RSM Canada Financial Conditions Index: The global threat of a resurgent virus

Canada’s financial markets continued their cautious optimism in August despite the unexpected 1.1% decline in second-quarter gross domestic product because of declining demand in exports, supply chain constraints and residential investment.

That economic surprise may slow those at the Bank of Canada who are eager to begin the long process of policy normalization.

The markets’ cautious optimism has allowed the RSM Canada Financial Conditions Index to remain one standard deviation above normally expected levels of risk priced into financial assets, despite signs of a deceleration in the growth of commodity prices.

The RSM Canada Financial Conditions Index

Our financial conditions index is designed to show the level of accommodation in the financial sector. Positive values indicate a climate conducive for investment—which is essential for a growing economy—while negative values signify excessive levels of risk that would stifle investment.

After the shocks of the U.S. trade war and the pandemic, this high level of financial accommodation is a testament to the Bank of Canada, which maintained liquidity necessary for commercial activity, and to the fiscal authorities, who maintained household income streams and overall consumption.

There are a number of reasons to think those programs will continue for quite a while. Not only are infections increasing again in Canada, but more alarmingly, they are also rising in Asia, which will further impede progress in rebuilding manufacturing and trade supply chains and in consumer purchases.

Statistics Canada reported shortages of microchips and other inputs that have curtailed trade in motor vehicles and domestic consumption, and have caused shutdowns of plants.

This has resulted in a significant decrease in exports and a drawdown of inventories, which was the major driver of the decline in overall economic output in the second quarter.

StatsCan also reported that the savings rate reached 14.2% in the last quarter. This fifth quarter of double-digit savings is attributed to pandemic-related restrictions and uncertainty that continues to limit household consumption.

For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.