MNI POLICY: BOC May See Virus Low Point in Record GDP Fall

By Greg Quinn

     OTTAWA (MNI) - BOC Governor Tiff Macklem will likely get solid evidence of

the economy's low point this week with a record decline in GDP for April and a

narrower May trade deficit, setting the stage for his first policy decision July

15.

     GDP plunged 14% in April, according to an MNI economist survey. That report

on Tuesday is followed the May trade deficit on Thursday, seen narrowing to

CAD2.1 billion from CAD3.3 billion. 

     Since taking over from Stephen Poloz June 3, Macklem has cited evidence the

economy bottomed out early in 2Q and has a "deep hole" to climb out of, while

pledging to restore only part of the forecasts the BOC dropped in April. Macklem

has affirmed plans for at least CAD5 billion a week of federal bond purchases as

the focus shifts from stabilizing markets to economic recovery.

     April GDP will lead to big adjustments in what economists polled by MNI see

as a record 36% annualized decline in Q2, and what the BOC may present in its

Monetary Policy Report. Economist estimates for Q2 range between 32% and 40%,

and views of the Q3 turnaround diverge even more. 

     While there's no direct way to compare today with the Great Depression of

the 1930s, the CD Howe Institute think tank that grades recessions says output

fell from 1929 through 1933 by around 30% or more, with unemployment moving to

roughly 25%.

     "If there's a silver lining, it's that early indications for May point to a

more robust recovery than initially anticipated," Royce Mendes at CIBC wrote in

a research note calling for a 13% April GDP decline. CIBC also says to watch out

for Statistics Canada publishing a flash May GDP estimate in the April report. 

     Q1 ended with GDP falling -7.2% MOM in March, the worst in records back to

1961, suggesting a weak handoff to Q2. That figure was still better than the

agency's earlier flash estimate of -9%.

     Macklem has said the July 15 decision will be backed by a central planning

scenario presented with the risks around it, rather than a full forecast. Under

Poloz, the BOC said total output could fall -10% to -20% in 2Q. 

     Officials already warn Covid-19 will cause permanent damage that prolongs

the restart, with obstacles from a second wave of infections to broken supply

chains and subdued demand for travel and close-contact services. 

     "It's going to be important for monetary policy to provide the support it

needs through both phases" of the immediate restart and the longer

"recuperation," Macklem said a week ago. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

[TOPICS: MACDS$,M$C$$$]