Forecasting an economic recovery

Uncertainty persists for the economy and financial markets, but there are some positive signposts for investors.

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“Fiscal and monetary policy measures have been very strong — much quicker and larger than [ever],” said Luc de la Durantaye, chief investment strategist and CIO at CIBC Asset Management, in an April 9 interview.

“This should help in terms of putting a floor on financial markets,” he said.

The Canadian government has rolled out a $250-billion relief package, while the U.S. government’s economic aid is worth US$2.2 trillion.

Among monetary policy measures to address the pandemic, the Bank of Canada and Federal Reserve each cut rates by 150 basis points, announced large-scale asset purchases and opened credit facilities for business loans.

The Fed’s Main Street Business Lending Program, authorized by Congress’s massive relief package, provides up to US$2.3 trillion in loans to medium-sized businesses.

Another positive for investors is that the market correction presents opportunities.

“When we lift our eyes off the next three months and look out one to two years, the expected returns in financial markets have improved because of the sharp correction,” de la Durantaye said.

In credit, for example, he suggested investors look for opportunities in quality investment grade and high yield.

As markets remain uncertain, investors can also take the positive step of reconsidering allocation.

“[T]he recent downdraft provides an opportunity to re-evaluate asset mix and re-weight for the long term, weeding out low performers and reseeding with higher quality,” said Mark Stacey, co-CIO at AGFiQ Quantitative Investing and head of AGFiQ Portfolio Management at AGF Investments Inc., in a blog post last week.

The rate of recovery

With so much uncertainty, developing a forecast for the eventual recovery is challenging.

To help inform his outlook, de la Durantaye considers such factors as the effectiveness of social distancing and Asia’s experience with the coronavirus.

“We’re starting to see the growth of new cases in Covid-19 slowing” globally, because of social distancing, he said. “That’s a positive element.”

In Asia, economies reopened after one-and-a-half to two months, depending on the country.

“That would put Europe and North America somewhere in mid- to late May [or] early June to see a stabilization in new cases and measures to slowly ease social distancing and reopen businesses,” he said.

Accordingly, de la Durantaye said he expects GDP to contract by 2% to 2.5% in 2020 overall and a “gradual” recovery starting in the second half of the year and into 2021.

“That’s the middle-of-the-road scenario,” he said. “There are scenarios that are going to differ depending on how the pandemic is evolving.”

This week the International Monetary Fund forecasted that the global economy would shrink 3% this year before rebounding in 2021 with 5.8% growth. The outlook called for a contraction of 6.2% for Canada this year followed by growth of 4.2% in 2021.

The U.S. economy is expected to contract 5.9% this year, the IMF said.

The pace of recovery would be positively affected by the development of an antiviral treatment.

“That could ease some of the lock-downs,” de la Durantaye said. “It would also ease, mentally, the state of the consumer and could trigger […] recovery in consumption.”

Still, a full return to normal life isn’t likely until a vaccine is developed, which is about a year away — and the reason why de la Durantaye expects recovery to be moderate over the next few quarters.

While the pandemic’s recovery remains uncertain, so will the markets’.

The bottom line is that “investors will have to monitor these developments very closely because we’re still in an environment that is relatively volatile,” de la Durantaye said.

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