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Insight on current market conditions from DLC’s Chief Economist Dr. Sheppy Cooper. Modest improvement in consumer confidence showing in May but challenges prevail.
The pandemic shutdown put every sector of the economy into a medically induced coma, so it was no surprise that the first full month of lockdown would be ugly. Indeed, consensus estimates were worse than the 11.6% drop in economic activity reported this morning by Statistics Canada (see chart below). April’s contraction followed the March decline of 7.5%. All 20 industrial sectors of the economy were depressed, producing the largest monthly slump since the series started in 1961.

Services-producing sectors recorded a 9.7% drop, led by retail trade and transportation. Goods-producing industries saw a 17% decline in output. The economy at the end of April was 18.2% lower than its February level, the month before the COVID-19 measures began.

Nothing like this has ever happened in our lifetimes; we are in uncharted territory, and the virus will determine the future course of the economy. Policymakers in Canada have done a commendable job in cushioning the blow of the lockdown and its lasting impact on the economy. Importantly, Canada has posted a sustained decline in the number of cases owing to the enforced lockdown measures. Canada’s success is in direct contrast to the disastrous surge in COVID cases in roughly 20 US states where the economy opened prematurely, and public health initiatives were grossly mismanaged. It is crucial, however, that we not assume the worst is over and let down our guard. The World Health Organization said yesterday that “the worst was yet to come.” Moreover, the timing of a vaccine is unknown, and Canada remains susceptible to contamination from incoming American truckers, travellers and virus spread if we open too quickly.

Highlights of the economic contraction in April were:

  • Air transportation plummeted 93.7%, reflecting the reduced movement of both goods and passengers.
  • Accommodation and food services dropped 42.4%, following a 37.1% decline in March. The sector was down a whopping 64% from its level of activity in February.
  • Real estate declined 3.5% in April following a 1.2% decline in March. Activity at the offices of real estate agents and brokers plunged 57.2% in April, as home resale activity in nearly all major urban centres came to a standstill.
  • Personal and laundry services (provided by hair salons, beauty parlours, funeral homes, dry cleaners, etc.) dropped 39.3%, while private household services offered by maids, cooks, gardeners, etc. fell more than one-third.

The good news is that StatsCan said today that preliminary information indicates an approximate 3.0% increase in real GDP for May. Output across several industrial sectors–including manufacturing, retail and wholesale as well as the public sector (health, education and public administration)–increased in May, as activities gradually resumed in phases in different regions of the country.

Consumer Providing Support 

On a more positive note, the economists at Royal Bank reported yesterday that personal spending had rebounded sharply since early April, judging by debit and credit card purchases (see chart below). Overall card volumes were near year-earlier levels by June 16th, down 2% year-over-year. Reopening across the country spurred spending at clothing stores and on personal services such as haircuts and massages. Early indications suggest online shopping remains popular despite the opening of bricks and mortar stores.

The reopening of the economy, along with federal government income support, has boosted consumer confidence and spending. The Canadian Emergency Response Benefit program (CERB) provides eligible consumers who had stopped working because of COVID $2,000 per four-week period. Trudeau recently extended the CERB from 16 weeks to 20 weeks.

Consumer confidence has climbed for nine straight weeks according to the Bloomberg Nanos Canadian Confidence Index, a weekly composite measure of financial health and economic expectations. The index currently stands at 46. That’s up nearly 10 points from early May and is slowly nearing the 50-point mark, above which views are considered to be net positive.

One unintended problem, however, is that the CERB is becoming a disincentive to work. If a recipient earns more than $1,000 per month, he or she loses the full $2,000 payment. Also, for some, the CERB allotment is more than they earned at their previous job, so they are reluctant to return to work when their businesses open. The stipend is now making it difficult for restaurants, retail stores, cleaning services and trades to get their workers back. The government needs to start winding down direct cash support, but instead, it extended the payments until the end of August.