Never have economists seen our country’s economic outlook shaken so drastically, so quickly. With whole segments of the economy abruptly shuttered by COVID-19 and more than a million Canadians laid off in a matter of days, we’ve plunged into a sudden recession.
At first glance, the situation looks dire. Canada’s economy is among those most exposed to coronavirus-related shocks because of its dependence on imports from the U.S., according to analysts at ING Group. Canadian banks project Canada’s GDP to shrink by a whopping 20 per cent this quarter alone. Layoffs could reach nearly three million.
“What we’ve seen in the last few weeks is an unprecedented level of shutdown, but also unprecedented speed of shutdown,” said Robyn Gibbard, senior economist at the Conference Board of Canada. “I’m not sure what you can compare it to aside from a work of fiction. Certainly within recorded economic history there hasn’t been anything like this.”
But there is, even at this early stage in the crisis, a gleam of light at the end of the tunnel: Canadian economists are cautiously optimistic about the country’s ability to make a quick recovery once the worst of the pandemic is over.
“It’s very likely to be a very significant rebound,” said Jean-François Perrault, senior vice-president and chief economist at Scotiabank. In fact, last week Scotia pegged the chances of resuming normal economic activity by August at 75 per cent.
All five of Canada’s major banks predict economic growth will resume this summer following a historically steep downturn. The banks project Canada’s GDP to shrink by between 10 and 28 per cent this quarter, but they expect those losses will be mostly made up in the second half of the year. (Although not quite: They all project an overall contraction of the GDP this year, with forecasts ranging from -1 to -4.2 per cent.)
Assuming the virus can be sufficiently contained at some point this summer and businesses are able to reopen, it shouldn’t take long for the economy to rev up, Perrault said. With pent-up consumer demand and low interest rates, he said conditions should be ripe for a quick turnaround, likening it to flipping a switch. “Once we turn the corner there’s potential for quite strong growth.”
If this scenario occurs it would be what economists call a “V-shaped” recovery, in which a sharp, sudden downturn is quickly followed by an equally sharp correction.
“We’ve had a huge shock,” said Jack Carr, an economics professor at the University of Toronto. “It’s bad that it’s huge, but the good news is that it’s short-run and as soon as the shock ends there’s no reason why we can’t almost immediately go back to where we were.”
Carr believes the Canadian economy is poised to “snap back” once the virus is under control.
“Maybe, if we’re lucky, it will only hurt the economy for two or three months and that’s it.”
That doesn’t mean all businesses will bounce back, he said. Some won’t survive. Others will benefit. But the economy as a whole is likely to return to its pre-COVID levels relatively quickly.
“I predict a year from now we’re exactly at the place we would have been if this dip didn’t occur.”
The duration wild card
This, of course, assumes the virus will be under control by the summer and the economic restrictions will have lifted, which remains uncertain.
As TD states in its latest forecast: “The wild card is not depth, but duration.”
The longer the economy is disrupted, the less likely it will be able to quickly recover. The early evidence from China, where affected parts of its economy were able to quickly bounce back after a short recession, has been heartening.
If any country is going to have a V-shaped recovery, Canada is a good candidate, Gibbard said. He cited the federal government’s strong fiscal position prior to the crisis and the recent steps it has taken along with the Bank of Canada to soften the blow for workers and businesses.
Canada’s “extraordinarily low” debt-to-GDP ratio — about 31 per cent prior to the crisis — means it was in a good position to spend generously on its rescue package, Gibbard said.
“We have an enormous amount of fiscal capacity. We can essentially borrow an unlimited amount of money. So there’s really no harm in going all the way to the wall.”
The aid package now totals $105 billion. It’s expected to increase the debt-to-GDP ratio to around 40 per cent, which would still be the lowest among G7 countries.
So even though the numbers may seem astronomical, Gibbard said Canadians shouldn’t be worried about the extent of public spending or ballooning debt. The alternative is worse.
“The way that a big shock like this can cause lasting damage is if you don’t keep the gears turning,” he said. “That’s why it’s so important that we do have those supports for businesses and workers, because once you get on the other side of this what’s really important is that people have a job to go back to or that they have enough money to afford to live while they’re looking for a job.”
Perrault agreed. “There isn’t much choice,” he said. “It’s either you do this and you live with the consequences a year or two or three from now, or you don’t and you have mass bankruptcies, mass layoffs.”