Monthly Economic Letter (2 parts: 4th wave and overall economy)
What to expect from the fourth COVID wave
The number of new daily cases of COVID-19 has been increasing in Canada since the beginning of August, signaling that a fourth wave is underway.
This latest wave brings risks for the recovery, but the Canadian economy appears well-positioned to weather the storm. Waves come and go, but they are not the same.
What will the business environment look like this fall? This month, we look at three factors that companies should consider in preparing for the fourth wave.
1. An enviable vaccination rate
The first factor to consider is the vaccination rate. Canada has the highest vaccination rates among G7 countries, with two-thirds of the population fully vaccinated by early September.
The success of the vaccination campaign is clearly reflected in a relatively low number of new cases, but more importantly in a low number of hospitalizations. However, while research shows that vaccinations are strongly protective against infection, vaccinated individuals can still transmit the virus.
That’s why physical distancing, mask wearing and limits on the size of gatherings will remain the preferred measures to counter this new wave.
Most businesses have already adapted to these measures, although new adjustments may be necessary, such as requiring a vaccination passport to visit certain places. All in all, vaccinations should keep closures and economic disruptions to a minimum in the coming weeks.Enlarge the table
2. Risks and limitations will persist for some sectors
There is no such thing as zero risk when it comes to the pandemic, but the level of risk differs by industry. While many industries in the goods sector have fully recovered to their pre-pandemic level of activity, service sectors are still struggling.
Each new wave is a sword of Damocles hanging over high-contact sectors. The restaurant, arts and entertainment, and retail industries have been the main victims of previous waves in Canada.
Challenging conditions for service businesses are likely to persist during the fourth wave. Venue capacity will remain limited; business travel is unlikely to pick up this year; and face-to-face events will be more limited.
The tourism industry was still far from full recovery during the summer, but the borders should remain open to fully vaccinated travelers this fall, helping to extend the season. That said, businesses in this sector remain most at risk for new restrictions, depending on the trend in new cases and the emergence of new variants.Enlarge the table
3. The international situation weighs on supply chains
While the health situation in Canada is relatively good, businesses are not immune to COVID-related difficulties. As a small, open economy, many Canadian companies source all or part of their supplies from abroad.
The pandemic has created a number of challenges for the goods producing industries and these challenges will continue for several months.
Among these is the price of raw materials. While this has benefitted Canadian exporters, the price of many inputs has skyrocketed as demand for these products has risen sharply and supply has been slow to adjust.
The good news is that industries are beginning to adapt and some prices are coming down to more sustainable levels. This has been the case for lumber producers, in particular.
The pressure on production costs created by high raw material prices should slowly improve in the coming months. However, supply bottlenecks for some products and shortages of freight capacity will take longer to recover.
The reopening of economies around the world has created strong demand for space in shipping containers. However, ports in some countries have been forced to close to contain the spread of the virus. Most recently, in late May, parts of a Chinese region that has one of the most important ports for containerized exports was forced to close. Each port closure results in ships being stuck outside the port, unable to handle the pile of cargo that has accumulated.
At this point, any type of disruption will have a disproportionate effect on transportation costs and delivery times. Companies are already talking about supply problems for the holiday season.Enlarge the table
What the fourth wave means for your business
- Canada’s vaccination rate is high compared to other developed countries. The impact of the fourth wave on businesses and the economy is therefore expected to be less significant than previous waves. Health measures are not expected to increase significantly.
- High-contact service businesses remain the most at risk for new health measures. If your company is in this type of business, consider this risk in your strategic planning.
- Although the health situation in Canada is encouraging, the pandemic is taking a much heavier toll in many countries. International restrictions are causing shortages and supply problems. Entrepreneurs whose business depends on international trade, whether for imports or exports, should plan accordingly.
Economic Report (Canada)
The economic recovery falters
Most economists had expected the Canadian economy to rebound modestly in the spring as it shook off the effects of the third wave of COVID infections. However, GDP declined at an annualized rate of 1.1% between the first and second quarters, led by a sharp drop in exports and residential investment.
The second quarter ended on a more optimistic note with GDP rising by 0.7% in June after two months of decline. That brought economic activity to 98.5% of the pre-pandemic peak in February 2020.
Exports take a step backwards
The slowdown in the spring reflected continuing turbulence from the pandemic. Canadian exports fell by 4% in the second quarter (15% annualized) compared to the previous quarter. This drop translated into a decline of almost 5 percentage points in GDP growth.
The drop came entirely from the goods sector, as services exports continued to rise. Services account for only about 15% of total Canadian exports, so they were not enough to offset the losses in Canada’s two main goods export sectors—energy (-7.9%) and automotive (-14.8%).
Shortages in automotive supply chains (especially semiconductors) have taken a toll on the industry. They forced the closure of automotive plants in Canada this spring. Although production resumed in June for some plants, supply remains an issue and will continue to hold back the industry for several more months. This should result in subpar exports in the next quarter as well.Enlarge the table
Sharp slowdown in residential housing
The residential sector emerged as an important contributor to the recovery in late 2020 and early 2021 with the construction and real estate services industries accounting for about 20% of the economy.
But a slowdown in the resale housing market in recent months put a damper on the most recent GDP data. Residential investment hurt growth by 1.4 percentage points in the second quarter.Enlarge the table
Although it declined by 3.3% in Q2, residential investment remains high by historical standards. Residential investment has three components: real estate transactions, construction, and renovation.
The slowdown in residential housing reflects a low supply of homes for resale, which limits transactions. New construction and renovation, the two main components of residential investment, were still up last quarter.
While levels remain high, early indications for the third quarter show that both construction and renovation are slowing. Housing starts were down 3.2% in July from June. Building permit applications also declined during the same period.
According to a Bank of Canada survey, 75% of respondents who accumulated excess savings during the pandemic planned to spend a good portion of it. Despite this positive outlook, household consumption was more sluggish in Q2.
With growth of just 0.2%, consumers appear to have reallocated their budgets from goods to services rather than increasing their overall spending.Enlarge the table
Shortages will limit growth
According to Statistics Canada’s initial estimates, the economy contracted by 0.4% in July. Since this is only a preliminary estimate, we have little detail to explain such a decline at a time when the Canadian economy was well on its way to reopening. This is also one of the strongest periods for the tourism industry, which has the potential for strong growth considering that it lags behind the recovery of other Canadian industries.
One hypothesis is that shortages are slowing growth. Labour shortages, which business have faced since the economy began reopening, are at an all-time high.Enlarge the table
Additionally, delivery difficulties and a mismatch between supply and high demand for certain products may also be dampening the expected consumption boom. Many businesses have been forced to limit their hours of operation or deal with long delivery delays, limiting the potential for household consumption.
Employment continues to grow in August
The Canadian economy added over 90,000 in August. Not surprisingly, the majority of the gains were in the hotel and food services (+74,600) and arts, culture and recreation (+23,900) sectors, which continued to benefit from the easing of health measures and the tourism season. Similarly, most of these jobs were created in Ontario (+53,000) where the reopening accelerated at the end of July.
The impact on your business
- Despite the uncertainty surrounding the fourth COVID wave, vaccinations and mitigation measures should limit its economic impact in Canada.
- Demand is still high, but a return to normal seems to have begun. Businesses should remain busy but will have time to breathe a little easier between clients.
- Labour shortages are back and forcing many companies into difficult decisions, including limiting business hours. The competition for staff is getting fiercer, prepare your job offers accordingly.
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