EDC chief economist predicts terrible recession but even stronger recovery
By Patrick Flannery
Peter Hall, chief economist for Export Development Canada, presented his projections for how the COVID-19 pandemic will affect the Canadian construction industry in a webinar hosted by the Canadian Construction Association April 2. Hall’s short-term outlook was dire, but the overall takeaway was a very optimistic prediction of a sharp, strong recovery once pandemic measures are lifted, possibly equally unprecedented in its intensity.
Hall showed the economic impact so far has come in two waves, with China suffering extreme slowing as it applied distancing measures, then again as those measures came into effect across the developed world. Hall noted that not all market sectors have been hit equally, but that the extreme nature of the recession will necessitate massive levels of government assistance across the board. The bailouts in 2008-2009 created a 22 per cent jump in special borrowing – Hall’s team estimates this crisis will require at least double that.
Hall couldn’t avoid some dramatic language when commenting on the intensity of the impact so far, saying one’s “heart goes into spasms” when you look at some of the numbers. China is the “canary in the coalmine” that shows how the lockdown will affect our economy, and he pointed to numbers like a previously unheard-of 80 per cent drop in auto sales. Hall said he’d never seen anything like this, and could apply that comment to his entire presentation as there were similar impacts to industrial production, electricity generation, traffic density…even air pollution. Just about every economic metric has declined by levels and at a rate never before measured. Close to 10 million people have filed for unemployment benefits in the U.S. in the last two weeks, with parallel impacts to employment in Canada.
Now for the good news. Hall pointed out that this recession is completely unlike other recessions in that it has nothing to do with structural aspects of the economy. It is a “policy recession.” The world economy was actually fairly healthy before the outbreak. Even in the small slowdown in growth at the end of last year, unemployment was low with labour force participation and wages increasing. GDP growth was actually below potential, Hall feels, because investor confusion caused by Trump’s policy chaos was putting an artifical drag on activity. The American domestic economy was very strong. The UK looked to have finally achieved some resolution on Brexit and Canada had signed its new/old trade deal with the U.S. Hall’s forecast showed most indicators improving going into 2020. So world economies came into this from a relatively high place. Companies, Hall notes, came into this with a lot of orders on the books.
Hall and his team referred to data from previous pandemics and early information emerging from China and South Korea (where restrictions have started to lift) to show that economies bounce back very quickly from artificial recessions of this kind once the conditions creating them are removed. His projected growth curve, now sloping well below the previous trend line of GDP growth, spikes back up in a sharp V, rising quickly well above the old trend, then receding back closer to it. “It’s like being on a roller coaster,” Hall explained. “When you are on the downslope, it is scary and doesn’t feel like you will ever come up.”
Much of the present pessimism is based on memories of the very slow recovery from the Great Recession of 2008, Hall said. This is different. The financial crisis did long-term damage to banks’ capital holdings, restricting their ability to lend and taking time to build back up. Since then, banking reforms have been put in place to prevent a similar situation and the nature of this crisis is unlikely to lead to that kind of damage. Because of government intervention, most people have either retained their jobs or will be able to swiftly return to their jobs when the crisis ends. Businesses want to operate and people want to work in the prevailing market conditions, they are simply prevented from doing so. While sales losses in sectors like tourism and travel are indeed losses that can never be recovered, people are sitting at home, unable to spend money even as most still have some income. Many businesses have found they can do more than they thought remotely, and some few will even be profitable. All this adds up, Hall said, to intense pent-up demand that will be released in a rush as soon as it is allowed to be.
Hall did caution that construction activity tends to lag the rest of the economy and there may be a delayed return to strength in our sector. But the impact in the construction sector has been less than in some others because so far most activity has been allowed to continue.
Detailed forecasts are nearly useless at the moment, Hall cautioned, because circumstances are changing so fast economists cannot keep up. However the predictions for a strong, fast recovery are solid based on everything that has been seen in prior, similar situations and in the early data coming back from Asia. With those caveats, Hall’s group is predicting 4.7 per cent growth in the U.S. in 2021, 3.8 per cent in Canada and 8.8 per cent in China and India. Housing in the U.S., he said, looks to have a particularly strong recovery as the market is still undersupplied due to the lingering effects of 2008. Canada’s situation is not as good as good as we went into the pandemic with a real estate bubble caused by low interest rates, high valuations and oversupply. So Hall predicts a small correction in housing, but nothing serious.
Domestic manufacturing following the pandemic could actually benefit as companies learn their lesson about dependence on overseas supply chains and look to “reshore” or “nearshore” production. This would create opportunities for construction and industrial suppliers. Hall also speculated about the pandemic recovery accelerating the trend toward automation as domestic manufacturers look for ways to meet a surge in demand without being able to hire hard-to-come-by workers. That could be a long-term benefit to North American manufacturers, Hall said, because machinery costs the same in Asia as it does here, eliminating the advantage overseas producers have had from cheap labour.
Another weirdly hopeful note in Hall’s presentation was the woeful state of Canadian infrastructure. Hall showed numbers ranking Canada 60th or lower in the world in such areas as railroad density and quality of the electrical supply. The country needs $100 billion in investment in infrastructure, and that’s likely where government stimulus dollars will be directed. Good news for the construction industry, for sure.
Hall closed by telling everyone to prepare for a period that will be rough and sharp, but not long. Then he advised everyone to fasten seatbelts for a fourth-quarter recovery as strong as the recession is devastating.