The Canadian economy post-lockdown

As published in Policy Magazine

The COVID-19 pandemic has devastated the Canadian economy. In the first quarter of 2020, the economy shrank by a previously unimaginable 8.2 percent on an annualized basis. The economic downturn pushed the unemployment rate to 13.7 percent in May, with the federal deficit on track to hit $252.1 billion in fiscal 2020-21 after extraordinary programs were unveiled to support Canadians. 

In the early days of the pandemic and economic crisis, there were hopes that once the spread of COVID-19 was curtailed, Canada’s economy would rebound and life would return to normal. While we may have witnessed the bottom of the economic contraction, it is increasingly apparent that Canada will experience a multi-speed recovery with stops and starts that will affect different sectors in different ways. 

Given a protracted, uneven recovery, the Canadian economy will look very different over the medium term. There are four key trends that governments and businesses will need to understand and adapt to if Canada is to emerge from the crisis stronger.  

1. Living with the virus 

Physical distancing, protective equipment, testing, tracking and tracing will become the ‘new normal’ until a vaccine is available and mass produced. Businesses will need to take steps to rebuild the confidence of employees and customers. That means demonstrating a commitment to safety, including proper sanitization procedures and physical distancing.

For the most part, businesses that operated without the need for direct physical contact before the pandemic will be able to scale up quickly as demand comes back. This includes some corporate services as well as online retailers and the tech sector. Many, if not most, of these businesses will be able to return to normal operations as soon as government-ordered shutdowns are lifted, with little need for fundamental changes to their business models. 

Many companies in the manufacturing, natural resources and construction sectors are positioned to recover relatively quickly as demand picks up in Canada and around the world. The key challenge for these companies will be to ensure that workers have adequate protective equipment and workspaces that allow for physical distancing. 

The outlook is more uncertain for entrepreneurs and employees who cannot realistically serve customers while practising physical distancing. Many restaurants, bars, hair salons and other personal care services face a long and difficult road to recovery. The Canadian Federation of Independent Business, which represents more than 110,000 small firms, says a third of its members who have been forced to close their doors during the month of May are unsure if they will be ever be able to reopen.

The oil and gas industry suffered a double whammy. The government-mandated shutdown significantly reduced demand for their products at the same time that global oversupply was having a sharp downward effect on prices. Any economic recovery is that much harder without the full contribution of a sector that represents almost 10 percent of Canada’s GDP. As the country transitions to a lower-carbon economy it will need to draw on the knowledge from Canada’s energy sector, which is already innovating in emission reductions. 

The shutdown also hit the aviation, accommodation and tourism sectors early and hard. Permanent changes to consumer attitudes toward traveling and taking holidays are unlikely, but there is bound to be a lag effect. To respond to consumer concerns, businesses in these sectors have already begun unveiling new protocols aimed at boosting consumer confidence. Equally important are clear and coordinated efforts from governments across Canada to ease travel restrictions and restart the travel and tourism sector.

2. Digitization

The pandemic forced many companies to pivot almost overnight to a digital work-from-home model. Those that could operate in a virtual environment moved quickly to equip employees to operate remotely. For businesses in the physical retail sector the pandemic required an immediate shift to online sales and delivery. 

This accelerated a digitization trend that was well under way before COVID-19. According to McKinsey’s 2017 Digital Global Survey, 92 percent of companies thought their business models would need to change to adapt to digitization. Digitalization is no longer a journey for companies but a necessity for survival. 

What could this mean for commercial real estate? A recent survey of Business Council members found that 73 per cent of respondents will make working remotely a permanent option for roles that permit it. For some businesses this may mean reducing their real estate footprint while others may require more space to allow for adequate distancing in the workplace.

This potential shift could have a significant impact on commercial real estate and the thousands of small-and-medium-sized businesses that provide services to tenants and their employees in and around office towers. 

3. New consumer preferences

The pandemic has created new opportunities for entrepreneurs and businesses that move quickly to respond to changing consumer preferences. Living with the virus for years and not months may result in permanent changes to consumer behavior. 

For example, physical distancing may result in greater demand for vehicle ownership at the expense of ride-sharing and public transit. According to a recent survey by autoTRADER, 65 per cent of respondents who use ride-sharing services are using them less, while 81 percent of respondents who use public transit have limited their use. Survey respondents also indicated that even when physical distancing is no longer required, 70 percent would not revert to using ride sharing, and 40 percent would not go back to taking public transit.

In the travel and tourism industry, demand may shift from overseas travel to more domestic or regional holidays in designated ‘safe zones’ where the virus is contained. This will create opportunities for businesses that can offer new and innovative tourism packages close to home. And activities such as RVing, previously reserved for a small subset of the population, may witness surging popularity as Canadians seek holidays that allow them to maintain physical distancing. According to a recent survey by Abacus Data, 1 in 3 Canadians (9.9 million people) say they never before thought RVing was right for them, but are now open to it as a result of the pandemic. 

For the hotel industry, renewed emphasis will be put on cleanliness and certification programs to restore consumer confidence. In Singapore, a set of criteria has been established for hotels to limit the spread of COVID-19 that includes an audit process to ensure compliance. This has created significant opportunities for the private sector to develop and deliver certification and assessment programs in partnership with government and other businesses.  

While it is impossible to predict whether changes to consumer behaviour will be permanent, there is clearly an opportunity for entrepreneurs and businesses to tap into shifting preferences. 

4. Supply chains and trade

Even before the pandemic hit, Canada was exposed to rising protectionism around the world, led by our neighbor to the south. The most recent trade monitoring report from the World Trade Organization (WTO) found that between mid-October 2018 and mid-October 2019, import-restrictive measures implemented by members were estimated to cover US$747 billion in trade. This is the highest level recorded since October 2012 and represents an increase of 27 percent compared to the figure recorded in the previous annual overview of US$588 billion.

Faced with a lack of critical equipment such as respirators, protective garments and ventilators, many countries have taken a national security approach to health care equipment, adopting export controls and directing domestic manufacturers to begin production of supplies. Today, nearly 100 countries have instituted export restrictions on COVID-19 supplies, including the US, despite calls from the World Health Organization and WTO not to do so. 

In response to lockdowns around the world and the rise in protectionism, many businesses are re-examining their supply chains with emphasis on improving resiliency to insulate them from future disruptions. This includes shortening supply chains and diversifying input sources. 

For Canada, this means a renewed emphasis on strengthening supply chains in North America. The pending implementation of the Canada-United States-Mexico Agreement (CUSMA), which replaced the North American Free Trade Agreement (NAFTA) creates an opportunity for the US, Mexico and Canada to develop a continental supply chain resiliency strategy. For the US, this would meet one of the key objectives it set out at the beginning of the CUSMA renegotiation—incentivize greater production in North America.

This could be achieved by promoting greater North American regulatory compatibility in key goods sectors, including medical devices. As businesses look to reduce their reliance on inputs from China, consideration could be given to relocation incentives.

Many businesses will be permanently and negatively transformed by the COVID-19 pandemic and economic downturn. While some opportunities have been created for those that can respond to the new trends shaping the Canadian economy, the transition will be painful for many.

For Canada to emerge stronger from this crisis we need to understand the trends shaping the economy and build back better. This will require ongoing cooperation among business, labour and government to navigate the turbulent waters ahead.  

Goldy Hyder is President and Chief Executive Officer of the Business Council of Canada, and Brian Kingston is Vice President (Policy) for the Business Council.