Posted Tuesday June 23, 2020

Worst Contraction

Canada begins recovery from the deepest but shortest recession in history

With the risk of a second pandemic wave and the wait for a vaccine ongoing, Canada’s economic trajectory hinges on the successful balance of opening the economy while withdrawing government support.

An 8.2 per cent decline in the Canadian economy this year will mark the worst annual contraction on record. Despite the quick and pronounced economic fallout from the pandemic, recovery is underway.

A brighter outlook for 2021 is forecast in today’s release of The Canadian Outlook Summary, with an economic rebound of 6.7 per cent in 2021 and 4.8 per cent in 2022. Yet as the threat of the pandemic eases, a number of factors will affect Canada’s path to recovery.

“This rebound is more in line with a “U” shaped recovery as opposed to a “V” recovery that would have seen growth increase at a faster pace, explains Alicia Macdonald, Associate Director of Economic Forecasting. “It reflects the tremendous uncertainty that will be a fact of life in the world economy over the next year or so as economies grapple with the continued health risks associated with the virus.”

Employment will remain nearly 1.1 million lower for 2020 as a whole than in 2019. With many Canadians out of work, consumer spending will take a hit. After an 11.3 per cent drop in consumer spending in the first quarter of 2020, a staggering 57.5 per cent drop is expected in the second quarter.

Additionally, near term gains in the labour market will be affected by the Canadian Emergency Response Benefit Program. How and if the government shifts spending from individuals to the businesses via the Canadian Emergency Wage Subsidy Program remains to be seen and will impact the likelihood of people returning to the labour market.

In terms of federal government spending, it is estimated that the deficit will exceed $250 billion—by far the largest deficit in Canada’s history. Despite this, the Canadian fiscal situation should remain healthy with most increased spending contained to this fiscal year. A risk to reducing expenditures, however, will be the extent to which provinces and municipalities require financial assistance due to lost revenues.

Business confidence will also take time to recover. With global demand drying up, exports are forecast to contract by 14.3 per cent in 2020. Unsurprisingly in this uncertain environment, firms are reluctant to invest in new capacity, and we expect an 11.3 per cent drop in private sector investment this year. Global travel restrictions will also hamper the recovery as tourism will be slow to return to pre-pandemic levels.

Conference Board of Canada
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