Canada sees early signs of economic recovery after Covid-19 openings...get ready for long-haul to 'normal'

  AboutAnything  | Greg McComb

   Up until a few weeks ago, Canada's Covid-19 pandemic was laser-focused on the medical side of things: daily counts of cases, hospitalizations and deaths

Photo by Greg McComb

 were presented at government press conferences by senior medical officers, who often took center-stage. Many gained minor celebrity status. Busily toiling behind-the-scenes were teams of economists, statisticians and financial analysts who - quite unnoticed - published report-after-report on the state of the economy. Their consensus view early on: not very good, in fact, pretty horrible. 
    
    Voluntarily shutting down an economy - especially a well-performing economy like Canada's -  is akin to screeching on the brakes of a high-end sports car while speeding down a highway. We didn't crash the car; that's what happened during the great recession of 2008-09. We simply shut it down in mid-March as part

Image by Mediamodifier from Pixabay

of a self-imposed lockdown to contain the Covid virus. Very quickly and with little notice. A few weeks ago, public officials decided to turn the key and start the engine again. Some provinces shifted into first gear; others are in second. Canada is in the early stages of opening up, (see previous blog).

   Certainly, these are strange days for the economy; there really aren't any good precedents.  As the economy locked down in mid-March, millions of Canadians lost their jobs and unemployment spiked to 13.7% in May (See StatsCan table), while Gross Domestic Product (GDP) plunged 11% in April, according to an early estimate (click link).   Feels a lot like a recession or even a depression but it really isn't. Importantly, there isn't anything intrinsically wrong with the guts of the

Image by PublicDomainPictures from Pixabay

economy. The car didn't crash, it quickly came to a halt. There were no widespread bankruptcies, the financial system was well capitalized and although the stock market crashed, it has recovered a large portion of its losses over the last month. 
  
    The big problem is the pandemic, and the uncertainty it creates for the economy. This is one greased pig that will be difficult to wrassle to the ground. As businesses wait for the economy to open up, their bottom lines become more fragile and many will close their doors, restructure or simply go bankrupt, (see link). Small businesses are especially vulnerable, as are specific sectors where social distancing or border closures are an issue: hotels, airlines, restaurants and pubs, spectator sports and the performing arts. Quite a

United Nations COVID-19 Response

few...much more. And as the federal government doles out billions in relief payments to individuals and business, its bottom-line becomes more precarious, so will its ability to fund critical programs into the future like healthcare, education, infrastructure and pensions. To push the metaphor, our sports car of a modern economy has been parked for a few months: it's been rusting out and parts are falling off.  Can we get it started again?...

  In this blog, I will provide analysis of the economy during the the pandemic.What kind of hit did the economy take?...and are there early signs of recovery?  Next, I will analyze programs introduced by governments to provide relief to people and businesses, such as the much talked-about Canadian Emergency Response Benefit (CERB). In this context, I will discuss their impact on government debt. 

          Early signs of  economic recovery....and pandemic innovation

    Although the Covid-19 outbreak is winding down in Canada - and most provinces are in full swing opening-up - it's still early days for gauging the impact of the pandemic on the economy. Even as cases and deaths tend to zero, the Canadian economy won't snap back in lock-step.  Most estimates suggest it will take at least a year-or-two for the economy to return to 'normal,' (See Bank of Canada forecast pg. 18)...long after

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provinces have lifted lockdown measures.  The reason is that it will take considerable time for people to feel comfortable doing the things we normally do: get on an elevator, take a subway, sit next to someone at work, eat in a packed restaurant or take a trip on a plane. Even with social distancing, masks and disinfection. These are the things-we-do to get the engine of the economy up and running:  work and consumption. Without these at full steam, the economy will be a bit slower. How slow and for how long is anyone's guess. The timelines are uncertain -- and markets don't like uncertainty.

   That said, the early data has reason for optimism: Canada's economy is showing signs of life, after a month of  'opening up.'  Even during lockdown, job losses weren't as great as analysts had expected. Earlier, I noted the unemployment rate spiked to 13.7%; that translates into the loss of three million jobs from Canada's 'normal' economy in February to full

lockdown in April, (see bar graph). The question begs, what are the 16.18 million people doing that are still employed? With the exception of essential workers, most are supposed to be quarantined in their houses or apartments, twiddling their thumbs. Why didn't this happen?  This will be yet another post-pandemic puzzle that will be studied for years to come. A McKinley and Company report (see link) provides some insight. They suggest that businesses that quickly adapt to pandemic conditions not only survive but thrive. The strategies are

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numerous;  I'll name just a few. The most obvious is the boom in tele-or-remote work using innovative software tools like Zoom or Slack. Ottawa-based Shopify kept its 5,000 employees on staff by working remotely, (see link) and recently inked a partnership with Walmart to help it grow its online marketplace; a deal worth billions, (see link). While the multi-billion dollar Canadian golf industry successfully lobbied provincial governments to open early, arguing social-distance golf can be done safely, (see link). Parking lots at golf courses in my area have been packed since opening; their industry is booming. Other examples include the growth of food delivery services like Uber Eats or GoodFood; the latter opened a new fulfillment warehouse in Toronto (see link) during the pandemic, and grew its subscription base by 44%, (see link). To keep its head-above-water, Yuk Yuk's Comedy Club in Ottawa is holding shows at a drive-in, where people can social distance in their cars, (see link). This is a very short list but it is obvious that pandemic innovation has kept millions employed during the lockdown in Canada.

                The Quebec anomaly: most severe outbreak, earliest opening

   In  previous blogs, I have produced a bar graph (below, June update) as a measure of the severity of Covid outbreaks in provinces across Canada, (see methodology). I expected provinces with severe outbreaks like Quebec (5,340 deaths) and Ontario (2,553 deaths) to open later while 

Data sourcs: PHAC; Ontario and Quebec governments

'clean' provinces like Manitoba, Saskatchewan and New Brunswick to open earlier. That did happen to some extent with the exception of Quebec, which was one of the first to open. Ontario were more cautious and left regions with few cases closed.  Early employment data show how this timing affected job gains and losses in provinces (see bar graph below). While every province lost a large number of jobs (-12% to -19%) over the first two months of the pandemic (blue bars) Quebec was the fastest to snap back in May,

 regaining 6.5% of its workforce. Ontario was the only province to continue to lose jobs (-1.0%) in May due to its slow opening.  So, what happened?
As discussed in previous blogs, my view is that provinces should open up by region when cases and hospitalizations fall to manageable levels. Ontario has been cautious, preferring to avoid the risk of a 'second wave' with slower  phased openings. On Wednesday, Ontario opened Canada's financial centre - Toronto (phase 2) - the latest for a city in Canada. By waiting, Ontario has likely delayed economic recovery: more businesses may go bankrupt or close, as did the three Fish Market Group restaurants in Ottawa's Byward Market in mid-June (see link).  By comparison, Quebec has emphasized a more balanced approach. Health along with the importance of jobs and the economy, 

Claims-based pandemic curves. Source: CTV news.ca

noting long quarantines also have negative long-term impacts on mental health. To justify early openings, Quebec also cited the fact the coronavirus selectively targets the elderly - especially those in senior residences - so younger people should be safe to go to work. Early evidence bears this out. Of the 5,340 Covid deaths in Quebec, almost all were over 60 years old: 97.8%. Only 117 were under 60, (see graph). And early evidence of a 'second wave' in Quebec has yet to materialize. Daily case counts in Quebec are now below 200, (see graph) compared to cautious Ontario, where the pandemic curve is trending slightly higher.  

           Stock markets reason for optimism, oil prices not so much

  Although it's early days, stocks markets provide reason for optimism; oil prices not so much. Let's start with stock markets. After dipping sharply in early March as information about the pandemic became widely known, stock markets in Canada recouped a large portion of their losses. This recovery was partly based on an expectation the long-term impact of the coronavirus on the economy won't be as severe as initially thought -- although market volatility reflects uncertainty around this view. In the first graph

Stock Market Index: S&P/TSX

pair (click to enlarge), I compare how the S&P/TSX index moved during the Covid-19 outbreak to the Great Recession of 2008-09. The initial Covid 'crash' was quite severe, with the index falling 7,000 points in the first two weeks. However, the index quickly regained 4,500 points in the next two months and is now hovering only a thousand points below market averages from May to November of 2019. By comparison, the initial 2008-09 crash of the 'great recession' was of similar magnitude, dropping 7,000 points. However, it took much longer to recoup these losses, about five years after a double-dip recovery. A bit of a carnage. Although uncertainty exists over bankruptcies in sectors affected by the pandemic such as airlines, hotels and restaurants - market sentiment now is that it won't drag the economy into a recession anywhere near as long-and-deep as 2008-09. 

   One of the early economic shocks of the Covid pandemic was a sharp drop in the price of oil, from $60US per barrel to $20US (West Texas Intermediate), briefly flirting with negative prices as storage facilities worldwide became overwhelmed with a glut of unneeded oil:  people parked their cars while quarantined and planes stopped flying as borders closed, (see graph below).

Crude oil prices per barrel

Prices quickly rebounded, although they are still below pre-pandemic levels - $40 dollars - which gave markets reason for some optimism. However, my view is oil - a key sector of the Canadian economy - will continue its roller coaster ride for the next few years. One reason is the sector has never fully recovered from the oil price shocks of 2014-15 caused by: i) a worldwide glut of oil partly due to discoveries of new shale deposits in the U.S., using fracking,  and ii) falling demand as countries switch to greener energy sources to tackle climate change. Another reason is the pandemic adds a wild card into the mix.  As people get used to remote work, many companies (click link) may permanently switch some of their workforces over to telework, and let leases lapse on downtown office buildings. Call it the Zoom economy,  it will mean less commuting and gas consumption, which will put further downward pressure on oil prices. On the upside, this new 'normal' may result in less congestion and smog in major cities, with people spending more time with their families. Not a bad trade-off.

              A V-shaped pandemic recovery: consensus view

   Let's move on to the big picture, how the Gross Domestic Product (GDP) will move over the next year or two. When economists talk about recessions and depressions, it's this indicator that is being referred to. Early indications are that  Canada is headed for a very sharp decline in GDP (-6 to -8%) in 2020 due to lockdowns and continued social distancing, followed by a quick recovery in 2021 (~ +5% growth), as the economy opens up completely.  In my forecast, GDP would return to pre-pandemic levels in early 2022, (see forecast in graph below).

Canada's Real GDP, 2000 to 2022

    This is the so-called V-shaped pandemic recovery and a consensus is building around it. It's technically a recession but its pattern is very unique. The Brookings Institute summarizes several scenarios of pandemic recovery, ranking them from optimistic to pessimistic and the V-shaped recovery is ranked second, "still very optimistic," (see link). In other scenarios, things can go bad such as a W-shaped recovery when a second wave of COVID-19 infections results in a new round of closures. In Canada, this is unlikely as provincial governments have exercised caution, opening up in phases only when infections have dropped to

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manageable levels. In the United States, the risk of a W-recovery is higher as several states have opened up prematurely, and are seeing renewed case spikes, (click link). Same thing for Brazil, which lacks a coherent Covid-19 policy, (see link).

  As for my forecast methodology, it is a consensus view of several forecasts done by major Canadian and international institutions. For example, the  International Monetary Fund (IMF) this week released an updated forecast for Canada that projects -8.4% growth for 2020 and 4.9% growth for  2021, (see link).  While  Canada's Parliamentary Budget Office (PBO) recently estimated 2020 GDP at -6.8%, a less severe downturn than an earlier estimate of -12% (April 30) due to solid job gains in May, (click link). In April, the Bank of Canada offered an early forecast which assumed a lot of uncertainty: the most optimistic scenario suggested GDP could return to pre-pandemic levels by the end of 2020; for the most pessimistic, GDP doesn't return until well into 2023, (see link).

   As for my forecast graph above, I included a long time series (2000 to 2022) to illustrate how resilient the Canadian economy has been to major economic shocks, similar to the Covid pandemic. Take the 2008-09 recession: it was much shallower in Canada than the U.S. because we have a stable, well-

Toronto skyline photo by James Wheeler from Pixabay

capitalized and regulated bank system. Canada's banks held up under the storm, while most American banks needed massive bail-outs. Same thing for the global oil price shock of 2014-15. While some oil-exporting countries went into deep, protracted recessions, like Venezuela - Canada's diverse service-oriented economy held its own, flat-lining for a year and a half before rebounding at the start of 2016.  I don't have a crystal ball but we can probably expect a similar, strong rebound post-pandemic. Canada seems to take a licking, and keep on ticking. 

           Canada in strong position to fund massive Covid-19 benefits

    As countries around the world locked citizens down to contain the Covid-19 pandemic, governments provided emergency benefits to people so they could survive: to pay for basic expenses such as food and rent. Other programs targeted business so they could stave off bankruptcy while closed, or keep workers on the payroll.  The cost of these bail-out programs is staggering, the most expensive in history.  The U.S. government

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signed off on a stimulus bill worth two trillion U.S. dollars, (see link) while the European Union is proposing a trillion euro rescue fund for member states, (see link). Canada has also stepped up to the plate with several rescue programs, the most-talked about is the Canadian Emergency Response Benefit (CERB), paid directly to individuals. With its broad criteria and easy-to-navigate online forms, it had rapid uptake. As of June 21st, the Canadian government had received just over eight million unique applications and paid out $52.1 billion (see link). With a recent two-month extension for CERB, Canada's annual budget deficit is projected at  -$256.0 billion, the largest on record, (see PBO report). ...that's a quarter of trillion dollars in the hole for one year.

   These are very large amounts of debt...difficult to fathom.  To compare debt across countries, economists use a statistic called "Government debt as a % of GDP," (see graph below). By using a percent, this statistic factors in the wealth of a country - its ability to pay back debt - and so it makes sense out of these huge amounts. The International Monetary Fund houses data for and reports on debt % of GDP in their Fiscal Monitor Reports, (see link). 

     As can be seen from the graph above, Canada was in a relatively good position to fund our massive Covid bail-out package. Of this grouping of

eleven advanced economies, Canada had the fourth lowest debt-to-GDP ratio at 30.6% (2018). This compares to 77.9% for the U.S, 77.7% for the United Kingdom, and much higher ratios for some European countries hard hit by the pandemic:  Italy (117.0%), Spain (83.4%) and France (87.2%).  All these countries were already holding substantial debts loads heading into the pandemic, and so will  have more difficulty paying back their bail-outs. Into the future, these countries may see their credit ratings downgraded, interest rate payments increase and critical

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programs in areas such as healthcare, education and infrastructure pared back. Despite our relative strong standing, Canada had their AAA credit rating downgraded to AA+ by a major credit agency this week, (see link). Two of the other major U.S. credit agencies held pat.

   So, what countries are in the best financial position post-pandemic? Norway, (-91.7%) Sweden (2.7%) and Australia (19.2%) had the lowest long-term government debt and so can easily pay for their relief packages. Both Norway (45 deaths per million) and Australia (4 deaths per million) also did well containing the coronavirus. Norway is a stand out: the country used royalties from oil to fund a massive sovereign wealth fund, and so it has no debt:  its books actually show a net asset valued at 91.7% of its GDP (see link)....an enviable position.  

   So, let's take a quick look at how Canada's debt changed in the past, and how much of a hit it will take due to the Covid bail-outs. The above graph shows Canada's debt % of GDP from 2000-01 to 2025-26.  A few things to point out. We started out the century well, reducing our debt load from just over 47% of GDP in 2000 to a low of 28.2% in 2008-09. Most of those

gains were because Canada grew rapidly. Debt became a smaller percent of GDP. Call it the 'great expansion,' it was an era in which Canada's diverse, modern economy took off, uninterrupted by any major shocks. The sports car I talked about earlier. That first shock was the 'Great Recession' of 2008-09. Bail-outs and other stimulus money grew Canada's 'raw' debt while growth sputtered, increasing our debt-to-gdp ratio to 33.4%. Canada continued its growth run for the next decade, interrupted briefly by the oil price shocks of 2014-15, which had a small impact on debt. In the 2010's, debt gradually declined by three percent to 30.6% of GDP in 2019-20.

   Which brings us to the present. As we view this long-sweep, we can see what the Covid-19 bail-outs will do. They will  erase two decades of work, bringing Canada's debt-to-GDP ratio back to what it was at the onset of the century: it will jump 14% to 44.4% in 2020-21, according to an estimate by the Parliamentary Budget Office, (click link). This is the largest increase in

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history. It's painful, but the small consolation is that our debt load will be manageable, and lower than most advanced economies. In fact, Canada's debt-to-GDP ratio would still be just over half of the G20 average of 79.2%.  

     Looking forward, I penciled in a quick forecast, (see graph) assuming that debt moves in a similar way to after the great recession: flat-lining for three years until 2022-23, and then gradually coming down. As with previous shocks, I don't expect the federal government will attempt to quickly pay down the debt. Austerity measures may reduce Canada's 'raw' debt in the short-term -- but result in a rising debt-to-GDP ratio as the economy contracts and unemployment increases. Not a good thing...

                    

e-mail: gregmcc07@gmail.com