The Worst is Behind Us: Now Recovery

As the recovery begins to take hold, we’re seeing how much ground has been lost

Recent economic indicators are a stark reflection of Canada’s difficult reality. While the contraction in GDP was less than expected in March, the data available to date suggest a sharper contraction in April. The gradual easing of lockdown measures, however, led to an unexpected rebound in employment in May—a sign that the worst of the storm may be behind us.

Record low economic activity

Statistics Canada data confirm the recession began at the same time as lockdowns across the country. Business, school and border closures in the last two weeks of March contributed to a 7.2% drop in GDP for the month as a whole.

Virtually no sector was spared. Among goods-producing industries, it was manufacturing that was the hardest hit in the first few weeks of the crisis. This was not a surprising outcome since nearly 80% of businesses in the sector reported a slowdown in their activities in the Monthly Survey of Manufacturing. In particular, the auto industry was badly hurt by plant closures.

In the service sector, food, accommodation and the arts, entertainment and recreation sector were the most affected.

GDP fell at an annualized rate of 8.2% in the first quarter. By comparison, the economic contraction in the United States was 5.0%. Elsewhere, GDP fell 14.2% in the eurozone and 33.8% in China. In general, the earlier containment measures were introduced, the greater their impact on GDP in the first three months of the year.

Forecasts of second-quarter GDP declines in Canada and the United States (about -40%) are more pessimistic than those in China at the peak of its lockdown. Canadian GDP is estimated to have declined by 11% (non-annualized rate) in April, according to Statistics Canada based on preliminary data. This would represent an economic contraction of nearly 18% in just two months.

Early effects of the pandemic

First-quarter data indicates the harsh effects of the crisis on consumer spending and investment. It’s important to note that widespread lockdowns were in place for only two of the thirteen weeks in the quarter. Services, which often require direct contact with the customer, obviously suffered. Spending in this sector was down 10.8% from last fall on an annualized basis.

 Consumption of goods was down 6.8%. Only non-durable goods posted gains (+12.9%) due to households stocking up on food and personal care products. However, in-store purchases suffered much more than these figures indicate. The e-commerce consulting firm Absolunet reported an increase of more than 100% in online sales at the end of March for several sectors in Canada, including furniture, sporting goods and appliances.

Private investment was down 1.4%, mainly due to a drop in investment in machinery and equipment (-13.1%). Exports of goods and services fell 11.3%.

Finally, the savings rate rose to 6.1%, a level not reached in almost 20 years. In the medium term, this additional saving could work in favour of retailers by providing more disposable income to households. However, economic uncertainty and the loss of income could limit consumers’ willingness to part with their money for some time to come.

One in seven Canadians has lost his or her job

The easing of lockdowns reversed the trend in the labour market. Some 290,000 jobs were recovered in May, representing about 10% of the 3 million jobs lost in the previous two months.

Still, the unemployment rate has risen to 13.7%. It would have been 18.2% if discouraged workers, workers awaiting recall or involuntary part-time workers were included.

Nevertheless, there is reason for optimism—more than a million individuals who didn’t work in May reported being on temporary layoff, meaning their unemployment spell could be short.

What’s more, the Labour Force Survey was conducted during the week of May 11, before the gradual reopening of many businesses across the country. In fact, the number of hours worked has already jumped in all industries, and especially in construction, manufacturing, and wholesale and retail trade. Gains could be more generalized when statistics are released for the month of June.

 What does it mean for business?

1.     The recovery is underway. However, it’s likely to be slow and uneven given the magnitude of the economic shock.

2.     Despite a rising savings rate, households are not yet ready to loosen the purse strings. The loss of wages and economic uncertainty will limit non-essential spending for some time.

3.     Lockdown easing continues, but the economic recovery will not be uniform across industries. While some will have returned to normal activity levels this winter, others will wait several years before doing so.

Statistics Canada, Financial Post, BDC