Head to head: What shape will global economic recovery take?
As the global economy slogs through one of the most dire situations in living memory, some predict it will bounce right back to its old self, while others aren’t so sure.
Janet Rabovsky, independent investment consultant
With lockdown restrictions lifting, Canadians are wondering how quickly the economy may rebound. While none of us have a crystal ball, all signs point to a U- or W-shaped recovery.
Recently, the International Monetary Fund forecasted global gross domestic product at almost negative five per cent for 2020, worse than its April forecast of negative three per cent. Canada’s outlook has also worsened, with 2020 GDP forecasted at negative 8.4 per cent , before rebounding to 4.9 per cent in 2021. It’s worth noting that GDP was already decelerating in 2019, ending the year at 1.6 per cent, in part due to declining export volumes in farming, fishing, oil and automotive-related industries.
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In July, the federal government’s economic update projected a deficit of more than $340 billion for the current fiscal year. Despite the government programs, May 2020 unemployment stood at 13.7 per cent. Many are calling this recession the ‘she-session,’ as women have borne a disproportionately high number of job losses, along with youth, as many retail, leisure and other service industry jobs have been lost — and it’s uncertain when (and whether) they’ll rebound.
Approximately 70 per cent of GDP can be linked to consumer spending. When people are concerned about the future, they tend not to spend, and this doesn’t bode well for a speedy recovery in Canada or elsewhere.
A low oil price has also impacted Canada’s unemployment and GDP potential. The current energy glut will take some time to work through, with the timing depending on resumed economic activity in Canada and among our trading partners. Many Canadian oil producers are too high-cost compared to producers in other countries and the current move toward green energy doesn’t compel investment in expanding production capacity.
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The nascent health-care industry is a potential bright light as Canada seeks to control its supply chain, as is the work underway by labs and pharmaceutical companies. However, it will be some time before it can have a significant impact on total GDP.
Ian Russell, chief executive officer and president of the Investment Industry Association of Canada
When the pandemic hit in early March, the economy entered a deflationary spiral.
The difference of opinion on economic recovery begins roughly at mid-year, between expectations of a modest upward-sloping L recovery and the unlikely expectation of a sharp rebound or V recovery back to pre-crisis spending levels, powered by pent-up spending by consumers and businesses.
However, this consumer spending is unlikely to materialize, reflecting behavioural changes as consumers shift to more cautionary spending — a wants-to-needs transition arising from the uncertainties about the course of the pandemic and future economic activity. The negative wealth effect from weaker markets will also restrain spending.
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Further, the resumption of business spending in the post-crisis period will begin modestly late into this year and even beyond. The gradual step-up in economic activity this year and slower momentum of the global economy from a continued U.S.-China trade war and global business reorganization will restrain business spending.
The successful technology shift to remote operations during the crisis will scale back planned non-residential construction. Further, poor corporate margins and profits, as revenues fall short of cost increases, will weigh down share prices and the cost of external capital, slowing the tempo of investment spending. Estimates of investment spending must be mindful of three key negative factors before the crisis, restraining capital formation in the post-crisis: a continuously battered energy sector, now coping with even lower oil prices; high levels of indebtedness and balance sheet leverage; and weak business confidence.
Moreover, skyrocketing federal deficits and a higher public debt load will cause little prospect of competitive tax rates and limited scope for increased fiscal support to boost investment. Finally, the limited fiscal options are unlikely to attract much foreign direct investment from expected restructuring of global supply chains, boosting economic activity in Canada.
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