Post-Covid: Why a global economic meltdown is looking increasingly possible

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Covid-19 has wreaked havoc on the global economy- plunging nations into financial chaos and putting millions of people out of work. Governments worldwide were quick to respond with stimulus packages designed to cushion the blows and keep their economies propped up- while racking up enormous levels of debt in the process. Canada’s government was widely applauded for its fast response to Covid; introducing both personal and business subsidies back in March. Those subsidies are set to expire in the coming months; leaving many to wonder what will happen to our already severely damaged economy when they do.

Two of the largest subsidies introduced by the federal government were CERB (Canada Emergency Response Benefit)- which provided people who had lost their jobs $2,000 per month over a 6 month period. Recently, newly-minted Finance Minister Chrystia Freeland announced a one month extension of CERB- which is now set to expire at the end of September; and then eventually transition to a program similar to EI. The second subsidy was the CEWS (Canada Emergency Wage Subsidy). Provided to Canadian businesses affected by Covid, it covered 75% of their employees’ wages, up to a maximum of $847 per week. Prime Minister Justin Trudeau recently announced CEWS will be extended into December. Over 250,000 companies have received the CEWS since its introduction.

While it is quite obvious that both these benefits have been a much-needed financial lifeline to Canadian citizens and businesses, the cost of providing them could have adverse long-term impacts on the Canadian economy long after they run out. The Canadian government is expected to post a record-setting deficit that could approach $400 billion– with its total cumulative debt load approaching $1 TRILLION. (This does not include the debt that is owed by provincial and municipal levels of government either.) In the span of just 3 months- from April to June- Ottawa racked up an additional $120 billion in debt, namely due to additional spending on CERB ($41.6 billion) and CEWS ($22 billion)- plus also a small business loan program; and their allowing of income tax that is owed to be deferred to next year. 

While borrowing costs on the debt remain low due to the Bank of Canada keeping its prime interest rate at just 2.45%, at the end of June Canada saw its AAA credit rating downgraded by Fitch, citing “Deterioration of public finances in 2020 resulting from the Coronavirus pandemic.” This will make future borrowing costlier for the federal government- with Canadian debt instruments being deemed riskier investments.

Another massive problem that looms over the prospect of any potential recovery is the staggering number of small businesses that have been forced to close their doors for good; unable to survive several months of closure.

The Canadian Federation of Independent Business (CFIB) recently warned that one in seven Canadian small businesses are at risk of going under. Its mid-range estimate for business closures due to Covid is 158,000 (or 14% of small businesses). Depending on how the recovery goes, it estimates losses could be as few as 55,000 (5%) or as many as 218,000 (19%). At the highest risk of closure are businesses in the hospitality and arts & recreation sectors.

A potential silver lining: Statistics Canada recently reported that Canada added 419,000 new jobs in July; and combined with gains in May and June, Canada is now past the halfway point in recouping the three million jobs lost since the onset of the pandemic. Still at a loss of 1.3 million jobs from pre-pandemic levels, Canada’s unemployment rate was 10.9% in July, down from its record high of 13.7% in May.

While this sounds optimistic, economists state Canada is unlikely to see any more job gains of this size; attributing the gains of the past few months to the flurry of government mandated re-openings of businesses including food services, gyms, barbershops and hair salons.


Despite crushing debt loads and the permanent closure of hundreds of thousands of businesses, Canada appears to be slowly recovering- having added new jobs in recent months as lockdown orders and state of emergencies expire. However, there is one very large elephant in the room that threatens to derail Canada and the rest of the world’s progress… The United States is currently leading the world in new Covid case counts, with a staggering 45,000 new cases per day (as of August 30). Despite this, many states are trying to prematurely re-open their economies, citing the severe long-term financial consequences of keeping their industries closed.

America is truly stuck in a difficult position- with a massive deficit for this year pegged at $4 TRILLION, and overall total national debt at an eye-popping $24 TRILLION– the world’s largest economy could fail if the pandemic lasts for several more months- OR if they continue to keep businesses closed indefinitely- and this would have a ripple effect that could impact the economies of just about every other nation; given the degree of integration between America and the rest of the world – especially with respect to finance and trade. 

Desperate to keep their financial markets afloat, the Federal Reserve has injected over $1.5 trillion of liquidity into the US stock market. Many analysts believe that stocks are artificially overvalued as a result of this stimulus; and when the Fed decides to stop pumping money in, the stock market could see a steep price correction that could make the crash of 2008-09 look like a picnic. And if US stocks tank, it is inevitable that all global stock markets will follow suit.


The months ahead could potentially be the worst yet; and we may just as well be headed for a long winter of discontent made worse by the threat of a second wave of Covid. As government stimulus benefits wind down, Canadians who are still unable to find work will be facing a serious dilemma. Furthermore, millions of Canadians who benefitted from CERB and income tax deferments will be in for a rude awakening in early 2021 when their tax bill comes due. With a substantial amount of people being unable to pay their taxes owing to the CRA, this could cause a string of defaults and foreclosures and send the economy into a severe recession.

A potential worst-case scenario resulting from this would be where both people and businesses- still out of work and now much more in debt- would be unable to pay their rent; and in turn their property owners would be unable to cover their mortgages. This could cause a chain reaction resulting in mass mortgage defaults and a collapse of the real estate market reminiscent of the sub-prime lending crisis in 2007 (which ended up being the catalyst that triggered the 2008-09 financial crisis). Add into the mix a potential second wave of Covid and a global stock market crash- and you have a recipe for disaster- plunging the entire world into a possible second Great Depression that could eclipse the first. The coming months will tell how this will all play out- and being mindful of this and making sure that you have enough savings put away to cover major living expenses plus next year’s tax bill is the best thing you can do to be prepared and ensure you are not caught off guard.