The massive challenge of finding how the economy and COVID-19 can co-exist still waits to be fully addressed, writes Philip Cross

By Philip Cross, August 7, 2020

Canada’s economy is regaining its footing after falling off a cliff during the government-mandated shutdown of many sectors this spring. Real GDP rose by 4.5 percent in May and Statistics Canada projects another 5 percent gain in June. This parallels back-to-back employment gains, with both output and jobs having recovered just over 40 percent of their losses.

However, there are troubling signs that sustaining the recovery will be difficult and uneven as many industries struggle to adapt to the new reality of co-existing with COVID-19. The recovery has been concentrated in those sectors that can most easily adapt to the requirements for social distancing. These include manufacturing, construction, and natural resources, which have the advantages of either working outdoors or relying heavily on capital equipment for production. Some services also have rebounded quickly, notably professional services (many of which can be done online) and retail trade.

Conversely, the recovery has lagged for many services that rely on face-to-face interactions with or between customers. Airline travel remains a staggering 97 percent below its pre-pandemic peak, while accommodation and food, recreation, arts, and personal services languish about one-third below their normal level of business. Industries that rely on large crowds such as spectator sports, cinemas, and the arts likely will not recover significantly until after a vaccine is proven effective. Other industries such as restaurants and health care will struggle to survive with higher costs for protective equipment and lower revenues due to social distancing, especially after the weather forces the closure of outdoor dining.

Compounding the difficulties, many of these sectors are made up of small businesses which do not have the access to capital that most large companies have to ensure their survival until a vaccine is available.

The return of nearly half the economy to something like normalcy reduces some of the demands on the federal government’s $350 billion deficit. Still, with large swathes of the service sector struggling with the pandemic, many companies and their employees continue to need government support. The federal government is grudgingly admitting that its ability to transfer income support to Canadians is not unlimited. Most obviously, the decision to wind down the Canada Emergency Relief Benefit program and shift support to employment insurance or wage subsidies is a recognition that the cost of the CERB is unsustainable for even one full year (and forget about a permanent guaranteed annual income).

However, the initial recovery of economic growth and the related drop in demand for government support represents picking the low-hanging fruit. Sustaining growth, reducing unemployment, and generating tax revenues will be more difficult as several service industries struggle to adapt and survive.

This unevenness of the recovery reveals the flaw in the federal government’s reliance on record deficits to deal with the pandemic: it never had an exit strategy beyond waiting for a vaccine or an effective treatment. Extending generous income transfer schemes to individuals was a quick fix but ignored the inevitably that money would run out, and many companies will face bankruptcy before a vaccine arrives.

A more effective, longer-term solution would have involved working with service companies to find novel ways they could interact safely and confidently with customers as the virus was circulating, while ensuring the survival of those with viable prospects when the pandemic ends. Some companies, out of necessity, found innovative solutions. Governments—whose operations outside of hospitals were shielded from both the health and economic consequences of the pandemic—have little understanding of these challenges and a woeful track record of identifying or developing innovative solutions.

Now we see the benefit of producing a full federal budget and not just a snapshot of the current (abysmal) state of government finances. Crafting a budget with a fiscal plan for this year and next would have forced the government to think through its strategy to deal with the virus and how to transition from expensive income transfers to households to more sustainable long-term support for companies. Instead, many households and businesses face the prospect of less government support just when programs that deferred mortgage and rent payments are ending.

The massive challenge of finding how the economy and COVID-19 can co-exist still waits to be fully addressed.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute and the former chief economic analyst at Statistics Canada.

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