Economic recovery in the time of COVID
June 16, 2020 | 4 min read
Focus Area—Canadian Economics
This op-ed by Pedro Antunes was originally published in The Hill Times on June 15, 2020.
Governments can support confidence by being transparent with respect to when and how restrictions will be phased out, what health and security requirements specific businesses will need to adhere to, and what they will do in the event of a resurgence of COVID-19 cases.
Canada is deep in recession. Social distancing and the halt to non-essential activity were policy actions necessary to slow the spread of COVID-19 but the economic implications of the shutdown are becoming evident. In March and April, Canada lost three million jobs—15.6 per cent of our workforce. The total number of hours worked, a truer reflection of the loss in economic activity, was down nearly 28 per cent in April from February levels. Household spending and investment have collapsed, as has global demand for exports. Going forward, Canada’s political and business leaders are facing an unprecedented balancing act—how to boost Canada’s economy with the continued presence and risks of further COVID-19 outbreaks?
“Emerging from this recession will require restoring business and consumer confidence so that as restrictions are eased, they are ready to hire and spend.”
Recent weeks have brought a sliver of hope. The spread of COVID-19 seems to be peaking, social distancing measures are being eased, and employment inched back in May, gaining nearly 290,000 from collapsed April levels. Still, the number of hours worked was at 77 per cent of February’s capacity in May. Even as we continue to reopen, for many businesses, the effects of operating in the time of COVID will be a costly challenge until the virus threat is eliminated. The situation will endure until a treatment or vaccine is found and distributed in Canada and globally—something that many experts suggest could take another year or more. In the interim, what support measures can best help lay a path to full recovery?
The lion’s share of federal budgetary measures have been aimed at supporting household income. Direct transfers from government to households, that include the Canada Emergency Response Benefit (CERB), student benefit, and others are estimated at over $80-billion. Through to the first week of June, the CERB paid out $43.5-billion to households, effectively covering lost wages. In fact, despite the lost jobs and reduced hours, we are forecasting that household income will hold up in 2020. This, coupled with a steep drop in consumer spending, means that households’ savings will swell. The situation is somewhat like pulling back a slingshot, consumers have income and pent up demand, but will they let go the sling and start spending?
The trigger is jobs and confidence. As social distancing measures are lifted, we need to help lift consumer and business confidence to accelerate a recovery. To do this, policy measures must now focus on encouraging businesses to open and rehire, by establishing clear guidelines for operating and providing direct support to help deal with elevated costs. We need to move workers off the CERB and back into employment.
To date, business support has come primarily through liquidity measures such as lower interest rates, credit, bond purchases and tax deferrals that total well in excess of $500-billion. Many of these measures will help businesses in Canada survive the temporary shutdowns by providing much needed cash. However, small, medium and large businesses will undoubtedly continue to struggle with the higher costs of operating in an environment that requires physical distancing and other precautionary health measures implemented to contain the spread of the virus. To encourage business operations, provincial and federal governments need to clearly establish guidelines and rules for operating. Clarity will encourage businesses to open, provide a safe environment for customers, and reduce employer’s liability for those (hopefully few) workers or customers that do contract COVID-19.
The federal Canada Emergency Wage Subsidy (CEWS) is key to helping business deal with the high costs of running a business while COVID-19 is still a threat. The program has gotten little take up thus far, because businesses are just starting to reopen but use will undoubtedly accelerate. The federal government initially slated $74-billion for the CEWS, but that amount was reduced to $45-billion despite the program’s extension into August. But additional support will be necessary. The CEWS should be extended well beyond August, especially for those industries where a return to normal is much further down the road.
Emerging from this recession will require restoring business and consumer confidence so that as restrictions are eased, they are ready to hire and spend. Federal support measures are sizeable and are helping maintain household incomes. As the economy starts to open, more use of the federal wage subsidy will help transition workers from income support to employment. To encourage this transition, businesses will need to have clearly established guidelines for operating safely in an environment where the threat of COVID-19 is still present. Governments can support confidence by being transparent with respect to when and how restrictions will be phased out, what health and security requirements specific businesses will need to adhere to, and what they will do in the event of a resurgence of COVID-19 cases.