While Canada’s economy is starting to reopen following the Covid-19 shutdowns, one factor putting the brakes on the rebound is that the return to employment will be gradual.
“A lot of layoffs will have proven temporary, but we still will see an elevated unemployment rate,” said Katherine Judge, economist at CIBC World Markets, in a May 26 interview. Some sectors will operate at reduced capacity or not at all, she added, especially those that require large social gatherings.
Further, and relative to the U.S., Canada’s resource-based economy will likely face a longer recovery period.
“Canada relies heavily on global resource demand,” Judge said, and the global economy is expected to recover slowly until a vaccine for Covid-19 is available.
While Canada could be less hard hit by a second wave of the virus compared to the less restrictive U.S., she explained, “the overall story is that we still see a larger contraction in output in Canada this year given Canada’s reliance on global resource demand as a source of growth.”
Recovery by sector
While equities have recently rallied, Judge warned that the market may be overlooking the risk of a second wave of Covid-19 cases.
Even if the worst economic data are behind us, “that doesn’t mean that it’s going to be all smooth sailing from here,” she said. “That’s something that markets might not be accounting for.”
With no second wave, the Organization for Economic Co-operation and Development (OECD) forecasts that the global economy could shrink 6% this year; with a second wave, it could shrink 7.6%.
For Canada, those figures are -8% and -9.4%, respectively. Meanwhile, for the U.S. — where Judge says officials “have been a little more cavalier in removing restrictions” and where she foresees greater risk — the OECD predicts economic contraction of 7.3% with a single wave versus 8.5% with a second.
Generally, sectors expected to rebound faster domestically are those with industries that are allowed to re-open sooner, such as retailing, construction and manufacturing.
But the extent of their rebound is uncertain. “Even though some restaurants and retail shops are opening, that doesn’t mean that consumers will have the confidence to go out there and shop, given that we do not have a vaccine,” Judge said.
Also, with elevated unemployment, income loss will weigh on demand, she said. As such, consumer spending will focus on non-discretionary purchases.
“Discretionary spending won’t just bounce back,” Judge said. “It’ll be a protracted return to where we were pre-virus.”
Disrupted supply chains represent a further economic challenge. “We’re seeing very long lead times for shipments and supplies to arrive,” Judge said, which weighs on construction and manufacturing.
Sectors expected to rebound last are those that require continued social distancing, such as travel, hotels, leisure and large-scale entertainment. As non-discretionary purchases, these sectors will be challenged, she said.
Other areas of the economy that are forecast to remain weak are business investment and exports.
“You’re seeing a lot of open capacity, which suggests that business investment will remain weak for some time,” Judge said. And given decreased global demand, “exports will also take a little longer to rebound.”
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