disappeared from China as quickly as claimed.<\/p>\r\n\r\n\r\n\r\n We can\u2019t compare the Chinese economy or banking system of 2003 (SARS) to what it is today. In 2003, China experienced a sharp downturn followed quickly by a strong recovery.<\/p>\r\n\r\n\r\n\r\n At that time, China\u2019s growth rates exceeded 10%. Today they\u2019re under 6%, and the banking system is burdened with bad debt.<\/p>\r\n\r\n\r\n\r\n In fact, Chinese regulators had to bail out a few banks for the first time in decades in spring 2019. By early summer 2019, the Chinese government convened an emergency meeting with the banking sector. It\u2019s no surprise that the solvency of the Chinese banking system is declining\u2014and now COVID-19 is about to hit already weakened balance sheets.<\/p>\r\n\r\n\r\n\r\n Even a year ago, outside of the U.S.-China trade conflict, the Chinese economy was already weakening. Credit had dried up for the private sector\u2014an important engine of growth\u2014and consumers had begun pulling back sharply on spending. COVID-19 will only intensify this trend.<\/p>\r\n\r\n\r\n\r\n It\u2019s clear that China\u2019s recovery won\u2019t be as fast as hoped. It won\u2019t happen unless demand rises in other countries\u2014which are now grappling with the virus. A strong rebound in domestic demand is possible, but Chinese consumers alone cannot drive global growth<\/p>\r\n\r\n\r\n\r\n The longer it takes to contain the pandemic\u2014and the longer the economic recovery is delayed\u2014the more unsustainable debt will become, for countries, banks, businesses, and individuals alike.<\/p>\r\n\r\n\r\n\r\n The big economic question after the health crisis: will we see a V-shaped recovery or a prolonged recession?<\/p>\r\n\r\n\r\n\r\n Governments clearly want to preserve household income with aggressive stimulus. The speed at which funds reach people and businesses will be a key success factor. Bills need to be paid\u2026 so others can earn income and pay theirs\u2026 and so on.<\/p>\r\n\r\n\r\n\r\n Some sectors may recover quickly, once workers can return and supply chains resume. But no one knows if SMEs can survive an extended shutdown.<\/p>\r\n\r\n\r\n\r\n For a rapid recovery to work, aid programs must protect businesses from insolvency due to lost revenues\u2014and there must be some level of international coordination. There\u2019s no point restarting a supplier if the buyer is still sick\u2026<\/p>\r\n\r\n\r\n\r\n The economy as a whole must accept slightly lower productivity in exchange for greater supply chain resilience.<\/p>\r\n\r\n\r\n\r\n More grimly, it\u2019s reasonable to expect a second wave of infections in 2021. If that occurs, the recovery could stall\u2014or worse, we could see a \u201cdouble-dip\u201d recession. However, by then, scientists may have had time to develop an effective treatment to slow the disease\u2019s spread.<\/p>\r\n\r\n\r\n\r\n Let\u2019s hope our governments, business leaders, and we ourselves are not caught off guard by that second wave.<\/p>\r\n\r\n\r\n\r\n Notes:<\/em><\/strong><\/p>\r\n\r\n\r\n\r\n 1.<\/em>\u00a0The Keynesian approach suggests that a country\u2019s economic health (and recessions) can be managed\u2014or avoided\u2014by using government policies to influence aggregate demand.<\/em><\/p>\r\n\r\n\r\n\r\n 2. For reference,<\/em>\u00a0Canada\u2019s federal debt-to-GDP ratio before COVID-19 was just under 35%.<\/em><\/p>\r\n\r\n\r\n\r\n 3. SARS: Severe Acute Respiratory Syndrome.<\/em><\/p>\r\n\r\n\r\n\r\n See also:\u00a0Crisis and Currency Risk: Pandemic, Inflation, Market Volatility<\/a>, Crisis and Currency Risk: Coronavirus \u2013 What Now?<\/a> and this article<\/a>\u00a0from BDC.<\/p>\r\n\r\n\r\n\r\n Expanding into foreign markets drives growth but also exposes SMEs to risks. Tracking the successive impacts of exchange rate fluctuations on anticipated business performance is particularly complex.<\/p>\r\n\r\n\r\n\r\nMacroeconomic Outlook: Impacts on Businesses and Supply Chains<\/h2>\r\n\r\n\r\n\r\n
Investors and the Preference for Liquidity in Times of Crisis and Currency Risk<\/h2>\r\n\r\n\r\n\r\n
Effectiveness of the Monetarist Approach and Fiscal Policies<\/h2>\r\n\r\n\r\n\r\n
Central Banks and the Risks of Over-Financialization<\/h3>\r\n\r\n\r\n\r\n
Regional Macroeconomic Challenges<\/h3>\r\n\r\n\r\n\r\n
The Importance of Risk Management in Times of Uncertainty<\/h3>\r\n\r\n\r\n\r\n
Canada<\/h3>\r\n\r\n\r\n\r\n
United States<\/strong><\/h3>\r\n\r\n\r\n\r\n
China<\/strong><\/h3>\r\n\r\n\r\n\r\n
Global Outlook<\/strong><\/h3>\r\n\r\n\r\n\r\n
International Markets: A World of Opportunities<\/h2>\r\n\r\n\r\n\r\n