The economic shock generated by the Covid-19 outbreak has likely done permanent damage to the Canadian economy. The hard-hit service sector will never recover the output lost during the imposition of widespread lockdowns, says TD Economics.
In a new report, TD said economic downturn has been both sharp and swift. The downturn is also unusual in that the service sector has borne the brunt of the damage, the report said.
For instance, during the recession that followed the financial crisis, goods-producing sectors recorded about 70% of the job losses, TD said. This time around, those sectors have only seen about 20% of the losses, with the bulk of the impact falling on the services sectors.
“This makes the current shock more permanent in nature because there’s no going back in time for pent-up demand for an ‘extra’ haircut or massage,” the report said.
“Incomes and spending for service workers are unlikely to make up the ground lost from the months of social distancing measures,” the report said, adding that this means some economic activity will be permanently lost as a result.
There’s also a great deal of uncertainty about how well the economy will recover, aside from the permanent output loss.
TD noted that a long-running lack of business investment in Canada may undermine the economy’s ability to recover quickly.
“The trend of falling capital investment relative to population may accelerate, further sapping economic growth,” TD said.
Additionally, the pandemic’s impact on immigration — which is a key driver of Canadian economic growth — may also stunt the recovery.
“Although the federal government has reiterated its medium term immigration targets, should Canada become less attractive as a destination, longer-term growth would be at risk,” TD said.
“For instance, halving the pace of immigration would take Canada’s long-run growth rate from around 1.6%-1.7% to a much more modest 1.3%-1.4%,” the report said.
Additionally, job losses have hit younger workers disproportionately hard, which may have negative long-run effects too.
“The challenge is not just for those who have lost their jobs, but also younger Canadians graduating into a depressed labour market,” TD said. “Relative to other cohorts, these individuals can experience persistently lower incomes, for up to a decade or more.”
In the short term, there remains a great deal of uncertainty too, given that the recovery is largely dependent on the ability of economic activity to resume in the face of a persistent public health threat.
TD said that overall it expects the recovery to be “U-shaped,” although GDP is not expected to re-gain its pre-pandemic level until early 2022, and the recovery trajectory will vary widely from sector to sector.
Interest rates are also forecast to remain at current levels into 2022 “at a minimum,” TD said.