‘We need people to just calm down’

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This article was published 23/03/2020 (2094 days ago), so information in it may no longer be current.

People across North America and around the world are self-isolating, working from home and watching as the value of their savings, if they are lucky to have any, melt away.

In a matter of days, the TSX has lost everything it has gained in the last seven years, down 35 per cent since February. Economic forecasts are stating the obvious: the economy is likely to fall into a recession.

Craig Alexander, the chief economist for Deloitte Canada, said in his economic outlook published last week, the fallout of the COVID-19 pandemic will cause the Canadian economy to falter.

“The economy is tracking a small decline in the first quarter. We expect a significant contraction in the second quarter with the weakness fading in the third quarter,” the report states.

“Our best-case forecast is for the Canadian economy to experience a 0.2 per cent decline in real GDP this year, concentrated in the second quarter.”

In an interview, he said that if the pandemic is not contained then the weakness will not fade so quickly.

“In this current environment, fear is our biggest enemy,” he said. “We need people to just calm down… This is a valley. We don’t know how wide the valley is, but we will get to the other side.”

Behavioural economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. Experts in that field know better than most bad things happen when economic decision-making is gripped with fear.

Chi Liao, an assistant professor at the Asper School of Business at the University of Manitoba, who focuses on behavioural finance, said there is an inordinate amount of fear that’s affecting the way people are reacting.

“People are looking at their portfolios because they are scared and then based on their emotional reaction to the numbers they see, which are probably much lower than expected, they might react as a result, which is not a good idea,” she said.

Obviously, there have been market corrections in the past, but the scope and scale of this one has some unusual twists.

“This is unique in the sense that not only are we worried about our retirement savings, we are also worried about contracting the COVID virus and ending up in the hospital where there might not be an extra respirator available,” Liao said. “So there’s even more uncertainty.”

While there may be a sense in some quarters that society is over-reacting, we will never know. On the other hand, Liao points out that in a few months’ time we will know if we under-reacted… if it turns out that the health crisis here mirrors what is happening in Italy.

Alexander’s report came out the day before Prime Minister Justin Trudeau announced sweeping fiscal support totalling $27 billion in direct aid and $55 billion in tax deferrals and liquidity support. That will allow companies to make the expenditures they need to survive even though they do not have the revenues they would otherwise have had.

“The (federal fiscal stimulus) focus has been on the right things,” he said. “Business needs to be able to manage their finances until we’ve reached the other side of valley… You need to have measures that will keep businesses afloat.”

As well, when the government has told people to stay home, they need to know there will be some support for individuals until they can get back to work.

“That is why the federal announcement around income support was so important,” he said.

Alexander said that in previous recessions, monetary policy could do the trick. In recessions in the ’70s, ’80s and early ’90s, lowering interest rates provided a useful incentive.

But this time not only are interest rates already low, lowering them further still won’t be enough to get people to visit the car dealerships or attend open houses since the whole community is being urged to self-isolate.

While the fear factor is racheted up this time, Alexander said the unprecedented amount of monetary and especially fiscal stimulus could provide a big offset.

“On the other hand, the pandemic could drag out longer. We do not know,” he said. “If the pandemic is not checked, then the economic projections will be much worse.”

Meanwhile, people are cooped up at home, some with nothing better to do than worry about the status of their jobs and the immediate decline of their personal wealth.

“The fact that we are all asked to self-isolate is adding to the fear,” Liao said. “During the financial crisis (of 2008-09) there was all this stuff going on in the markets but we weren’t being asked to change our day-to-day lives to accommodate what was happening.”

martin.cash@freepress.mb.ca