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Katherine Judge, economist at CIBC [World] Markets.
Governments now are moving to lay off some of the social distancing measures. Now, of course, we haven’t gotten a vaccine yet so that means that the measures have to be removed very slowly in gradual stages. So what that means for the economy is that yes, some people will be called back to work. A lot of layoffs that we’ve seen will have proven temporary, but we still will see an elevated unemployment rate given that some sectors of the economy will be operating at reduced capacity or some not at all, especially those that require large social gatherings.
Another factor in the Canadian recovery, specifically, is that it actually could be prolonged compared to the U.S., for example, given that Canada relies heavily on global resource demand. And that’s something that is expected to recover very slowly, given the gradual removal of social distancing until a vaccine is available to everyone.
And the other thing to look out for would be a second wave of the virus. Now, if you compare Canada to the U.S., for example, officials in the U.S. have been a little more cavalier in removing restrictions. So there might be a bit more of a risk of a second wave happening in the U.S. rather than in Canada. But 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.
Some sectors will rebound faster than others. When you look at the sectors that are having restrictions removed right now, there’s retailing, construction, manufacturing — those are all the first that will reopen. So of course they’ll see a pickup in activity sooner. Now, keep in mind that 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.
And then secondly, the unemployment rate is elevated. So that income loss of course will weigh on demand.
When you look at sectors that will likely rebound last, they are those that will have social distancing measures in place for longer. So that includes travel, hotels, leisure, large-scale entertainment, probably bars more so than restaurants. It’ll be a little bit longer for those to rebound.
And now when we look at how that can affect equities. Of course rates are so low so investors are looking towards equities for returns.
I think there is a chance that the market is overlooking the risk of a second wave happening. It’s true that we might have received some of the worst economic data that we’re going to see, but that doesn’t mean that it’s going to be all smooth sailing from here. And I think that’s something that markets might not be accounting for.
Our equity strategist Ian de Verteuil also views the recent rally in equity markets as a little suspicious. So investors should keep that in mind.
And then of course keep in mind that yes, consumer spending will be driving this rebound, but it’ll be probably largely tilted towards non-discretionary purchases and less so in discretionary areas that I mentioned that will have those social distancing restrictions in place for longer.
Given that the impact of social distancing works largely to restrain consumption, the emerging recovery that we will see over the summer months will be driven by consumption. Other areas of the economy like business investment and exports — you’re seeing a lot of open capacity, which suggests that business investment will remain weak for some time. And of course, given the global climate, exports will also take a little longer to rebound.
When you do look at the factors that are rebounding — I mentioned retailing, construction and manufacturing — you have to remember that for construction and manufacturing, they’re grappling with not only weak demand but supply chain disruptions that have exposed a lot of vulnerabilities for producers during this time. We’re seeing very long lead times for shipments and supplies to arrive. So that’s something to keep in mind for those sectors.
And then retailing, yes it will start to rebound as things reopen but when the unemployment rate is elevated, discretionary spending won’t just bounce back. It’ll be a protracted return to where we were pre-virus.