Trudeau Unleashes Cash Drop in Bid to Revive Canada’s Economy

(Bloomberg) -- Prime Minister Justin Trudeau has opened the government’s coffers to businesses in an effort to save a Canadian economy on life support due to the Covid-19 pandemic.

The government’s fiscal stimulus package now totals C$202 billion ($145 billion) after today’s measures, which include wage subsidies, government-backed credit lines and more tax deferrals to inject cash into the country’s nearly 1.2 million small- and medium-sized businesses.

Trudeau unveiled the measures hours after the Bank of Canada lowered its policy rate to 0.25% and said it would begin large-scale asset purchases for the first time.

“Our government knows you’re really feeling the impacts of this pandemic, especially with the end of the month coming up,” Trudeau told reporters outside his residence, where he continues to govern while self-isolating.

There is more to come. Finance Minister Bill Morneau told journalists Friday “there’s not a cap” on what the government will spend to safeguard the Canadian economy. Further relief measures, specifically for the oil and gas and airline sectors, will come in the “not too distant future.”

The economy is now sliding toward its most severe slump in decades because of the pandemic, with one bank predicting it will shrink 25% in the second quarter on an annualized basis.

The country saw 929,000 unemployment claims last week, crushing all records. The new measures, including a 75% subsidy on wages, up from 10%, are designed to encourage companies to keep workers on the payroll.

‘Mission Critical’

Under the C$25 billion Canada Emergency Business Account, some small business owners will be able to apply for up to C$40,000 in loans, which will be guaranteed by the government. Loans will be interest-free for the first year and up to C$10,000 can be forgiven if certain conditions are met.

Ottawa will also offer a further C$12.5 billion in credit for small- and medium-sized businesses via two financing agencies, Export Development Canada and the Business Development Bank Canada.

Perrin Beatty, Chief Executive Officer of the Canadian Chamber of Commerce, welcomed the government’s response.

“That’s critically important because it keeps employees connected to their jobs, which will dramatically reduce the amount of time required to ramp up production once the recovery kicks in,” he said in an email.

The emergency loans and other liquidity measures are vital to making sure companies survive the pandemic, he said. “This is also mission critical to the recovery because it will help ensure that Canadians have a job to go back to.”

Trudeau this week also announced a plan to help workers whose income has been hit by the coronavirus. Employees inside and outside the unemployment insurance system and the self-employed can apply to receive C$2,000 each month for four months.

Bank Firepower

The Bank of Canada’s actions were aimed at easing blockages in the markets and ensuring credit can flow, Governor Stephen Poloz said.

The central bank has lowered its policy rate to 0.25% once before, during the global financial crisis. But its asset-purchase program breaks new ground. The bank said it will purchase a minimum of C$5 billion a week in government securities as well as short-term debt issued by companies.

This month, the Bank of Canada has lowered interest rates by 150 basis points and created a series of programs to inject cash into the financial system. But Poloz acknowledged that monetary policy can only achieve so much during a pandemic, since entire parts of the economy are basically shut down.

“We can help cushion the blow and lay foundations but with businesses closed, it’s not as though low interest rates are encouraging people to go out and spend and to boost economic growth. That just isn’t the case,” Poloz said during a press briefing Friday.

Still, he said the bank has unlimited firepower through its debt purchase programs to keep financial markets functioning and lay the groundwork for a rebound.

“While central bank stimulus can’t bring the economy back to life on its own, the Bank of Canada’s actions will help alleviate some of the pain and will support the recovery, whenever that begins,” said Canadian Imperial Bank of Commerce economist Royce Mendes in a note Friday.

©2020 Bloomberg L.P.

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