Canada's Covid-19 Story:
Exploring the Effects and Channels through which Covid-19 has Affected Canada’s GDP
Highlights:
The Global Economy is experiencing its worst recession since the Great Depression
Canada’s GDP fell by 11.46% in April as lockdowns were imposed
Support from Government through policies and transfers acts as a lifeline for individuals and businesses
Unemployment jumps to 13.8% in May with a sharp decline in Consumer Confidence accompanying it
Tourism and retail trade industries are one of the worse hit sectors
The Covid-19 pandemic has plunged economies around the world into a “Great Lockdown” as governments try to control the spread of the virus. Lives and livelihoods are at stake, a normal lifestyle is being redefined, and the economic consequences of this pandemic are so severe that the global economy is experiencing one of its worst, if not the worst recession since the Great Depression of the 1930s.
One question to be explored now as Canada moves forward and parts of the country start to reopen is: How has the Canadian Economy fared against this pandemic since the nation-wide lockdowns were imposed?
This is a key question to ask to know how Canada fought through this pandemic and be able to identify which parts of the economy might be heavily weakened and where there might be opportunities for growth to be able to properly allocate resources.
One key indicator that economists look at to evaluate the general health of an economy, as well as providing a broad snapshot of its past performance, is its Gross Domestic Product (GDP), defined in simple terms as the value of all goods and services produced in an economy, it provides a snapshot of the economic activity and health of an economy.
To help better understand the impact of the pandemic, we will break down and analyze GDP and its main components in sub-sections along with its key drivers
that were affected by the pandemic. The expenditure-approach to GDP will be used, thus, will be covering the components of: Consumption, Investment, Government Expenditures, and Net Exports.
GDP Equation Used: Y= C + I + G + NX
Canada Before Lockdown
Canada entered this crisis with a strong, well- functioning, and robust economy and this served as a strong basis as it persevered through this pandemic. Before lockdowns were imposed, the Canadian economy was operating near full-potential output with historically low unemployment levels and inflation stable around the Bank of Canada's goal of 2%. Heading into the pandemic, Canada has had one of its strongest labour markets in years and it had a robust and well-functioning economy as well as financial market. This is one of Canada's strengths heading into the crisis. Just as a healthy and strong body is more capable of fighting off bacteria and viruses to avoid getting sick, so does an economy.
A Record-Low -11.64% Decline in GDP for April 2020 as Economic Activity Halts (Y)
Canada’s Real GDP plunged in April 2020, experiencing an -11.46% drop from the prior month, following a -7.47% month/month change in March, as can be seen from the graph below. This unprecedented decline is the result of having most of the economy being forced to shut down.
Data Source: Statscan- Table 36-10-0434-01 (formerly CANSIM 379-0031)
To put that into perspective, during the financial crisis of 2008, Canada’s lowest point of that crisis was only a -1.37% drop in December of 2008, highlighting the severity of the current crisis. The reason for this steep decline in GDP is that every component included in its measurement, except government expenditure, experienced substantial declines since the nation-wide lockdown was imposed in mid-March of 2020. Businesses closed leading to a fall in output, workers were laid off, and there was a significant loss of economic activity and income in the economy. Consequently, this created very high levels of unemployment, dampened consumer and business confidence, and global trade to plummet as other countries imposed lockdowns. The overall economic outlook for Canada is sluggish.
If GDP levels were to remain low for a long period of time and the severity of its impacts is not controlled, it could leave a long-lasting impact on the economy. This could occur through the closure of businesses, high and unsustainable debt levels, as well as discouraged workers never wanting to work again. All of these could lead an economy into a negative cycle of declining economic activity.
Unemployment Rate Soars to 13.8% in May 2020 Leading to a Steep Fall in Consumption and Confidence (C)
Canada saw its unemployment rate skyrocket to 13.8% in May amid the pandemic as businesses closed shops and laid-off workers to offset the costs of stopping business operations while under lockdown. This inevitably reduced the confidence consumers had about spending and their financial future, which further diminished overall demand.
Consumption accounts for roughly around 56% of GDP for Canada. This component is relatively stable compared with investment spending but the dramatic loss of income, confidence, and spending power of households associated with being unemployed, in combination with the shutdown of businesses, is a major reason for the steep fall in GDP.
As a side note, services spending roughly accounts for 52% of overall consumption. Thus, the halt of personal services operation, erased almost all of the services portion of consumption.
From the graphs below, the employment rate and confidence of consumers reached never-before-seen levels during lockdowns. The unprecedented shock caused by the pandemic severely damaged Canadians and in turn, the economy.
Data Source: Statscan – Table 14-10-0287-01 (formerly CANSIM 282-0087)
Data Source: OECD
People are the core of economic activity. If people are not working and earning income and are fearful about their future, this could create negative effects for the economy now and in the long-run. People may become discouraged and not willing to enter the labour force again, there could be a mismatch of skills or deskilling, and may not spend as much.
Numerous policy actions have been taken by the government to help minimize this damage to households, most notably the Canada EmergencyResponse Benefit (CERB) for those out of work due to Covid-19, and Canada Emergency Wage Subsidy (CEWS) that provides a wage-subsidy to businesses that retain employees. This quick policy action should help deal with the symptoms of this virus and minimize the longer-term damage of unemployment.
Investment and Business Confidence Stagnates as Lockdowns Are Imposed Dampening Economic Grown (I)
Overall investment in Canada stagnated in April as many businesses closed down, and delayed or cancelled investment plans. Investment in building constructions, in particular, fell by -45.9% from the previous month, in part as governments directly restricted construction activity.
Data Source: Statscan – Table 34-10-0175-01
Several small businesses are likely to permanently close after the pandemic is over as the economic burden of this crisis may be too much for them to handle. It is key to note that investment spending contributes to an economy’s long-run economic growth as a greater stock of machinery and equipment raises labour productivity.
To keep businesses afloat, as they are a key source of employment, economic output, and business investment, one thing that is vital for all businesses is access to credit, which is mostly supplied by commercial banks. The Bank of Canada has made access to credit easier by lowering its key interest rate to its effective lower bound of 0.25%. This in turn lowers the rates that commercial bank charges on their loans to businesses and households, making the cost of borrowing cheaper and credit more accessible. As a result, businesses are more able and willing to tackle debt to help them survive through this pandemic.
Government Spends on Healthcare and Education with Policy Actions becoming a Source for Survival (G)
The federal government acted to support provincial and municipal spending primarily on the health and educations sector. Municipalities have seen major declines in revenue leaving the province to bear the burden of health and education spending. This action from the federal government is crucial today as spending in the health sector is a key priority to help control the spread and treatment of the virus and expenditure on education is vital as disrupting
education could create disastrous results for the economy’s economic growth.
A notable action the government has taken is the provision of a $450 million investment to help Canada’s research community during Covid-19. This helps universities retain staff and maintain research-related activities during the crisis. The government has tried to ensure that universities have access to the technology required to operate remote classes and has provided guidance and updates on operations for the upcoming school year.
"Government Support Acts as a Lifeline for Individuals and Businesses and in Providing the Foundation for Recovery"
The Government of Canada also acted quickly to help offset the current and potential damages of the pandemic. The most familiar ones to students would be in the form of government transfers through the CERB and the CESB whose purpose is to put money into people’s pockets. Other actions that the Government has deployed can be seen in Table 1.
These initiatives created a cushion for the Canadian economy which helped minimize the
damage of the pandemic. Overall, they act as a lifeline for individuals and businesses and in providing the foundation for recovery as Canada goes through this crisis.
One thing to keep an eye on is the rising debt levels the government is taking on to fend off this crisis. The government has to be careful in adding more debt as it could become harder to manage this higher debt loads and further put constraints on the economy moving forward.
Oil Price, Tourism Plummets, and with Shock in Global Trade, Creates Downward Pressure on Exports (NX)
Merchandise exports fell as much as -29.09% in April 2020 as a result of the imposition of lockdowns by Canada and other countries, as can be seen from the graph below. This decline implies that other countries are buying less from Canada which means less inflow of money for the economy and reduces overall economic activity.
Data Source: Statscan – Table 12-10-0011-01 (formerly CANSIM 228-0069)
Canada is an open economy that trades with other countries and commodities, such as oil, comprises a large share of it. At one point the West Texas Intermediate (WTI), the North-American benchmark for oil prices, dropped to as low as -36.98 on April 20, 2020. In an unprecedented turn of events, the price of oil turned negative. It has since recovered but is still substantially lower than its pre-Covid levels.
A decline in global oil prices reduces incomes in the oil-producing provinces of Alberta, Saskatchewan, and Newfoundland. Although it would typically also help to reduce production costs in oil-importing provinces, this effect was mitigated by a drop in overall economic activity due to the Covid-19 shock.
The tourism industry has also been badly hit worldwide as restrictions on international and even domestic travel have been imposed to control the spread of Covid-19. Trips to Canada by travelers abroad, in particular, decreased by as much as -82.1% in May from the previous month.
This drop in oil prices and tourism levels could potentially have a multiplier effect on the economy, if the income strain of the pandemic was more severe than planned and covered by the government income support, making the impact of the lockdown, more than just the closing of businesses.
As a quick note, the fall in oil prices and shock in global trade lead to the value of the Canadian Dollar getting weaker causing it to depreciate sharply against the US dollar in late- march. With oil prices starting to recover and Canada doing better than most countries in containing the virus, the Canadian Dollar has started to rise in value.
Conclusion
Covid-19’s impact on the Canadian economy has definitely been severe and unprecedented and we are not out of the woods yet. Government policies have acted well to deal with the symptoms of this virus and provided spending on health care and research to aid in eliminating the virus in our system. So far, it seems we have avoided experiencing the critical state of the effects the virus could potentially have.
While there was initially hope of a V-shaped recovery – and there is some evidence of a sharp rebound in employment and retail sales – we may be heading for a long and uneven recovery filled with tremendous risks and uncertainty.
Canada has so far persevered and there is hope that the worst already happened in April. Cities and provinces have begun to gradually re-open, people are getting back to work, and economic activity is starting to gradually build up. But the recovery path is as good as anyone’s guess right now.
With the path of the virus impossible to predict and as countries prepare to counteract a possible second wave, we have to be prepared for the worse. Risks of high debt burdens, permanent damages of unemployment and business bankruptcies, and disruptions in global supply chains and the political global trade climate, all have to be carefully considered moving forward.
Appendix
Table 1: Canadian Government - Economic Response Plan: Costs and Implementation
More info can be found on https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html
References
Canada, D. (2020, June 15). Canada's COVID-19 Economic Response Plan: Support for
Canadians and Businesses. https://www.canada.ca/en/department/finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html
Government of Canada. (2020, May 29). Gross domestic product, income and expenditure,
first quarter 2020. https://www150.statcan.gc.ca/n1/daily-quotidien/200529/dq200529a-eng.html
Government of Canada. (2020). New temporary program announced to support research
staff in Canada. https://www.canada.ca/en/research-coordinating-committee/news/2020/05/new-temporary-program-announced-to-support-research-staff-
in-canada.html
OECD (2020), Consumer confidence index (CCI) (indicator). doi: 10.1787/46434d78-en
Statistics Canada. (n.d.) Table 36-10-0434-01 Gross domestic product (GDP) at basic prices,
by industry, monthly (x 1,000,000) https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?
Statistics Canada. (n.d.) Table 24-10-0005-01 International travellers entering or returning to
Canada, by province of entry, seasonally adjusted
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2410000501
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