The Great Meltdown: The Economic Effects of the Lockdown and the Long Road to Recovery
At the height of the pandemic, financial writer Jason Kirby analyzed the economic effects of the pandemic and the chances for a smooth recovery. Photography: Temmuzcan/Getty Images (coins); Dave Chan/Getty Images (Morneau)
In late March, as COVID-19’s twin invasion of the world’s population and the global economy worsened, leaders from the G20, an informal group of 19 countries and the European Union, gathered – virtually, of course – to commit to a united front against the novel coronavirus.
Their pledge to do “whatever it takes” to overcome the crisis became the war cry of public health officials, finance ministers and central bankers. But trillions of dollars in emergency spending later, it’s still not clear that “whatever it takes” will be enough to pull the global economy out of its tailspin.
The viral outbreak and what some are calling the Great Lockdown meant to curb its spread have delivered an unprecedented shock to the economy and people’s savings. And it comes at a time when millions of Canadians are in their prime earning years ahead of retirement and many millions more retirees were trying to max out their investments.
With the stock market portfolios of both groups decimated and the housing market looking more precarious by the day, the wealth effect that had powered Canada’s economy to new highs for more than a decade has been abruptly thrown into reverse. Not only must many older workers contemplate delaying retirement – assuming they still have jobs to return to when the lockdown lifts – the pandemic will leave a lasting economic scar on younger Canadians just entering the workforce.
If the downturn were to end as suddenly as it began, some economists, business leaders and politicians initially hoped a sharp rebound could undo much of the damage the economy has endured. Few now share that outlook. “Any wishful thinking about things going back to normal by the summer have all but vanished,” says Benjamin Tal, deputy chief economist at CIBC Capital Markets.
No one knows yet how deep this recession will be, but the estimates are staggering. In the second quarter, which covers the period from April
to June, Canada’s gross domestic product is expected to contract by 20 per cent from the previous quarter, according to a forecast by Canada’s Parliamentary Budget Officer (PBO). Some private-sector economists predict the decline will be even deeper. On a global basis, the International Monetary Fund warned in mid-April that the pandemic will cause economic growth to fall by three per cent annually in 2020. “This makes the Great Lockdown the worst recession since the Great Depression,” the IMF stated, “and far worse than the  Global Financial Crisis.”
Few sectors of Canada’s economy have been spared. Some businesses, like restaurants, hotels, airlines and personal services, have seen their revenues fall anywhere from 50 to 100 per cent. Canadian businesses also entered this crisis carrying more debt than they ever have before, raising the spectre of corporate bankruptcies despite moves by the Bank of Canada – which slashed rates from 1.75 per cent to just 0.25 per cent in March – to pump tens of billions of dollars into the economy to keep loans flowing.
Lockdowns have already inflicted a punishing toll on Canadian workers. At least one million people were thrown out of work in March, according to a Statistics Canada survey, and that likely underestimated the job losses because the survey was carried out partway through the month. More than 3.5 million people applied for the federal government’s $2,000-a-month Canada Emergency Response Benefit (CERB) in the first week it was offered in April. By the end of the month, the number of applicants hit 7.3 million.
Several economists now expect employment in April to have fallen another four million. If that were to happen, the number of people with jobs would shrink to 14.2 million, roughly where it stood in 1998 when Canada had a population of 30 million, compared with 37 million today.
At the same time, a lot of people aged 50 and up have launched second or third acts as consultants, entrepreneurs and small-business owners. While CERB is available to self-employed workers who don’t usually qualify for employment insurance, small-business owners who had to shut down in March may not see wage subsidy money begin to flow until May. Many small businesses owners are wary of Ottawa’s offer of loans
because they fear taking on more debt when the future is so uncertain.
The outlook for inflation is also a question mark. On the one hand, supply chains are being disrupted as workers contract the virus while, at the same time, massive fiscal and monetary stimulus programs are flooding the economy with money. Further down the road, after the virus is eventually defeated, these inflationary pressures may continue – although similar fears persisted long after the Great Recession and the official rate of inflation remained stubbornly low.
Of course, if this were just a pandemic, it would be bad enough, but Canada is also enduring the double whammy of an oil price collapse. Nor is Canada alone. As a relatively small and open economy, we are heavily dependent on trade, particularly with our neighbours to the south. And America is facing its own jaw-dropping downturn – the latest forecast from investment bank J.P. Morgan sees the U.S. unemployment rate hitting 20 per cent. In the best of times, Canada catches a cold when America sneezes. When America is in the grips of a pandemic, the prognosis for Canada is even worse.
Add it all up and the outlook for Canada’s economy in the medium to long term is grim. “We had a global supply shock and a global demand shock that’s morphed into a domestic shock, and that’s layered on a wealth shock and the oil shock,” says David Rosenberg, chief economist and strategist with Rosenberg Research & Associates in Toronto. “Despite what the central banks have done, is it going to be enough? That’s not obvious.”
The fiscal rescue mission launched by governments around the world has been equally unprecedented, though fortunately Canada was in a good fiscal
position, relative to many other countries, to tackle the challenge.
Under the PBO forecast, the aid measures already announced – including emergency benefit payments to those workers impacted by the pandemic and a 75 per cent wage subsidy for companies – translate to a federal deficit of $252 billion in fiscal 2020-21. Relative to the size of Canada’s economy, that would be 8.5 per cent of GDP. Economists at Scotiabank believe the final tally could reach 10 per cent – a level of deficit spending not seen since the Second World War.
The hope is financial aid offered to date will allow the mechanics of the economy to eventually pick up where it left off once the so-called “curve” of new COVID-19 cases has been flattened.
That’s how outgoing Bank of Canada Governor Stephen Poloz sees the future unfolding. “The recovery is going to have a lot of pent-up characteristics to it,” he said in April. “The fiscal actions have put a floor under consumer and business confidence, effectively stopping the clock, and then we restart the economy later.”
But even if that happens, the pandemic is likely to cast a long shadow over the recovery.
In April, CIBC’s Tal took a sobering look at what the economy will look like in July, assuming lockdown measures will have begun to ease by then. Older Canadians may still be required to stay at home, he argues, while businesses will be asked to keep as many employees as possible working remotely. Factories will run at reduced levels to avoid unnecessary contact between workers, and places where people gather, like sporting events and concerts and museums, will remain closed.
It’s possible the U.S. could move to open its economy sooner. Early on in the crisis, U.S. President Donald Trump bristled against the lockdown measures, tweeting in all caps in March that “we cannot let the cure be worse than the problem itself” and pledging to re-open the economy by Easter.
As the number of deaths soared amid images of refrigerated trucks at New York hospitals being filled with the bodies of COVID-19 victims and modelling suggested the number of American fatalities could climb to between 100,000 and 200,000, Trump changed his tone.
Likewise, U.K. Prime Minister Boris Johnson initially resisted a lockdown in his country, with officials there toying with the idea of “targeted herd immunity,” or letting the virus spread through the population on the unproven assumption that those who recover will be immune. Within days, Johnson’s government reversed course, and that was before he got COVID-19 himself and spent several days in the ICU, where doctors said there was a 50-50 chance he would need a ventilator.
As the economic toll of the lockdowns has become more apparent, there are mounting calls for a different approach – including from Trump, who once again suggested he could force state governors to reopen their economies earlier than what his health officials recommend. Michael Burry, a doctor-turned-investor whose bold bet that the U.S. housing market would implode in 2008 as told in the book and movie The Big Short, was one voice calling for the lockdown to be lifted. “Universal stay-at-home is the most devastating economic force in modern history,” he told Bloomberg News in April. “It is man-made. It very suddenly reverses the gains of underprivileged groups, kills and creates drug addicts, beats and terrorizes women and children in violent now-jobless households and more. It bleeds deep anguish and suicide … Every day, every week in the current situation is ruining innumerable lives in a criminally unjust manner.”
The worry in lifting restrictions too soon is that another more deadly wave of COVID-19 cases could cripple the economy all over again. That’s what happened during the 1918 Spanish Flu pandemic, when a second outbreak in some countries claimed five times as many lives as the first wave did. Even a small secondary outbreak would threaten what would already be a shaky economic recovery. A second outbreak, warns Doug Porter, chief economist at BMO Financial Group, would cause a “dispiriting slump” in both consumer and business sentiment.
Going into the crisis, older people and seniors were carrying more debt than ever before. That included home equity lines of credit because many felt flush given the increasing value of their homes and borrowed against them. From 1999 to 2016, the percentage of people 65 and over who carried a mortgage nearly doubled to 14 per cent, while the share carrying any type of debt climbed from 27 to 42 per cent. Meanwhile, nearly three-quarters of those in the 55 to 64 age group carried debt loads, up from 61 per cent in 1999.
So long as house prices and stock markets kept soaring in value, that debt was manageable. Indeed, Canadians 55 and up had a total net worth of $6 trillion, or 60 per cent of all the wealth in Canada, up from 47 per cent in 1999.
Yet, since the COVID-19 outbreak roiled markets, older Canadians have seen their investment portfolios hammered. At one point in March, after days of losses, the S&P/TSX Composite Index reached the level it stood at in 2016, effectively wiping out more than $1 trillion in wealth. In subsequent weeks, global markets, including Canada’s, saw some of those losses reversed as investors wagered that the volley of government and central bank stimulus programs would allow large companies to emerge from the lockdowns relatively unscathed. Not everyone is convinced the market can avoid another drop as the barrage of bad economic news rolls in over the coming weeks and months. “It’s as if the stock market is wearing a red dress to a funeral,” says Rosenberg.
Meanwhile, economists are closely watching Can-ada’s housing market for signs of trouble, given its outsized importance to the economy – Canadians have three-quarters of their wealth tied up in real estate, while housing and consumer spending together account for their largest share of GDP in recorded history.
The good news is that with Ottawa’s encouragement, the big banks have allowed some homeowners hit by COVID-19 to temporarily defer mortgage payments. Meanwhile, the Bank of Canada and the Canada Mortgage and Housing Corporation have begun to take risky mortgages off the banks’ books to encourage them to keep lending. Robert Hogue, a senior economist at RBC, predicts prices nationally will decline by 2.9 per cent in the second half of the year, compared to the year before, but that the market will rebound in 2021.
Others are less sanguine. “Job losses are always the worst event for the housing market, and that’s what we’re seeing now,” says Scott Terrio, a manager of consumer insolvency at Hoyes, Michalos & Associates in Toronto. “I can’t see a scenario where this doesn’t affect housing negatively.”
If house prices fall and stock markets continue to languish, it could put a squeeze on retirees. Those fortunate enough to have a defined benefit pension plan, which guarantee a set payment in retirement regardless of what happens to markets, are cushioned against market upheaval, says Toronto financial planner Alexandra Macqueen. But that’s a limited group, leaving the rest to consider their options.
Some may have to return to work, depending on their circumstances and whether their portfolios continue to fall. If the current economic crisis results in another deep recession with declining equity and real estate values, it could jeopardize the greatest transfer of wealth in history. A 2016 report by CIBC predicted that seniors would pass down $750 billion to their heirs over the next 10 years, but the historic COVID-19 shock could interrupt that.
Canadians nearing retirement also find themselves in a punishing situation. “The people who are hardest hit are those who are not quite at retirement but were planning to retire,” says Macqueen.
Again, working longer is a possibility, but labour-market prospects are grim. “A common question I hear is should I delay my retirement? Would it be better if I just kept working?” says Macqueen. “All of these things people thought of as their backups – that if I run out of money, I’ll return to work; if my other investments fall, I’ve still got my dividends; if I don’t have the money I need to retire with the lifestyle I want, I’ll just work longer – what if those backups are now off the table?”
Hundreds of thousands of Canadians who were gearing up for retirement may have no choice but to put their plans on hold, says David O’Leary, the founder of Toronto-based Kind Wealth who has co-ordinated a network of 30 financial advisers across the country to provide free portfolio consultation to Canadians. The math of withdrawing money from your portfolio for retirement during a market downturn is such that it reduces the longevity of your portfolio. “It can have some really damaging effects on your portfolio and raises the risk that you’ll run out of money before you die,” he says. “The longer this lasts, the more problematic it will be for retirees.”
This is what COVID-19 and the Great Lockdown come down to. If “whatever it takes” measures undertaken by governments and central bankers to temporarily freeze the economy work as planned, then the thawing process should allow Canadians to return to where they left off.
We can only hope our recovery from this once-in-a-century shock unfolds so smoothly.
A version of this article appeared in the July/August 2020 issue with the headline, “The Great Meltdown,” p. 40.