The Canadian Economy: Gradual recovery on the way

As elsewhere, the Covid-19 pandemic has led to a dramatic recession in Canada. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. In addition, Canada is an important producer of oil and was hit by the sharp drop in oil prices. In the first quarter of 2020, the Canadian economy dropped at a rate of 2.1 percent (or at annualized rate: 8,2 percent). Both household consumption and business investment considerably decreased. As one may expect, the decrease in consumption was particularly strong for durable goods such as cars. Since forecasts or scenarios are of course associated with very high levels of uncertainty at the moment, I do not publish a detailed economic forecast. I am relatively optimistic as regards the short-term recovery in the summer and autumn, but relatively pessimistic as to economic developments in the coming years (I also hold this view for several other countries). The economic recovery has started in May and will continue during this summer. The situation of the labor market improved in May and June, but remains bad. The unemployment rate in June was at 12.3 percent (compared to 5.6 percent in February before the lockdown).

For the second quarter of 2020 (April to June), one should still expect a dramatic economic contraction of around 30 percent (annualized). And for the whole year of 2020, I think that there will be a severe contraction of the economy of perhaps 6 to 8 percent. This will be followed by a rebound of around 5 percent in 2021. In a more dramatic scenario (for instance, if there is a second wave of the pandemic), the contraction in 2020 would be at around 10 percent. However, I assume that measures to combat a potential second wave of the coronavirus will be more targeted than this spring and will do less harm to the economy. In 2020, fiscal and monetary policy measures will particularly support the economy. The government adopted measures such as income backstops for households and loan guarantee programs. The Bank of Canada reduced its interest rate and adopted asset purchasing programs. As I mentioned above, such forecasts are obviously associated with a high degree of uncertainty. In particular, there is the risk of a severe second wave of the pandemic. At the global scale, worldwide tensions could increase – especially between the United States and China.

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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