Some regions will bounce back quickly. Will others bounce back at all?
Collapse of sectors like airlines, tourism will place heavy toll but experts see upturn for areas not reliant on imperilled industries
There won’t be a depression in Manitoba. But there might well be one in Malton.
Canada’s economic recovery from the COVID-19 pandemic will depend on many things — including the development of a vaccine and the hope that the U.S. won’t blow its rebound.
But it will not be uniform across the country. The collapse of core industries such as airlines and tourism will leave patches of lasting ruin in the midst of renewed prosperity in wide swaths of the country with banking, manufacturing and oil sectors all coming back, economists say.
“The real problem with the coronavirus is that some industries just might effectively cease to exist in any kind of familiar form,” says Mark Kamstra, a professor of finance at York University’s Schulich School of Business.
“This is a nasty little virus and people aren’t going to want to get it, so you may see entire sectors really shrinking.”
These contractions could leave areas such as Mississauga’s Malton community surrounding Pearson International, with its numerous hotels and airline-related office towers, desolate as neighbouring municipalities revive, Kamstra says.
“That entire area, buildings are going to be shuttered and there’s nothing to do with them,” Kamstra says.
The same might be true of downtown Toronto, where clusters of towering bank buildings might be hard pressed to keep business tenants around, he says.
“There are going to be a lot of empty buildings. People are going to continue working from home because it’s cheaper and nicer,” he says.
Meanwhile, regions of the country that don’t rely on imperilled industries — sports and entertainment and other areas where social distancing is difficult — will prosper again, Kamstra says.
“(A prolonged downturn) is not going to affect Regina much, Saskatchewan or Manitoba,” he says. “They’ll still be producing food and they’ve got their industries (agriculture, forestry, mining) that work.”
Perplexingly, despite the gloomy outlook for much of the economy, global stock markets continue to paint a much sunnier picture.
Here in Canada, the S&P/TSX Composite, which plunged by more than 35 per cent between late February and late March, has since seen a surprisingly quick rebound, jumping up by more than 30 per cent from the bottom of the crash as of market close on Tuesday.
University of Toronto economist Peter Dungan credits investor confidence that a vaccine will be found and much of the world will prosper once again for this outlook.
Unlike the banking crisis of 2008 and 2009, which had investors panicked and unable to see a way out, most investors today understand that we will recover from this, Dungan says.
“If there’s a general feeling there that in many sectors you will get back to relatively normal and relative profitability in one to two years … then the stock market valuations at the moment look reasonable to me,” Dungan says.
He adds that interest rate drops by central banks around the globe have made stocks more attractive than government bonds to investors — even in these perilous times.
“When the non-risky stuff basically earns you nothing, you’re willing to take more risks,” he says, adding as more people move into the market, stock prices are pushed higher.
“The general consensus of market participants at the moment is that ‘yeah, it’s bad and that’s why valuations aren’t where they were a few months ago.’ ”
But it’s not like in the financial crisis, where investors had no idea how it was going to end, Dungan says.
Kamstra says the nature of this economic crisis means interest rate cuts and other moves by governments and central banks have less impact than they otherwise would. That’s because, unlike most economic plunges, this one is marked more by a collapse of supply, rather than demand.
“The pandemic I think of as a classic supply shock,” Kamstra says, referring to parts of the supply end of the economy that have dried up as oppose to the demand, which was the case during the Great Recession.
That means the output of many industries such as airlines has disappeared, rather than consumer confidence and spending.
Thus, the Bank of Canada and other central banks have a depleted quiver of remedies to respond with, Kamstra says.
“If you’ve got some kind of change in (consumer) preferences, or people are just nervous about (getting their) paycheques, then you can lower interest rates and flood the market with easy cash,” he says. “You can really help mitigate demand by boosting consumer confidence. And the government can do a lot with fiscal spending to make up for the lack of demand.”
But those kinds of solutions can’t encourage people to spend on goods and services they think might threaten their lives, such as getting on a plane or going to a concert.
“It’s not like a financial crisis where you just have to give people confidence to spend money again,” Kamstra says. “You would have to convince people to … risk their health and lives to resume their normal lives.”
Still, many economists are optimistic that Canada’s economy will recover relatively well — especially once a vaccine is found.
The main reason for this, Kamstra says, is that the country’s current financial woes are due to cratering oil prices more than the virus.
“The Canadian economy is much more impacted by the oil price shock than anything else,” he says. “The pandemic is almost second order for us compared to what is happening with oil prices.”
Oil prices are being artificially suppressed, and will almost certainly rise as economies reopen, Kamstra says, making Canada’s recovery prospects look better.
And while there has been much talk about a long-term depression of late, Pedro Antunes, chief economist for the Conference Board of Canada, says there is actually much room for optimism.
Even with two million job losses in April, Antunes sees an upturn in jobs and economic activity as the economy reopens.
“What I’m hoping though is that April was the worst month,” he says. “And perhaps May we’ll see very little in terms of reprieve, but June and July we’ll see the virus contained and have a little more economic activity picking up.”
Antunes says the second half of 2020 should see more vigorous growth and the reversal of some of the job losses.
“I think hopefully the worst has already passed behind us (but) it’s not to say it’s not going to take a fair bit of time before we do come out of this,” he says.
Antunes says that the continued flight of retiring baby boomers from the workforce and an almost certain drop in immigration will make jobs more available as the pandemic abates.
And like most economists, Antunes says a full economic recovery can only happen once an effective vaccine has been widely deployed.
There is a risk that if the virus surges during reopenings, the economy can tank again — creating the so-called W-shaped rebound, where it charts down and up for a second time. That would be an unprecedented economical disaster.
Antunes acknowledges that Canadian households are not saving much at all and suggests this pandemic could spark a return to saving in coming years, which happened after the Great Depression of the 1930s.
Amin Mawani, director of the health industry management program at York’s Schulich business school, is confident that globally the economy can rebound significantly, pointing to a recent cover of the Economist magazine that describes a 90 per cent recovery going forward.
“An economy performing at 90 per cent is a significant decline. The 10 per cent decline will be noticeable and be felt by everyone,” Mawani says. But is better than being in a depression.
Vik Singh, a global management expert at Ryerson University’s Ted Rogers School of Management, isn’t as optimistic. He says we’re almost certainly in a recession right now.
“We’re getting hit on all sides: employment is down, retail spending is down, the U.S. economy looks pretty bad,” and there isn’t a switch you can flick to go back to the way things were, he says.
Dungan adds that any optimism in Canada’s ability to see an economic rebound is predicated on the hope that the U.S. — in its rush to reopen — won’t throw the continent’s economy into even worse turmoil.
“One of the big issues that hangs over us is whether the Americans blow their recovery,” Dungan says. “If they open up too early and … that leads to a surge that may be even worse than the one they’ve already had, then that’s really going to slow us down, too.”
Canada will continue to depend on U.S. trade to prosper and a shuttered American economy would cripple ours, he says.
“We’re still heavily integrated and you can’t get away from that.”