Front Burner - Why ‘V’ beats ‘U’ in the post-COVID economy

Episode Date: April 1, 2020

By most measures, COVID-19 has devastated the global economy. But how much worse could it get? And what can be done to help it recover? Today, CBC senior business correspondent Peter Armstrong drops by to explain what’s being done globally to keep the economy moving and what kind of outcomes could be in store for Canada, and the world.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. So the other week, CBC Senior Business Correspondent Peter Armstrong came onto the podcast. And we talked about what was happening here with Canada's economy and the measures our governments have taken to triage the economic damage that comes with essentially shutting everything down. Today, we're going to zoom out a bit and look at the global picture and discuss what kind of shape or actual shapes, as you will hear, a recovery could take.

This is FrontBurner, the macroeconomy edition. Hey, Peter, thank you so much for coming back. Nice to be back. So look, what are we seeing around the world right now? Basically, how bad is it? Bad. It's incredibly bad. I mean, try to imagine a giant wheel upon a wheel that's just been spinning madly for decades, all of a sudden just grinding to a halt. And it's happening. It sort of started sector by sector. And we saw it really hit, you know, movie theaters closed down and the airline industry started to ramp things down.

Now we're at a point, Jamie, where nothing is immune from this. You know, it's not just the oil industry, but the oil sector really tells us a lot about what else is happening in the economy. And the report now is that oil consumption will drop by like 26 million barrels this week. 25% of the world's demand for oil will collapse. So it just gives you an indication

that it's everywhere. It's everything. And you can see it when you're out for a walk or when you're trying to get to work or whatever our listeners are doing. Every time you see a closed door or a little bit less traffic, imagine that amplified on a global scale and you get a sense of just how bad the economy is being hit right now. Right. Some of these numbers are astounding, like 2.25 million people filing unemployment last week in the U.S., like some projections that put unemployment in the U.S.

at 30 percent. Right. The previous high for unemployment in the United States was 24.9 percent. That was 1933 at the height of the Great Depression. And we're now hearing projections that it could go as high as 30%. We're talking millions of Americans, millions of Canadians out of work. And that has a very serious trickle-on effect. The domino effect of that is profound and reaches every corner of society.

And you have to think how deep in debt were Americans and Canadians and Europeans when they headed into this, right? That was a very serious problem that you and I talked about several times, that there were really deep concerns about what would happen if something went wrong. And yet here we are, where so many things have gone wrong and a crisis far more profound than even the deepest skeptics could have imagined. We're dealing with some catastrophically bad news across the board. So let's go through some of the responses you're seeing around the world to deal with this.

I know that this is like a full-on econ university class on monetary and fiscal policy, but can you boil this down for me, how governments and other institutions are trying to deal with this unprecedented time? Right. So the thing to remember in this is literally, let's put a marker in the sand right now today and say, let's talk about what has been done because we know more will come. And we know the response from both central banks and governments around the world, more will be needed.

And yet more has been done than has ever been done in the history of mankind. I mean, the central bank response of lowering interest rates effectively to zero, and in some cases actually to zero as a global coordinated effort from central banks. The bond buying, Canada has finally embarked on that crazy notion of quantitative easing, they call it, basically just creating money out of thin air and using that to buy bonds to the

tune of $5 billion a week, injecting that into the economy. Then you've got the fiscal side, the spending side from governments around the world. Canada's, we're still trying to get a tally for exactly how much ours is going to be once you factor in the wage subsidy. But around the world, I mean, the U.S. response is $2.2 trillion. And that's a staggering sum unto itself. And it's worth deconstructing a little bit. Like the New Deal in 1933, FDR's big plan to really take on the Great Depression was $41 billion in 1933. I shall ask the Congress for the one remaining instrument to meet the crisis, broad executive power to wage a war against the emergency as great as the power that would be given to me if we were in fact invaded by a foreign foe.

Let's do an inflation calculator. Say that's 800 billion. Still a fraction of what we're talking about here. You know, these are staggering sums of money that we're seeing, you know, Germany, the UK, Canada, like the entire Western society, all they're trying to do here is keep a crisis from boiling over into something way, way worse. And all they're trying to do is keep people in their homes, keep them paying their rent, keep food in their fridges, keep businesses from going under entirely. And we know that it

won't work in every case. Essentially, what we're trying to do right now is just kind of bridge the gap until we get some sort of health response to this, some sort of health solution. That's exactly it. All they're trying to do here is get us through to the other side of this.

Maybe it's a couple of months, a few months, four months. I mean, Andrew Cuomo in New York has said it's between four and nine months he expects the shutdown to be. Nobody can tell you, is it four months, six months, eight months, nine months, but it is several months. We all have to now confront that that is a new reality. That is not going to change. You're not going to turn on the news tomorrow morning. And, you know, a reminder that it's nine months if we don't do everything we need at the beginning, that if everybody hunkers down and does their part in social distances and stays home and stays out

of the way, we can probably, he thinks, get this done in four months. So we're talking about a long period and an unknown period, which is, again, why we're going to have to get a lot more from governments that have already spent more than they ever have in the history of man. I had not heard that statistic from Andrew Cuomo, governor of New York. It is unbelievable to think of New York City shut down, possibly, for nine months. For months. I know you do not have a crystal ball here, but I want to talk to you about what could conceivably happen when we start to come out the other side of this. So, you know, as you mentioned before, you and I have talked about the incredible levels of debt that individuals and countries were

already carrying before this crisis. And now we're looking at debt we've never seen before. In terms of coming out of this, what on earth could that look like? Peter, you know, for example, I'm hearing about a lot of shapes, like a V shape and a U shape. And what are these shapes? Like, would this help me understand what any sort of recovery could possibly look like? Well, there's sort of two aspects to that, that I think are important to understand what we're talking about. And the shapes you're talking about are a V shape. So imagine the right side of that V is what we're in right now, a sharp and steep drop in everything, in unemployment, in GDP, in value on the stock market.

All those things are plummeting right now. And eventually they'll hit a bottom. We don't know when that bottom will come. And I'm certainly not here to project when that might happen. But the question becomes, does it bounce right back up and take the shape of a V? Or does it linger at the bottom a little while and then eventually start to come up? And then, of course, what does the right side of that V or maybe U start to look like? Is it a long, slow climb? Is it a steep bounce back up? And the projections I saw from Capital Economics were a minus 30 to 35% drop

in GDP in the second quarter, so in April, May, and June, But then a fairly robust double-digit bounce back in July, August, and September. So that would be like a clear V, right? Precisely. That would be a clear V where it bounced all the way down and then a big, fast, sharp rise afterwards. Others are saying it won't be quite as steep and as sharp as that, but that it will continue. So sort of slightly misshapen V, the kind of V my six-year-old son draws. You know, I think fewer people think of that U shape where, you know, it comes down and then you just, you get stuck in a recession or a depression for a really long time.

And you just can't figure out how to get the wheels out of the mud. That's more of a U shape. And I think the sense here is, and you can see it, Jamie, you can hear it when you talk to people. How many times this week alone have you heard somebody say, you know, when this is all over X or when this is all over, I'm going to do this or I'm going to buy that or I'm going to go support this.

People have this pent-up sense of community, I think, that they want to get out and do. So they'll go to their movie theaters and they get out and do. So they'll go to their movie theaters and they'll go back to restaurants and they'll go to the bars and they'll buy things and they'll send flowers to their friends. And I think there is a sense that a lot of that demand is pent up. And, you know, you have to think about the structure of the crisis that we're in. Why is all this happening? It's not because the global financial infrastructure was teetering on the edge and set everybody off. This is because of a health crisis. And if we can get

through the health crisis, well, then the recovery will be fairly quick. The question is what happens if the health crisis lingers? Different parts of Canada are experiencing this epidemic in a slightly different timing, and their acceleration and deceleration will potentially be different. So I still think it's a little too early to tell because we are only at the end of March, but next week will be very, very important. But next week will be very, very important. It is different from 2008 in that there's not something inherently rotten happening in the financial system. Is that like that's fair?

I think that's entirely fair to say. And I think it's important to point out that, in fact, the financial system is fairly robust and healthy so far. Let's see how deep and profound this crisis gets for them and whether there's some sort of cascading credit event that can push the limits of that stability. But right now, heading into this, those banks and those big financial institutions that kind of make up the infrastructure and the solid base of the rest of the economy, they seem healthy. And that's why all these central banks are dropping interest rates and injecting money into repo markets and going about quantitative easing. They're trying to make sure that they're doing whatever they can to make sure that that side of it doesn't start. Because in 2008, we had essentially a financial institution crisis. That's one of the very few crises that we don't actually have happening right now.

of the very few crises that we don't actually have happening right now. And central banks are doing everything they can to make sure it's not yet one more crisis piled atop on all the other stuff that is burning out of control right now. Right. Just all the other crises that we have to deal with right now. I know when we talked the other week, you're saying a bunch of stuff right now that makes me feel optimistic. But I know that when we talked the other week, you did feel like there were some sectors that certainly may not come out of this. Do you have a better sense today of what those sectors may be? I think we're getting a look at what the oil industry is going to look like. And it's ugly. I mean, the price of oil, I think we all now know, has fallen.

West Texas Intermediate, the main North American benchmark, fell below $20 a barrel. That means Western Canada Select, the big heavy crude benchmark, was trading I think its low point in the first half of this week was like $3.82 a barrel. It's astounding. Oh my god, like the barrel's got to be worth more than that, no? Yeah, I think the kids game of a barrel of monkeys is be worth more than that, no? Yeah, I think the kids' game of a barrel of monkeys is actually worth more than an actual barrel of Canadian heavy oil.

That is a now thing. That is at the height of this crisis, all of this going on. Consumption has dropped by 26 million barrels this week alone. It's a staggering figure. That's not going to last. It will recover. The

question is, what will it look like? And all of that on the oil side, remember, is happening in the midst of a price war, which is either absolutely insane or a magnificent piece of gamesmanship from the Saudis to try to control both price and market share. But we are going to emerge to a different world of oil. Goldman Sachs has said that we're going to be looking at a world where the oil industry is just never going to be the same. There will be fewer companies that will have higher assets. This is going to force changes in that industry. We're going to see changes in the way we travel, or at least we're going to see more longer changes in how we travel.

You know, like I was talking to somebody about who would have ever thought that because on 9-11 hijackers flew planes into the towers in New York, that you wouldn't be able to use proper cutlery on trains. But the smallest, weirdest little things changed as a result of that. And had you spoken to a regular air traveler on September 10th and told them what life was going to be like five, six years later, they would have thought you were crazy. Right, that you have to take your shoes off every time you walk through the metal detector, right? It was unfathomable then. And it's a lot of what will happen as a result of this is probably unfathomable now. There will be profound changes in the way we live and the way we buy and the way we shop and the way we interact and the way we go to school. and then you can cast it up through to the macro, the biggest macro level available, those will have profound impacts on our economies and our various economies,

not just for us in Canada, but for everyone, everywhere. When you think about it, you know, if we're all not going to offices as much, what does that mean for commercial real estate? If we're all not going to malls as much, it is incredible to start thinking about the cascading effects here. One last question before we go today. I know China is starting to get back to work, essentially. And are we seeing any glimpses there of what we could potentially expect here in the coming months, when hopefully we can start to get back at least a little bit to normal? Yeah, because China is the first economy to get itself back on its feet. And it's still adjusting daily, for sure. But those factories, 96% of factories in China are back up and running. Public transit is rolling again. Trains and shipments are moving again. It will have an enormous first mover advantage. I mean, right now, in the height of an enormous world global crisis, it's China sending aid to North America? And who would have ever thought that, that it would be plane loads of medical supplies

coming from China to Canada and New York that would be the thing that might help us in a crisis? We will be receiving equipment, masks and gloves and gowns from China extremely shortly in the coming days. It is a global pandemic, and countries need to set aside their differences and work together to get us through this as best possible. And that's certainly the approach. What impact is that going to have in terms of their ability to get out in front of

some of the more permanent changes in the economy? But they are going to be out in front of this. They are going to have way more data about how the economy is moving and how to adapt to it. And they have an ability to, you know, they have a controlled economy. So they can move their companies and adjust their own economy far more quickly than most Western nations could. Right. And I guess we'll have to see as well whether or not they get spikes again in the virus spreading throughout the country. Peter, I actually was lying before when I said this was the final question. I have one more question I'm hoping to ask you. You know, all of this money that's being thrown at this problem to just try and bridge this crisis.

You know, in Canada, the PBO, our budget office, is estimating that our deficit could now be like $105 billion. So how do we pay this back at the end of it? You know, is my like yet-to-be-born child going to be paying for this? Are your children going to be paying for this? The short answer is I don't know. And the longer version is that while we don't know, figuring that out is less of a priority now than making sure that we won't really have a functioning economy to bounce back. It is a staggering sum of money. This will have deep and profound impact for years to come. And yet the question is, how else do you do it?

Because letting people have to just sort of go on their own without any support simply isn't an option. Okay, Peter Armstrong, thank you so much. Thank you. And I hope next time we talk, I have better news. I hope so too. Although, you know, I was quite buoyed today to hear about the V. I'm keeping my fingers crossed for just a really good V. See, I bring sunshine wherever I go, buddy.

Okay, so before I let you go today, a short update from the Pinecrest Nursing Home in Bob Cajun, Ontario, a residence that has been hit incredibly hard by COVID-19. As of Tuesday, the deaths of at least 12 residents and one volunteer have been linked to COVID-19. As of Tuesday, the deaths of at least 12 residents and one volunteer have been linked to COVID-19. The issue of resident and staff safety at long-term care homes across Canada is a growing one. According to the Globe and Mail, there are 26 long-term care homes in Ontario that have had at least one case of COVID-19. And last week, my colleague Jason Proctor brought us the story of the deadly outbreak at BC's Lynn Valley Care Centre. You can find that one in our feed. I'm Jamie Poisson.

Thank you so much for listening to FrontBurner, and we'll talk to you soon.