When will Canada’s economy recover?

[Soft music playing]

[Avery Shenfeld seated with a large CIBC banner behind him] 

[Avery Shenfeld, Chief Economist, CIBC Capital Markets]

Avery Shenfeld: We're hearing the roar of economic engines again, which is the good news that the economy has seen the worst. But unfortunately, there are still some yellow flags that could be waved at us on the track to a full recovery. We expect to see some pretty good numbers over the course of this summer as more and more of the Canadian economy opens, more of the U.S. economy opens up.

[Aerial view of the parliament buildings in Ottawa. A time-lapse shot of the exterior of the White House. An open sign on a restaurant window]
But what we caution is that beyond this first leg, many of the sectors that won't participate in the third quarter are probably not going to be any better in the fourth quarter.

[A time-lapse shot of an airplane at a gate. The view from the window of an airplane. A packed conference room and a panel of speakers. A time-lapse aerial view of a convention centre. A crowded bar. A nightclub with a packed dancefloor. The security gate of a store being pulled down.]

So, if you add up the portion of the economy that's in things like international travel, large conferences and convention centres, bars and nightclubs that are going to stay closed. They're going to be a remaining gap to economic activity.

[A sign in a store is flipped from closed to open. Candle-lit dining tables in an empty restaurant with a waiter in the background]

And even in the sectors that were opening, there were opening many of them with one hand tied behind their back. Our forecast is that the Canadian economy will have seen a decline of something on the order of 7% for this year as a whole. And we won't recover all of that in 2021 because of those limitations that the virus still imposes on what we can do, where we can do it and how much business activity can actually come back without triggering a large second wave. And it really is still the virus that is the major constraint to economic wealth in the here and now.

[Too much government debt?]

[Aerial view of the parliament buildings in Ottawa. A closed sign on a shop window.]

Governments had no choice but to step up to the plate and provide income to people who have lost jobs, provide support for businesses that were forced by health regulations to go into a deep freeze or hibernation stage.

[Empty escalators. Downtown Ottawa at dusk. The White House at night. The German parliament building. Tiananmen square in Beijing during the day.]

And we've seen governments of every political stripe across the world essentially do the very same things. We're not particularly worried about the legacy of that debt. It's being borrowed at very, very low interest, and the interest payments on that debt are not going to be crippling in the years ahead. The negative for the economy right now, however, is that the household sector does still carry a lot of debt going into this crisis.

[Aerial views of suburban houses in clusters]

They're not borrowing as much because there isn't as much to borrow and spend on these days. So that's the positive. But it's going to be a constraint on Canada's ability to use low interest rates as a way of fueling economic growth. Simply put, there will be households that will be coming to the conclusion that they're already carrying a lot of debt.

[More aerial views of suburban neighbourhoods with rows of houses]

They already bought a house. They don't need another one. So, sectors like housing, for example, that would usually be fuel for an economic recovery in a really low interest rate world, likely to be less powerful as a way of getting out of this crisis.

[More Canadians return to work]

We're going to see some pretty healthy job numbers, we believe, over the next several months as more businesses open up. But they're going to be leaving Canadians behind to work in sectors that don't have the same sort of reopening prospects. 

[A barista in a coffee shop flipping a sign from closed to open]

And the result is that we expect the Canadian unemployment rate — and the same will be true for the U.S. — to still be about 3% points higher than where we started. That's right through 2021. So, this will be in the labour market as well. An incomplete recovery is going to keep inflation pressures down.

That's a positive because if the labour market has lots of slack, usually inflation stays at bay.

[A close-up shot of four vials. Computer generated simulation of a shot being administered. A doctor holding up a small vial.]

But it's going to be frustrating for those still waiting for that second leg, which really can only come when we have a vaccine or an effective treatment.

[A mask and a rubber glove. A close-up of someone washing their hands under a faucet. Someone spraying sanitizer onto their hand. An empty stadium. An aerial shot of a basketball court.]

Even if we don't see a full second wave of the virus itself, the need to defend against that, the need for perhaps some localized shutdowns or reversals of some of the liberation we're seeing now in order to contain flare-ups is going to affect the GDP numbers and the employment numbers over the next year or two.

[Investment outlook]

One thing that we can see from past recessions is that the economy can start recovering, but it takes a fairly long runway before earnings ever return to previous peaks. So, the typical recession could be 2 or 4 quarters, but it might take 10, 14 quarters for earnings to get back to previous peak. So, I think that just a cautionary note that we shouldn't count on a full return to profitability while we're still battling the virus, while we're still constraining economic activity to defend against a second wave. That makes it a stock pickers market, in effect, if overall earnings performance is not going to be spectacular, it still means that there will be companies, some of which have actually benefited from this crisis.

[A shot of a drone en route for a package delivery. The view of a row of suburban houses seen from a moving vehicle. A clerk preparing a bag of groceries for delivery.]

Sectors involved with home delivery, for example, and some of which have been much lighter affected. Those still have room to see a complete earnings recovery faster than the economy as a whole.

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