Canadian economy to take massive hit from COVID-19 and oil — will see largest contraction since 1921

The great lockdown of 2020 to slow the spread of COVID-19 has pushed the world's economies into a crisis "like no other," the International Monetary Fund warned Tuesday in a sombre report that predicts the largest economic contraction in Canada since 1921.

It is "very likely" the global economy in 2020 will suffer its worst recession since the Great Depression, the decade-long downturn that followed the 1929 stock market crash in the U.S., IMF chief economist Gita Gopinath said in a foreword to the fund's latest half-yearly forecast.

She said the economic pain will easily surpass that seen during the global financial credit crunch a decade ago and could produce a cumulative loss to global gross domestic product of $9 trillion (U.S.). Gopinath said the crisis is hurting both advanced and developing countries, with rich western economies seen contracting by an average of 6.1 per cent. Emerging market and developing economies are also projected to have negative growth rates of minus 1.0 per cent in 2020, she said.

"The world has been put in a great lockdown," Gopinath told reporters after release of the forecast. "This is a crisis like no other."

The 189-nation IMF is projecting the global economy overall will shrink by 3 per cent in 2020, rather than expand by 3.3 per cent as it predicted at the start of the year. That would be a much more serious contraction than the 0.1 per cent squeeze seen in 2009, the worst year of the previous recession.

In Canada, where the Parliamentary Budget Office last week said the 2021 federal deficit would balloon to $184 billion (Cad.) or 8.5 per cent of GDP, the IMF predicts the economy will shrink by 6.2 per cent in 2020, and then rebound to 4.2 per cent growth in 2021. That's assuming the pandemic fades in the second half of the year and containment efforts can be gradually unwound.

The fund sees economic contraction this year of 5.9 per cent in the U.S., 7.5 per cent in the 19 European countries that share the euro currency, 5.2 per cent in Japan and 6.5 per cent in the United Kingdom.

China, where the pandemic originated, is expected to post 1.2 per cent growth in 2020 versus 6.1 per cent in 2019 after the world's second-biggest economy began to open up well before other countries.

The IMF sees global growth surging to 5.8 per cent in 2021, compared with 2.9 per cent in 2019, as economies bounce back from a lowered baseline.

Canada's economy has faced a double hit, from both COVID-19 and collapsing oil prices, economists note. More than two million Canadians, or one in 10 workers, have made jobless claims since the start of nationwide lock downs in March.

A 6.2 per cent decline in GDP for Canada would be significantly bigger than the just over 1 per cent contraction the IMF forecast for the country after the 2008 financial crisis, and would mark the biggest annual fall since 1921.

Senior Canadian bank economists, however, caution that economic forecasts vary widely and say the IMF's numbers should not be treated as the only correct prediction.

"People, frankly, are all over the map," said BMO chief economist Doug Porter. "I would say while these are reasonable estimates, they're more toward the negative range. But it doesn't mean they're wrong."

BMO had previously forecast a smaller 4 to 5 per cent decline for Canada's GDP this year.

Economists said there could be a very modest recovery in the latter half of this year, with a strong rebound next year, though that too will depend on whether there's a subsequent wave of the virus. It will also likely take longer than a year for the unemployment rate to again reach pre-COVID-19 levels.

"Real growth is really going to be a 2021 story," said Dawn Desjardins, vice-president and deputy chief economist at RBC.

Areas such as travel and entertainment, which have been particularly hard hit by lockdowns and travel restrictions, will most likely not see as quick a rebound as other sectors.

A V-shaped recovery is likely still possible for some sectors, Porter said, notably retail.

"I think we'll see transformation on that front," Porter said. "Some bricks-and-mortar stores might not reopen, but others will strengthen online presence ... I think retail will come back relatively quickly."

Compared to Canada, the IMF is forecasting a less steep drop in GDP for the United States this year. Economists said the difference between the two is less about which country has implemented tougher lockdowns and more about the impact of the price of oil.

"The energy sector is a smaller part of their economy than Canada's," said CIBC chief economist Avery Shenfeld.

He also said while the 4.2 increase the IMF is predicting for Canada's GDP next year may look strong, it really isn't when compared with the big drop forecasted for this year.

"The message from the IMF is we're not getting out of this fully in 2021," Shenfeld said.

With files from Jacques Gallant

Michael Lewis is a Toronto-based reporter covering business. Follow him on Twitter: @MLewisStar