Over the past few weeks, the number of COVID-19 cases in Canada has grown, following the exponential curve that is the typical pattern of this very contagious virus. So here as elsewhere, drastic measures, imposed and self-imposed, are being adopted by governments, business leaders and households to slow its spread. If we can quickly flatten the rise in the number of new cases, the economic implications over the coming quarters may not be so severe. But for now, Canada is teetering on the brink of recession.
Canada’s economy was on soft footing even before the developments that led to a record plunge in global equity markets in early March. Over the past six months, declining exports and weak private investment, exacerbated by rail blockades, have eroded the growth of the economy to an average annualized pace of well below 0.5 percent. In the coming months, the collapse in oil prices and measures to mitigate COVID-19 will put a halt to economic activity across a wide range of industries. Business investment and exports are expected to suffer further declines, while tourism and household spending on services plummets.
Whether Canada suffers a technical recession — that is, two consecutive quarters of negative growth — will depend on how effective current measures to mitigate the virus are here in Canada and in the United States. The old adage “When America sneezes, Canada catches a cold” holds true. Canada relies heavily on US consumers, and production is intricately tied to US supply chains — so if the spread of COVID-19 is mitigated in Canada in the coming months but not in the US, we’ll likely see continued declines in economic activity here at home.
Moreover, as governments at all levels have acted quickly to deal with the health implications of the coronavirus, so too have they implemented measures to help offset negative economic impacts. Initiatives from the Bank of Canada and the Office of the Superintendent of Financial Institutions focused on lowering lending costs and providing access to credit for small and large businesses. The intent is to provide cash to firms to get them through what, for many, will be a very rough patch of declining revenues. The federal and many provincial governments have also announced supports to households, including covering day care charges, buffeting employment insurance and other measures. And this week, Finance Minister Bill Morneau announced $27 billion in targeted spending and $55 billion in deferred taxes to help households and businesses get through the economic turmoil expected over coming weeks or months.
Considering all these measures, while we at the Conference Board of Canada forecast a sharp decline in economic activity in the second quarter, a recession could be averted. China provides some evidence supporting such an outcome. Drastic measures in that country seem to have successfully halted the spread of COVID-19 in Hubei, a province far denser and more populous than Canada, in just a few months. Economic activity is recovering in China — if only slowly. If the spread of COVID-19 is similarly contained in Canada (and the US), a soft rebound in economic activity over the second half of the year is the most likely scenario.
This may not be the case in tourism-dependent sectors such as air transportation, accommodation, the food industry and entertainment services. These sectors started feeling the pinch with the collapse in the number of Chinese travelers in late January; they will suffer a deeper decline in coming months and will undoubtedly be the last to recover. Oil patch workers, especially those involved in conventional drilling, will also feel the effects of rock-bottom oil prices for longer than workers in other sectors, as demand for oil will recover only in line with global economic activity and air travel.
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Whether Canada will suffer a technical recession should not be our main focus. These are extraordinary times. Canadian leaders, business owners and households are facing unprecedented uncertainty. The short-term economic implications will be incredibly steep, as reflected in record drops in Canadian and global equity markets.
Our economic recovery hinges on successfully containing the spread of COVID-19, and we feel that the current measures adopted in Canada are likely on track to do so within a few months. Even if containment takes longer, Canada’s economy will eventually recover from the circumstances caused by the COVID-19 pandemic.
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