Economic recovery will be slow and difficult

TORONTO—The lockdown is easing. But the economic recovery will be slow and difficult. There will be a protracted period of adjustment before we have a healthy economy again because it has to be a different economy. Existing jobs and businesses can disappear quickly, but new businesses and jobs will take time to emerge. In the meantime, many Canadians will feel poorer. Not all the jobs lost will return—many won’t. Not all companies can be saved—or should be. The challenges of economic recovery—and jobs recovery—are well set and put in a paper published by the National Bureau of Economic Research in the U.S., written by three economists—Jose Maria Barrero, Nicholas Bloom and Steven Davis. Its title is “COVID-19 is Also a Reallocation Shock." The economists argue is that we face “a major reallocation shift” in jobs and businesses that is necessary for economic recovery. Businesses and jobs that were important before the pandemic may not be important post-pandemic while new post-pandemic businesses and jobs will take time to emerge. To help, we should focus on measures that accelerate the transition to a different economy. New jobs will come from new activities. In the meantime, consumer and business uncertainty and fears of a future surge in COVID-19, until we get a confidence-building vaccine, will hold back consumer spending and business investment. For Canada, this is a big challenge. Even before the pandemic we had a competitively weak economy. Per capita GDP growth, adjusted for inflation, has been growing at an average annual rate of just 1.0 per cent a year since 2010, compared to 2.4 per cent a year from 1997 to 2006. Canada has not been paying its way in the world, which is reflected in a chronic current account deficit for just over a decade. Instead, we have been building up our foreign debt. We’ve had trade deficits since 2009 (in 2001 we had a merchandise trade surplus of $70.1-billion; in 2019 we had a deficit of $18.2-billion). Our lack of competitiveness can be blamed in large part on the poor innovation performance by business. Multifactor productivity, which is a proxy for innovation, declined at an average annual rate of -0.6 per cent from 2000 to 2010 and rose at a small average annual growth rate of just 0.7 per cent from 2010 to 2017. We cannot expect future job growth to match past job growth. Canadians will have to transition into new types of jobs. What’s remarkable if we look back on net new job creation in Canada is how dependent we have become on two parts of the economy. The first part is the largely public sector world of health and social assistance, education and public administration. These three sectors combined accounted for 34 per cent of the net new employment, or 1.4 million positions created between 2001 and 2019. The post-pandemic world is likely to see perhaps big changes in health and education while fiscal concerns will limit growth in public administration. The second big group consists of those working in retail and wholesale trade or in food and accommodation. Employment in these sectors accounted for another 24.1 per cent of the net new employees, or 967,217 positions, between 2001 and 2019. Long-term job losses in these industries could be huge and changes significant. We are weak in sectors of the economy that produce tradeable goods and services we can sell to the rest of the world. For example, manufacturing took a heavy hit over this 20-year period, with a loss of almost 400,000 positions, to just under 1.6 million jobs. And even in the mining and oil and gas sector, we added only 64,000 jobs, for a total of just over 200,000 positions by 2019. Looking ahead, as the three economists point out in their NBER paper, the demand side of the economy, which reflects consumer spending and business investment, will be weak due to loss of income and profits and uncertainty about the future. This will discourage consumer spending and business investment. Weak business investment would also disrupt the supply side of the economy, with a negative impact on the economy’s productive potential in the future, they warn. A number of factors will impact the supply side of the economy, they stress, on top of the uncertainty about the outlook for future growth and product demand. COVID-19 has led to cutbacks in research projects in universities and industry, so that the future supply of new knowledge, the basis for new industries, products and start-ups, could slow, weakening prospects for future growth and productivity. Moreover, creating new businesses or planning new products takes time. Time is needed to plan a new business or product line, to navigate regulatory and permitting processes, to arrange financing and make the capital investments to enable production, to hire employees, develop supply networks, establish distribution networks and build a customer base. At the same time, consumer behaviour may have changed significantly, with a big impact on jobs. For example, the pandemic world has led to a significant increase in e-commerce, including food shopping. Businesses may decide they can do without much less travel while consumers will be inclined to reduce travel, impacting airlines, hotels, taxis and restaurants. And many marginal businesses able to survive in the pre-pandemic world, are likely to disappear in the post-pandemic world. As Bank of Canada Deputy Governor Tim Lane acknowledged in a recent speech, the adjustments brought on by the pandemic lockdown “are likely to result in damage to Canada’s productive capacity that may be profound and long-lasting.” Businesses with negative cash flow may not survive. Households will struggle after many weeks of lost income. A lot of wealth has been lost due to the stock market crash. While the Trudeau government has been rightly focused on disaster relief from the pandemic, what we need now is a clear strategy for rebuilding the economy. David Crane can be reached at crane@interlog.com. The Hill Times