David Aston
Oct. 29, 2020
With a second wave of COVID-19 upon us, it’s natural to worry whether the pandemic might send the economy skidding into a deep ditch like it did during the first wave.
We’ve seen renewed shutdowns this month of specific sectors ranging from dine-in restaurants to indoor bars and gyms in specific locales including Toronto, Peel and York Region.
But it’s important to keep what’s happening in perspective. The second-wave restrictions are unlikely to result in a magnitude of economic shock anywhere close to what we experienced in the first wave.
The best prognosis from leading economists is that we’ll stay firmly on the road to recovery, although there is still a long recuperation ahead and the second wave is likely to cause a big bump or two along the way.
Before we get into the economic details, consider major reasons for confidence that the economic recovery will stay reasonably on track without major relapse.
For starters, second-wave restrictions are much more targeted at specific regions and activities. That contrasts with the first-wave shutdown of pretty much all non-essential economic activity that couldn’t be performed remotely.
Moreover, the government is ready with a well-funded second wave of income support programs to counter the dire personal impact felt in the hard-hit sectors. During the first wave, there was a brief delay after the pandemic struck before income support programs could be rolled out, which contributed to a short interval of economic free-fall before the beginning of recovery.
Beyond specific second-wave income support programs already in place, the federal government declared in its September Speech from the Throne a general resolve to do “whatever it takes.”
And with our hard-won pandemic experience, we’ve gotten better in such areas as mask-wearing and prevention, in-hospital treatments for those who become severely ill, and tracking and tracing (although there is still room for improvement).
It’s easy to forget that in the early days of the first wave, it took a while before we learned the critical importance of something as simple as mask-wearing, and then masks were in short supply and hard to obtain.
First-wave tumult
To understand the likely economic path going forward, it helps to recap the economic drama from the pandemic’s early months.
“It’s the deepest recession in modern history,” says Craig Alexander, chief economist at Deloitte Canada, a major accounting and consulting firm. “It’s been characterized by the sharpest drop in the economy followed by the sharpest rebound off of the trough that we’ve ever seen.”
Governments pulled out all the stops to blunt the economic shock and fuel the rebound. The Bank of Canada drove the short-term benchmark overnight interest rate to 0.25 per cent and engaged in a massive bond-buying program (known as “quantitative easing”) of unprecedented proportions. Governments implemented enormous new income support programs, of which the Canada Emergency Response Benefit (CERB) was the most prominent.
However, the pandemic struck suddenly and it took a number of weeks to get the fiscal stimulus moving. With CERB in particular, it took about a month to create the program, roll it out, and get money flowing to recipients. That understandable delay created room for a sharp initial drop in the economy before the stimulus kicked in and the rebound started.
Economic activity measured by gross domestic product (GDP) dropped 18 per cent in March and April and three million jobs were lost. The subsequent rebound recovered most but not all the ground to still leave us about six per cent below pre-pandemic GDP levels by July. About three-quarters of the jobs lost were recovered by September, but the unemployment rate remained high at around nine per cent. As impressive as the rebound was, we are still well short of pre-pandemic levels of economic activity.
The Canadian income support programs were so enormous that, despite mass joblessness, aggregate household disposable income actually increased during the second quarter. “That’s never happened before,” says Douglas Porter, chief economist at BMO Capital Markets. Overall retail sales have been at or above pre-pandemic levels since June. House prices began to soar again and stock markets have been fairly strong.
But disparities are vast between the healthy parts of the economy and the most pandemic-impacted sectors like hospitality, travel, arts and entertainment, dine-in restaurants and bars. “You have sectors that are doing well averaged in with sectors that are still devastated in a way we don’t typically see in a recession,” says Avery Shenfeld, chief economist at CIBC World Markets.
The net impact leaves us far short of general prosperity. “If you take a weighted average of the good and the bad, the combination of the two has the economy back about at what it would be in a normal recession,” says Shenfeld.
Continuing recovery, slower pace
Going forward, we should expect the recovery to continue, but at a slower rate. That’s because the effect of reopening most of the economy (except for the most pandemic-affected sectors) has already occurred. “This is the low-hanging fruit,” says Porter. And the second-wave restrictions will hinder it as well. The next phase of the recovery won’t be rapid or easy.
Governments will continue to provide income support to help struggling businesses and employees stay afloat, but the return to full prosperity must wait for the roll out of effective vaccines and the full reopening of the hardest-hit sectors.
The second wave will undoubtedly cause some economic bumps in the road this fall. While there’s still a lot of uncertainty about how far second-wave restrictions will need to go, most economists don’t expect a broad economywide shutdown nor a corresponding major economic relapse.
“We’re going to shift down several gears in terms of the speed of recovery, but I think the recovery continues,” says Alexander.
Porter expects a “small setback” in the economy this fall, but believes the recovery will continue in “fits and starts.”
“I think we’ll see some weak months,” says Shenfeld. “The measures taken in Ontario and Quebec could show up in a drop in GDP in November. We may get some bumps in the monthly data, with each quarter (as a whole) still being better than the prior one.”
Meanwhile, the federal government stands ready with additional stimulus. Although CERB coverage ended Sept. 26, the Canada Recovery Benefit (CRB) and other successor programs are intended to be in place for another year. The government also announced plans to extend the Canada Emergency Wage Subsidy (CEWS) until June.
Despite the rapid buildup of hundreds of billions of dollars in new government debt, most economists believe that the federal government has enough fiscal borrowing capacity to provide whatever economic support is required until effective vaccines can be rolled out.
“If the recovery falters, there is still scope for the government to provide another large wave of stimulus to help the economy get through this,” says Alexander.
The key to achieving full recovery is developing an effective vaccine and disseminating it widely, which is generally expected some time in 2021. Porter, Alexander and Shenfeld each expect Canadian GDP to be more or less back to pre-pandemic levels by the second half of 2021. However, they expect it will take longer to return to pre-pandemic levels of unemployment.
“Patience is necessary,” says Shenfeld. “Increasingly the medical profession is confident that vaccines will be available and that they will work well enough. That’s the positive — we can definitely see the light at the end of the tunnel.”
