What is the economic impact of the pandemic lasting through summer?

Conference Board of Canada predicts a $20 billion drop in household spending.

 

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The Conference Board of Canada is sending a message to Canadian industry that, no matter how long the pandemic lasts, they should prepared for drastic decreases in economic activity – including a $20 billion decline in household spending over the course of one quarter.

The economic research organization outlined two scenarios for how the economy will respond to the COVID-19 outbreak. One assumes the curve flattens and life returns to normal after a six-week lockdown; the other is a set of predictions based on current travel bans and social distancing measures being in effect until the end of August, a possibility some medical researchers suggest may be necessary.

According to the Board, even a short-term lockdown will completely stall Q2 growth forecasts for GDP, from the 1.8% growth it had previously predicted to a mere 0.3%. The group’s baseline best-case-scenario forecast also assumes that the Bank of Canada overnight rate sinks to 0.25% (recently, the central bank lowered its target for the overnight rate by 50 basis points to 1.25%).

But if social distancing measures extent to the end of summer, it will mean a much deeper and prolonged hit to economic activity in Canada, with real GDP declining at an annualized rate of 9.6% in the second quarter, and the Bank of Canada entering the realm of negative policy rates.

In this scenario, the U.S. would fall into recession, and Canada’s economy would see lower energy and resource investment, weaker exports and a drastic decline in household spending.

With the bulk of people confined to their homes for the next four months, the report finds that Canada’s tourism industry would “grind to a halt,” on top of the short-term negative impact it is already seeing. On Tuesday, WestJet announced layoffs to nearly half its staff, comprising nearly 7,000 workers, while Air Canada said it would cut 5,000 jobs and furlough up to 600 pilots, largely a result of nonessential travel bans to popular destinations like Europe and the United States.

The organization also predicts household spending on bars, restaurants, arts, entertainment and other personal services would decline by nearly $20 billion over Q2 and Q3 of this year.

And with Canada being such a resource-dependent economy, the ongoing oil price freefall means Canadian light and heavy oil producers “will suffer a significant hit to revenues,” putting the brakes on conventional production and new capital investment.

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Not surprisingly, jobs in the resource extraction sector would be most drastically affected, followed by construction. Commercial services, however (which includes sectors such as accommodation, food and beverage services, arts, entertainment, and other personal services) will comprise the bulk of job losses – 230,000 over the second and third quarters. Over the coming months, real estate markets would cool significantly as more and more jobs are shed.

One sector also expecting a downturn is retail, be it because of  changing consumer behaviour and demand as a result of the pandemic, or the fact that most stores are closing, either of their own accord or in response to mandates from provincial governments.

But a greater issue may be that the industry was not on the strongest footing to begin with.

In his latest analysis of Canadian retail, Ed Strapagiel says that despite a slight improvement in sales growth in January, the sector was not sufficiently robust in 2019 to be able to weather this serious a downturn. He says that the coronavirus pandemic “is almost certain to lead to a recession.”

According to Strapagiel, the pandemic has shattered consumer confidence and emptied shopping malls. Fear of public exposure means people’s taste for ecommerce may grow, and this could result in a marginal but permanent shift from bricks and mortar to e-commerce. The food and drug sector, he says, is probably the most insulated from the coronavirus pandemic, but as Strapagiel notes, it too experienced record lows in 2019.

The least insulated sector, Strapagiel says, is store merchandise, as it has the most products that would be deemed “non-essential,” and was already being dragged down by declining sales in electronics, sporting goods, books, shoes and home furnishings. Today, furniture retail Leon’s announced it is closing 72 stores and laying off nearly 4,000 workers.