COVID-19's impact on Canada's economy

[Music] hello welcome to panomics podcast series exploring the economic impact of the covid-19 pandemic and what the coming months May hold Canadians my name is Steven Maurice I'm the editor of Scotia Bank perspectives over the next few weeks I'll be talking to Scotia Bank economists about the federal government's response to the pandemic the job market real estate small business and much more we'll delve into the real life impact on Canadians as they struggle to keep their families healthy while also dealing with all their financial challenges today I'm talking to Scotia bank's Chief Economist Jean Fran pero about the big picture what the pandemic has done to our economy how the liberal government has reacted and what the coming months May hold in store for all of us JF thanks for joining us today it's a great pleasure Steve all right well let's Jump Right In on this there has been a whole glut of economic news over the last couple of weeks that paints at least a partial picture of where we're at and where we might be headed including a throne speech new GDP numbers a report from the Parliamentary budget officer and most recently a new10 billion infrastructure program and at the same time we've had a new surge in covid cases especially in Quebec and Ontario that's leading to renewed restrictions on some kinds of economic activity this may or may not be a so-called second wave but it's certainly showing that we're not out of the woods yet when it comes to dealing with the Corona virus so let's go through some of that starting with the GDP numbers now just we should point out these are numbers from July way back in the sunny days of summer when it felt like things were starting to head in the right direction can you walk us through some of those numbers what they mean what they mean about what was happening then and what they tell us about what's what's happening now so you know the the economic data that are coming in generally speaking are clearly reflective of a very very sharp rebound from you know the the the crushing blows dealt by P the pandemic in the early part of the year um so that's obviously it's good news that we are recouping some of the Lost ground um but the fact that the numbers are fantastically strong as they have been so far in the third quarter you know can't be necessarily interpreted as indicating that everything is everything is hunky dor you know getting back to normal you know very very rapidly that's simply not true you know GDP uh obviously has been growing strongly but if you peel the onion back a little bit and you see that some parts of the economy are still struggling and that's going to be the case for quite a while other parts of the economy obviously done a lot better um so you've heard folks for instance talk about kind of a k-shaped recovery so some parts of the economy you know rebounding in in V fashion others kind of stagnating a little bit and that's you know that's that's the reality that we're going to be in um so you know you can look at the July GDP data as being comforting and it is and it looks like August is probably going to be a decent number as well um but as you move forward in the quarter even before you start talking about the second wave it was always going to be the case that GDP and economic indicators would start to uh you know come back down to more normal levels following a extremely rapid um you know postco recovery in say May June July and some extent August so C can I just stop you there and just to go back at these numbers because the numbers for July where it looked like there was a 3% increase in GDP in July as you say following 6% increase in June so already by July the sort of the pace of the recovery was starting to slow down and as I understand it stats can is even talking about they're only projecting a 1% increase in in August so I mean that is a reflection of you know as you say the that the pace of the recovery is maybe slowing down but was it already starting to slow down even in July and we weren't aware of it well well I mean you've got to you got to keep in mind that that usually a monthly GDP number is something like 0.1 or02 right so 6% obviously is incredibly strong uh as we declines of eight or n or 10% before that 3% is still extremely strong by historical standards 1% is still extremely strong my historical standards um so you know like that matters to some extent but clearly what we've been expecting and what what should happen is um you know that that the strength of the rebound Fades as you get farther and farther away from from the point of trauma uh and again it doesn't mean that things are things are things are back to normal right you think of um you know think of the restaurant industry think of the accommodation industry think of Tourism think of Cinemas you know those those Industries are operating at you know 10 20 30 40 50% capacity you know they're doing much better than they did in March and April when nobody was going but they're still they're still suffering mightily and that's you know that's going to be the case that was going to be the case probably pre second wave in any event as folks just kind of are a little bit fearful of re-engaging obviously the second wave if you want to call it that is is um you know going to impact those Industries and others uh in addition to what we've already seen and would would the projection even the 1% projection I mean they're talking about August so that's behind us and a second wave wouldn't have started would economists like yourself and the people at statan and elsewhere uh you would be constantly changing your forecasts based on even on events as are as they are happening now with with a with with a second wave taking place and how is if it is a second wave we keep saying it may or may not be it might just be tail end of the first but uh how do you how are you looking at it now how is it changing your projections as you know in Quebec they're talking about closing all kinds of uh businesses again Ontario might be heading in the same direction how are you seeing that now yeah so so you know to get a to kind handle on that you you know we need to go back a few months so when you know we putting together forecast in March or April or May for the year um it was pretty the general anticipation was there would be Resurgence of the virus in the second part of the year right some you know whatever a second wave or some pickup in in in virus activity um so the fact that we're seeing that now isn't a huge surprise um now there's there's a difference between anticipating something's going to happen and and that thing happening and and incorporating that in the forecast uh but clearly the fact that we are you know case counts are increasing pretty rapidly in some provinces hospitalization rates are increasing pretty rapidly it's also the case that this is happening globally um you know that clearly puts downside risks on the forecast it clearly means that you know the the rebound from the very bad lows that we saw is probably going to take a little bit longer uh to to kind of resolve itself and and and you know that's that's just the reality of kind of the virus so even if governments don't shut things back down um you know you can expect folks to and we're seeing that you know some folks are more uncertain there'll be a little bit of a delay in in wanting to re-engage uh so to some extent we're were we we're kind of Hostage to that I would say the good thing though is well to the extent that there's a good thing know with respect to the virus um is that we've clearly learned from the first phase we've clearly learned from you know how to manage uh business how to manage uh you know personal safety um uh you know what do we you know we wash our hands everybody's got masks now uh so the the the um the the the kind of decisions that were required by policy makers to force people to slow the spread of the virus aren't nearly as I think challenging as they as they have been so the as we think about you know what might happen to slow uh things down and in in the second phase um you know we don't anticipate a return to full full lockdowns as we have we don't anticipate you know extreme social distancing measures or they're less likely to be extreme social distancing measures and that means that you know the economic impact of the second wave is likely to be U much more muted than than in the first case and of course adding on to all of that um is the fact that we now have very wellestablished government support programs you know those were being ramped up in the beginning they took a little while to take to take effect those are fully in place now and that again is going to help us um manage if you will The Economic Consequences of a pickup in in in in virus activity relative to our ability to do so 6 months ago right that well that's a great segue into my next question that I had for you which was exactly about about that about the federal government's uh response and the measures that they've taken in response to the to the pandemic to put it uh to put it bluntly and maybe not entirely fairly the response essentially was let's spread money across the country to whoever needs it and maybe it's indefinite and I I guess maybe the first question is did that work was was it the was it the right thing to do has it had the the positive impacts that the the massive amounts of government spending that have taken place uh were intended to have it it seems so uh in fact you can argue that maybe the supports are overly generous uh if you look for instance at the behavior of household income which obviously is is is a key economic uh Force um we went in February from the lowest rate of unemployment in Canada in 45 years to march with the highest rate of unemployment in history so a huge swing in unemployment rates and of course when folks are unemployed usually there's a pretty significant decline in income and as that income declines and obviously consumption slows housing market slow a range of things happen associated with that what we saw for however in the second quarter so the the um uh well second quarter we saw a a very significant increase in household income so instead of a Sharp decline very significant increase because the government support programs to household were very very generous by historical standards so as a result of that and also the fact that you know Banks deferred mortgages and the range of other financial support measures we saw uh through June and and and and July um some pretty remarkable developments first a huge increase in household savings right extremely large like like by far the largest TI household saving rates in history at the same time you saw retail sales going back to where they were pre pandemic uh he saw a dramatic rebound on the housing market he saw Auto Sales pick up dramatically um and that was all or most of that was associated with the uh income supports that the government provided to households so it's it's very clear that there's been a very positive impact as a result of that and when we think about for instance growth Dynamics so growth and sorry growth the fall in economic activity in second quarter is about 40% you know we're tracking an increase in economic activity in a third quarter of like 45 46% now so you know that that a critical part of that was simply resulting from the fact that governments did provide a huge amount of stimulus on the household side yeah some of those areas are are fascinating the the growth in in housing and Auto Sales and all that in the m in the midst of a a recession even I saw someone in an article today call it a depression um is remarkable we'll get into those things in some in some of our future episodes of uh of the podcast um in the meantime I mean the side not the side effect but the direct result of uh those government programs which seem to have been effective in in keeping the economy afloat and keeping households afloat is of course uh huge Federal deficits and debt like we haven't seen in a very long time uh the par parliamentary budget officers latest report uh forecast a federal deficit this year of $328 billion it's a number that's difficult for many of us to even understand what it means so could you maybe put that into some context for it for us what does it mean sort of compared to historical levels compared to preco levels compared to some some other some other countries and so on and then what does it mean for down the road when the government's carrying that kind of debt yeah so so a couple of things on that uh just to give you a perspective on how big this deficit was and how quickly it increased you know if you go back to a couple years ago um and certainly the previous government we were on track to balance the budget you know it was a question of you know when that might happen um but basically with the liberal government and and well you know farther way than we should be but we we we could it was an achievable objective and obviously the Harper government basically brought us to brought us brought us to to balance um we're as you said you know 330 whatever maybe 400 we'll see the final numbers come out um but another way to think about that is to go back to previous episodes of stimulus that were required so if we go back to the last the last recession the great financial crisis which was a pretty darn big shock at that time you know eclipsed by what we're seeing now but a big shock back then you know the fiscal stimulus that came out of that so the deficit that came out of that was something like $50 billion you know more give or take we're we're six or seven or eight times that now so like absolutely uh unbelievable increases in in in fiscal support and and obviously with an impact on fiscal on the fiscal position of the government and this is true in Canada as it is in in other countries as well so when you when you then think about okay well how are we going to pay for this what does it mean you know for my taxes in 2 3 4 5 6 years well obviously to get a sense of that you firstly have to get sense of you know how how's the economy going to do over the next year or two so are we going to be in a position where we still need to run very large defic it's still support our population given given the prevalence of covid and that seems to be the case right now you know the virus is coming back the government's made it clear that they're not going to pull back on the support measures for firms and households so you're looking at another big deficit next year so that's not going to come off automatically it's going to come off at some point when the economy is better and the government can pull those things back um but you know looking at our forecast we the Canada started you know went into the crisis with a net debt to GDP ratio by 30% so the lowest in the G7 you know it might come out of this with or we might come out of this with something like 60% at the GDP ratio so doubling which is which is unbelievable um but it's still at 60% at the GDP it's still by G7 standards a pretty darn low level of indebtedness and that suggests obviously not that we can be you know Loosey with with the fiscal position um but that you know 60% seems like it's a sustainable amount that you can then you know from that 60 or 65 wherever you kind of Peter out bring that debt to GDP ratio down gradually beyond that without probably needing to to raise taxes uh because these big programs are are going to roll hopefully will roll off um so that's that's a pretty important thing that you know as as we think about the the deficit you know the worry is okay at some point in time we're going to have to raise corporate taxes we're going to have to raise taxes on individuals to bring this thing down that's not necessarily the case given given the starting point that we're at and where we're likely to end the other thing obviously is you know at some point our markets going to get tired of this our Market's going to say you know what we don't like the path you're going on we're going to charge you more it's going to cost you more uh to borrow from us and again here you know relativity matters so the fact that we're still among that we'd still be among the lowest in G7 probably the lowest in G7 um you know speaks well in our favor the reality is right now there is such a large amount of liquidity in markets that it's very simple it's very easy for firms and governments to borrow and that doesn't seem like it's likely to change in part because central banks have been extremely extremely aggressive in providing liquidity to Global Financial markets that not includes the direct buying of government debt so the environment in which all this is happening is very different than than previous envir where government debt was a problem you just got much more demand much more support for government debt markets than we've seen in well in in Canada that we've ever seen um other countries a little bit different but it's so so it's not it's easy to scare ourselves uh with with the path that we're on but it's probably not as dramatic as what we would have thought would have been the case um if we were looking at a you know a $300 billion deficit 5 or 10 years ago right and historic low interest rates that are likely to continue for for years and years and years uh makes that all possible I mean I don't know if it is there anything that could cause an interest rate shock that where suddenly you would see them see them Spike yeah so so obviously as you've indicated central banks again the Bank of Canada other central banks have done this the Bank of Canada very explicitly basically said we're not going to move interest rates until we think and we we are we are convinced that inflation sustainably above 2% in Canada and that's you know that's three or four years away um so you know short-term borrowing costs aren't going to increase uh if inflation remains below two so the so the the key the key determinant here is really inflation Dynamics you know if inflation comes back more rapidly than than Central Bank think then obviously they would have to do something about that and that means higher interest rates um and and you know despite the fact that we have this very large shock to growth which in principle means lower inflationary pressures which is why central banks have been cutting rates I mean this is a bit of a bizarre shock in that there's a very big Supply aspect to it right you're you're you know so think of a restaurant that's operating now at whatever 50% capacity um so either that restaurant needs to raise prices to maintain its profits or you know maybe at the end of the day it closes so you reduce capacity so there's a potential for what we're seeing to actually lead to higher price pressures than we would assume given given the economic Outlook and that's what some of the folks are worried about so they look at you know maybe there's some maybe there's some incipient inflationary pressure there that is um uh you know more robust if you will than what you would normally assume given given the decline in economic activity and of course on top of that you know there's this worry um that as Government debts pile up and the central bank is buying those it increases the money supply that you have this kind of this this old school uh pushed inflation which is that money creates inflation uh in a way that we've not seen you know in 20 30 50 years depending on the country you're looking at so that's all in the background and those are the things that could lead to higher interest rates and therefore more expensive government debt but that's you know that I think is the kind of more of a tale scenario than something that's really that's really likely right doesn't seem like a huge threat at this point uh so I just have one more question for you in the time we have left and you were talking about you know deficits over the next couple of years as Government continue to be required to support to provide additional supports related to covid but then in the throne speech couple couple of weeks ago the government also perhaps in sort of a vague way there wasn't a lot of detail in there and you know to be honest they've also promised these things before so whether it becomes reality or not as a question but they they talked about new social programs or spending programs that arguably not directly related to to covid talking about expanding uh support for child care with a view to helping women get into and stay into the workforce and I know the bank has uh has made some suggestions around that particular area but also about pharmacare and green initiatives and so on so it sounds like this government as you might expect is fairly ambitious in what it would like to do how what's your view of some of those bigger picture that wish list that the government had in the throne speech the likelihood that they that they might materialize and whether or not it's a good thing well clearly it's an environment where governments that are more inclined to spend are going to be uh you know it's going to be easier for them to do that given the fact that you know we are talking about 3400 billion dollar deficits right that environment is very different than again the pre-co environment where the deficit was going to 20 and you're trying to bring it down to zero um so when you've got the ability to spend 501 billion dollarss on stuff and have you know and markets not really worry about that it really kind of opens up the the possibility of for governments to to do things some of them smart some of them less smart what's an extra 10 or 20 billion in those contract exactly right like peanuts uh and even now you get you know the deficit forecast for this year is like whatever folks will say 320 350 like whatever you know in that range well like there's a huge difference compared to what we used to in any event um the the you know what we're looking for is hopefully for the government to do really smart Investments things that that kind of pay off economically that have the potential to raise long-term Pro Prosperity that have the potential to pay for themselves in some way and then Child Care is one of those things so if you if you do it the right way it's it's you know the the increased economic activity to flow that has the potential to pay it pay it pay for itself which is what we've seen in Quebec um but some of the other stuff is is is is a little bit um you know it's not quite as obvious in terms of economic impact um so we'll we'll see I mean clearly the government is prioritizing anything that's Co related for now and it needs to do that um and the speed at which we kind of uh walk the virus back I think it will will determine what it is that's feasible on their end um but you know I would think that these large scale social programs that they're thinking about things like pharmacare even even Child Care um you know which requires pretty significant consultations with the province are things that are I think at this point some distance off so you know we think of the we think of this Throne speech as as basically wish list more than anything uh we'll have some details in in the upcoming budget whenever that's done um but it's you know the job the government's I I think is still uh their job number one is still is still managing the virus and I think we hope we'll prioritize measures that that that do that over things that maybe um have a longer term Fiscal implication or uh might not pay off as quickly as as some other things right un fortunately I'm going to have to stop you there JF we are going to have you back on a future episode because we haven't even touched on what everybody is talking about now which is the US election so we will get you back to talk about that uh a little bit later on but thanks a lot this has been really interesting really appreciate you taking part well thanks very much and uh next week we'll be talking to Rebecca Young director of fiscal and provincial economics at Scotia Bank uh about the job market specifically there'll be some new job numbers coming out we'll talk to Rebecca about who's being hit hardest what the impact of those job losses is and what the Outlook over the course of the winter months might be thanks so much for listening and we'll see you next week on panomics [Music]