Coronavirus infects the Canadian economy

As posted on LinkedIn

The World Health Organization has declared the coronavirus (COVID-19) a global health emergency. What does this mean for the Canadian economy?

The virus, which broke out in China, has infected 93,000 people globally with nearly 13,000 cases outside of China. The overwhelming majority of confirmed cases are in China but the virus has spread to 76 other countries as of March 5, 2020.

There are both immediate and long-term impacts on the Canadian economy to watch over the coming days, weeks and months.

Immediate impact

When a virus breaks out, the most immediate effects are felt by the travel, hospitality and tourism industries. As global travel slows, airlines and hotels see a significant drop off in demand. The airline industry alone is estimating the sector stands to lose US $113 billion in sales if the coronavirus continues to spread.

The virus also results in less consumption as stores close and people stay inside to avoid exposure. China’s economy is expected to slow to 4.5% in the first quarter – this is the slowest pace since the financial crisis. Less growth in China means Canada’s exports will take a hit. China accounts for over half of the freight volume at Canada’s Pacific gateway with the Port of Vancouver warning that the number of cancelled sailings is on the rise.

Over the coming weeks we expect to see supply chain disruptions affecting Canadian companies. China is a major producer of intermediate goods, including computers, electronics, pharmaceuticals and transport equipment, that feed supply chains around the world.

Many Chinese factories shut down operations on January 25, meaning final shipments to North America should be reaching ports over the next two weeks. Assuming most manufacturing companies hold about 15-30 days of inventory, supply shortages will start to hit Canada this month. Approximately 10% of Canadian imports of intermediate products come from China, so there is potential for supply shortages to be significant. Compounding this is the rail blockades that had companies using up inventory before coronavirus became a global concern.

In Canada, fears about the crisis are having an impact on consumption as Canadians reduce travel, conferences are cancelled and large events are postponed. Add to this the impact of the rail blockades and the outlook for the Canadian economy in the first quarter of 2020 is looking grim.

Long term implications

To understand the potential long term impact of coronavirus on the Canadian economy, most economists based initial estimates on the 2003 SARS outbreak. A SARS-equivalent pandemic would have a similar impact on the Canadian economy, reducing GDP by just over 0.1% by 2020.

However, much has changed since 2003. China is far more connected and important to the global economy today. China is now the second-largest economy in the world, responsible for nearly 18 per cent of global GDP.

In 2003, Canada sent just shy of $5 billion in goods exports to China. China was our 4th largest export partner behind the US, Japan and the UK. Last year China was our second largest export destination and a major buyer of natural resources and agriculture products.

The virus will compound an already problematic situation for Canadian exports to China. Our exports to China fell 16 per cent in 2019 to $23 billion, the largest decline in more than two decades.

The OECD cut its full-year growth forecast to 2.4 per cent from 3 per cent (in the November outlook) on the assumption that the outbreak in China peaks this quarter and outbreaks elsewhere “remain mild and contained.” But if the disease runs rampant and puts some economies into reverse, global growth would fall to just 1.5 per cent.