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Although he doesn’t think it will happen, Capital Economics senior Canada economist Stephen Brown said Canada faces the same risk, but at a heightened level. The Canadian economy is set to contract by a percentage point in the second quarter, but regain some ground in the third and thus avoid a recession. That thesis, Brown said, relies on a rebound that would occur if the coronavirus outbreak peaks.

The chances of a 2020 recession have increased to about 40 per cent from 15 only a few months ago, Brown said. Canada is at more risk than the U.S. due to its dependence on oil; plunging Western Canadian Select prices will almost immediately begin to weigh on the economy here. Canada’s debt situation is also more problematic, Brown said. The last time there was a global oil price shock, households and businesses, particularly in Alberta, were able to circumvent it by taking on more debt, but that may not be a solution this time.

“They haven’t made progress in repaying that debt so they won’t be able to use that same shock absorber this time,” Brown said. “We’ve got this great unknown because we don’t know to what extent this debt can actually act to make the situation worse.”

The solution in both the U.S. and Canada may lie in fiscal stimulus. While the White House is reportedly cooking up a plan that might involve a payroll tax cut, Canadian Finance Minister Bill Morneau has flipped from initially saying that the budget was the proper place to deal with the coronavirus to ensuring that Canada will use its “fiscal firepower” should the virus weigh on the economy.

Brown estimates that Morneau would have about 0.5 per cent in GDP to use on the virus, if need be.

In the U.S., where the Fed’s recent rate cut was ignored by investors, Vanguard Investment Strategy Group senior investment strategist and economist Jonathan Lemco said a fiscal stimulus package is crucial to prevent a recession.

“The Fed has done what it can, but the truth is this has a limited impact on the broader economy,” Lemco said. “The remedy for this is fiscal more than monetary.”

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