What will follow the "deepest and shortest" recession on record?
On Monday, the Conference Board of Canada released its anticipated look at the mid-term future of the Canadian economy. The Board’s Canadian Outlook Summary: Summer 2020, in contrast to projections made by institutions like the Canadian Mortgage and Housing Corporation, predicts less dramatic declines in housing prices, but its remaining insights track closely with projections that see the damage done to Canada’s economy at the hands of COVID-19 lingering well into 2021.
In what the Board is calling the “deepest and shortest recession on record”, Canada’s economy is expected to contract by 8.2% in 2020. According to Conference Board chief economist and contributor to the Outlook, Robin Wiebe, that puts the COVID-19 recession miles beyond past downturns. From the second quarter of 1976 until the end of 1982, GDP fell by almost four percent. It fell 2.3 percent between Q3 1987 and the second quarter of 1991. The recession associated with the 2007 financial crisis saw GDP growth shrink by 3.3 percent.
“It is pretty stark, there’s no question about that,” says Wiebe of the contrast.
The Board’s projections, however, are far from pessimistic. After adding almost 300,000 new positions in May, the job market is expected to maintain some sense of momentum over the next year-plus. Unemployment is expected to peak at 13.7 percent in the second quarter of 2020, but once another 1.3 million jobs are added in the third quarter, unemployment will start returning from its brief sojourn to the stratosphere. Unemployment is expected to remain above seven percent until late 2021. The rebound in hiring is expected to be more pronounced in industries such as financial services, professional services, manufacturing, and construction.
International trade is expected to be devastated by COVID-19, with export volumes falling by 14.3 percent and imports falling by 13.8 percent this year. Neither sector is expected to grow by more than eight percent in 2021. No surprise, then, that business investment is projected to decline by 11.3 percent in 2020.
Canadian housing in 2020 and 2021
When it comes to housing, the Conference Board appears to be far more optimistic than CMHC. Whereas CMHC has said home prices may fall by as much as 18 percent following COVID-19, the Board is projecting a possible decline of 11 percent in the average existing home price between the first and third quarters of 2020. But because of raucous pre-COVID buying activity, the Board is predicting a drop in the average resale price of only 1.6 percent this year and 2.1 percent in 2021.
“I think we might be a little more optimistic on the employment front,” than CMHC, Wiebe says, adding that the Board sees economic growth starting up earlier than CMHC, as well.
There will still be considerable discomfort for borrowers and prospective buyers. Travel habits aren’t expected to recover until late 2021, which is an awfully long time for the owners of short-term rental properties to survive without the above-market rents they (and their lenders) have come to depend on. CMHC’s new guidelines around borrowing, set to be implemented on July 1, will push untold numbers of first-time home buyers further to the sidelines. Housing starts are expected to drop precipitously, as well, meaning the buyers who remain in the market will inevitably be paying more for their properties.
But Wiebe is confident in the market’s ability to weather the storm.
“I do believe that the overall housing market is going to be strong in the medium-term,” he says. “Housing starts have been below household formations for seven of the eight years going into 2019, so there is pent-up demand.” If the economy rebounds “relatively decently” through 2020 and 2021, Wiebe says local housing markets should regain their strength by 2023 or 2024.
It's important to note that the Conference Board’s projections are based on a number of assumptions, including:
- Canada avoids a second severe outbreak of COVID-19 that shuts down the economy
- A vaccine is made widely available to Canadians by June 2021
- The Canada Emergency Response Benefit winds down in October and funds shift toward the Canadian Emergency Wage Subsidy until a vaccine is available
- Canada returns to announced federal targets for international immigration in 2022
That’s a lot for people to hang their hopes on. As has been seen in the U.S. over the last two weeks, weak social distancing practices can quickly pull communities back into the COVID-19 quagmire. For Canada’s economy to rebound in a significant, continuous manner – more jobs, more investment, more spending by Canadian consumers – mitigating the spread of COVID-19 is a must. Otherwise, the Conference Board’s projections of economic growth, along with the hopes of 37 million Canadians, will need to be downgraded significantly.
