As part of our ongoing webinar series, RBC’s Deputy Chief Economist, Dawn Desjardins discussed the current state of the Canadian economy and short-term prospects during this time of unprecedented challenges. We share Dawn’s top ten insights.
1. Substantial economic impact: The policies to contain the virus, which resulted in halting economic activity, have had some substantial impacts. From a global perspective, there has been a decline in economic output of close to 5%, one of the worst on record.
Following the significant declines in economic activity in the first half of the year, we started to see some pick-up in growth in the summer and expect recovery to continue through the remainder of the year and into 2021.
The extraordinary levels
of government support
have had a material
impact on economic
recovery
2. Strong government support: The extraordinary levels of government support have had a material impact on economic recovery. In Canada, supports equaling almost 20% of GDP have been introduced, including direct income supports for individuals, loan guarantees, and tax deferrals for businesses to help them migrate through this very difficult period. This support has been key in providing households and businesses with funding to keep them afloat.
3. Quantitative easing? Yes, in Canada too: Central banks also moved very rapidly to ensure that financial systems were able to continue to function and that borrowers could get access to loans at low interest rates, for example.
In Canada, the Bank of Canada (BoC) went into unknown territory by introducing quantitative easing to ensure sufficient liquidity and flows in the front end of the market. Over time the program has moved further out the yield curve and the policy is now aimed at ensuring that interest rates across the entire maturity spectrum remain at very low levels.
Canada matches the picture of other advanced economies. We had a significant drop in economic activity as lockdown measures took hold and the BoC lowered policy rates in March. Rates are expected to remain extraordinary low.
We are hopeful that the worst impacts of COVID-19 and the policies and measures introduced to contain the virus are ‘in the rear view mirror’. However, it is still going to be a bumpy road ahead and will take a sustained period of time for economies to fully recover lost ground.
4. Contraction, contraction, growth: From mid-March through to the end of the month, the Canadian economy contracted by over 8% at an annualized rate. But the first quarter was totally overshadowed by second quarter results with a further contraction of close to 39%, annualized. These declines were slightly offset by the gradual recovery that began in May and June as parts of the economy reopened.
Growth rates are coming in slightly slower than that first bump up in June but are on a recovery path. Data suggests third quarter growth of around 40% annualized. While we are seeing some recovery from this deep hole, digging out is a slow process. Even if we see another 6% gain in the fourth quarter, we will still be significantly below where we would have been if we didn’t experience COVID-19, and the policies that followed. We expect growth in 2021 will still leave us to a shortfall from where we would have been.
5. A different downturn: Rather than a demand side shock this has been a supply side shock. The typical sectoral breakdown has reversed. Usually the goods side of the economy gets hit first, which then leads into the services side. In this case, as economies are more driven by services, they were most dramatically hit and continue to be under pressure.
Rather than a
demand side shock
this has been a
supply side shock.
In Canada, retail and housing activity did recover quite quickly. Low rates have given some uplift to the consumer side of the economy and manufacturing has started to recover. Yet, it is still down 6% from pre-shock levels. Areas that will continue to be under pressure will be those sectors with person to person contact such as travel, accommodation, tourism, entertainment, etc., even as we re-open.
6. Labour worries: What has this meant to the labour market? Initially, three million jobs were lost in Canada due to COVID-19. At this time, 1.9 million jobs have been recovered but, on an industry basis, there are still areas that will continue to underperform, in our view. Food and accommodation services, and entertainment are still down 250,000, and 100,000, respectively.
Jobs in manufacturing are still down by 83,000 but we expect this to slowly come back online, as well as education which we anticipate to grow as schools have reopened.
This will not be a quick recovery for Canada’s labour market. While we entered the crisis with an extraordinarily low unemployment rate, at 5.6%, it spiked to a high of close to 14% and now hovers above 10%. We expect to end 2020 about 3% higher than where we started the year.
7. Business sentiment–cautious optimism: While business saw a quick rebound as we started to reopen, data from the Canadian Federation of Independent Business’ (CFIB) Business Barometer index, which measures small business confidence, reveals that has since stalled and sits at 59.2. For small and medium-sized business, only two thirds have fully opened. Furthermore, 25% of businesses said they may have to reduce staff over next three months versus only 15% that say they will be hiring. A business barometer index of 65 is considered to reflect ‘normal’ economic conditions. Clearly there is continued uncertainty which may be alleviated once vaccines are developed and we can adopt a new normal.
8. CAD resiliency: The Canadian dollar has been relatively resilient as the USD has weakened over the past few months. Oil prices, which are another driver of Canada’s currency, have come back from the very low levels but still sit well below where they were in 2019.
As we move forward with recovery, we anticipate oil prices will move a bit higher but remain around the $40/$43 mark West Texas Intermediate. This won’t be a huge help to Canada’s currency.
9. Oil patch struggles: All provinces are experiencing downward pressure, some less so than others. The differentiator is exposure to oil and gas production. Into 2021, we anticipate that all provinces will recover to a large degree in some cases, but oil producing provinces will likely run deficits in the next few years.
All provinces are experiencing downward pressure, some less so than others. The differentiator is exposure to oil and gas production.
10. The final word: Fortunately, Canada had the fiscal room to introduce programs to help households and businesses stay solvent and confident. They have also reassessed programs and pivoted those that may not have been performing to make them more accessible. While this will bump up our debt to GDP ratio, the government was confident in taking such actions because they started in a stronger place than many economies. The government now needs to decide how we progress and get spending levels back to normal.