The Cana­dian Econ­omy Post-Lock­down

Policy - - In This Issue - Goldy Hy­der and Brian Kingston

As with pre­vi­ous eco­nomic dis­rup­tions through­out his­tory—wars, de­pres­sions, in­dus­trial rev­o­lu­tions—the COVID-19 pan­demic has trans­formed so­ci­ety, but in a more tele­scoped man­ner. While the long-term im­pli­ca­tions re­main to be seen, the short- and medium-term ones are be­gin­ning to clar­ify. Goldy Hy­der and Brian Kingston of the Busi­ness Coun­cil of Canada pro­vide a help­ful as­sess­ment of where the busi­ness and con­sumer sta­tus quo lies at press time.

The COVID-19 pan­demic has dev­as­tated the Cana­dian econ­omy. In the first quar­ter of 2020, the econ­omy shrank by a pre­vi­ously unimag­in­able 8.2 per­cent on an an­nu­al­ized ba­sis. The eco­nomic down­turn pushed the un­em­ploy­ment rate to 13.7 per­cent in May, with the fed­eral deficit on track to hit $252.1 bil­lion in fis­cal 2020-21 af­ter ex­tra­or­di­nary pro­grams were un­veiled to sup­port Cana­di­ans.

In the early days of the pan­demic and eco­nomic cri­sis, there were hopes

that once the spread of COVID-19 was cur­tailed, Canada’s econ­omy would re­bound and life would re­turn to nor­mal. While we may have wit­nessed the bot­tom of the eco­nomic con­trac­tion, it is in­creas­ingly ap­par­ent that Canada will ex­pe­ri­ence a multi-speed re­cov­ery with stops and starts that will af­fect dif­fer­ent sec­tors in dif­fer­ent ways.

Given a pro­tracted, un­even re­cov­ery, the Cana­dian econ­omy will look very dif­fer­ent over the medium term. There are four key trends that gov­ern­ments and busi­nesses will need to un­der­stand and adapt to if Canada is to emerge from the cri­sis stronger. 1. Liv­ing with the virus

Phys­i­cal dis­tanc­ing, pro­tec­tive equip­ment, test­ing, track­ing and trac­ing will be­come the ‘new nor­mal’ un­til a vac­cine is avail­able and mass pro­duced. Busi­nesses will need to take steps to re­build the con­fi­dence of em­ploy­ees and cus­tomers. That means demon­strat­ing a com­mit­ment to safety, in­clud­ing proper san­i­ti­za­tion pro­ce­dures and phys­i­cal dis­tanc­ing.

For the most part, busi­nesses that op­er­ated with­out the need for di­rect phys­i­cal con­tact be­fore the pan­demic will be able to scale up quickly as de­mand comes back. This in­cludes some cor­po­rate ser­vices as well as on­line re­tail­ers and the tech sec­tor. Many, if not most, of these busi­nesses will be able to re­turn to nor­mal op­er­a­tions as soon as gov­ern­ment-or­dered shut­downs are lifted, with lit­tle need for fun­da­men­tal changes to their busi­ness mod­els.

Many com­pa­nies in the man­u­fac­tur­ing, nat­u­ral re­sources and con­struc­tion sec­tors are po­si­tioned to re­cover rel­a­tively quickly as de­mand picks up in Canada and around the world. The key chal­lenge for these com­pa­nies will be to en­sure that work­ers have ad­e­quate pro­tec­tive equip­ment and workspaces that al­low for phys­i­cal dis­tanc­ing.

The out­look is more un­cer­tain for en­trepreneur­s and em­ploy­ees who can­not re­al­is­ti­cally serve cus­tomers while prac­tis­ing phys­i­cal dis­tanc­ing. Many restau­rants, bars, hair sa­lons and other per­sonal care ser­vices face a long and dif­fi­cult road to re­cov­ery. The Cana­dian Fed­er­a­tion of In­de­pen­dent Busi­ness, which rep­re­sents more than 110,000 small firms, says a third of its mem­bers who have been forced to close their doors dur­ing the month of May are un­sure if they will be ever be able to re­open.

The oil and gas in­dus­try suf­fered a dou­ble whammy. The gov­ern­ment-man­dated shut­down sig­nif­i­cantly re­duced de­mand for their prod­ucts at the same time that global over­sup­ply was hav­ing a sharp down­ward ef­fect on prices. Any eco­nomic re­cov­ery is that much harder with­out the full con­tri­bu­tion of a sec­tor that rep­re­sents al­most 10 per­cent of Canada’s GDP. As the coun­try tran­si­tions to a lower-car­bon econ­omy it will need to draw on the knowl­edge from Canada’s en­ergy sec­tor, which is al­ready in­no­vat­ing in emis­sion re­duc­tions.

The shut­down also hit the avi­a­tion, ac­com­mo­da­tion and tourism sec­tors early and hard. Per­ma­nent changes to con­sumer at­ti­tudes to­ward trav­el­ing and tak­ing hol­i­days are un­likely, but there is bound to be a lag ef­fect. To re­spond to con­sumer con­cerns, busi­nesses in these sec­tors have al­ready be­gun un­veil­ing new pro­to­cols aimed at boost­ing con­sumer con­fi­dence. Equally im­por­tant are clear and co­or­di­nated ef­forts from gov­ern­ments across Canada to ease travel re­stric­tions and restart the travel and tourism sec­tor.

2. Dig­i­ti­za­tion

The pan­demic forced many com­pa­nies to pivot al­most overnight to a dig­i­tal work­from-home model. Those that could op­er­ate in a vir­tual en­vi­ron­ment moved quickly to equip em­ploy­ees to op­er­ate re­motely. For busi­nesses in the phys­i­cal re­tail sec­tor the pan­demic re­quired an im­me­di­ate shift to on­line sales and de­liv­ery.

The shut­down also hit the avi­a­tion, ac­com­mo­da­tion and tourism sec­tors early and hard. Per­ma­nent changes to con­sumer at­ti­tudes to­ward trav­el­ing and tak­ing hol­i­days are un­likely, but there is bound to be a lag ef­fect.

Busi­nesses will need to take steps to re­build the con­fi­dence of em­ploy­ees and cus­tomers. That means demon­strat­ing a com­mit­ment to safety, in­clud­ing proper san­i­ti­za­tion pro­ce­dures and phys­i­cal dis­tanc­ing.

This ac­cel­er­ated a dig­i­ti­za­tion trend that was well un­der way be­fore COVID-19. Ac­cord­ing to McKin­sey’s 2017 Dig­i­tal Global Sur­vey, 92 per­cent of com­pa­nies thought their busi­ness mod­els would need to change to adapt to dig­i­ti­za­tion. Dig­i­tal­iza­tion is no longer a jour­ney for com­pa­nies but a ne­ces­sity for sur­vival.

What could this mean for com­mer­cial real es­tate? A re­cent sur­vey of Busi­ness Coun­cil mem­bers found that 73 per cent of re­spon­dents will make work­ing re­motely a per­ma­nent op­tion for roles that per­mit it. For some busi­nesses this may mean re­duc­ing their real es­tate foot­print while oth­ers may re­quire more space to al­low for ad­e­quate dis­tanc­ing in the work­place.

This po­ten­tial shift could have a sig­nif­i­cant im­pact on com­mer­cial real es

tate and the thou­sands of small-andmedium-sized busi­nesses that pro­vide ser­vices to tenants and their em­ploy­ees in and around of­fice tow­ers.

3. New con­sumer pref­er­ences

The pan­demic has cre­ated new op­por­tu­ni­ties for en­trepreneur­s and busi­nesses that move quickly to re­spond to chang­ing con­sumer pref­er­ences. Liv­ing with the virus for years and not months may re­sult in per­ma­nent changes to con­sumer be­hav­ior.

For ex­am­ple, phys­i­cal dis­tanc­ing may re­sult in greater de­mand for ve­hi­cle own­er­ship at the ex­pense of ride-shar­ing and pub­lic tran­sit. Ac­cord­ing to a re­cent sur­vey by au­toTRADER, 65 per cent of re­spon­dents who use ride-shar­ing ser­vices are us­ing them less, while 81 per­cent of re­spon­dents who use pub­lic tran­sit have lim­ited their use. Sur­vey re­spon­dents also in­di­cated that even when phys­i­cal dis­tanc­ing is no longer re­quired, 70 per­cent would not re­vert to us­ing ride shar­ing, and 40 per­cent would not go back to tak­ing pub­lic tran­sit.

In the travel and tourism in­dus­try, de­mand may shift from over­seas travel to more do­mes­tic or re­gional hol­i­days in des­ig­nated ‘safe zones’ where the virus is con­tained. This will cre­ate op­por­tu­ni­ties for busi­nesses that can of­fer new and in­no­va­tive tourism pack­ages close to home. And ac­tiv­i­ties such as RVing, pre­vi­ously re­served for a small sub­set of the pop­u­la­tion, may wit­ness surg­ing pop­u­lar­ity as Cana­di­ans seek hol­i­days that al­low them to main­tain phys­i­cal dis­tanc­ing. Ac­cord­ing to a re­cent sur­vey by Aba­cus Data, 1 in 3 Cana­di­ans (9.9 mil­lion peo­ple) say they never be­fore thought RVing was right for them, but are now open to it as a re­sult of the pan­demic.

For the ho­tel in­dus­try, re­newed em­pha­sis will be put on clean­li­ness and cer­ti­fi­ca­tion pro­grams to re­store con­sumer con­fi­dence. In Sin­ga­pore, a set of cri­te­ria has been es­tab­lished for ho­tels to limit the spread of COVID-19 that in­cludes an au­dit process to en­sure com­pli­ance. This has cre­ated sig­nif­i­cant op­por­tu­ni­ties for the pri­vate sec­tor to de­velop and de­liver cer­ti­fi­ca­tion and as­sess­ment pro­grams in part­ner­ship with gov­ern­ment and other busi­nesses.

While it is im­pos­si­ble to pre­dict whether changes to con­sumer be­hav­iour will be per­ma­nent, there is clearly an op­por­tu­nity for en­trepreneur­s and busi­nesses to tap into shift­ing pref­er­ences.

4. Sup­ply chains and trade

Even be­fore the pan­demic hit, Canada was ex­posed to ris­ing pro­tec­tion­ism around the world, led by our neigh­bor to the south. The most re­cent trade mon­i­tor­ing re­port from the World Trade Or­ga­ni­za­tion (WTO) found that be­tween mid-Oc­to­ber 2018 and mid-Oc­to­ber 2019, im­port-re­stric­tive mea­sures im­ple­mented by mem­bers were es­ti­mated to cover US$747 bil­lion in trade. This is the high­est level recorded since Oc­to­ber 2012 and rep­re­sents an in­crease of 27 per­cent com­pared to the fig­ure recorded in the pre­vi­ous an­nual over­view of US$588 bil­lion.

Faced with a lack of crit­i­cal equip­ment such as res­pi­ra­tors, pro­tec­tive gar­ments and ven­ti­la­tors, many coun­tries have taken a na­tional security ap­proach to health care equip­ment, adopt­ing ex­port con­trols and di­rect­ing do­mes­tic man­u­fac­tur­ers to be­gin pro­duc­tion of sup­plies. To­day, nearly 100 coun­tries have in­sti­tuted ex­port re­stric­tions on COVID-19 sup­plies, in­clud­ing the US, de­spite calls from the World Health Or­ga­ni­za­tion and WTO not to do so.

In re­sponse to lock­downs around the world and the rise in pro­tec­tion­ism, many busi­nesses are re-ex­am­in­ing their sup­ply chains with em­pha­sis on im­prov­ing re­siliency to in­su­late them from fu­ture dis­rup­tions. This in­cludes short­en­ing sup­ply chains and di­ver­si­fy­ing in­put sources.

For Canada, this means a re­newed em­pha­sis on strength­en­ing sup­ply chains in North Amer­ica. The pend­ing im­ple­men­ta­tion of the Canada-United States-Mex­ico Agree­ment (CUSMA), which re­placed the North Amer­i­can Free Trade Agree­ment (NAFTA) cre­ates an op­por­tu­nity for the US, Mex­ico and Canada to de­velop a con­ti­nen­tal sup­ply chain re­siliency strat­egy. For the US, this would meet one of the key ob­jec­tives it set out at the be­gin­ning of the CUSMA rene­go­ti­a­tion—in­cen­tivize greater pro­duc­tion in North Amer­ica.

This could be achieved by pro­mot­ing greater North Amer­i­can reg­u­la­tory com­pat­i­bil­ity in key goods sec­tors, in­clud­ing med­i­cal de­vices. As busi­nesses look to re­duce their re­liance on in­puts from China, con­sid­er­a­tion could be given to re­lo­ca­tion in­cen­tives.

Ac­tiv­i­ties such as RVing, pre­vi­ously re­served for a small sub­set of the pop­u­la­tion, may wit­ness surg­ing pop­u­lar­ity as Cana­di­ans seek hol­i­days that al­low them to main­tain phys­i­cal dis­tanc­ing.

Many busi­nesses will be per­ma­nently and neg­a­tively trans­formed by the COVID-19 pan­demic and eco­nomic down­turn. While some op­por­tu­ni­ties have been cre­ated for those that can re­spond to the new trends shap­ing the Cana­dian econ­omy, the tran­si­tion will be painful for many.

For Canada to emerge stronger from this cri­sis we need to un­der­stand the trends shap­ing the econ­omy and build back bet­ter. This will re­quire on­go­ing co­op­er­a­tion among busi­ness, labour and gov­ern­ment to nav­i­gate the tur­bu­lent waters ahead.

Adam Scotti photo.

Prime Min­is­ter Justin Trudeau at his daily COVID-19 brief­ing out­side Rideau Cot­tage. He’s been an­nounc­ing un­prece­dented gov­ern­ment grants and pro­gram spend­ing to stim­u­late eco­nomic re­cov­ery from the dev­as­tat­ing im­pact of the pan­demic.

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