Confronting the economic realities of Covid-19

May 11, 2020

The ongoing Covid-19 crisis shapes the lives of Canadians in countless ways. Millions of individuals and families seek emergency government support, investors nervously watch stock markets swing up and down wildly, and front-line health professionals exhaust themselves to save others. “What’s next?”, quite understandably, is a question on many minds as we all adapt to life in a new world.

No one can answer that question with full confidence, and anyone who claims they can is simply wrong. Yet, in looking carefully at the responses of policy makers, businesses, and individual Canadians, a faint picture emerges that offers some comfort that we will, in fact, get through this together.

We’re entering a sustained recession

According to Bank of Canada’s recently released quarterly Business Outlook Survey, business sentiment in Canada was already heading downhill “before the Covid-19 shock intensified”. That downward trend is getting much steeper now that we’re all dealing with the devastating economic impacts of Covid-19 across the country. In other words, entering into a prolonged recession is a certainty; the only variables are how deep and how long.

Taking a global perspective, IMF Managing Director Kristalina Georgieva was stark in her assessment of the new reality. “We have witnessed the world economy coming to a standstill. We are now in recession. It is way worse than the global financial crisis.”

Vastly expanding roles for government

Many politicians are calling the crisis a war on Covid, with government and industry mobilizing to fight a highly lethal foe. And while this war theme can get overdone, there’s no question that from an economic perspective, the Government of Canada is expanding in terms of scope and scale in ways we’ve not seen since the Second World War.

In my view, expanded governments will be part of our lives for years to come, and this will cost us all in the form of higher taxes. Some Canadians will chafe at this, while others will welcome it. Either way, big governments are here to stay for the long haul.

Canada’s resilient financial sector

Directly or indirectly, the investment plans of practically every Canadian are tied in some ways to the financial sector. And to put it mildly, that vital sector is under a series of enormous pressures. Yet stressed though it may be, Canada’s financial sector is so far holding up for many reasons, not least of which are the underlying strengths of Canada’s well-run and well-regulated financial institutions.

Resilience is often used to describe institutions lending to Canadians – as an example of financial services – and the regulations governing those lending practices. Using “resilience” and its many synonyms also sends a message of confidence to Canadians, as OSFI Superintendent Jeremy Rudin made a point of stressing in his statement earlier this month. “Canadians can have confidence in our financial system during these current extraordinary times,” he wrote, “because it is resilient and well prepared.”

Energy sector getting pummelled

The energy sector, though, is another story. Free-falling oil prices, languid demand and surging supplies conspire to test this sector – one of Canada’s most important – like never before.

Writing late last month in The Financial Post, leading energy economist Peter Tertzakian warned about the widespread effects these strains have on everyone. “A societal disruption of this magnitude affects the suppliers and consumers of energy, and everything in between. Because ‘everything in between’ spans the continent, this looming system-wide issue isn’t exclusive to Western Canada’s oilfields. The entire system is affected.”

Canada’s energy sector, like most other sectors in our economy, will rebound. But the pace and shape of energy’s recovery are both uncertain and somewhat distant. That’s worrisome, especially (but not only) for Western Canada. Governments and Canadians across the country rely on the energy sector for employment, tax revenues and investment returns.

The broader economy is on pause

Entire swaths of the broader economy are effectively on indefinite pause. Canadians working in tourism, hospitality and culture are among the millions applying for emergency government support as their employers reel from and react to precipitous crashes in customer demand.

Likewise, real estate is getting walloped. Sales figures for March in Toronto, for instance, showed ongoing vigour at the front of the month. Things then fell off a cliff at the back end. “The overall sales result for March was strong relative to last year,” said Toronto Real Estate Board President Michael Collins in reporting these figures. “But the impact of COVID-19 was certainly evident in the number of sales reported in the second half of March.” Collins and many others in Canada’s real estate market will watch April’s figures very carefully for signs of trends one way or another.

Innovation in the isolation

Covid hits entrepreneurs particularly harshly, with revenues for countless small businesses drying up almost overnight. Caught in nightmare realities well beyond their control, thousands of entrepreneurs had little choice but to lay off millions of staff, at least temporarily. Add to that the emotional tolls of seeing small businesses falter, if not collapse outright, and the tangible and intangible costs of Covid on entrepreneurs are almost impossible to measure.

There’s innovation to be found in the isolation of physical distancing, however. Entrepreneurship always finds a way. And this is a source of hope.

Faced with existential crises, many business owners rapidly embraced online capabilities to not only survive but – in modest ways, perhaps – actually thrive in a Covid economy. In a similar spirit, Canadians are adapting their skills to new endeavours, neighbours are looking after each other, and an enhanced sense of collective effort fuels the country forward. Standing apart brings us together. And that’s the image – and the reality – that I think we need to focus on as we move through and beyond this pandemic.

Steven Bright, a longtime client of the firm, has worked in and written about financial services for more than 25 years. You can find him on LinkedIn.

This article was published in Leon Frazer’s  Strategies newsletter. Read the full edition here.