Pessimism does not come naturally to the world of business, which may be why there was so much early enthusiasm for the idea of a V-shaped recovery.
Based on a graphic portrayal of the economy’s initial sharp decline, the V-shape, as opposed to W, U or L, was seen as the most optimistic path.
The concept was that after a steep plunge down to the bottom of the V caused by the novel coronavirus and lockdown, economic activity would rebound right away as everyone went back to their old jobs and resumed their spending.
Even with the wisdom of hindsight, it is not entirely clear that governments could have orchestrated that perfect recovery. Clearly some — including our southern neighbour — could have done a much better job.
Economic chain reaction
As we wait for the latest numbers on Canadian trade and fresh jobs data for both the U.S. and Canada this week, a sharp revival seems ever more unlikely, as a chain reaction of grim events echoes through the Canadian and global economies.
And while Canadian leaders can be congratulated for getting COVID-19 under control and patching some of the worst cracks with bailouts, it is becoming increasingly clear that the outbreak is inflicting longer-term damage — damage we may begin to see in trade figures on Wednesday.
Early evidence of a decline in trade was pointed out by David Parkinson in the Globe and Mail last week, when he drew attention to the fact that revenue ton-miles — a potential proxy for trade — at CN and CP Rail were down 16 per cent and 12 per cent, respectively.
In a globalized economy, no country stands alone. And with the U.S. our biggest trade partner, it is hard not to blame — as U.S. Federal Reserve chair Jerome Powell did last week — the failure of the United States to stop the spreading outbreak of the disease.
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The Fed chair warned that the renewed U.S. flareup, now seen moving from Sunbelt states to the Midwest, would continue to be a drag on the economy. While the central bank would “plan for the worst,” Powell said, eventually businesses would reopen.
“But there’s probably going to be a long tail where a large number of people are struggling to get back to work,” he said.
That is one of the reasons economic forecasters are not predicting the same large rebound in jobs for July that we saw in the June data.
But even as Canadian economic growth snapped back in May, regaining almost half its losses, there are increasing signs the second half of the year will be much harder. A predicted second wave of the disease in Canada will not be the only thing putting the brakes on a recovery.
Pandemic led to falling dominoes
The day after Powell’s gloomy outlook, news came that the U.S. economy had contracted by 33 per cent, the biggest reduction on record, making it increasingly clear that the dominoes had started to fall and that Powell’s long tail would apply to more than just jobs.
Just like the viral contagion that began the process, parts of the economy that we see as quite disparate have linkages that lead to transmission in a vicious circle. What we have seen is that government attempts to stem the tide by flooding cash into markets, businesses and housing — and into the pockets of the unemployed — simply cannot fill all the gaps.
Six months ago, back when we thought the novel coronavirus could largely be contained to China, economists were already warning that the severity of its impact would depend on how long the epidemic ― it had yet to be labelled a pandemic — lasted.
Three months ago, independent real estate analyst Ben Rabidoux suggested house prices would suffer very little if the crisis ended quickly — a time frame he put at less than six months. Meeting that deadline now seems unlikely.
In May, tax historian Shirley Tillotson remarked on how previous crises that governments expected would soon be over had a way of extending or even worsening. And while acknowledging excessive pessimism could make things worse, the U.S. response to the pandemic has been a lesson that unrealistic cheerleading can have a more dire effect.
The end, or the scaling back, of income support programs in the U.S. may be intended to force people back to work. But as Powell implied, those jobs no longer exist.
The list of bankruptcies is long, including in retail, a big employer on both sides of the border. And even if creditor protection allows some of those businesses to resume operations, as DavidsTea announced it would last week, creditors will be out of pocket.
The tea shop’s 18 Canadian stores, downsizing from nearly 200 before the pandemic, will mean jobs will disappear and the rest of the storefronts will be looking for new tenants.
Situation far from hopeless
The purchase by Canadian construction giant Bird Construction of the No. 3 builder, Stuart Olson, may keep its projects alive, but it will almost inevitably lead to a reduction in jobs since most of the cash went to paying off accumulated debt. Stuart Olson and DavidsTea are just two recent examples of the way one thing has led to another during this economic decline.
A fall in oil exploration, a decline in immigration and perhaps worse — the danger of growing political divisions in the U.S. — will compound themselves into damage to other parts of the economy.
In Canada, it seems outrageous that the WE Charity controversy has diverted so much focus away from the essential task of developing long-term strategies to rebuild a broken economy.
But the problem is far from hopeless. Before the pandemic, full employment and, in many sectors, an output glut were challenges to new businesses and new growth.
Wiser governments around the world are now setting aside political squabbling and — while temporarily shoring up the economy — are devising strategies to employ unused economic capacity as the raw material for the next recovery.
Follow Don on Twitter @don_pittis