Economies around the world won’t be back to pre-pandemic levels until the back half of 2022, according to Mark Machin, chief executive of the Canada Pension Plan Investment Board.
In the meantime, Canada’s largest pension will seek investments in sectors poised for rebound, such as toll roads and cruise lines, and even shopping malls in geographies where retail has already rebounded, such as India, he said in an interview with the Financial Post on Tuesday.
He added that he believes “a wall of money” is headed towards real assets including infrastructure “because of structurally low interest rates,” and urged governments to consider privatizing assets to help reduce record deficits taken on to offset the economic and public health fallout of the COVID-19 pandemic.
“I really encourage governments around the world that have got massive deficits to really consider at this point privatizing, you know, selling operating brownfield infrastructure assets if they can because they’re going to get extraordinary prices for it, given the wall of money that’s interested in it, and it will help (bring down) deficits.”
Machin said the $456.7 billion fund is in the market for infrastructure and real estate investments, despite the pandemic’s dampening effects on office space and commuter-driven infrastructure such as toll roads.
“We still like real assets, we still like toll roads,” he said. “In fact we’re very close on another toll road (investment).”
CPPIB owns a stake in the Greater Toronto Area’s 407 commuter toll road, where use remains depressed from pre-pandemic levels. But Machin noted that toll road traffic “has very much recovered in India, in Indonesia, in Australia, and in Mexico.”
He said his personal working assumption is that life will return to a relative normal in Canada — “when restaurants are open again and offices are open” — by next fall.
“I’m reasonably optimistic that Canada has a potential to be in quite good shape with a vaccination rollout,” he said.
Canada and the United States began to vaccinate high-risk segments of the population this week to protect against COVID-19 — in a timeline that met the most optimistic expectations — but Machin and others at the pension fund believe the virus and its fallout will continue to be the biggest factor in the global economy in 2021.
“It’s tempting to think the rapid arrival of effective vaccines will mark the beginning of the end of the pandemic,” CPPIB said in a paper published this week. “Instead, it’s more likely to mark the beginning of a long transition back to something approaching normal as people only gradually gain confidence they can resume customary activities without endangering themselves or others.”
The supply and demand shocks of the pandemic and efforts to control it “contributed to the most substantial and synchronized global recession in living memory,” the paper says, adding that the International Monetary Fund (IMF) is projecting a drop in real GDP in 2020 in every advanced economy except Taiwan.
However, the depth of the downturn and subsequent recovery, has varied widely across industries and countries, with those that rely heavily on face-to-face services particularly hard hit.
“Service sector output is still well below its pre-pandemic level,” the report says, noting that the number of seated diners at restaurants worldwide remains 50 per cent below last year’s level.
The ripple effects of the pandemic are expected to be “far reaching,” with local economic recovery depending on factors including the adequacy of government responses to workforce impacts and changes in the pattern of global trade.
“The recovery from the COVID-19 shock could be relatively vigorous if the vaccine roll-out is successful and policy actions continue to facilitate a faster rebound to the pre-pandemic trajectory for growth,” the report says.
“There is, however, a significant risk of scarring effects that could have a more protracted impact on productivity and economic potential.”
The impact on the labour market and across industries has been uneven, with women bearing a heavier burden from the shock, which is also expected to have an effect on recovery.
“A failure of female workforce participation rates to recover to their pre-pandemic trends would have long-term negative effects on potential growth,” the paper warns.
In addition, productivity growth — already slowing sharply globally over the past decade — could suffer a setback “scarring economies far into the future” if contributors such as business investment and technological innovation decline due to the shock of the pandemic and efforts to control it. Higher unemployment, skills erosion and lower participation rates could be factors affecting the next few years.
CPPIB suggests advanced economies will see varying GDP growth based on three factors: local spread of COVID-19, the economic structures in place pre-pandemic, and the response to the pandemic itself.
In some cases, the pandemic may accelerate changes that were already underway, from global inequalities to transformation of logistic networks” and even technological innovation, the report says.
When it comes to trade, the report notes that a decades-long process of integrating economic activity through international trade had lost momentum even before the pandemic hit, affected by the trade war between the United States and China.
“COVID-19 has forced firms to re-evaluate and transform their logistical networks, as the hidden costs of single-source dependencies and inflexibility in adapting to real-time shocks have been laid bare,” the report says.
The pension giant is closely scrutinizing whether this development “increases firms’ emphasis on resilience and diversification of suppliers, as compared to efficiency in production.”
The report notes that integration has nevertheless increased in some corners of the global economy during the pandemic.
“Despite the setback in trade globalization, the pace of trade and value-chain integration has accelerated at a regional level, particularly in Asia,” the report notes. “This trend of regional integration could further accelerate, with additional regional trade agreements being finalized.”
On the subject of fiscal policy and debt sustainability, the report notes that new government fiscal measures taken in 2020 amount to over US$5 trillion, or six per cent of global GDP, with the crisis expected to push the global public debt-to-GDP ratio above 100 per cent.
“Modifications to monetary policy frameworks, combined with accommodative fiscal policy, could lead to modest but temporary increases in rates of inflation in the near-to-medium term and spur a rebound in employment rates and business investment,” the white paper concludes. “On the other hand, a failure of policy to evolve, along with unexpected weakness in global growth, could lead to continued below-target inflation.”
The latter scenario would raise the risk that interest rates will remain near zero and that business investment will remain weak, the report says.
• Email: [email protected] | Twitter: BatPost
