25 May 2020

Canada’s recovery needs to reshape its economy

The global lockdown to fight the coronavirus pandemic has hit an already softening Canadian economy hard – and consumption can’t buy us out this time.

With the global lockdown to fight the coronavirus pandemic dealing a blow to Canada’s economy, there’s opportunity to emerge strong and resilient 

There is no certainty amidst a global pandemic. We can’t know when the contagion will come under control, when the necessary economically-crippling measures to fight it will ease or exactly when and how recovery will start. What we do know is that for every week of lockdown, from 0.55 to 0.8% will be cut from global GDP. It’s a forecast that sees a 3.3% drop in world GDP in 2020, 5.9% in developed economies and 3.4% here in Canada.

We’re forecasting a much deeper economic impact than the global financial crisis, with a potentially swift rebound. Once economies are up and running again, the rebound will come, but there will be lasting impacts that mean GDP will be unlikely to recover to where it was until well after 2021. And of course, the key consideration is when economies will be up and running again – the longer the restrictions continue, the more uncertain predictions become.

For Canada, the global shock has come at a bad time. In late 2019, we had already noted an economic softening, as momentum slowed enough for the Bank of Canada to consider an interest rate cut in January 2020. Then domestic risk was further magnified by blockades of rail lines in February, so that when the threat from COVID-19 became apparent and oil prices declined severely at the same time in early March, Canada was hard hit. In particular, consumer and small and medium-sized business confidence has plummeted, and unemployment has shot up to an expected rate of 13.1% in April.

Canada is, like the rest of the world, suffering from too much debt on the balance sheet and that extends into household debt. With rising unemployment, mortgage payments will be threatened, and consumer confidence and spending will be dampened. Unemployment will not rebound as soon as the country opens up again, the level of employment is unlikely to regain 2019 levels for five to ten years. Many of the businesses that have shuttered for the lockdown won’t be able to reopen and those that do will be reluctant to invest or expand too quickly.

Unemployment will lead to consumer insolvencies and mortgage arrears, which will have a huge impact on spending on the short-term. As time goes on, spending won’t be able to come back up to the same levels. People’s disposable income will need to go to servicing their debts and attempting to deleverage their households.

This is a particular challenge for Canada, whose economic growth in the last decade has been fuelled by consumption, in turn powered by increasing debt. In order to recover from this downturn, Canada’s economy will have to change, embracing innovation and R&D and working to improve productivity.

“Going forward in the recovery, we’re going to face some headwinds that might not necessarily be evident in other economies. Household consumption will not be able to provide the same level of lift as it has before,” said David Watt, chief economist at HSBC Canada.

The other challenge for Canada is in oil prices, which will have a knock-on effect on both employment and capital expenditure. Oil and gas sector investment has been a key driver of total business investment since 2000 – accounting for over 75% of non-residential investment between 2010 and 2014. If oil prices continue to linger at below break-even prices, capital expenditure will languish.

“It’s going to be really important in the next phase for government programs to come in and boost business – especially non-energy business – ability and willingness to invest in buying new machinery and other capital expenditure,” Watt said.

Although rebalance in the economy will be complex, it’s a necessary shift away from consumer-led growth, particularly when that growth is fuelled by heavy debts. Government needs to focus on back-stopping business investment and improving productivity and competitiveness. This was the same situation we had coming into 2020, and it’s only been exacerbated by the current crisis.

Back in July last year, we said that the Canadian economy needed to rebalance toward exports and business investment in coming years. Now, as then, government policies need to support improved competitiveness, so that Canadian firms can take advantage of the lower trade barriers with the EU, much of Asia and the US.

The economic downturn brought on by this crisis will be painful, but when recovery comes, we will also have an opportunity. It will be up to the Government to ensure that its intervention shapes the recovery to create a Canadian economy with staying power and resilience for the future.

This article is based on the economic outlook by HSBC’s Global Chief Economist, Janet Henry and Chief Economist, David Watt, during an April 15 webinar, Navigating your business during uncertain times: Economic update and outlook.

Watch the full webinar

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