The economic impact of the Covid-19 outbreak will likely be historic, but the federal government’s efforts to cushion the blow should position the Canadian economy for recovery, says DBRS Inc. in a new report.
“In our view, the fiscal plan is timely, well-targeted, temporary, and most importantly, it is large,” said Michael Heydt, senior vice president at DBRS. “Fiscal stimulus cannot stop the pandemic, but it can increase the likelihood of a strong recovery on the other side.”
In its report, DBRS said it expects the economic fallout from the pandemic will be massive, and the ultimate cost will depend on the duration of the shock.
“The best case scenario is that the shocks prove to be short-lived (i.e., 1-2 quarters), and that markets quickly recover the lost output,” DBRS said. “However, this scenario looks less and less likely with each passing day.”
Many sectors will suffer from hits to their revenues, and DBRS said that it’s concerned about the creditworthiness of some households and firms, “especially since many were highly leveraged going into the crisis.”
Against that backdrop, the rating agency welcomed the federal government’s efforts to mitigate the income shock for households and support businesses, particularly small firms.
“We should have greater visibility over the next few weeks with regards to Canada’s progress on flattening the coronavirus curve and the ability to lift extreme social distancing policies,” DBRS said.
“Once the public has greater confidence that the pandemic is contained and treatable, prospects for a robust recovery will depend on financially secure households, strong company balance sheets, and a healthy financial system,” the rating agency added.
To that end, the government’s fiscal stimulus plan will provide “sizeable and immediate direct support” to both households and businesses, DBRS said.
DBRS added that the federal government has the capacity to deliver this sort of stimulus, given its “modest fiscal deficit, relatively low levels of debt, and funding costs that are negative in real terms.”
“With Canada’s strong public balance sheet, large temporary stimulus can be provided without putting downside pressure on the ratings,” DBRS said.