Hope for recovery hinges on resilient services sector, report says

As certain businesses tentatively reopen, there is some hope that a recession centred on the services industry will have a faster recovery than previous ones.

A report from Richardson GMP says the current recession is unique because it was self-induced to stop the coronavirus from spreading, and because it’s driven by the services sector.

In previous recessions, the services sector has been the stabilizer rather than the centre of the pain, the report said.

“The good news is that compared to past recessions, which had to work through excess inventories of houses or tech, this one doesn’t have such a burden,” the Richardson GMP report said.

“Instead of suffering two years of job losses and a long four years to get back to normal, this recession may have a similar pattern but over quarters. Of course, there are many unknowns as we are in the uncharted waters of a novel services recession.”

A report from RBC based on its cardholders’ data said April spending was down almost 30%, though it rebounded somewhat late in the month. Spending on household goods was still higher than pre-pandemic levels, household construction was strong and discretionary spending was low but had stabilized, the report said. However, spending on restaurants and entertainment was down 50% from pre-crisis levels.

Last week, the U.S. Commerce Department reported that retail sales in April were down 21.6% from the previous year, more than doubling the previous record drop set in March.

The Richardson GMP report looked at data from restaurant reservation app OpenTable in the southern United States to see how the services sector was faring as economies reopen. While the number of seats dropped by 100% in March, recent data has shown “the green shoots of normalcy and pent-up demand for dinner with family and friends.”

Cities in Florida, Texas and Arizona have seen bookings gradually rise since they reopened at the start of May, the report said. The question is at what point will bookings stabilize — and how far below pre-crisis levels will they be? An OpenTable survey found one-quarter of restaurants may not reopen at all.

“Capacity constraints, virus fears and a consumer that will likely prefer to save more on the margin will all contribute to a more muted new normal,” the report said.

Still, while the recovery in services won’t be as fast as the decline, the authors expect the turnaround to be faster than previous recessions.

“Consumers and business will adapt to minimize the collateral damage and the pace of recovery could be surprising,” the report said.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.