Canada is in for a massive economic shock — but top economists say the recovery will be surprisingly fast

Never have economists seen our country's economic outlook shaken so drastically, so quickly. With whole segments of the economy abruptly shuttered by COVID-19 and more than a million Canadians laid off in a matter of days, we've plunged into a sudden recession.

At first glance, the situation looks dire. Canada's economy is among those most exposed to coronavirus-related shocks because of its dependence on imports from the U.S., according to analysts at ING Group. Canadian banks project Canada's GDP to shrink by a whopping 20 per cent this quarter alone. Layoffs could reach nearly three million.

"What we've seen in the last few weeks is an unprecedented level of shutdown, but also unprecedented speed of shutdown," said Robyn Gibbard, senior economist at the Conference Board of Canada. "I'm not sure what you can compare it to aside from a work of fiction. Certainly within recorded economic history there hasn't been anything like this."

But there is, even at this early stage in the crisis, a gleam of light at the end of the tunnel: Canadian economists are cautiously optimistic about the country's ability to make a quick recovery once the worst of the pandemic is over.

"It's very likely to be a very significant rebound," said Jean-Franiois Perrault, senior vice-president and chief economist at Scotiabank. In fact, last week Scotia pegged the chances of resuming normal economic activity by August at 75 per cent.

All five of Canada's major banks predict economic growth will resume this summer following a historically steep downturn. The banks project Canada's GDP to shrink by between 10 and 28 per cent this quarter, but they expect those losses will be mostly made up in the second half of the year. (Although not quite: They all project an overall contraction of the GDP this year, with forecasts ranging from -1 to -4.2 per cent.)

Assuming the virus can be sufficiently contained at some point this summer and businesses are able to reopen, it shouldn't take long for the economy to rev up, Perrault said. With pent-up consumer demand and low interest rates, he said conditions should be ripe for a quick turnaround, likening it to flipping a switch. "Once we turn the corner there's potential for quite strong growth."

If this scenario occurs it would be what economists call a "V-shaped" recovery, in which a sharp, sudden downturn is quickly followed by an equally sharp correction.

"We've had a huge shock," said Jack Carr, an economics professor at the University of Toronto. "It's bad that it's huge, but the good news is that it's short-run and as soon as the shock ends there's no reason why we can't almost immediately go back to where we were."

Carr believes the Canadian economy is poised to "snap back" once the virus is under control.

"Maybe, if we're lucky, it will only hurt the economy for two or three months and that's it."

That doesn't mean all businesses will bounce back, he said. Some won't survive. Others will benefit. But the economy as a whole is likely to return to its pre-COVID levels relatively quickly.

"I predict a year from now we're exactly at the place we would have been if this dip didn't occur."

The duration wild card

This, of course, assumes the virus will be under control by the summer and the economic restrictions will have lifted, which remains uncertain.

As TD states in its latest forecast: "The wild card is not depth, but duration."

The longer the economy is disrupted, the less likely it will be able to quickly recover. The early evidence from China, where affected parts of its economy were able to quickly bounce back after a short recession, has been heartening.

If any country is going to have a V-shaped recovery, Canada is a good candidate, Gibbard said. He cited the federal government's strong fiscal position prior to the crisis and the recent steps it has taken along with the Bank of Canada to soften the blow for workers and businesses.

Canada's "extraordinarily low" debt-to-GDP ratio - about 31 per cent prior to the crisis - means it was in a good position to spend generously on its rescue package, Gibbard said.

"We have an enormous amount of fiscal capacity. We can essentially borrow an unlimited amount of money. So there's really no harm in going all the way to the wall."

The aid package now totals $105 billion. It's expected to increase the debt-to-GDP ratio to around 40 per cent, which would still be the lowest among G7 countries.

So even though the numbers may seem astronomical, Gibbard said Canadians shouldn't be worried about the extent of public spending or ballooning debt. The alternative is worse.

"The way that a big shock like this can cause lasting damage is if you don't keep the gears turning," he said. "That's why it's so important that we do have those supports for businesses and workers, because once you get on the other side of this what's really important is that people have a job to go back to or that they have enough money to afford to live while they're looking for a job."

Perrault agreed. "There isn't much choice," he said. "It's either you do this and you live with the consequences a year or two or three from now, or you don't and you have mass bankruptcies, mass layoffs."

Carr admits that even with the massive government aid package, some industries, such as cruise lines, may suffer irreparable damage because of reduced demand.

"But people aren't going to rethink whether they like going to restaurants. Whatever the demand was for restaurants in January 2020, it's going to be the same in January 2021. Maybe a few of them will have to close, but people will take over those restaurants."

Gibbard, for his part, notes that Canada, as far as he could tell, was the only country offering both a substantial wage subsidy and a benefit for laid-off workers.

Earlier this week the federal government announced it was increasing its wage subsidy from 10 to 75 per cent for businesses, non-profits and registered charities that had seen revenue declines of at least 30 per cent due to COVID-19. That's in addition to the Canada Emergency Response Benefit, which provides $2,000 per month for four months to anyone who lost work as a result of the pandemic.

Most countries are doing one or the other, Gibbard said.

What could go wrong?

Two things could get in the way of a quick rebound: The first is we are unable to contain the virus and the current economic disruption continues into the summer. The second is the situation in the U.S. spirals out of control.

"Even if we've done all the right things we could still be dragged down if the U.S. doesn't get itself together and save people's lives," Gibbard said. "I'd say that's my biggest worry right now."

The number of infections in the U.S. per capita is twice as high as Canada, and the fatality rate is four times as high.

"There's no question that the COVID situation is far worse in the U.S. than it is here," Perrault said. "But we assume that at the end of the day the Americans do what is required to control everything, so they too are back sometime in the third quarter or by the end of the second quarter, so you (still) have that V-shaped recovery."

If they don't, then the global economy is in a "much tougher spot," Perrault said. "That becomes a much more serious economic event than we think at present. It's already going to be bad; it's just going to be a lot worse if the Americans don't get it under control in the next few weeks or a couple of months."

Infections in Canada haven't reached the point where the virus is overwhelming the health-care system, but judging by what has happened in other countries, Gibbard said, that could still happen here. The Conference Board's "alternate scenario" looked at the economic ramifications if the current travel restrictions and social distancing measures remained in place through the end of August. This would lead to a "much deeper and long-lasting" hit to the economy.

Even with a "V-shaped" recovery, in which the majority of the economy's losses return in relatively short order, returning to 100 per cent of pre-shock levels could take much longer, Gibbard said. He could see a return to 95 per cent quickly, but admits, "Even if a small number of businesses are knocked out of commission, it can still affect people."

Lisa Kramer, a professor of finance at the University of Toronto and a research fellow in behavioural economics at the Rotman School of Management, said one key difference between this and past recessions is the amount of uncertainty.

"We don't know whether or when we'll be able to develop treatments for COVID-19. We don't know whether or when we'll be able to get a vaccine. We don't know whether the virus will mutate in ways that will render it difficult to develop treatments and vaccines."

Without any of that information, it's difficult to predict what the next weeks and months will look like for life in general, let alone the economy. Kramer described the current state of the economy as being in an "induced coma." Much like a patient who has to be put into a deep state of unconsciousness to survive a traumatic injury, she said the economy is required to be similarly sedated and at this point it's impossible to know for how long.

"But it's the best thing we can do right now in terms of the long-term prognosis of our economy, our society and all of us as individuals."