E Canada Is Challenged To Fill The Hole Created By The Pandemic

I have been observing Canadian economic developments for nearly a half a century. Never has forecasting required a host of exogenous assumptions regarding non-economic factors, all related to the management of the Covid-19 health crisis.

So, at best, let me describe the impact of COVID-19 on the economy to date and just how large and deep is the economic hole in which we find ourselves. Knowing the size of the problem is a necessary condition to anticipating how great the task before us is.

How Deep is the Hole? 

A series of charts depict the extent of the collapse of the Canadian economy starting in the early Spring 2020. The service sector clearly was the hardest hit, dropping to 60% compared to the pre-COVID-19 level, while the rest of the economy contracted by 10% approximately (Figure 1).

While there has been some modest recovery in the first quarter of 2021, subsequent lockdowns in Ontario, Quebec, and B.C. will negatively hurt the second quarter. While the lockdowns remain in place, all we can do is to speculate on the outlook for the balance of the year.   

Figure 1.

Although there has been an improvement in the unemployment rate, approximately 300,000 additional people would need to be hired just to reach the pre-COVID-19 employment level. Given the normal rate of growth in the labor force, the economy needs to generate, in total, 475,000 jobs this year.

Thankfully, the unemployment rate has declined from its peak of 13.7% in May 2020 to 7.5 % in March 2021. Despite this improvement, the share of unemployed people who have been without a job for 27 weeks or more remains elevated, at about 30 %. This is particularly disconcerting because long periods of unemployment have been associated with a lower attachment to the labor market and an overall weakening of the economy. 

Despite the strong estimated growth in the first quarter of 2021, considerable excess supply still exists. At the depth of the shutdown, the Canadian recession fell by 12% in early 2020. The rebound since still leaves considerable unused capacity. Estimates of the shortfall or the output gap - the difference between actual and potential economic performance - is in the range of minus 3-6%, which is consistent with the current high unemployment rate.

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