What are the implications for pension funds coming out of coronavirus crisis?
By Janet Rabovsky
Last August, I wrote about whether central banks were creating a financial bubble with their coordinated easing programs intended to spur economic growth and/or lift inflation. In January 2020, I wrote about the end of the economic cycle, the potential for a recession and what that might mean for positioning an investment portfolio.
Little did I know, when I wrote these articles, that we would be experiencing further central bank action as a result of COVID-19, as we entered the current decade. Nor did I foresee the sort of sharp economic contraction that most countries will be experiencing in the next few quarters as activity has stopped or been significantly reduced in many sectors of the economy.
The International Monetary Fund has forecasted that global GDP will decline by three per cent in 2020, before increasing by 5.8 per cent in 2021. To provide some context, global GDP declined by 0.1 per cent during the global financial crisis. Canada isn’t immune to this, with a 6.2 per cent decline forecast for 2020, down from an expected GDP of 1.8 per cent as late as January 2020.
Canada’s expected decline is similar to the forecast for other advanced economies, though the reduced energy price provides additional concerns for a large segment of the Canadian economy. The IMF sees a resumption in economic activity going into 2021, with Canadian GDP forecast at 4.2 per cent. With interest rates already at historically low levels even prior to the pandemic, there’s been discussions about whether monetary policy can act as a tool to help economies weather the recession.
The Bank of Canada dropped its key interest rate twice to its present level of 0.25 per cent. It’s combined this with fixed income purchase programs that extend well beyond the usual government bonds, including money market instruments, mortgage paper, corporate and municipal paper. However, these purchases are intended to maintain liquidity in fixed income markets and can’t help business and individuals weather the current recession.
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