The economy contracted more than expected, but why is anyone surprised?
The headline numbers showed Canada lost 1.01 million jobs in March, while the conventional unemployment rate jumped from 5.5 to 7.8 per cent. Both monthly movements were the largest ever but they only partly convey the effect of the pandemic.
Another 1.3 million Canadians were unable to work, while 800,000 more saw their work week cut at least in half. Total hours worked plunged 15.1 per cent, three times the drop in employment. Worse is to come, as shutdowns widened in April, including in the oilpatch and among small businesses, which escaped largely unscathed in March.
Headline unemployment misses how many other Canadians were impacted. These include the 1.0 million unable to work and the 515,000 who lost a job and decided not to look for another. Including these people, StatsCan calculated, the unemployment rate would have been 23.0 per cent, more in line with its preliminary estimate that March GDP plunged nine per cent.
Jobs disappeared faster than economists forecast. Though pandemics are hard to predict, economists can be criticized for not grasping the current one’s impact and therefore not warning governments of the true devastation from locking down the economy. Anyone can miss one call but blowing this forecast is yet another example of a persistent lack of imagination in the economics profession. At the worst of the global financial crisis in 2009, Queen Elizabeth famously asked economists “Why did no one see it coming?” The semi-official response from economists at the British Academy was that the lack of foresight reflected “a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.” This same lack of imagination has been reflected in underestimating the pandemic’s impact.
Saying the pandemic itself could not be foreseen is not an excuse. Canada is regularly subjected to unexpected shocks. In recent years, these have included the Asian financial crisis of 1997-98, the Ice Storm in 1998, the 2001 stock market crash, the SARS epidemic and Ontario electrical blackout in 2003, the 2008 global financial crisis, and the oil price shock of 2014. Unforeseen events occur with regularity, if not a fixed periodicity, and it is government’s responsibility to prepare for such emergencies.
This recession’s origin in a pandemic has completely reversed the usual response of the goods and services sectors. Recessions invariably begin on the goods side and then flow downstream into lower spending on services. This time, services collapsed first and the effect will work upstream to such industries as autos and house construction.
The unprecedented downturn in services is reflected in higher job losses for women than men. Usually, men bear the brunt of recession, reflecting their preponderance in cyclical industries such as factories, mining and construction. But in March adult women lost almost four times more jobs as men did. It is a bitter irony that a federal government that made gender equality the centrepiece of its 2018 budget presided over the largest reversal for female employment on record.
Many firms and households will struggle to stay afloat, even with government help. Governments themselves will be constrained. Most local governments in Canada are feeling the pinch of unpaid property taxes and lower fees and fines and will ask their provincial government for financial aid. But several provincial governments already had high levels of debt even before the pandemic caused a sudden increase in health-care costs and ravaged their revenues. Moreover, in recent years many universities have shifted to a business model of recruiting more foreign students, who pay higher fees than Canadian residents. The sudden loss of many of these students is creating a funding crisis for post-secondary institutions, which will turn to governments for help.
These subnational governments will join the very long line of supplicants asking for federal government aid. Already analysts are struggling to update deficit forecasts: in two weeks, the Parliamentary Budget Officer twice revised the forecast deficit upward, first from $26.7 billion to $112.7 billion and then to $184.2 billion. And that figure does not include the latest new measures for individual workers and promised bailouts to several industries. At some point the federal government will have to start refusing requests for aid and adopt austerity to curb its own debt.
The sudden economic collapse exposes Canada’s excessive reliance on debt. Rapidly escalating debts, especially the federal government’s, shows that one of the lessons Canada should have learned from the 2008 crisis is that apparently safe levels of public debt were in fact not so safe. This is the economist’s version of Hemingway’s famous quote about the two ways to go bankrupt: “Gradually and then suddenly.”
The economy will not come “roaring back” in the short term. In the recovery from 2008-9, Canada’s low levels of debt allowed it to take advantage of low interest rates, while oil prices quickly rebounded to $100 a barrel. Both those factors now work against a recovery. High debt means most people cannot borrow more, even at record-low interest rates. Meanwhile, oil prices are at record lows, partly reflecting the growing supply from shale oil producers whose ability to quickly boost output has kept oil prices capped since 2014. More importantly, Canada’s productive capacity of capital and labour will be curtailed for years, as business investment slumps and immigration slows. Governments need to focus on improving potential growth as much as buttressing demand in the short term.
Financial Post
