The partial economic recovery seen in Q3 has been stopped in its tracks by COVID-19’s second wave
According to the Conference Board of Canada’s most recent Provincial Outlook, there is a growing risk that Canada’s economic recovery from COVID-19’s nine-month assault is stalling. A vaccine will be coursing through the veins of several thousand Canadians over the next several weeks, but the Board, in a release accompanying the outlook, said that most industries will not return to their pre-pandemic economic activity “until a vaccine is available to the public, both in Canada and globally.”
“As health restrictions began to be lifted in May, the rebound set in,” the Outlook reads. “Statistics Canada estimates that by September, economic activity was back to 96% of February levels and 2.4 million jobs had been recovered. Still, that leaves a gaping chasm from what we would consider ‘normal’ levels of economic activity.”
The Conference Board expects Canada’s overall, real GDP to shrink by 6.6% in 2020, with projected gains of 5.6% in 2021 and 3.4% in 2022 being insufficient “to bring Canada’s economy back to full potential.” Unemployment is expected to remain above 2019 levels through the end of 2023.
No province will be heading into 2021 with anything resembling economic momentum. All will face their own uphill battles, but some will be steeper than others.
Atlantic Canada
Canada’s eastern provinces achieved relative success in keeping the spread of COVID-19 under control during the first wave of the outbreak, but all four will suffer acute recessions this year that will require considerable recovery time.
Newfoundland and Labrador have been dealing with the double whammy of the pandemic and the province’s comatose oil industry. The Conference Board expects Newfoundland’s resource sector to recover, but says its dwindling government finances could trigger an extended period of austerity, which does not bode well for infrastructure spending or the province’s ability to attract new business.
But Conference Board senior economist Jane McIntyre remains optimistic about Newfoundland’s prospects for recovery, citing stable oil production throughout 2020 and a successful first-wave response that got residents back to work relatively quickly as reasons for hope. Tourism and trade remain restricted, but McIntyre told Mortgage Broker News “the return to normal activity should continue to gain traction through 2021, helping the province’s economy grow 5% next year as a result.” Real GDP, she said, is expected to return to pre-COVID levels by late next year, “although employment will take longer to respond.”
Nova Scotia is projected to post the greatest GDP decline in Atlantic Canada this year, the result of a heavy COVID-19 case load and an extended initial lockdown period. Its struggles – unemployment, low retail sales, severe pain in its manufacturing sector – said the Board’s Anna Feng, are expected to continue, but there are bright spots on the province’s path to recovery.
“We expect that the $1.29 billion capital investment plan by the province’s government, the fast rebound of residential investment, and the $10 billion Goldboro LNG project will support the economic recovery of Nova Scotia,” she said.
While Prince Edward Island is currently experiencing its largest recession on record – GDP dropped by 12% in the second quarter of 2020 – and is unlikely to bounce back completely until its tourism industry is whole, New Brunswick’s economy is projected to fare better than any other in the country. Employment in the province has not eroded to the extent that it has in other provinces, a phenomenon partially explained by New Brunswick’s high ratio of public sector workers to overall members of the workforce.
Quebec
Quebec has been hit especially hard by COVID-19, resulting in a recession the Conference Board describes as “deeper than initially forecast.” While most provinces began feeling the effects of the second wave in October, Quebec’s rise in infections started impeding the province’s economic recovery as early as late summer.
Despite the disruption, the province’s construction and housing markets remained among the country’s most active. Conference Board economist Liam Daly said the number of units under construction in Quebec hit a record in June “and is approaching that volume again.” Quebec housing supply, he added, promises to be “decent, at least in the near term.”
Over the medium term, Daly said reduced immigration and student numbers are set to lower housing demand, which may increase the persistently low vacancy rates in Quebec’s major cities, if only slightly.
“Furthermore, COVID-19 is driving movement away from urban cores, lower usage of short-term vacation rentals and loss of jobs among lower income workers, who are typically renters,” Daly said.
Over the long term, Daly said that he expects housing starts to continue “a downward trend owing to demographic changes in the province”, such as an ageing population and low immigration. A near-term reduction in household formation among young people whose incomes have been disrupted by COVID-19 could compound this trend.
Ontario
Canada’s most populous province has shown, according to the Conference Board, “bright spots in a cloud of muddy data.” Employment is recovering at a rate slower than that of several other provinces, but job gains have been encouraging in higher-paying sectors such as financial services and professional services, which have helped fuel the province’s housing market and household spending. Ontario’s GDP is expected to grow by 5.2% in 2021.
The Conference Board’s Robin Wiebe told MBN that the surge in COVID-19 cases currently affecting the province could disrupt its new housing market if strict lockdowns limit the work being done on the record number of units under construction. But any impacts are expected to be short-lived. Interest rates remain attractive, the province’s population is growing rapidly, and the job market for higher-income workers has remained supportive of homebuying.
“That said, job losses among potential renters could ultimately impact future multi-family starts, particularly of small apartments,” Wiebe said. “Prospective starts of such units (and indeed, their resale outlook) also face threats from a lack of interest among those who fear a future lockdown in a tiny apartment or among investors who were hoping to attract rental clients – now less numerous due to travel restrictions and online learning at post-secondary institutions.”
Wiebe estimated that household formation in Ontario has exceeded housing starts by approximately 100,000 over the past five years.
“This alone would suffice to rekindle the housing market’s strength in the event of a COVID-inspired disruption,” he said.
The Prairies
Saskatchewan and Manitoba were models of COVID-19 containment from March until October. It’s been a different story since then, with both provinces racking up disturbing rises in infections and hospitalizations. Like other provinces whose economies are driven by manufacturing, Manitoba’s has been stifled. GDP is expected to decrease by 6.2% this year and recover by only 3.5% in 2021. For 2020, Saskatchewan is looking at a second straight year of recession, only this time around the dip is far more severe: 4.9% versus 2019’s 0.8%. GDP in Saskatchewan is expected to rise by 4.5% in 2021.
Alberta, where COVID-19 levels have been surging since November, has recently instituted new restrictions on businesses as a means of mitigating the spread of the disease. That move on the part of the provincial government will only deepen Alberta’s current recession, the worst among all provinces. But Alberta is expected to bounce back admirably in 2021, when GDP is projected to rise by 6.0%.
Conference Board senior economist Sam Goucher calls Alberta’s current situation – one of the country’s highest unemployment rates coupled with a runaway second wave – “alarming”. If the COVID-19 vaccine is not widely available before the spring, Goucher says hard-hit industries like restaurants, tourism and accommodation industries will find themselves “in an even deeper hole of debt than before.”
Goucher told MBN that Alberta’s recovery will have “elements of a healthy rebound.” Those elements will have to contend with the province’s far more pressing challenges, notably the queasy state of its oil industry. As Goucher explained, Alberta’s oil producers have been increasing their production this year, but they are doing so while creating fewer and fewer jobs. It’s a great tactic as far as bottom lines are concerned, but it also means less employment in a reliably high-paying sector of the economy.
Alberta’s provincial government, squeezed on all sides by ballooning debt and weak revenues, is attempting to downsize itself through a combination of reduced hiring, salary freezes and job cuts. It’s an approach Goucher says will “lower job prospects over the next few years” as the government prioritizes its budget.
“On the flip side,” Goucher said, “the private sector will benefit from less taxation as the corporate income tax rate has been cut from 12% to 8% in just two years. This will help businesses grow again when the dust settles, but its impact will be hard to assess with all of the noise in the data caused by the COVID-19 recession.”
British Columbia
The Conference Board’s last provincial forecast had British Columbia leading the country in its minimizing of COVID-19’s impact on the economy. Like Quebec, B.C.’s second wave started in August, giving the coronavirus a head start on its second phase of disruption.
A lack of international travel will continue to hinder trade and tourism in B.C., but its forestry industry will buoyed by the demand among North America’s residential builders for the province’s lumber. Kiefer Van Mulligan, research associate at the Conference Board, said US housing starts are forecast to continue growing until 2023, which bodes well for one of the province’s most critical industries.
“Of course,” he cautioned, “any newly introduced public health restrictions put in place to counter COVID-19 in the US may limit the pace of growth.”
Van Mulligan expects B.C.’s housing market, which had already adjusted to both the federal mortgage stress test and multiple provincial taxes and regulations prior to the pandemic, to remain strong. But he does see one potential risk: the end of mortgage deferrals.
Even though many homeowners deferred their mortgage payments because of the “climate of economic uncertainty this year” and not because their mortgages had become unaffordable, Van Mulligan said, “It remains to be seen whether foreclosures will increase as these are phased out.”
Why GDP should matter to mortgage brokers
Mortgage brokers hyper-focused on finding the next deal may not feel as if they have time for macroeconomics. Dominion Lending Centres’ chief economist Dr. Sherry Cooper says keeping an eye on the vicissitudes of provincial economies can provide valuable information.
“Interest rates are crucial to mortgage brokers’ business, and economic data impacts interest rates,” Cooper told MBN by email. “However, the [Bank of Canada] posts a single policy rate for the nation. Provincial economies determine relative strength across regions.”
Contrary to what has been seen in the Canadian housing market in 2020, Cooper said that recessions typically weaken housing demand until lower interest rates are required to boost economic activity.
“Of course,” she said, “COVID turned the world on its head.”
