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Monthly Economic Letter

June 2020

Economic recovery: What does post-COVID mean for your industry?

A return to normal is expected in 2021 for some, but others will have to wait longer

We know a recession caused by the COVID-19 pandemic is well underway. But it’s much less certain when the economy will return to its pre-pandemic level of activity.

In this article, we forecast when the recovery will come for some of the most important industries in the country.

Economic forecasting: A perilous exercise

What happens when you put 10 economists in a room? You're likely to get 11 different opinions. This old joke is all the more topical in these times of pandemic. The proof is the wide range of predictions from economists—from 5% to 10%—about the depth of GDP contraction in 2020. Scenarios for the recovery in coming years are equally divergent.

Prudence leads us to include both optimistic and pessimistic scenarios in our forecast. That is why we expect GDP to return to pre-crisis levels somewhere between the summer of 2021 and the fall of 2023. Why such a range of potential outcomes? First and foremost because the economy’s performance will depend on the seriousness of a possible second wave of COVID-19 infections. The size of the current economic shock could also lead to continuing weakness in consumer confidence.

However, within this overall forecast for the economy, we also expect wide variations in the rates at which different sectors rebound.

Follow the recovery in real time

Increasingly, big data is guiding our economic forecasts.

For example, Google now publishes daily data on the mobility patterns of Canadians by type of activity.

As of May 29, retail and recreational traffic remained down 30% from where it is normally. Travel to the workplace was also well below normal at minus 40%.

Different industries, different challenges

While the most plausible recovery scenarios vary from one industry to another, certain characteristics of each sector allow us to make more informed forecasts. It’s likely sectors that are more susceptible to physical distancing will regain their momentum before others.

An analysis by the University of British Columbia measured the relative risk of returning to work for more than 300 jobs in about 100 industries. The indicator developed by the researchers takes into account the physical proximity of employees and the frequency of direct contact with colleagues and clients, among other things.

In general, sectors with higher risks of infection for workers also had the greatest job losses in the pandemic (except for essential services). These industries, including some sub-sectors of retail trade, accommodation and food services, could experience a slower recovery, or even another lockdown period if a second wave of infections were to occur.

Consumer demand at the onset of recovery is another factor that will have an impact on the recovery of individual industries. The economic shock has had a significant impact on the incomes of many households. They are likely to remain cautious.

Moreover, while the manufacturing and construction sectors lend themselves more easily to physical distancing, their performance will depend primarily on demand for their products and services.

Five industries to keep an eye on

Each sector of activity will experience a separate pace of recovery. Thus, entrepreneurs in some of Canada’s most important industries will face different scenarios.

1. Construction

The Canadian construction industry was among the most affected at the beginning of the crisis, as evidenced by the over 40% drop in hours worked in April as compared to February. However, construction lends itself better to physical distancing than most industries as confirmed by the rebound in activity in this sector. Hours worked in May were at 20% of their pre-crisis level.

This industry should be among the first to regain its footing. The acceleration of certain infrastructure projects planned by governments will help the industry get back on its feet. On the other hand, the deceleration of activity in the housing market represents a downside risk.

2. Manufacturing

As was the case in Asia and Europe, the manufacturing sector was the first to recover from confinement measures. As compared to February, hours worked recovered from 71 per cent in April to 83 per cent in May.

However, the reduction in household purchasing power, coupled with greater caution by consumers, will have an impact on demand in some sub-sectors.

Thus, manufacturing sub-sectors will recover their volume of activity at different times over the next few years. While it will generally take until the end of 2021 to return to production levels reached in 2019, the food industry should achieve this as early as next winter. On the other hand, the aerospace sector may have to wait until the end of 2022. And, for various reasons, the automotive sector may not fully recover until 2024.

3. Wholesale and retail trade

Wholesale and retail trade bore the brunt of the pandemic. In April, hours worked in this sector were 30% lower than in February. Despite continued restrictions in May (especially for shopping centres), hours worked were still up, at 81% of pre-crisis levels. The gradual reopening of stores should support the recovery in the coming months.

However, early indicators from Asia and Europe show that traffic is still down sharply from last year, despite the reopening of stores. Cautious households will take some time to return to their old spending habits.

Oxford Economics predicts it will take until the summer of 2021 for a return to pre-crisis activity levels in these industries. Once again, some sub-sectors are expected to perform better than others, especially those that have already made the digital shift. Another important underlying trend will be that consumers are likely to turn to buying more local products.

4. Information and Communications Technologies (ICT)

The ICT sector will do well in the coming years for a couple of reasons.

First, many employees are becoming comfortable with teleworking, and several companies have noted the transition is going more smoothly than expected. Investments are expected.

In addition, in the wake of the explosion in online sales, internal BDC surveys indicate increased intentions among entrepreneurs to invest in e-commerce.

As a result, this sector will return to its pre-crisis level as early as next winter and presents better medium-term prospects than had been otherwise expected.

5. Tourism

Ongoing uncertainty will limit tourism beyond this year. The risk of having to quarantine oneself upon returning home will dampen the spirits of many travellers. Oxford Economics expects tourism activity to be reduced by almost half in 2020 and not return to normal until 2022 at the earliest.

With the cancellation of many foreign trips, Canadians are more favourable to spending their holidays in Canada, according to a Conference Board of Canada survey released in May.

What does it mean for entrepreneurs?

  1. Plan your activities by considering both optimistic and pessimistic scenarios. While opinions differ on the extent of the economic recovery, there is a general consensus on the sequence of industries that will rebound and their risk factors.
  2. You can continue to track travel in your province through Google's mobility tool. If your business depends on increased traffic, this tool can help you understand emerging trends.
  3. For retailers, a well-functioning and inviting digital platform is increasingly indispensable. Your business could also benefit from changing consumer habits by adopting a strategy focused on offering local products.
  4. Industries depending on tourism must primarily target Canadian travellers. Such an approach should pay off over the next two years.

The worst of the storm looks to be behind us

As the recovery begins to take hold, we’re seeing how much ground has been lost

Recent economic indicators are a stark reflection of Canada’s difficult reality.

While the contraction in GDP was less than expected in March, the data available to date suggest a sharper contraction in April. The gradual easing of lockdown measures, however, led to an unexpected rebound in employment in May—a sign that the worst of the storm may be behind us.

Record low economic activity

Statistics Canada data confirm the recession began at the same time as lockdowns across the country. Business, school and border closures in the last two weeks of March contributed to a 7.2% drop in GDP for the month as a whole.

Virtually no sector was spared. Among goods-producing industries, it was manufacturing that was the hardest hit in the first few weeks of the crisis. This was not a surprising outcome since nearly 80% of businesses in the sector reported a slowdown in their activities in the Monthly Survey of Manufacturing. In particular, the auto industry was badly hurt by plant closures.

In the service sector, food, accommodation and the arts, entertainment and recreation sector were the most affected.

GDP fell at an annualized rate of 8.2% in the first quarter. By comparison, the economic contraction in the United States was 5.0%. Elsewhere, GDP fell 14.2% in the eurozone and 33.8% in China. In general, the earlier containment measures were introduced, the greater their impact on GDP in the first three months of the year.

Forecasts of second-quarter GDP declines in Canada and the United States (about -40%) are more pessimistic than those in China at the peak of its lockdown.

Canadian GDP is estimated to have declined by 11% (non-annualized rate) in April, according to Statistics Canada based on preliminary data. This would represent an economic contraction of nearly 18% in just two months.

Early effects of the pandemic

First-quarter data indicates the harsh effects of the crisis on consumer spending and investment. It’s important to note that widespread lockdowns were in place for only two of the thirteen weeks in the quarter.

Services, which often require direct contact with the customer, obviously suffered. Spending in this sector was down 10.8% from last fall on an annualized basis.

Consumption of goods was down 6.8%. Only non-durable goods posted gains (+12.9%) due to households stocking up on food and personal care products. However, in-store purchases suffered much more than these figures indicate. The e-commerce consulting firm Absolunet reported an increase of more than 100% in online sales at the end of March for several sectors in Canada, including furniture, sporting goods and appliances.

Private investment was down 1.4%, mainly due to a drop in investment in machinery and equipment (-13.1%). Exports of goods and services fell 11.3%.

Finally, the savings rate rose to 6.1%, a level not reached in almost 20 years. In the medium term, this additional saving could work in favour of retailers by providing more disposable income to households. However, economic uncertainty and the loss of income could limit consumers’ willingness to part with their money for some time to come.

One in seven Canadians has lost his or her job

The easing of lockdowns reversed the trend in the labour market. Some 290,000 jobs were recovered in May, representing about 10% of the 3 million jobs lost in the previous two months.

Still, the unemployment rate has risen to 13.7%. It would have been 18.2% if discouraged workers, workers awaiting recall or involuntary part-time workers were included.

Nevertheless, there is reason for optimism—more than a million individuals who didn’t work in May reported being on temporary layoff, meaning their unemployment spell could be short.

What’s more, the Labour Force Survey was conducted during the week of May 11, before the gradual reopening of many businesses across the country. In fact, as mentioned in the main article, the number of hours worked has already jumped in all industries, and especially in construction, manufacturing, and wholesale and retail trade. Gains could be more generalized when statistics are released for the month of June.

What does it mean for entrepreneurs?

  1. The recovery is underway. However, it’s likely to be slow and uneven given the magnitude of the economic shock.
  2. Despite a rising savings rate, households are not yet ready to loosen the purse strings. The loss of wages and economic uncertainty will limit non-essential spending for some time.
  3. Lockdown easing continues, but the economic recovery will not be uniform across industries. While some will have returned to normal activity levels this winter, others will wait several years before doing so. Our main article looks at this topic.

The U.S. appears to have passed the inflection point

Data leaves much to be desired, but economy may have seen its worst

The good news is that the labour market unexpectedly saw gains in May. Also, easing of lockdowns in several states doesn’t appear to be leading to a rebound in COVID-19 infection rates.

Nevertheless, economic indicators remain historically weak. The recovery has begun but will be slow and gradual.

Close to 20 million jobs lost in three months

The GDP contraction in the first quarter has been revised to 5.0% from 4.8%, and the outlook for the second quarter is even gloomier. Preliminary data suggest a staggering GDP decline of an annualized 30% to 40% for the quarter. The recovery should get started in the second half of the year, but a reduction in economic activity for the full year of 5% to 7% is inevitable.

According to the monthly employment report, the U.S. labour market has turned its fortunes around after two devastating months. Some 2.5 million jobs were added, leaving a total of 19.5 million jobs still lost since February. As a result, the unemployment rate decreased to 13.3%.

These results don’t change the fact that nearly one in four workers (43 million) registered for unemployment benefits between mid-March and the end of May. The good news, if it can be called that, is the number of renewals of these benefits has fallen for the first time since the start of the crisis. After peaking at 25 million claims in the first week of May, claims had fallen to 21.5 million two weeks later. Continued easing of lockdowns should accelerate the return of employees to jobs. Employment statistics should thus remain in expansionary territory as of the next survey, which will be conducted in mid-June.

Transfers up, consumption down

Personal income and consumption data are released much earlier in the U.S. than in Canada. It’s therefore useful to examine them to gain an indication of Canada’s macroeconomic situation.

Average personal income in the U.S. rose an unprecedented 10.5% in April. This extraordinary increase was mainly due to a large increase (+91%) in U.S. government social benefits. The household wage component—down 8% given the 20.5 million jobs lost in April—obviously didn’t contribute to this significant increase.

However, the jump in personal income didn’t translate into additional consumption. Consumer spending plunged 13.6% between March and April. Since February, households have cut spending by 20%, led by a decline in purchases of durable goods (-27%).

In the non-durable goods category, households cut spending on gasoline and clothing by half since February. The purchase of food and beverages at grocery stores was up 4%, showing stabilization following the pantry filling of March.

Services were down 20%, reflecting significant spending cuts in transportation, food, accommodation and recreation. It will be interesting to monitor the evolution of these different sub-categories as confinement easing continues.

Overall, core inflation (as measured by the PCE price index) was negative at -0.4%, confirming that deflationary pressures have so far outweighed inflationary pressures caused by the disruption of supply chains.

Savings up sharply

The strong increase in incomes and drop in spending led to an unprecedented savings rate of 33% in April, surpassing the record level of about 13% reached some 40 years ago.

How to explain this high level? First, you should keep in mind that many sectors were not operational in April, mainly in the services sector. The ongoing easing of lockdowns should allow a resumption of several categories of spending, but at uneven rates.

On the other hand, in times of economic uncertainty, households tend to increase their savings. Federal Reserve Chairman Jerome Powell recently said that 40% of households earning less than US$40,000 a year had seen a member lose a job in recent months. These households sometimes don’t have emergency funds to compensate for loss of income. It’s therefore likely they will increase their savings in case the economic crisis persists.

Similarly, workers who have kept their jobs may postpone larger purchases, including durable goods, such as a car or furniture. This category of goods usually depends on consumer confidence. Confidence remained close to its 10-year low, according to the Conference Board (86.6) and University of Michigan (72.3) confidence indexes.

Business confidence is still depressed

The Institute for Supply Management (ISM) reports that manufacturing activity continued to contract in May, but at a slower pace than in April. The ISM manufacturing index, which climbed slightly from 41.5 to 43.1, thus remained at a level comparable to that seen after the 2007-2009 U.S. recession (an index below 50 indicates a contraction).

The same was true on the services side, where the non-manufacturing ISM index rose from 41.8 to 45.4. However, the survey preceded lockdown easing in some states—making an increase in the index likely in the coming months.

For each of the two indices, managers surveyed reported increases in new orders, production and employment.

What does it mean for Canada?

  1. The recovery has begun but will be slow and gradual.
  2. The increase in savings is not good news for retailers—households are likely to be more cautious over the next few quarters, both north and south of the border.
  3. In this regard, our exports may suffer for some time—especially those that require increased consumer confidence.

Renewed optimism in the markets

After a month of April for the record books, oil is still on a rollercoaster ride

Sharp changes in oil prices continued in May—this time to the upside. Although demand remains weak, it’s rebounding faster than expected, mainly due to greater than expected tightening in production.

West Texas Intermediate (WTI) and Brent, which were trading around US$40 per barrel as of June 4, were at values similar to those seen in early March before the outbreak of a Saudi-Russian price war. At US$30, Western Canadian Select (WCS) was also trading at a high that preceded this impasse. Fewer bottlenecks on the Canadian side of the border reduced the price differential between WCS and WTI to below $10 for the first time in 2020.

While reaching these prices was unthinkable just a month ago, the outlook still remains clouded for the second half of 2020. The fear of a second wave of the pandemic poses a definite risk to prices, at least until a vaccine to counter COVID-19 is available.

Mobility on the rise

Easing of lockdown measures continued in many countries, contributing to an increase in traffic.

According to population mobility data collected by Google, travel was increasing in every G7 country (see main article for more details on Canada). From a low of 47% of normal in mid-April, travel jumped to 71% by the end of May (an average of seven countries). Several non-OECD countries—notably in South America and Africa—had not begun to lift confinement measures by mid-May.

The main consequence of this increase in travel is that year-over-year demand for gasoline, which was down 40% in April in the U.S., is expected to be down only 15% in June.

The International Energy Agency (IEA) has thus revised upwards its global demand outlook for 2020. After demand dropped by about 25% in April from a year ago, the gap is expected to narrow to 13% in June and then to 5% on average for the second half of the year.

A significant part of oil demand depends on international trade. Here, the forecast is more uncertain. The World Trade Organization expects trade to decline from 13% to 32% in 2020. The pace of recovery in international trade will certainly have an impact on demand in the coming quarters.

Tightening of production

The Organization of the Petroleum Exporting Countries (OPEC) and Russia had already been expected to jointly cut production by about 9.7 million barrels per day (mb/d) by May.

What was less certain was tightening by non-OPEC producers. Despite the low prices observed since March, many analysts expected logistical constraints to limit cutbacks by other producers.

However, producers in Canada and the U.S. reduced their throughput by 3 mb/d as early as April. In just a few weeks, global production fell by a record 12% to its lowest level since 2011 (88 mb/d).

From a record level of 5.8 mb/d in December, Canadian production is estimated to have declined to about 5.0 mb/d in April, a 14% decrease in four months. Drilling operations were at their lowest level in decades, with only 20 active rigs as of May 29 compared to 78 at the same time last year.

Implications for Canada

Higher oil prices should provide some breathing room for Canadian producers still in operation. However, the situation remains precarious. At current prices, producers are barely avoiding operational losses.

It was inevitable that jobs would decline in the oil extraction sector. However, the IEA expects Alberta's production to increase in the second half of 2020. If the WCS continues to trade around current prices, several oil sands operators could restart production.

Despite the recent rise in oil prices, confidence among firms operating in the sector remains fragile and investment is likely to suffer for some time to come. Economic growth in the oil-producing provinces is thus expected to remain weaker than elsewhere in the country.

Changing of the guard at the Bank of Canada

The new Governor of the Bank of Canada, Tiff Macklem, took office on June 3. He is expected to keep the overnight rate at its current low level of 0.25% at least until the end of 2021. In the meantime, the central bank is ensuring the smooth functioning of financial markets through massive asset purchase programs. Between February and April, assets held by the Bank of Canada increased from $123 billion to $390 billion, which now represents close to 20% of national GDP.

The Canadian dollar returns to 2019 levels

The loonie has appreciated in recent weeks against the U.S. dollar, reaching US$0.74 in early June. This appreciation goes hand in hand with a rise in oil prices, discussed in the oil section, of this economic letter. The Canadian dollar is thus returning to its value of a year ago.

Canadian business confidence points to recovery

The economy is recovering with 38% of Canadian small and medium-sized businesses saying they had fully reopened at the end of May and 44% saying they had partially reopened, according to a survey by the Canadian Federation of Independent Business (CFIB). However, more than one in two entrepreneurs said they were concerned about their ability to enforce physical distancing rules in their business.

The optimism of entrepreneurs is also on the rise. CFIB's Business Barometer confidence index rose to 52.5 in May from 46.4 in April. However, the agriculture, natural resources, manufacturing, retail trade and information, arts and recreation sectors did not reach the 50 threshold, indicating they were still in contraction.

At the provincial level, the contraction in activity was felt in Newfoundland and Labrador, Prince Edward Island, New Brunswick and Quebec.

Weak demand leads to deflation

The Consumer Price Index (CPI) for April fell 0.2% from a year ago. This was the first year-over-year decline in inflation since the 2008-2009 recession.

Prices were down in three of the eight major CPI categories including transportation (-4.4%) and clothing and footwear (-4.1%). While the cost of gasoline (-39%) accounted for most of the reduction in transportation-related prices, no category stood out in the clothing and footwear sector, indicating the drop in prices could be due to the strong growth in online commerce since the beginning of the pandemic.

Prices for basic necessities such as food (+3.4%) and household cleaning products (+6.4%) were on the rise.

Core inflation remained close to the 2% target set by the Bank of Canada, as the average of the three indicators used to measure it was 1.8%.

Disruptions in supply chains could potentially lead to inflationary pressures. But there is every reason to believe the overall inflation rate for the remainder of 2020 will remain low or even negative, given a significant contraction in demand.

Key indicators—Canada