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Economists forced to rework projections as hopes for quick end to shutdown vanish

Economists and analysts at some of the country’s biggest financial institutions are reworking their projections for the economic fallout from the novel coronavirus pandemic after the government suggested closures of non-essential businesses were likely to last until July.

At Royal Bank of Canada, economists had been looking at May as the likely end of the extreme shutdown measures aimed at containing the highly-contagious COVID-19, but chief economist Craig Wright said Wednesday that now seems optimistic.

“We haven’t settled on the month though May is looking a bit aggressive/hopeful right now,” he told the Post.

Wright said his team is looking at a revised timeline for a full economic forecast that is to be released next week.

Economists at RBC were already calling for significant impacts from the pandemic, including a 30 per cent slowdown in home re-sales this year, which would mark a 20-year low.

The National Post, citing government documents, reported late Tuesday the federal government is looking at a “best case scenario” of maintaining social distancing measures until at least July.

Avery Shenfeld, managing director and chief economist at Canadian Imperial Bank of Commerce, said he will be revising his estimates, in part to assess the economic impacts of a potentially much longer period of shutdowns.

“Not just for that, but also to allow for business disruptions in sectors like mining and manufacturing due to worker illness and the need to isolate their workmates,” Shenfeld said.

The economic pain is expected to be particularly heavy in sectors such as energy and banking where earnings are dependent on both consumers and businesses.

Meny Grauman, a bank analyst at Cormark Securities Inc., said any forecast of a “V-shaped” recovery that includes a short trough and quick rebound is “wishful thinking” at this point.

“Even after we leave our houses there is a high probability that we will be walking into a prolonged recession,” Grauman said. “We are still in the very early innings here.”

Even after we leave our houses there is a high probability that we will be walking into a prolonged recession

Meny Grauman

He is forecasting that banks will experience both early and prolonged pain from the shutdowns — though government programs aimed at encouraging the financial institutions to keep lending, as well as regulatory relief on capital requirements and support from the Bank of Canada, should at least delay some of the impact.

“I have scenarios modelling earnings falling in the 30 to 60 per cent range on average across the Big Six banks this year,” Grauman said. “I have seen a number of analysts talk about 20 per cent, but that assumes a very quick recovery.”

He said the biggest factor in bank performance will be on the credit side, as paycheques and business revenue dry up, making it difficult for consumers and businesses to service their debts.

“Rising loan-loss provisions will be the key driver weighing on bank earnings through this crisis,” he said.

“Revenue will also be diminished, but that will be a much smaller impact.”

Grauman said government stimulus and directives from the Office of the Superintendent of Financial Institutions — including treating consumer and small business loans with a payment deferral of up to six months as performing loans — appear to be sufficient in size and scale at this time and will help “smooth things out.”

Nevertheless, he said he expects to see some signs of trouble for the banks as early as the second quarter.

“Credit cards and other unsecured loans will see a more immediate hit,” he said, adding that ripples into the housing sector will take longer to play out.

“The way loan-loss accounting works is that the first impact will be on expectations,” he said. Actual loan impairments always lag.”

Financial Post

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