The numbers make even the recession during the Great Financial Crisis appear relatively muted
This year, Canada has entered a recession that is at least as bad as the worst-case scenario predicted by the central bank last year, according to wealth manager Hilliard MacBeth.
In a recently released client note, MacBeth said that by every measure, the Bank of Canada’s adverse scenario in its 2019 forecast considerably outstripped any of the previous three recessions.
The central bank pegged the duration of a worst-case recession at seven quarters, GDP decline at 8.2%, peak unemployment rate at 12.6%, and home price contraction at 40.9%. Even the recession that stemmed from the Great Financial Crisis would appear benign in comparison, with a three-quarter duration, a 4.5% GDP drop, an 8.6% peak unemployment rate, and a 7.8% decline in housing prices.
MacBeth said that as of August, the ongoing recession has already exceeded the adverse scenario numbers for GDP drop and unemployment. Statistics Canada figures showed that real GDP declined by 8.2% as early as May, while peak unemployment reached 13.7% during the same month.
“Most observers expect that GDP will not recover to 2019 levels before 2022 or 2023, exceeding the seven quarters of recession parameter,” MacBeth said.
Fortunately, the situation so far has a silver lining.
“The last parameter, a decline in house prices of 40% is the only one that, so far, is not near the worst-case scenario model,” MacBeth said, adding that any major losses on the central banks would be because of consumer and business loans.
“According to BoC assumptions, very few Canadians would default on their mortgages, even with a 40.9% drop in prices.”
Nevertheless, MacBeth stressed that this recession will be “much worse” than anything the Canadian financial system has encountered before.
“Canadian banks are unprepared in their provisions for the size of losses that appear in an average recession, much less the more severe one contemplated by the BoC,” MacBeth said. “We can expect that as mortgage, credit card, business, and consumer loan deferrals start to expire in about one month, impaired loans will soar and in the next reporting cycle in late November, or perhaps in February 2021, Canadian banks will have to get more realistic about the severity of the current downturn and substantially increase their provisions.”
