The Canadian Economy: Gradual recovery on the way after a severe recession

As elsewhere, the Covid-19 pandemic has led to a dramatic recession in Canada. Sectors such as travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. In addition, since Canada is an important producer of oil, it was hard hit by the sharp drop in oil prices this spring. As expected, GDP fell dramatically in the second quarter of 2020 (minus 11.5 percent). In the first quarter of 2020, the Canadian economy had already dropped at a rate of 2.1 percent. Both household consumption (minus 13.1 percent ) and business investment (minus 16.2 percent) considerably decreased in the second quarter. 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 Since forecasts or scenarios are of course associated with very high levels of uncertainty at the moment, I do not publish a detailed economic forecast.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 July was at 10.9 percent (compared to 5.6 percent in February before the lockdown). For the third quarter of 2020 (that started in July), one can expect a strong rebound of around 4 to 6 percent. And for the whole year of 2020, I think that there will be a severe contraction of the economy of perhaps 5 to 7 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 large second wave of the pandemic), the contraction in 2020 would be at around 8 to 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 experience and judgment.

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