Canada’s economy is reeling from Covid-19 and a slumping energy market, but a lively tech sector and support from government and the central bank offer hope for recovery.
The world’s second-largest country by size recorded economic contraction in March and April as the government instituted community shutdowns to slow the spread of the coronavirus. While it’s seen far fewer cases of the disease than its much larger neighbor to the south, Canada’s economy has suffered just as dramatically.
“We’ve had an unprecedented decline in the economy so far this year,” says Nathan Janzen, senior economist at Royal Bank of Canada. “Over the two-month period, we had the biggest drop in economic activity in our history.”
Since its economy is closely integrated with the US, the health of the US market has an outsize influence on Canada’s fortunes. And like the US, Canada is now seeing an encouraging rebound after the initial shock of community shutdowns and business closures.
“Canada is essentially a micro-version of the US,” says Doug Porter, chief economist at BMO Financial Group. “From an economic standpoint, we had about the same hit as the US because of similar shutdown experiences and we both recovered somewhat in May.”
The hit was staggering. GDP fell 8.2% in the first quarter, and the second-quarter decline is expected to be significantly worse. The International Monetary Fund recently lowered its forecast for Canadian GDP growth in 2020 from -6.2% to -8.4%, because “the recovery is projected to be more gradual than previously forecast.” The IMF’s estimate for global growth in 2020 also fell, from negative 3.0% in April to negative 4.9%.
The IMF expects Canada to fare slightly worse than the US and Germany for the year but better than other European states, including France, Italy and Spain. More than 3 million Canadians have lost their jobs in 2020, causing the unemployment rate to spike to 13.7% at the end of May from 5.6% in February. That is nevertheless far better than was anticipated earlier this year.
The May stock market bounceback has encouraged investors. The TSX Composite Index, a broad measure of the Canadian stock market, has regained about 60% of its 38% decline in late February and March. Few economists, however, expect an immediate V-shape economic recovery due to the uncertainties of the Covid-19 crisis, particularly given the alarming resurgence of the virus in the US.
“People got excited about the May job numbers but this is going to be a long, painful and uneven recovery,” predicts Glen Hodgson, an economist at think tank C.D. Howe Institute. “We’re going to need a successful vaccine for things to fully recover.”
As in all developed economies, Canada’s hardest hit sectors have been those least able to operate while observing stay-at-home and social-distancing restrictions. Airlines, retailers, restaurants, accommodations and entertainment businesses have all been hammered. Young people and women have suffered a disproportionate share of job losses. “People are starting to call this a “shecession” because so many women are losing jobs in schools, restaurants and hotels,” says Hodgson.
Some parts of the country are feeling more pain than others. Much of western Canada and the eastern Maritime provinces didn’t see coronavirus cases surge as they did in more populous Ontario and Quebec. British Columbia successfully controlled early outbreaks at long-term-care centers with aggressive shutdowns, and is now further along in reopening communities. It is also expected to report one of the smaller economic contractions among Canadian provinces this year.
Quebec, on the other hand, has accounted for over half of Canada’s 104,000 reported cases of Covid-19; Montreal is the country’s hottest spot for infections. Quebec is now slowly emerging from lockdowns as new cases decrease, but job losses have been severe and could be slow, or reverse.
“Quebec has had as big a challenge with the coronavirus as European countries, in many cases,” says BMO’s Porter.
Ontario, which accounts for more than a third of Canada’s economic output, has eased restrictions through much of the province, but not yet in Toronto, which is now is reporting the most new cases in the country.
Another differentiating factor is the provinces’ sensitivity to commodity prices, most notably oil. Canada has a thriving natural-resources sector and is the world’s fifth-largest oil producer.
“Our resource sector sets us apart from most industrial economies,” says Hodgson. “The diversification is good, but we do have exposures.”
Alberta, by far the country’s largest oil producer, is most vulnerable. The collapse of energy demand and oil prices this year has hit the province’s oil sands sector hard. While the province has experienced comparatively few coronavirus cases, Alberta is expected to post a double-digit decline in GDP this year due to the devastated oil market.
Extraordinary Measures
While the pandemic has brought numerous industries to a standstill, there are plenty of bright spots in Canada’s diverse service-oriented economy. “Anything client-facing has been clobbered, but 80% of the economy has been relatively untouched,” says Hodgson.
The housing sector, long seen as a vulnerability—particularly Toronto and Vancouver, which had been the hottest markets prior to the pandemic—has performed far better than expected. Canada’s technology sector is also faring well. Shopify, its newest tech superstar, is firing on all cylinders. The Ottawa-based e-commerce platform offers small businesses the ability to manage orders, shipping, and payments across online marketplaces, and the Covid crisis is spurring demand for its services. With a market capitalization now over C$100 billion (US$76 billion), Shopify recently surpassed the Royal Bank of Canada as the most valuable publicly traded company in the country.
As big as the economic hit has been, the federal government has responded with extraordinary measures to support consumers and businesses.
“We’ve had an unprecedented pullback in the economy, but we’ve also had an unprecedented fiscal response,” says Janzen. Since March, the government has been sending out C$2,000 monthly checks to Canadians who lost their job because of Covid-19, and Prime Minister Justin Trudeau recently extended the benefit for another two months. The payments may actually have exceeded estimated lost wages in the first few months of the program, says Janzen.
The government is also providing bridge loans to help companies in crisis maintain their payrolls, and may eventually provide more direct support for hard-hit industries like airlines and oil and gas. The federal budget deficit is expected to reach at least C$250 billion this year and will increase Canada’s overall debt-to-GDP ratio from 88% at the end of 2019 to about 97% by the end of 2020, according to Trading Economics. The surge in public spending prompted a recent downgrade in June of Canada’s credit rating from AAA to AA+ by Fitch Ratings.
The Bank of Canada has also taken extraordinary measures to support the economy. It cut its benchmark interest rate to 0.25% in March and launched a government bond-buying program to provide liquidity to financial markets—something it didn’t do in the 2008 financial crisis.
Most economists expect the Canadian economy to rebound, with 6% to 7% growth in 2021, albeit from a much smaller base. There is wide consensus, however, that with Canadian consumers and businesses carrying high levels of debt, the pandemic-induced plunge will have lasting effects on the economy.
“Policymakers will go to great lengths to support the economy,” says Porter, “but I would be shocked if we don’t see a big increase in insolvencies in both the consumer and corporate sectors.”
