How bad will Canada's COVID-19 recession be?

The black swan has landed. 

The novel coronavirus pandemic is well underway worldwide, but it wasn't until this month that Canadians started coming to grips with the economic pain it can bring, in addition to its heavy human toll.

Economists are struggling to come up with best guesses as to what might be coming. There's still a lot that they — and we — don't know. But the picture they're painting for Canada's financial future is already bleak.

GDP could significantly contract

At a minimum, the Conference Board of Canada is assuming that most industries across the country will be essentially shut down for at least six weeks.

If they take an optimistic view and assume that's enough to contain the outbreak, even that short term pain will make a major dent in the country's total output, a metric known as the Gross Domestic Product, or GDP.

Should this relatively mild scenario come to pass, Canada's economy would eke out a tiny 0.3 per cent growth for 2020 as a whole as things ramp up in the latter half of the year. That's far from booming — Canada's economy grew by 1.6 per cent last year, for example — but it's preferable to other alternatives.

Under a more pessimistic scenario, the board sees lockdowns and quarantines stretching for up to six months, until August. If that happens, the GDP hit would be massive — an annualized contraction rate of 9.6 per cent in the second quarter, which is worse than what we saw in the financial crisis of 2008 and 2009. The economy shrank at an annual pace of 8.7 per cent at its worst stage, in early 2009 before rebounding starting in the spring.

"Brace yourself for some horrible data in the near-term, as there's little doubt that the second quarter will produce some painful and likely historic figures on ... economic contraction," the economics team at TD Bank said in a note to investors.

Joblessness fears escalate

Economists tend to focus on GDP in their modelling, but when you ask Canadian workers how they think the economy is doing, they tend to focus on whether they have jobs that pay the bills.

It already looks like the recession caused by COVID-19 will be one for the record books when it comes to joblessness.

In any given week, Canada gets about 45,000 claims for jobless benefits, according to the economics team at TD Bank.

But the numbers for March 16-22 came in at more than 20 times that, with 927,000 Canadians tossed out of work in a single week.

David MacDonald, an economist with Ottawa think-tank the Canadian Centre for Policy Alternatives, said those numbers are likely just the start.

"The situation is still moving rapidly: people who may have been employed and surveyed on Monday could easily have been laid off by Wednesday," he said. "It's likely not until the April data is collected and released at the start of May that we will see the full picture of what happened in the second half of March."

By the time all is said and done, MacDonald thinks roughly two million Canadians will at least temporarily lose their jobs in the current panic. That would cause the jobless rate to spike to more than 13 per cent.

TD's forecast is only slightly more positive, predicting the rate to rise to nearly 12 per cent before hopefully levelling off to about half that by the end of the year. 

But that's only if the unprecedented steps being taken now do any good.

"If fiscal and monetary policies prove successful, and social distancing tactics gradually ease, the unemployment rate should level off after one to two months and quite possibly fall just as fast if workers are called back to work," the bank said.

Catch-22 for the economy

The cure for the disease may be widespread shutdowns and social distancing efforts, but that underlines a fundamental paradox of the disease: the cure for the virus is precisely what makes the economy even sicker.

At least Canada's jobless rate was close to a record low before all this started.

Even officials in Ottawa are willing to admit they're expecting a record-setting flood of job losses to hit home, and soon.

"We have enormous job losses right now," Finance Minister Bill Morneau told the Senate on Wednesday. "We hope and expect it will be temporary."

Not everyone is sure they will be.

The Canadian Federation Of Independent Business says its monthly measure of small business confidence fell to the lowest level in its 32-year history this week. Normally, a reading of 65 suggests an economy that's basically operating close to its full potential. But the CFIB's gauge fell to a record low of 30.8 in March. That's lower than the 39 it hit in the depths of the 2009 financial crisis.

Roughly 50 per cent of small businesses say they expect to lose workers this year. Only five per cent are planning to expand, according to the CFIB's small business barometer.

"March 2020 has turned out to be a month like no other in Canada's economic history," said Ted Mallett, CFIB's chief economist.

The good news?

If there's good news in these bleak numbers, it may be that the depth and breadth of the slowdown may be so sharp and sudden that it can't help but spur a big rebound.

This recession is looking to be what economists described as "V-shaped" — meaning one that plunges quickly down and then quickly back up the other side. That differs from a "U-shaped," which is slower and less dramatic in both directions, or even a dreaded "L-shaped" recession where the economy falls off a sudden cliff and never bounces back to its previous level.

Doug Porter at Bank of Montreal notes that numerous countries have been through economic shocks as bad as the Canadian economy's current one. And they all emerged stronger on the other side.

Mexico's peso crisis of 1995, Russia's debt default in 1998 and South Korea the previous year during the Asian currency crisis all saw those economies shrink by more than 20 per cent. 

"In all three cases, activity bounced and forcefully within two quarters," Porter says.

"All different conditions, true," Porter said. "But very rapid rebounds from hard stops have and can be done."

Stocks may have hit bottom

If a rebound is coming, it's likely to be fast. And stock market investors are tentatively showing signs of believing that could be the case. Since falling to its lowest level in more than a decade on March 23, the TSX has quietly jumped back up almost 20 per cent since then, including its best day in more than 43 years on Tuesday. 

Stock markets tend to peak before recessions start but they also tend to bottom before they end, Manulife Investment Management said in a note to clients on Thursday. Which means anyone willing to buy in when things look this gloomy could be getting in on the buying opportunity of a lifetime.

"The economic data will get precipitously worse over the next month but don't bother looking at that, it will only confirm what we already know," the money manager said. "Rather, we believe now is the time to focus on the market fundamentals and start to take advantage of the valuation opportunities across asset classes as they present themselves."