The health emergency created by the COVID-19 pandemic is of course the primary concern of Canadians, and the first priority for government to address. But it is increasingly clear that the economic fallout from the pandemic is also going to constitute an emergency. And it requires government to respond as urgently and powerfully in the economic sphere, as they are attempting for public health.

I was invited onto CBC Radio’s special broadcast today to discuss the economic consequences of the pandemic, and needed policy responses – and also to comment on the policy announcements made by Finance Minister Morneau, Bank of Canada Governor Poloz, and Superintendent of Financial Institutions Rudin at a special joint news conference.

Here are some quick thoughts on what we can expect in coming months, the nature and dimensions of the policy response, and – of course – how we pay for it!

What We’re In For:

There is no doubt that the macroeconomy, already near-stagnant at the end of 2019, will now slide into recession. The immediate spillover effects of cancelled transportation, cancelled tourism and entertainment events and services, and reduced output in many different industries are knocking GDP backward right now. Second-order effects will be experienced across a wide swath of the economy, as both consumers and businesses scale back their purchases dramatically. Even a short-term surge in purchases of groceries and essentials (including toilet paper!) won’t offset that shock decline in aggregate demand.

Another category of impacts will be felt through disrupted supply chains. Imported parts and supplies from overseas producers (especially but not exclusively China) have been seriously disrupted, and that will have a ripple effect on Canadian production – even assuming we are allowed to go to work in the first place. All that will be enough to produce a serious, but not unusual, recession: a loss of 2-4% of real GDP, lasting for 2-4 quarters, driving unemployment up to perhaps 8%.

However, if we end up facing a full-out lockdown (as experienced in China or Italy) then the downturn takes on a new order of magnitude. We could see a decline in second-quarter GDP of perhaps 10% (at annualized rates), and an enormous jump in unemployment (well into double digits). In fact, if government statisticians are also on lock-down, we won’t even be able to measure how bad it gets. How soon and how sharply production begins to recover is unknown, depending first and foremost on how quickly people are allowed to begin leaving their homes and resuming normal activity (including working and spending). And if the experience of the ‘Great Recession’ – a decade of slow growth and underutilization that followed the 2008-09 GFC – is any indication, we would then likely face an extended period of hardship, perhaps lasting another decade.

Another dimension of the crisis could be its potentially dramatic effects on financial stability.